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C. Significant Business Presence
1. The Statutory Setting of the Dispute
If a possessions corporation has “intangible property
income”, then that income is generally treated as income of the
possessions corporation’s shareholders, in accordance with rules
set forth in section 936(h). However, a possessions corporation
may “elect out” under section 936(h)(5)12 and choose to compute
12Par. (5) of sec. 936(h) provides, in pertinent part, as
follows:
(5) Election Out.–-
(A) In general.--The rules contained in
paragraphs (1) through (4) do not apply for any
taxable year if an election pursuant to
subparagraph (F) is in effect to use one of the
methods specified in subparagraph (C).
(B) Eligibility.--
(i) Requirement of significant business
presence.–-An election may be made to use one
of the methods specified in subparagraph (C)
with respect to a product or type of service
only if an electing corporation has a
significant business presence in a possession
with respect to such product or type of
service. An election may remain in effect
with respect to such product or type of
service for any subsequent taxable year only
if such electing corporation maintains a
significant business presence in a possession
with respect to such product or type of
service in such subsequent taxable year. If
an election is not in effect for a taxable
year because of the preceding sentence, the
electing corporation shall be deemed to have
revoked the election on the first day of such
taxable year.
(continued...)
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