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(3) the purchase of personal property from any
person and its sale to a related person, or
(4) the purchase of personal property from any
person on behalf of a related person,
where (A) the property which is purchased (or in the case of
property sold on behalf of a related person, the property
which is sold) is manufactured, produced, grown, or
extracted outside the country under the laws of which the
controlled foreign corporation is created or organized, and
(B) the property is sold for use, consumption, or
disposition outside such foreign country, or, in the case of
property purchased on behalf of a related person, is
purchased for use, consumption, or disposition outside such
foreign country.
The definition does not apply to income of a controlled
foreign corporation from the sale of a product which it
manufactures. In a case in which a controlled foreign
corporation purchases parts or materials which it then
transforms or incorporates into a final product, income from
the sale of the final product would not be foreign base
company sales income if the corporation substantially
transforms the parts or materials, so that, in effect, the
final product is not the property purchased. Manufacturing
and construction activities (and production, processing, or
assembling activities which are substantial in nature) would
generally involve substantial transformation of purchased
parts or materials. [S.Rept. 87-1881, 84, 245 (1962), 1962-
3 C.B. 703, 790, 949; H. Rept. 87-1447, 62, A94-A95 (1962),
1962-3 C.B. 402, 466, 592-593.]
In general, taxpayers found it beneficial under subpart F to
show that income of a controlled foreign corporation was derived
from the sale of personal property which was manufactured or
produced in a foreign country by the controlled foreign
corporation.
c. Harmonizing; Conclusions
In the instant cases each side contends that Treasury
Regulations require a decision favoring that side. Respondent
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