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urges us to rely on section 1.936-5(b)(6), Q&A-1, Income Tax
Regs.16 Petitioners urge us to rely on section 1.954-3(a)(4),
16Sec. 1.936-5(b)(6), Q&A-1, Income Tax Regs., provides as
follows:
Sec. 1.936-5 Intangible property income when an election
out is made: Product, business presence, and contract
manufacturing.
* * * * * * *
(b) Requirement of significant business presence--
* * * * * * *
(6) Manufacturing within the meaning of section
954(d)(1)(A).
Q. 1: What is the test for determining, within the
meaning of section 954(d)(1)(A), whether a product is
manufactured or produced by a possessions corporation in a
possession?
A. 1: A product is considered to have been
manufactured or produced by a possessions corporation in a
possession within the meaning of section 954(d)(1)(A) and
sec. 1.954-3(a)(4) if--
(i) The property has been substantially transformed
by the possessions corporation in the possession;
(ii) The operations conducted by the possessions
corporation in the possession in connection with the
property are substantial in nature and are generally
considered to constitute the manufacture or production of
property; or
(iii) The conversion costs sustained by the possessions
corporation in the possession, including direct labor,
factory burden, testing of components before incorporation
into an end product and testing of the manufactured product
before sales account for 20 percent or more of the total
cost of goods sold of the possessions corporation.
In no event, however, will packaging, repackaging, labeling,
or minor assembly operations constitute manufacture or
production of property. See particularly examples 2 and 3
of sec. 1.954-3(a)(4)(iii).
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