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Income Tax Regs.17 Respondent responds that--
17Sec. 1.954-3(a)(4), Income Tax Regs., provides as follows
(examples omitted):
Sec. 1.954-3 Foreign base company sales income.
(a) Income included.
* * * * * * *
(4) Property manufactured or produced by the controlled
foreign corporation--(i) In general. Foreign base company
sales income does not include income of a controlled foreign
corporation derived in connection with the sale of personal
property manufactured, produced, or constructed by such
corporation in whole or in part from personal property which
it has purchased. A foreign corporation will be considered,
for purposes of this subparagraph, to have manufactured,
produced, or constructed personal property which it sells if
the property sold is in effect not the property which it
purchased. In the case of the manufacture, production, or
construction of personal property, the property sold will be
considered, for purposes of this subparagraph, as not being
the property which is purchased if the provisions of
subdivision (ii) or (iii) of this subparagraph are
satisfied. For rules of apportionment in determining
foreign base company sales income derived from the sale of
personal property purchased and used as a component part of
property which is not manufactured, produced, or
constructed, see subparagraph (5) of this paragraph.
(ii) Substantial transformation of property. If
purchased personal property is substantially transformed
prior to sale, the property sold will be treated as having
been manufactured, produced, or constructed by the selling
corporation. The application of this subdivision may be
illustrated by the following examples:
* * * * * * *
(iii) Manufacture of a product when purchased
components constitute part of the property sold. If
purchased property is used as a component part of personal
property which is sold, the sale of the property will be
treated as the sale of a manufactured product, rather than
the sale of component parts, if the operations conducted by
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