- 80 -
Petitioners’ primary authority should be the regulation that
explicates the section of the Internal Revenue Code that is
at issue in this case [i.e., sec. 936, which provides the
credit that is the subject of the dispute], particularly
where this regulation addresses the issue that is in
dispute.
Petitioners point out that the Congress made the choice of
requiring that the section 936(h)(5)(B)(ii) second prong test be
determined “within the meaning of section 954(d)(1)(A)”, and
“Accordingly, the determination of whether EAPR manufactured or
produced the video games must be made pursuant to section
954(d)(1)(A) (and the regulations and other authority
thereunder), and not pursuant to any other principles.”
Section 936(h)(5)(B)(ii) and the legislative history of its
enactment in TEFRA 82 make it clear that the test for satisfying
the second prong is to be that which is derived from section
954(d)(1)(A). In this, we agree with petitioners. We reject
17(...continued)
the selling corporation in connection with the property
purchased and sold are substantial in nature and are
generally considered to constitute the manufacture,
production, or construction of property. Without limiting
this substantive test, which is dependent on the facts and
circumstances of each case, the operations of the selling
corporation in connection with the use of the purchased
property as a component part of the personal property which
is sold will be considered to constitute the manufacture of
a product if in connection with such property conversion
costs (direct labor and factory burden) of such corporation
account for 20 percent or more of the total cost of goods
sold. In no event, however, will packaging, repackaging,
labeling, or minor assembly operations constitute the
manufacture, production, or construction of property for
purposes of section 954(d)(1). * * *
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