Table I-Agricultural Commodities Grown in the United States in Commercially Marketable Quantities
Livestock and Products | |
Beeswax | Horses |
Cattle and calves | Milk |
Chickens | Mink |
Chicken eggs | Mohair |
Ducks | Rabbits |
Geese | Sheep and lambs |
Goats | Turkeys |
Hogs | Wool |
Honey | |
Crops | |
Alfalfa | Lettuce |
Almonds | Lime |
Apples | Macadamia nuts |
Apricots | Maple syrup and |
Artichokes | sugar |
Asparagus | Mint |
Avocadoes | Mushrooms |
Barley | Nectarines |
Beans | Oats |
Beets | Olives |
Blackberries | Onions |
Blueberries | Oranges |
Brussel sprouts | Papayas |
Broccoli | Pecans |
Bulbs | Peaches |
Cabbage | Peanuts |
Cantaloupes | Pears |
Carrots | Peas |
Cauliflower | Peppers |
Celery | Plums and prunes |
Cherries | Potatoes |
Corn | Potted plants |
Cotton | Raspberries |
Cranberries | Rice |
Cucumbers | Rhubarb |
Cut flowers | Rye |
Dates | Sorghum grain |
Eggplant | Soybeans |
Escarole | Spinach |
Figs | Strawberries |
Filberts | Sugar beets |
Flaxseed | Sugarcane |
Garlic | Sweet potatoes |
Grapes | Tangelos |
Grapefruit | Tangerines |
Grass seed | Tobacco |
Hay | Tomatoes |
Honeydew melons | Walnuts |
Hops | Watermelons |
Lemons | Wheat |
Selling price | $400 | ||
Cost of goods sold: | |||
Material- | |||
Acquired from related persons | $100 | ||
Acquired from others | 40 | ||
Total material | $140 | ||
Conversion costs (direct labor and factory burden) | 70 | ||
Total cost of goods sold | 210 | ||
Gross profit | 190 | ||
Administrative and selling expenses | 50 | ||
Taxable income | 140 |
The conversion costs incurred by A Corporation are more than 20 percent of total costs of goods sold ($70/$210 or 33 percent). Although the product sold, an engine, is not sufficiently distinguishable from the components to constitute a substantial transformation of the purchased parts within the meaning of subdivision (ii) of this subparagraph, A Corporation will be considered under this subdivision to have manufactured the product it sells.
Selling price | $2,500 | ||
Cost of goods sold: | |||
Material- | |||
Acquired from related persons | $1,200 | ||
Acquired from others | 275 | ||
Total material | $1,475 | ||
Conversion costs (direct labor and factory burden) | 25 | ||
Total cost of goods sold | 1,800 | ||
Gross profit | 700 | ||
Administrative and selling expenses | 300 | ||
Taxable income | 400 |
The product sold, an automobile, is not sufficiently distinguishable from the components purchased (the engine, transmission, etc.) to constitute a substantial transformation of purchased parts within the meaning of subdivision (ii) of this subparagraph. Although conversion costs of B Corporation are less than 20 percent of total cost of goods sold ($325/$1800 or 18 percent), the operations conducted by B Corporation in connection with the property purchased and sold are substantial in nature and are generally considered to constitute the manufacture of a product. Corporation B will be considered under this subdivision to have manufactured the product it sells.
The foreign base company sales income for the taxable year from purchases of the property from related persons and sales to unrelated persons shall be the amount which bears to the amount described in subdivision (iv) (a) of this subparagraph the same ratio that the amount described in subdivision (ii) (b) of this subparagraph bears to the total cost of components used in the product which is sold. The foreign base company sales income for the taxable year from purchases of the property from related persons and sales to related persons is the amount which bears to the amount described in subdivision (iv) (b) of this subparagraph the same ratio that the amount described in subdivision (ii) (b) of this subparagraph bears to the total cost of components used in the product which is sold.
The foreign base company sales income for the taxable year from purchases of the property from unrelated persons and sales to related persons is the amount which bears to the amount described in subdivision (iv) (b) of this subparagraph the same ratio that the amount described in subdivision (ii) (a) of this subparagraph bears to the total cost of components used in the product which is sold. The application of this subparagraph may be illustrated by the following examples:
Cost of components purchased from all persons: | ||
Manufactured within country X | $20 | |
Manufactured outside country X | 40 | |
Total cost | 60 | |
Cost of components manufactured outside country X: | ||
Purchased from unrelated persons | 10 | |
Purchased from related persons | 30 | |
Total cost | 40 | |
Gross income from sales: | ||
Gross receipts from sales | 120 | |
Cost of goods sold: | ||
Components | $60 | |
Direct labor and factory burden | 10 | 70 |
Gross income | 50 | |
Gross income from sales: | ||
For use within country X | 26 | |
For use outside country X | 24 | |
Gross income | 50 | |
Foreign base company sales income from purchases from related persons and sales to unrelated persons ($24 * $30/$60) | 12 |
The facts are the same as in example 1 except that none of the purchases are from related persons and some of the sales for use outside country X are to related persons. Unless the records of C Corporation show that a different apportionment of income is proper, the foreign base company sales income for 1964 is determined in the following manner upon the basis of the following additional factual classification for such year:
Gross income from sales for use outside country X- | |
To unrelated persons | $8 |
To related persons | 16 |
Total gross income | 24 |
Foreign base company sales income from purchases from unrelated persons and sales to related persons ($16 * $40/$60) | 10.67 |
Foreign base company sales income from purchases from related persons and sales to unrelated persons ($8 * $30/$60) | $4.00 |
Foreign base company sales income from purchases from related persons and sales to related persons ($16 * $30/$60) | 8.00 |
Foreign base company sales income from purchases from unrelated persons and sales to related persons ($16 * $10/$60) | 2.67 |
Total foreign base company sales income | 14.67 |
Example. CFC, a controlled foreign corporation organized under the laws of Country A, is an 80 percent partner in Partnership X, a partnership organized under the laws of Country B. Partnership X performs activities in Country B that would constitute the manufacture of Product O, within the meaning of paragraph (a)(4) of this section, if performed directly by CFC. Partnership X, through its sales offices in Country B, then sells Product O to Corp D, a corporation that is a related person with respect to CFC, within the meaning of section 954(d)(3), for use within Country B. CFC's distributive share of Partnership X's sales income is not foreign base company sales income because the manufacturing exception of paragraph (a)(4) of this section would have applied to exclude the income from foreign base company sales income if CFC had earned the income directly.
Example. All activities of controlled foreign corporation conducted through sales branches and manufacturing branch.
Example. Multiple branches that satisfy paragraph (a)(4)(i).
X Country | Y Country | Z Country | |
Income of: | |||
Home office | $200,000 | ||
Branch B | $100,000 | ||
Branch C | $100,000 | ||
Income tax | $100,000 | $20,000 | $20,000 |
Effective rate of tax | 50% | 20% | 20% |
By applying subparagraph (1)(i) of this paragraph and by treating branch B as though it were the only branch of A Corporation, branch B is treated as a separate wholly owned subsidiary corporation of A Corporation in determining foreign base company sales income of A Corporation for 1963, the 20 percent rate of tax on the income of such branch being less than 90 percent of, and at least 5 percentage points less than, the 50 percent rate of tax which would apply to the income of branch B under the laws of country X if, under the laws of such country, all the income of A Corporation for 1963 derived through the home office and branch B were derived from sources within country X. Moreover, by applying subparagraph (1)(i) of this paragraph and by treating branch C as though it were the only branch of A Corporation, branch C is treated as a separate wholly owned subsidiary corporation of A Corporation, the 20 percent rate of tax on the income of such branch being less than 90 percent of, and at least 5 percentage points less than, the 50 percent rate of tax which would apply to the income of branch C under the laws of country X if, under the laws of such country, all the income of A Corporation for 1963 derived through the home office and branch C were derived from sources within country X. The income derived by branch B and branch C, respectively, each treated as a separate corporation, from the sale by or through each of them for use, consumption, or disposition outside country Y and country Z, respectively, is treated as income from the sale of personal property on behalf of A Corporation, a related person, and constitutes foreign base company sales income for 1963. The home office of A Corporation, treated as a separate corporation, derives no foreign base company sales income for 1963 since it produces the articles which are sold.
Examples 6-7 [Reserved]
26 C.F.R. §1.954-3