2002 U.S. Tax Ct. LEXIS 13">*56 In Kewanee Oil Co. v. Commissioner, 62 T.C. 728">62 T.C. 738, we held that the taxpayer's income from the sale of "substantially all of its oil-and gas-producing property and associated 118 T.C. 226">*248 equipment, the source of virtually its entire revenues until that time" was

derived from the termination of the major portion of its business and not from the active conduct thereof; accordingly, * * * [the taxpayer] did not meet the "active conduct" requirement set forth in section 921 and was therefore not entitled to the deduction provided in section 922. [62 T.C. 728">Id. at 739.]

In United States Gypsum Co. v. United States, 304 F. Supp. at 642-643, the opinion upon which respondent relies, the District Court discussed approvingly the opinion of the Court of Appeals for the Ninth Circuit in 308 F.2d 520">Frank v. International Canadian Corp., supra.The District Court then contrasted the factual setting of 308 F.2d 520">Frank v. International Canadian Corp., supra, with its own findings and conclusions based on the record before it, as follows (304 F. Supp. 627">304 F. Supp. at 643):

Clear from a reading of the Frank rationale and2002 U.S. Tax Ct. LEXIS 13">*57 holding is that the subsidiary there took over business previously performed by the parent. The parent transferred its selling operations to the subsidiary. The court further found there that the subsidiary was not "inactive":

"The facts also show clearly that International earned its income by performing services. International resolved shipping problems with Alaska Pine; it handled all the export declarations and customs papers; it incurred and paid $ 124,814.72 in freight charges; it was studying the possibility of expanding its business in Canada. In the words of the district court:

"* * * in entire good faith International was organized as a corporation and at all times operated as a bona fide separate entity engaged in substantial and legitimate business activities from which its gross income was derived." (308 F.2d 520">308 F.2d at 527)

In its dealings with the affiliate mining companies2002 U.S. Tax Ct. LEXIS 13">*58 Export performed no services; resolved no problems; incurred no freight charges; and engaged in no genuine business activities.

I therefore find and conclude that the portion of its income derived from the purchase of crude gypsum from its sister companies and the resale to its parent was not income derived from the active conduct of a trade or business within the meaning of section 921 (26 U.S. C. 921). I further find and conclude that for this reason Export did not qualify as a Western Hemisphere Trade Corporation and was not entitled to claim the benefits of the special deductions under the Act.

Thus, the opinion in 532 U.S. 200">United States Gypsum Co. v. United States, supra, was not thought by the District Court as being "contrary" to the rationale of 308 F.2d 520">Frank v. International Canadian Corp., supra. Rather, the difference in relevant facts in those two cases led to the difference in result.

118 T.C. 226">*249 In the instant cases, EAPR (1) bought, from unrelated sellers, and owned all the equipment used in Puerto Rico to manufacture the video games; (2) bought, from unrelated2002 U.S. Tax Ct. LEXIS 13">*59 suppliers, and owned all the raw materials and components used in Puerto Rico to manufacture the video games; and (3) was lessee of the facilities in Puerto Rico in which the equipment and the raw materials and components were used in Puerto Rico in manufacturing the video games. EAPR's manager lived in Puerto Rico and worked in the leased space; he supervised PPI employees in charge of managing materials and inventory control and saw to it that assembly line mistakes were corrected. The role that EAPR played regarding video game manufacturing in Puerto Rico was much more like what the taxpayer did in 308 F.2d 520">Frank v. International Canadian Corp., supra, than what the taxpayer did in 532 U.S. 200">United States Gypsum Co. v. United States, supra.

In MedChem (P. R.), Inc. v. Commissioner, 116 T.C. 308">116 T.C. 337-343, we discussed the factual elements that, in the aggregate, led us to conclude that the taxpayer-subsidiary therein was not in the active conduct of a trade or business in Puerto Rico during the statutorily relevant 3-year time period. ¹⁰ Although the general fact pattern of the instant cases has some similarities to that in MedChem, the aggregate of the differences2002 U.S. Tax Ct. LEXIS 13">*60 between the facts of MedChem and the facts of the instant cases convinces us that the instant cases fall on the other side of the line; i.e., that EAPR actively conducted a trade or business in Puerto Rico during the relevant time period. With the caution that our conclusion is based on the aggregate of the differences between the instant cases and MedChem; i.e., that no one difference is critical by itself, we proceed to describe the significant differences.

In MedChem, the taxpayers had acquired from an unrelated entity the assets of a Puerto Rican business that manufactured and sold a specific pharmaceutical (hereinafter2002 U.S. Tax Ct. LEXIS 13">*61 sometimes referred to as the drug). MedChem (P. R.), Inc. v. Commissioner, 116 T.C. 308">116 T.C. 314. The assets were divided between taxpayer-parent and taxpayer-subsidiary; the subsidiary is the corporation that was claimed to qualify for 118 T.C. 226">*250 the possession tax credit under section 936(a). 116 T.C. 308">Id. at 314, 327. The taxpayer-parent got receivables, several noncompetition agreements, goodwill, contract rights, records, patents and related know-how, trademarks, and Food and Drug Administration approvals. 116 T.C. 308">Id. at 314-315. The taxpayer-subsidiary got receivables, inventory, and machinery and equipment located in the unrelated entity's manufacturing facility. Idem.

As part of the sale, the unrelated entity agreed to continue manufacturing the drug for the taxpayer-subsidiary using the unrelated entity's facility and labor, and using the raw materials and equipment furnished by the taxpayer-subsidiary. 116 T.C. 308">Id. at 316. We found that the employees of the unrelated entity "performed every task required in the manufacturing process, including the supervision thereof, * * * without the right or ability of * * * [the taxpayers] to manage, direct, or control any2002 U.S. Tax Ct. LEXIS 13">*62 part of the manufacturing process." 116 T.C. 308">Id. at 339. Indeed, except for the MedChem cases themselves, the taxpayers had consistently reported in all instances that the unrelated entity was the drug's manufacturer. 116 T.C. 308">Id. at 340. As a reflection of this, the labels which the taxpayer-subsidiary used during one of the years at issue in MedChem designated the unrelated entity as the manufacturer of the drug. 116 T.C. 308">Id. at 315-316. We concluded that all of the business activities related to the manufacture of the drug were directed and controlled by the unrelated entity out of its Puerto Rico-based operation, and by the taxpayer-parent, out of its U.S.- based facility. 116 T.C. 308">Id. at 338.

The taxpayer-parent distributed, marketed, and sold the drug in the United States. 116 T.C. 308">Id. at 339. We found that the taxpayer-subsidiary "was expressly prohibited by the processing agreement from taking a managerial role in the manufacturing process." 116 T.C. 308">Id. at 342. We concluded that the substance of the work as to the manufacturing of the drug, which required specialized skill and expertise, was performed by the unrelated entity. 116 T.C. 308">Id. at 343.2002 U.S. Tax Ct. LEXIS 13">*63

The facts of the instant cases are distinguishable from those in MedChem in several material respects.

In MedChem, before the acquisition described supra, the unrelated entity manufactured the drug in Puerto Rico, and the taxpayer-parent did not have anything to do with the drug. 116 T.C. 308">Id. at 310-311, 314. After this acquisition, the unrelated 118 T.C. 226">*251 entity continued to manufacture the drug at its own facility with its own labor and was solely responsible for any problem that arose up to the time the finished product was delivered to a carrier for shipment to the taxpayer-parent. 116 T.C. 308">Id. at 317. Thus, although the acquisition affected ownership, it did not affect what happened "on the ground" in Puerto Rico. In contrast, in the instant cases, EA was in the entertainment software business and relied on unrelated manufacturers in Taiwan and Japan. After EAPR was created, the entertainment software was manufactured in Puerto Rico, using facilities and labor that PPI leased to EAPR, and using equipment that EAPR bought from unrelated sellers. Thus, the arrangements following the creation of EAPR created an entirely new business in Puerto Rico, using facilities, labor, and equipment2002 U.S. Tax Ct. LEXIS 13">*64 that had not previously been used in this business. In contrast to MedChem, what happened "on the ground" in Puerto Rico in the instant cases was substantially different from the past.

In MedChem, we concluded that the taxpayer- subsidiary's

"business presence" in Puerto Rico was insignificant in that it did not contribute significantly to Puerto Rico's economy either by creating new jobs or by providing capital to others to build new plants. * * * All of * * * [the taxpayer-subsidiary's] business activities after June 30, 1990, were based in Woburn, * * * [Massachusetts,] and * * * [the taxpayers'] primary connection to Puerto Rico during that time was to further its efforts to move the manufacturing of * * * [the drug] to Woburn * * *. 116 T.C. 308">Id. at 338-339.

In contrast, in the instant cases, the effect of EAPR's operations was to transfer to Puerto Rico the manufacturing operations that had hitherto been performed almost halfway around the world.

In MedChem, we found that the taxpayer-subsidiary "was expressly prohibited by the processing agreement from taking a managerial role in the manufacturing2002 U.S. Tax Ct. LEXIS 13">*65 process." 116 T.C. 308">Id. at 342. In contrast, in the instant cases, PPI and EAPR agreed that (1) all the lease employees "shall be under the general supervision of EAPR", and (2) "EAPR shall also supervise and control all technical and product-related training required by" the lease employees. The parties' stipulations make it clear that the EAPR manager position was filled "at all times during the years at issue" by "a manager who * * * worked in the leased space covered by the Lease" and who was compensated 118 T.C. 226">*252 by EAPR. See supra table 2. Also, it is evident that Alvarado directly supervised PPI employees as to certain parts of the manufacturing process. He was not a foreman for PPI's assembly line employees, nor did he hire and fire them. However: (1) He made sure that mistakes were corrected; (2) he "[watched] out for EA's interests" as to the assembly work; and (3) "If things were going wrong [as to the assembly line], then PPI would call me in for assistance."

In MedChem (P. R.), Inc. v. Commissioner, 116 T.C. 308">116 T.C. 338 n.14, we stated as follows:

14 We distinguish Frank v. International Canadian Corp., 308 F.2d 520">308 F.2d 520 (9th Cir. 1962), a case cited2002 U.S. Tax Ct. LEXIS 13">*66 by petitioners to support their assertion that MedChem P. R. actively conducted a trade or business by virtue of its sales activity. The relevant holding in Frank concerned whether the taxpayer actively conducted a trade or business and did not concern where that trade or business was located.

In the instant cases, EAPR's activities in Puerto Rico with respect to the video games are critically different from the taxpayer's activities in 116 T.C. 308">MedChem (P.R.), Inc. v. Commissioner, supra (where the taxpayer's only activities in Puerto Rico were the taking of steps to move the business from Puerto Rico to Massachusetts), and 62 T.C. 728">Kewanee Oil Co. v. Commissioner, supra (where substantially all the taxpayer's relevant income was derived from the sale of substantially all the taxpayer's relevant business).

Our findings (supra I.F.) lead us to conclude that EAPR, through its manager, participated regularly, continually, extensively, and actively in the management and operation of the manufacturing of video games in Puerto Rico.

In view of the foregoing, we conclude that EAPR actively conducted a trade or business in a U.S. possession within the meaning of section 936(a)(2)(B).

4. Respondent's Other Contentions

a. Genuine Issues of Material Fact

i. Place of Manufacture

Respondent contends as follows on opening brief:

2. There is a factual dispute as to where the video games were manufactured. * * * Whether2002 U.S. Tax Ct. LEXIS 13">*68 video games were manufactured in the Dominican 118 T.C. 226">*253 Republic or Puerto Rico is a crucial factor in ascertaining whether EAPR was engaged in the active conduct of a trade or business in Puerto Rico.

On answering brief, respondent objects to petitioners' proposed finding of fact that "The video games at issue that EA purchased from EAPR were manufactured in Puerto Rico. [Stip. 27]", as follows:

22. Objection. The evidence establishes that the video games that EA purchased from EAPR were manufactured by PPI employees in PPI's Dominican Republic facilities as well as in PPI's Puerto Rico facilities. See RRPSOF  17.

However, the parties stipulated as follows: "27. The video games at issue that EA purchased were manufactured in Puerto Rico." Note that respondent does not contend that EA bought the video games from PPI; respondent accepts petitioners' contention that EA bought the video games from EAPR. Respondent's only objection is as to the geographic location of the manufacturing -- the very point that the parties resolved by their stipulation.

Rule 91(e) provides, in pertinent part, as follows:

2002 U.S. Tax Ct. LEXIS 13">*69 (e) Binding Effect: A stipulation shall be treated, to the extent of its terms, as a conclusive admission by the parties to the stipulation, unless otherwise permitted by the Court or agreed upon by those parties. The Court will not permit a party to a stipulation to qualify, change, or contradict a stipulation in whole or in part, except that it may do so where justice requires. * * *

Respondent has not asked to be relieved from this stipulation, and nothing that has been brought to the Court's attention leads us to conclude that justice requires us, sua sponte, to relieve respondent from this stipulation. Compare the instant cases with, e.g., BankAmerica Corp. v. Commissioner, 109 T.C. 1">109 T.C. 1, 109 T.C. 1">12 (1997) (where we concluded that, in the interest of justice, the taxpayer should be relieved from the effects of a stipulation, but only for a specified "narrow purpose"); Stamos v. Commissioner, 87 T.C. 1451">87 T.C. 1451, 87 T.C. 1451">1454-1456 (1986) (where we "concluded that the language in question from the stipulation filed herein is so ambiguous and indefinite that it does not constitute a stipulation at all", and thereupon2002 U.S. Tax Ct. LEXIS 13">*70 denied a motion for partial summary judgment).

Respondent explains the stipulation as follows:

118 T.C. 226">*254 The stipulations listed by Petitioners do not preclude evidence that part of the games were manufactured elsewhere, e.g., the Dominican Republic, since they refer only to what has taken place in Puerto Rico and do not address activities outside Puerto Rico.

The effect of this explanation is to treat Stipulation 27 as though it read as follows:

27. The video games at issue that EA purchased were manufactured in Puerto Rico, except to the extent they were manufactured in the Dominican Republic.

We refuse to allow respondent to unilaterally reform the filed stipulation in this matter. We do not accept respondent's unilateral explanation that the stipulation means so much less than it appears to mean.

We conclude that there is no genuine issue as to the material fact of Puerto Rican manufacture of the relevant video games.

ii. Control Over Manufacturing Process

Respondent contends as follows:

3. There is a factual dispute as to whether EAPR had any control over2002 U.S. Tax Ct. LEXIS 13">*71 the manufacturing process. According to Alvarado, there were significant conflicts between EA and PPI because EA did not want the video games to be manufactured at PPI's plant in the Dominican Republic. Alvarado Decl. 34-35. The manufacturing was done by PPI workers in the Dominican Republic because it was cheaper. Alvarado Decl. 22. Obviously, if EA (or EAPR) had been in control of the manufacturing process, the video games would not have been manufactured in the Dominican Republic by PPI against EA's wishes. Whether EAPR had any control over the manufacturing process is directly related to the issue of whether EAPR controlled and supervised the PPI employees. [Fn. ref. omitted.]

This asserted genuine issue of material fact is bottomed on the contention of Dominican Republic manufacture. As we have pointed out supra, i. Place of Manufacture, the parties' stipulation has foreclosed this contention. Thus, this contention as to EAPR's control over the manufacturing process is not a genuine issue as to a material fact.

2002 U.S. Tax Ct. LEXIS 13">*72 iii. Supervision Over Lease Employees

Respondent contends as follows:

1. There is a factual dispute as to whether the one EAPR employee (i.e., Willie Zamora, Jose Cruz, or Miguel Orlando Alvarado) supervised or controlled 118 T.C. 226">*255 the PPI employees who manufactured the video games or the EA employees who performed all of EAPR's daily operations.

Respondent relies primarily on Alvarado's declaration, which respondent offered in support of respondent's opposition to petitioners' motion. Alvarado's declaration indicates that he was EAPR's manager for most of the period before the Court. Alvarado's declaration states that

(1) he oversaw the transferring of raw materials, work in process, and finished goods, and in this capacity he "had two or three PPI employees under me in the materials management function"; and

(2) he --

also oversaw the PPI employees who worked on inventory control, which meant that I had to make sure that they were doing the cycle counts and that they entering [sic] the correct data onto paper2002 U.S. Tax Ct. LEXIS 13">*73 inventory reports. I was responsible for entering the data into the computer. I oversaw that the correct data was entered into the computer for [MRP System] on the Puerto Rican end. * * *

In general I did not deal directly with assembly line operation, since this was handled by PPI. However, if I saw a mistake being made, then I would see that it got corrected. My basic function in regard to the assembly work was to watch out for EA's interests. However, PPI handled the daily production requirements and PPI scheduled the employees, assigned positions to them, handled things on the assembly floor, took care of sick leave and other personnel problems. If things were going wrong, then PPI would call me in for assistance. Otherwise, PPI handled everything.

Respondent also relies on Cruz' declaration, which is as follows, in entirety:

1. I reside at Calle Leonor AV 21, 4th Extension, Levittown Lakes, Puerto Rico 00949.

2. I was employed by Electronic Arts Puerto Rico for a period of 3

3. I was hired about two weeks2002 U.S. Tax Ct. LEXIS 13">*74 before the death of Mr. Zamora as his assistant.

4. I never held the position of General Manager nor did I ever carry out the duties of General Manager.

5. The focus of my work as assistant to Mr. Zamora was with inventory control, particularly counting inventory, communicating with Electronic Art [sic] in California in regard to inventory needs, and I also had some responsibilities with regard to shipping.

6. My employment was terminated 1

Respondent further contends that "Absent first hand evidence of the business practices prior to Cruz and Alvarado, 118 T.C. 226">*256 Respondent is entitled to the inference that the same business practices were in effect while Zamora was employed at EARP [sic]."

As we have noted supra (in note 6, and in the description in II. A. In General, of the affidavits and declarations that the parties submitted), for purposes of the instant partial summary judgment motion, we have treated the statements as to matters of fact in the Alvarado declaration as though (1) they accurately describe the events they deal with, and (2) the events that occurred before2002 U.S. Tax Ct. LEXIS 13">*75 Alvarado was hired were consistent with these statements -- except, of course, to the extent that the statements are contrary to the parties' stipulations. We give little weight to the Cruz declaration's account of the 2 weeks when he was Zamora's assistant and the 1-

We conclude from the foregoing that, for the period before the Court, EAPR's employees provided substantial supervision to the PPI employees (the lease employees) who did the video game manufacturing for EAPR in Puerto Rico. Although there is room for further factual development, the material offered by respondent leads us to the conclusion that, if any such development were to show us that respondent's proffered materials fully and accurately described the facts, then we would conclude that the supervision requirement of MedChem has been satisfied.

In other words, on this issue, petitioners win on the facts as described in respondent's materials. Thus, although there may be a genuine issue as to the extent of EAPR's supervision of the manufacturing process, there is not a genuine issue as to a material fact with regard to EAPR's qualification for possession tax credits for the years in issue.

b. EAPR Ineligible As2002 U.S. Tax Ct. LEXIS 13">*76 a Matter of Law

i. WHTC Cases

Respondent contends that "Cases arising under section 921 and 922 [the Western Hemisphere Trade Corporation provisions] are not applicable to a section 936 issue. See Norfolk Southern Corp. v. Commissioner, 104 T.C. 13">104 T.C. 13 at 104 T.C. 13">41 [(1995)]."Firstly, the cited opinion, Norfolk S. Corp. v. Commissioner, 104 T.C. 13">104 T.C. 13, modified 104 T.C. 417">104 T.C. 417 (1995), affd. 140 F.3d 240">140 F.3d 240118 T.C. 226">*257 (4th Cir. 1998), neither states nor stands for the proposition for which respondent cites it. The cited opinion does not even involve or cite sections 921, 922, or 936 or their predecessors. ¹¹

2002 U.S. Tax Ct. LEXIS 13">*77 Secondly, respondent's brief does not present to us, or direct our attention to, an analysis to support the proposition that WHTC opinions "are not applicable to a section 936 issue."

Thirdly, as opinions of this and other courts have shown, the histories of WHTC legislation and possessions corporation legislation have been intertwined for the entire history of the WHTC provisions. See, e.g., Kewanee Oil Co. v. Commissioner, 62 T.C. 728">62 T.C. 728, 62 T.C. 728">735-738 (1974), and opinions cited therein, affd. without published opinion 517 F.2d 1398">517 F.2d 1398 (3d Cir. 1975) (a WHTC "active conduct of a trade or business" case in which the 1921 Act predecessor of section 936 is described as having "laid the conceptual groundwork," for, among other provisions, the WHTC provisions); Burke Concrete Accessories, Inc. v. Commissioner, 56 T.C. 588">56 T.C. 588, 56 T.C. 588">596-599 (1971), and opinions cited therein (a consolidated return case in which a section 1504(b)(4) reference to section 931 is construed by taking into account the agreement of the parties that the corporation there involved was both a WHTC and a possessions corporation). This intertwining of historical development increases the likelihood2002 U.S. Tax Ct. LEXIS 13">*78 that the Congress was actually aware that 118 T.C. 226">*258 "active conduct of a trade or business" figured in both the WHTC provisions and in section 936.

In light of the foregoing, we reject respondent's contention that WHTC cases "are not applicable to a section 936 issue", and we conclude that respondent's citation of 104 T.C. 13">Norfolk S. Corp. v. Commissioner, supra, does not provide any support for respondent's contention. On the contrary, we regard WHTC opinions as authority with respect to the meaning of identical language in section 936.

ii. Expressio Unius * * *

Respondent contends as follows:

"There is a venerable rule of statutory construction which states: expressio unius est exclusio alterius (the expression of one thing implies the exclusion of another thing)." Section 936(a)(2)(B) does not refer to attribution of activities, such as contract manufacturing; however, section 936(h)(5)(B)(iii)(II) does refer to "contract manufacturing." "Where Congress includes particular language in one section of a statute but omits it in another section of the same [statute], it is generally2002 U.S. Tax Ct. LEXIS 13">*79 presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion."

In choosing the words "such domestic corporation" as the statutory standard in section 936(a)(2)(B), without reference to attribution of another's activities, such as the activities of a contract manufacturer, Congress limited consideration exclusively to the domestic corporation's conduct in the possession. In other words, the activities of others cannot be attributed to the domestic corporation for purposes of section 936(a)(2)(B). [Citations omitted.]

In effect, the "expressio unius" rule to which respondent draws our attention is merely the obverse of what we have discussed supra note 9 and accompanying text. Ordinarily, in statutes and other legal documents, it is presumed that if the drafter uses the same terminology in several places then the drafter intends the same meaning in each such place. By the same token it is presumed that if the drafter varies the terminology then the drafter intends that the meaning also varies. Or, as Dickerson put it in the Interpretation and Application of2002 U.S. Tax Ct. LEXIS 13">*80 Statutes 224 (1975), it is presumed that the drafter "has committed neither 'elegant variation' nor 'utraquistic subterfuge'."

A problem with the "expressio unius" rule is that, although the rule tells us that a different meaning is probably intended, it often is difficult to determine what that different 118 T.C. 226">*259 meaning is. See, e.g., Black's Law Dictionary 602 (7th ed. 1999). The instant cases illustrate how the party that invokes this rule can find that the rule favors the other side. See, e.g., Ginsburg, "Making Tax Law Through the Judicial Process," 70 A.B.A.J. 74, 76 (1984).

In general, section 936(h) deals with the treatment of intangible property income. It provides that the domestic shareholders of a qualified domestic corporation which elects the possession tax credit are required to include in their gross income as of the close of the electing corporation's tax year their pro rata share of the possessions corporation's intangible property income as United States source income unless an election out is made by the possessions corporation. Sec. 936(h)(1)(A). However, the general rule of possessions corporations is inapplicable if an eligible possessions corporation2002 U.S. Tax Ct. LEXIS 13">*81 elects out of its provisions by electing to use either the cost sharing method or the profit split method for computing its taxable income. This election may be made under section 936(h)(5). For purposes of subparagraph (B) of section 936(h)(5), costs incurred by the electing corporation or a member of its affiliated group in connection with contract manufacturing by a person other than a member of the affiliated group are not treated as production costs of the electing corporation in the possession or as direct material costs or as compensation for services performed in the possession. Sec. 936(h)(5)(B)(iii)(II). Rather, they are treated as the direct labor costs of the affiliated group. Id.

The effect of the term "contract manufacturing" in section 936(h)(5)(B)(iii)(II) is to make it more difficult to establish a substantial business presence in a possession -- within the meaning of section 936(h)(5)(B)(i) -- when the possessions corporation uses contract manufacturing for its manufacturing activities. The term appears in a rule which is statutorily directed to apply "For purposes of this subparagraph," that is, subparagraph (B) of section 936(h)(5). Thus, when examined in context, 2002 U.S. Tax Ct. LEXIS 13">*82 the "expressio unius" canon of construction suggests that contract manufacturing is to be given a special unfavorable (for the taxpayer) effect only for purposes of section 936(h)(5)(B), and that for all other section 936 purposes contract manufacturing is not to be given an effect unfavorable to the taxpayer. It follows that the canon of construction that respondent urges upon us does not lead to the result for 118 T.C. 226">*260 which respondent contends, but rather (when the context is considered) it supports the result for which petitioners contend.

iii. Plain Meaning; Legislative History

Respondent contends that the plain meaning of "such domestic corporation" in the statute, and the plain meaning of "it" and "its gross income" in the report of the Senate Finance Committee, lead to the conclusion that "only the possessions corporation's conduct can be considered for purposes of satisfying the active business requirement."

The same statutory language has been in the predecessors of section 936 since the initial enactment -- section 262 of the Revenue Act of 1921, Pub. L. 67-98, 42 Stat. 227, 271. The same statutory language was in the WHTC provisions -- sec. 109, I.R.C. 1939. 2002 U.S. Tax Ct. LEXIS 13">*83 Essentially the same argument was presented to, and rejected by, the Court of Appeals for the Ninth Circuit in Frank v. International Canadian Corp., 308 F.2d 520">308 F.2d at 526-527. In our recent opinion in MedChem (P. R.), Inc. v. Commissioner, 116 T.C. 308">116 T.C. 337, we interpreted the statute to allow attribution of the services of nonemployees if certain conditions are satisfied.

Thus, the courts have interpreted this language to not preclude attribution as a matter of law, but rather as permitting attribution or not depending on the factual setting. A careful examination of respondent's contention that the plain meaning of the statute and its legislative history precludes attribution leads us to conclude that such a plain meaning cannot be drawn from the statute and its legislative history.

5. Holding

We conclude that EAPR's manufacturing arrangement in Puerto Rico met the requirements of the section 936 active-conduct- of-a -trade-or-business test as we interpreted it in MedChem. This is a highly factual determination. Frank is also persuasive in this context.

Further, we conclude that petitioners have met their burden of showing that there is not any genuine issue2002 U.S. Tax Ct. LEXIS 13">*84 as to any material fact with respect to whether EAPR actively conducted a trade or business in Puerto Rico within the meaning of section 936(a)(2)(B).

118 T.C. 226">*261 Accordingly, we hold that petitioners are entitled to summary judgment on this issue.

1. The Statutory Setting of the Dispute

If a possessions corporation has "intangible property income", then that income is generally treated as income of the possessions corporation's shareholders, in accordance with rules set forth in section 936(h). However, a possessions corporation may "elect out" under section 936(h)(5)¹² and 118 T.C. 226">*262 choose to compute its relevant taxable income under one of the methods described in section 936(h)(5)(C) -- the cost sharing method or the profit split method -- but only if the possessions corporation "has a significant business presence" in a possession. Sec. 936(h)(5)(B)(i). Section 936(h)(5)(B)(ii) provides that a possessions corporation "has a 'significant business presence'" in a possession if the corporation satisfies any one of three statutory tests. These three tests are (1) the 25-percent-value -added test, (2) the direct-labor-production test, and2002 U.S. Tax Ct. LEXIS 13">*85 (3) the direct-labor test for purchases and resales, set forth in subclauses (I), (II), and (III), respectively, of section 936(h)(5)(B)(ii). However, the final flush language of section 936(h)(5)(B)(ii) provides that, if the possessions corporation claims the profit split method with respect to a product that the possessions corporation produces in whole or in part in the possession, then the possessions corporation does not have a significant business presence in that possession --

2002 U.S. Tax Ct. LEXIS 13">*86 unless such product is manufactured or produced in the possession by the electing corporation within the meaning of subsection (d)(1)(A) of section 954.

Respondent refers to the alternative tests set out in the three subclauses of section 936(h)(5)(B)(ii) as "the first prong", and refers to the test set out in the final flush language of section 936(h)(5)(B)(ii) as "the second prong". That terminology appears to be helpful, and we use it in the instant opinion.

2. Parties' Contentions

Many of the parties' contentions on this issue are similar to those that they made with respect to the active-conduct-of-a- trade-or-business issue. In particular, respondent contends that petitioners' partial summary judgment motion must be denied because (1) "as a matter of law * * * Petitioners cannot attribute the activities of the PPI [employees] or EA employees to EAPR" to satisfy the significant-business-presence test under section 936(h)(5)(B), and (2) if attribution is not per se impermissible, then "there are material facts in dispute that are relevant to the statutory" test. 118 T.C. 226">*263 As to attribution, respondent contends that (a) it is contrary to the plain meaning2002 U.S. Tax Ct. LEXIS 13">*87 of the statutory text; (b) it violates the "firmly established rule of statutory construction that states: expressio unius est exclusio alterius (the expression of one thing implies the exclusion of another thing)"; (c) the legislative history shows that the Congress did not intend to permit attribution to satisfy the profit split method; and (d) absent attribution, EAPR's own activities do not constitute the manufacture or production of the video games.

Respondent urges that the "Congress did not intend its reference [in sec. 936(h)(5)(B)(ii) (final flush)] to section 954(d)(1) to lessen the requirement that the corporation electing the profit split method must manufacture the product", without "taking into account the activities of a contract manufacturer." Also, respondent contends, the Court should not take into account respondent's interpretation of section 954 in Rev. Rul. 75-7, 1975-1 C.B. 244. 13 Respondent contends that, if attribution is not prohibited as a matter of law, then there are the following genuine issues of material fact: (a) Whether the video games were manufactured in Puerto Rico or in the Dominican Republic; and (b) "exactly what level of involvement2002 U.S. Tax Ct. LEXIS 13">*88 in Puerto RicoEAPR had in the manufacturing process * * * and whether that level of manufacturing activity is significant enough to permit the attribution of the activities of the PPI employees to EAPR for purposes of the significant business presence test."

2002 U.S. Tax Ct. LEXIS 13">*89 Petitioners contend that EAPR satisfied the first prong of the significant business presence test by satisfying the direct labor test of section 936(h)(5)(B)(iii)(II). Petitioners contend that EAPR satisfied the second prong of the significant business presence test, and thus is eligible to use the profit split method, because EAPR met all the manufacturing requirements of section 1.954-3(a)(4), Income Tax Regs. Petitioners maintain that PPI was not the manufacturer within the 118 T.C. 226">*264 meaning of the cited regulation. Petitioners also rely on the inventory provisions (sections 471 and 263A, and the regulations thereunder, and Rev. Rul. 81-272, 1981-2 C.B. 116) and on Rev. Rul. 75-7, 1975-2 C.B. 244, to show that EAPR was the manufacturer. Petitioners contend that what EAPR did satisfied the congressional purpose of creating jobs in Puerto Rico.

In response to respondent's "expressio unius" contentions, petitioners maintain that the Congress's inclusion of "contract manufacturing" as a consideration in section 936(h)(5)(B)(iii)(II) that limits the ability of a corporation to qualify for significant business presence treatment, should properly2002 U.S. Tax Ct. LEXIS 13">*90 lead to a conclusion that contract manufacturing does not otherwise limit the ability of a corporation to so qualify.

In response to respondent's contention that the video games, or some of them, were manufactured in the Dominican Republic, petitioners rely on the stipulation that the video games were manufactured in Puerto Rico.

On opening brief, petitioners state that EAPR satisfied the first prong "and Respondent does not contend otherwise." Respondent states that "Respondent did not contend otherwise, however, until having obtained the unsigned Declaration of Miguel Orlando Alvarado." The only objection that respondent then states as to the first prong is that "it is highly likely that some of the direct labor costs claimed by Petitioners to have been expended in the possession were really expended in the Dominican Republic."

3. Summary of Conclusions

As we have stated supra (B.4.a.i. Place of Manufacture), we view the parties' stipulations differently than respondent. In the relevant stipulations -- executed and filed 9 days after respondent completed the Alvarado Declaration that respondent submitted in opposition to petitioners' summary judgment motion -- the parties have2002 U.S. Tax Ct. LEXIS 13">*91 agreed that "the video games at issue" were manufactured in Puerto Rico. This precludes respondent from contending that, to some extent, the video games that are relevant in the instant cases were manufactured in the Dominican Republic or any place else other than Puerto Rico. Thus, the only predicate of respondent's only 118 T.C. 226">*265 challenge to EAPR's satisfaction of the first prong drops out, and petitioners are entitled to partial summary judgment that EAPR satisfied the first prong.

This leaves the second prong as the only bone of contention on this issue, whether EAPR satisfies the requirement that the video games were "manufactured or produced" in Puerto Rico "by" EAPR "within the meaning of subsection (d)(1)(A) of section 954."

Our examination of (1) section 936(h)(5)(B)(ii) and the legislative history of that provision's enactment in 1982, and (2) section 954(d)(1)(A) and the legislative history of that provision's enactment in 1962, convinces us that there is not an absolute requirement that only the activities actually performed by a corporation's employees or officers are to be taken into account in determining whether the corporation manufactured or produced a product in a possession, 2002 U.S. Tax Ct. LEXIS 13">*92 within the meaning of sections 936(h)(5)(B)(ii) (final flush) and 954(d)(1)(A).

By the same token, petitioners' focus on certain language in section 1.954-3(a)(4), Income Tax Regs., overlooks the regulation's requirement that various actions have been done "by" the corporation being evaluated. Also, because of our evaluation in Spalding v. Commissioner, 66 T.C. 1017">66 T.C. 1017 (1976), we conclude that the Code's inventory provisions that petitioners rely on are not good precedents for interpreting "manufactured or produced" within the meaning of section 954(d)(1)(A).

In light of our rejection of both sides' views of the law, we conclude that proper evaluation of the merits of the instant cases requires a fuller development of the facts and perhaps a fuller exposition of the law consistent with the views we have expressed in this opinion. Under these circumstances, we conclude that petitioners have failed to carry their burden of proving that they are entitled to summary judgment as to the second prong.

4. Analysis

The dispute as to the second prong centers on the meaning of the final flush language of section 936(h)(5)(B)(ii), requiring that the product2002 U.S. Tax Ct. LEXIS 13">*93 have been --

(a) manufactured,

118 T.C. 226">*266 (b) in Puerto Rico,

(c) by EAPR,

and that this have been done "within the meaning of subsection (d)(1)(A) of section 954."

Ordinarily, if we do not have a clear authoritative interpretation of this language in section 936(h)(5)(B)(ii) (final flush), then we would examine other Code provisions that use the same language and treat interpretations of any such Code provisions as authoritative, or at least highly persuasive, definitions of this language. See, e.g., supra note 9 and accompanying text, and our analysis of the meaning of "active conduct of a trade or business". However, we have held that the terms "manufactured" and "produced" are not to be so analyzed.

In Spalding v. Commissioner, 66 T.C. 1017">66 T.C. 1017 (1976), the taxpayers constructed an 8-foot chain link fence around that portion of their auto wrecking yard in which their employees dismantled autos and stored salvaged parts. 66 T.C. 1017">Id. at 1019. The issue before us was whether this fence qualified for the investment credit. Id. In order to resolve this issue we had to decide whether the taxpayers' activity constituted "manufacturing" or "production" within the meaning of section 48(a)(1)(B)(i), I.R.C. 2002 U.S. Tax Ct. LEXIS 13">*94 1954. We opined that the taxpayers' activity apparently would not constitute manufacturing or production under section 954(d)(1)(A) but would under section 341. 66 T.C. 1017">66 T.C. 1020-1021. We concluded as follows, 66 T.C. 1017">id. at 1021:

Therefore we conclude that "manufacturing" and "production" have no uniform generalized meaning in the Code and we must look to the purposes and legislative history of section 48 for their specific meaning here.

To the same effect, see Garnac Grain Co. v. Commissioner, 95 T.C. 7">95 T.C. 7, 95 T.C. 7">30-31 (1990).

As best we can tell, we are most likely to give the same term different meanings in different places (i.e., to conclude that the drafter committed a "utraquistic subterfuge", whether intentionally or by mistake) if the term is short (e.g., the one- word terms "manufacturing" and "production") and is used in common (i. e., nonlegal) speech with a variety of meanings. In any event, it is clear that, as to "manufactured" and "produced", we must focus on the sections directly before us, and we are not likely to draw much assistance 118 T.C. 226">*267 from the interpretation of those words as they appear in other statutes. 2002 U.S. Tax Ct. LEXIS 13">*95 However, see discussion infra (a. Legislative History -- Sec. 936(h)), where a portion of the 1982 Act explanation by the conference committee states as follows:

In general, the figures to be used for these calculations [the first prong tests] will be those used by the island affiliate and its affiliates in their required inventory calculations. [H. Conf. Rept. 97-760, 506, 1982-2 C.B. 600, 619.

On this issue, also, respondent makes the "expressio unius" contention that the reference to "contract manufacturing" in section 936(h)(5)(B)(iii)(II), and the treatment of that subject in section 1.936-5(c), Q& A-3, Income Tax Regs., mean that contract manufacturing is not to be taken into account for any other purposes, including specifically the analysis of whether the possessions corporation is the manufacturer for purposes of our second prong analysis. Respondent takes the position that both the cited statute and the cited regulation apply only to the first prong.

On the basis of the analysis set forth supra (B. 4. b. ii), relating to the "active conduct of a trade or business" issue, we conclude that respondent's contention favors2002 U.S. Tax Ct. LEXIS 13">*96 petitioners to some extent. That is, the presence of a restriction on contract manufacturing when evaluating the first prong, and the absence of that term in the second prong, may mean that contract manufacturing is not restricted under the second prong.

Neither side has drawn our attention to, and we have not found, caselaw interpreting the provisions of either section 936(h)(5)(B)(ii) or section 954(d)(1)(A) as relevant to the instant cases. 14 Accordingly, we examine the origins of these 118 T.C. 226">*268 provisions in order to determine whether we can conclude that petitioners are entitled to summary judgment on the matter before us.

2002 U.S. Tax Ct. LEXIS 13">*97 a. Legislative History -- Sec. 936(h)

Subsection (h) was added to section 936 by section 213(a)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 (hereinafter sometimes referred to as TEFRA 82), Pub. L. 97-248, 96 Stat. 324, 452. The bill (H. R. 4961) as passed by the House of Representatives did not have a provision corresponding to subsection (h). H. Conf. Rept. 97-760, at 504 (1982), 1982-2 C.B. 600, 617; see also Staff of Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Tax Equity And Fiscal Responsibility Act of 1982, 79 n.* (J. Comm. Print 1982) (hereinafter sometimes referred to as JCT Staff General Explanation). The bill as reported by the Senate Finance Committee and as passed by the Senate included subsection (h), as proposed to be enacted by section 218(a)(2) of the bill, but did not have a provision corresponding to paragraph (5) -- the election-out provision. See text of H. R. 4691 reported by the Senate Finance Committee, 258-266; text of the Senate-passed amendments, 263-271. The election-out provision was added in conference, and was described in pertinent part as follows in the Joint Statement of Managers portion2002 U.S. Tax Ct. LEXIS 13">*98 of the conference committee report (H. Conf. Rept. 97-760, 505, 510, 1982-2 C.B. at 617-618, 620; see also JCT Staff General Explanation 85, 87, 92):

Intangible income

An election may be made to treat income attributable to certain intangible property as income of the section 936 corporation eligible for the credit (and certain domestic corporations operating in the Virgin Islands) under two options -- (1) a cost sharing rule and (2) a 50/50 split. The two exceptions with respect to certain types of intangible property found in the 118 T.C. 226">*269 Senate amendment are deleted. In addition, an exception to the Senate bill is made for intangible property which has been licensed since prior to 1948 to a U.S. corporation operating in a possession and is in use by such corporation on the date of enactment.

* * * * *

50/50 split of combined taxable income

In general

This election will provide for a split between the island affiliate and its U.S. affiliates of the combined taxable income of the island affiliate and its U.S. affiliates with respect to

products produced, in whole or in part, in the possession. 50%

of such profit will be allocated to the island affiliate; 50%

will be allocated to its U.S. affiliates.

Significant business presence.

For an island affiliate to be eligible to apply the profit split, it must satisfy2002 U.S. Tax Ct. LEXIS 13">*99 one of the significant business presence tests required for the cost sharing election for the product or type of service covered by the election. [The first prong.] In addition, for products produced in whole or part by the island affiliate in the possession, the profit split method is available only if the island affiliate manufactures or produces the product in the possession within the meaning of the controlled foreign corporation provisions of the Code (section 954). [The second prong.] If the significant business presence test (including the controlled foreign corporation manufacturing or production rule) is not satisfied for a product or type of service within the product area covered by the election, no intangibles income attributable to that product or type of service will be eligible for the credit.

Respondent's brief draws our attention to two passages in the Joint Statement of Managers portion of the conference committee report, as follows:

Congressional concerns regarding the potential adverse effects of the possessions credit on revenues is reflected2002 U.S. Tax Ct. LEXIS 13">*100 in the conference report for section 936(h):

The provision as modified is intended to lessen the abuse caused by taxpayers claiming tax-free income generated by intangibles developed outside of Puerto Rico. The conferees also intend that the provision be administered in a fashion so as to encourage increased Puerto Rican employment and investment in depreciable property at as low a cost to the Treasury as possible. [Quoting H. Conf. Rept. 97-760, at 505 (1982), 1982-2 C.B. 600, 617.

* * * * * * *

To meet its concerns, Congress incorporated a requirement for "real" investment into subsection (h). At this point, Congress inserted the requirement at issue that in order for a possessions corporation to be eligible to elect one of the favorable income allocation methods when intangibles were involved, the corporation had to meet the significant business 118 T.C. 226">*270 presence test. The activities necessary to meet this test were

2002 U.S. Tax Ct. LEXIS 13">*101 to prompt "real and significant business activity" [142 F.3d 442">id. at 507, supra, 1982-2 C.B. at 618-619 in the possessions.

The quoted items appear in the conference committee report; the quoted language "real and significant business activity" is part of the following explanation by the conference committee:

Significant business presence

For an island affiliate to be eligible to elect cost sharing for a product or type of service, it must have and maintain a significant business presence in the possession with respect to that product or type of service. This test is intended to require real and significant business activity in the possessions.

The island affiliate satisfies this requirement with respect to a product or type of service if (1) more than 25 percent of the value added by the affiliated group to the product is added by the island affiliate in a possession or (2) at least 65 percent of the direct labor costs of the affiliated group for the product or service (or in connection with the purchase and sale of2002 U.S. Tax Ct. LEXIS 13">*102 goods not produced by the affiliated group) are incurred by the island affiliate and are compensation for services rendered in the possession. In general, the figures to be used for these calculations will be those used by the island affiliate and its affiliates in their required inventory calculations. The Secretary may prescribe regulations providing significant business presence tests for other appropriate cases (including a value added test for services), which are consistent with the statutory tests.

142 F.3d 442">Id. at 507, supra, 1982-2 C.B. 618-619.

We are at a loss to understand how the foregoing advances the thesis of that part of respondent's brief, that "Attribution is contrary to the legislative history and the purpose behind the enactment of section 936."

Respondent's focus on "cost to the Treasury" led us to examine the revenue estimates for the "Limit on possession credit" provisions, as they appeared in the Senate Finance Committee report (S. Rept. 97-494 Vol. 1, 102-103 (1982)), and the conference committee report (H. Conf. Rept. 97-760, 692-693 (1982)), which are set forth in table 4. ¹⁵

118 T.C. 226">*271 2002 U.S. Tax Ct. LEXIS 13">*103 Table 4

Estimated increase in revenue (millions of dollars) from:

The conference committee added paragraph (5), the election-out provision we deal with in the instant cases, to the Senate amendment's new section 936(h), and also modified other parts of the Senate amendment. We cannot tell from the public record how much of the substantial "cost to the Treasury" (i.e., reduction in the estimated amount of the revenue increase) is attributable to the election-out change and how much is attributable to the other changes. Nevertheless, it is clear that the Congress was willing to forgo substantial revenue (estimated at almost a billion2002 U.S. Tax Ct. LEXIS 13">*104 dollars for fiscal 1987 alone) as a result of the determination to modify the provisions of the Senate Amendment. Under these circumstances, we have no way of knowing (or even making an educated guess) as to whether the "cost to the Treasury" phrase in the Joint Statement of Managers was intended to refer to the election-out provision or any specific other provision in the revisions relating to the possessions credit.

Respondent's other legislative history focus -- the statement that the significant-business-presence test "is intended to require real and significant business activity in the possessions" -- is in that part of the conference committee's explanatory statement that deals with "significant business presence" for purposes of the cost sharing election -- what we have referred to as the first prong. As we have pointed out, supra, respondent has already stipulated away the only challenge that respondent makes on brief as to whether EAPR has satisfied the first prong. Thus, to the extent that the conference committee's explanatory statement is helpful in explaining the test of the first prong, in the instant cases EAPR has met that test.

118 T.C. 226">*272 We conclude that respondent's legislative2002 U.S. Tax Ct. LEXIS 13">*105 history analysis does not add even a makeweight to respondent's view of the law.

However, the legislative history (in this instance, primarily the sequence of events) does tell us something. The Senate amendment does not refer to section 954 in its version of proposed section 936(h). The Conference Committee added paragraph (5) to section 936(h), and specifically made satisfaction of the second prong depend on "the meaning of subsection (d)(1)(A) of section 954."

As a result, in order to understand how to apply the second prong, we must examine subsection (d)(1)(A) of section 954.

b. Legislative History -- Sec. 954(d)

Enacted by the Revenue Act of 1962, section 954(d) is part of subpart F of part III of subchapter N of chapter 1. Through subpart F, the Congress sought to limit the tax-deferral abilities of certain foreign corporations -- those meeting the definition of a "controlled foreign corporation". Vetco, Inc. v. Commissioner, 95 T.C. 579">95 T.C. 579, 95 T.C. 579">585-586 (1990). Under subpart F (secs. 951 through 964), a U.S. shareholder of a "controlled foreign corporation" generally must include in gross income a pro rata share of the corporation's foreign base company income, which2002 U.S. Tax Ct. LEXIS 13">*106 includes, inter alia, foreign base company sales income. Section 954(d)(1) provides, in pertinent part, as follows:

SEC. 954. FOREIGN BASE COMPANY INCOME.

(d) Foreign Base Company Sales Income. --

(1) In general. -- For purposes of subsection (a)(2), the term "foreign base company sales income" means income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or 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, 2002 U.S. Tax Ct. LEXIS 13">*107 or extracted outside the country under the laws of which the controlled foreign corporation is created or organized, and

* * * * * * *

118 T.C. 226">*273 For purposes of this subsection, personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities.

The language of section 954(d)(1)(A) appeared in almost identical form as proposed new Code section 952(e)(2)(A) in H.R. 10650 (bill pp. 112-113), the Revenue Act of 1962, as reported by the House Ways and Means Committee. The enacted language appeared in identical form as proposed new Code section 954(d)(1)(A) in H.R. 10650 (bill p. 190), as reported by the Senate Finance Committee. H. Conf. Rept. 87-2508 (1962), 6-7 (statutory language), 31 (description), 1962-3 C.B. 1129, 1159. The committee reports explain as follows:

The "foreign base company sales income" referred to here means income from the purchase and sale of property, without any appreciable value being added to the product2002 U.S. Tax Ct. LEXIS 13">*108 by the selling corporation. This does not, for example, include cases where any significant amount of manufacturing, major assembling, or construction activity is carried on with respect to the product by the selling corporation. On the other hand, activity such as minor assembling, packaging, repackaging or labeling will not be sufficient to exclude the profits from this definition.

The sales income with which your committee is primarily concerned is income of a selling subsidiary (whether acting as principal or agent) which has been separated from manufacturing activities of a related corporation merely to obtain a lower rate of tax for the sales income. This accounts for the fact that this provision is restricted to sales of property, to a related person, or to purchases of property from a related person. Moreover, the fact that a lower rate for tax for such a company is likely to be obtained only through purchases and sales outside of the country in which it is incorporated, accounts for the fact that the provision is made inapplicable2002 U.S. Tax Ct. LEXIS 13">*109 to the extent the property is manufactured, produced, grown, or extracted in the country where the corporation is organized or where it is sold for use, consumption, or disposition in that country. Mere passage of title or the place of the sale are not relevant in this connection.

* * * * * * *

(d) Foreign base company sales income. -- Paragraph (1) of subsection (d) corresponds to section 952(e)(2) of the bill as passed by the House and defines foreign base company sales income as income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with:

(1) the purchase of personal property from a related person and its sale to any person,

(2) the sale of personal property to any person on behalf of a related person,

(3) the purchase of personal property from any person and its sale to a related person, or

118 T.C. 226">*274 (4) the purchase of personal property from any person

2002 U.S. Tax Ct. LEXIS 13">*110 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

2002 U.S. Tax Ct. LEXIS 13">*111 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 urges us to rely on section 1.936-5(b)(6), Q& A-1, Income Tax Regs.¹⁶118 T.C. 226">*275 Petitioners urge us to rely on section 1.954- 3(a)(4), Income Tax Regs. ¹⁷ Respondent responds that --

118 T.C. 226">*276 2002 U.S. Tax Ct. LEXIS 13">*112 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 respondent's thesis, that regulations under section 936 must control because the credit that petitioners claim is a credit under section 936. However, we are not aware of, and petitioners have2002 U.S. Tax Ct. LEXIS 13">*113 not directed our attention to, any requirement that a regulation cannot effectively control a determination under section 954 unless it is a regulation under section 954. Section 7805(a), the basic regulation- prescribing authority for the Treasury Department does not impose such a restriction. Accordingly, we reject petitioners' thesis, that we follow regulations numbered 1.954 and ignore regulations numbered 1.936. Instead, we conclude that both section 1.936-5(b)(6), Q& A-1, Income Tax Regs., and section 1.954-3(a)(4), Income Tax Regs., are authoritative interpretations of the statute and guide us in the instant cases in ruling on EAPR's eligibility to use the profit split method of section 936(h)(5)(C)(ii), by determining whether or not the video games were manufactured or produced in Puerto Rico by EAPR "within the meaning of (d)(1)(A) of section 954." To the extent possible, we should harmonize the foregoing regulations. See, e.g., Bencivenga v. Western Pa. Teamsters, 763 F.2d 574">763 F.2d 574, 763 F.2d 574">579 (3d Cir. 1985), where the Court of Appeals "118 T.C. 226">*277 conclude[d] that in this instance the language of [Treasury] Regulation 1.411(d)-3(b)2002 U.S. Tax Ct. LEXIS 13">*114 is not in fact inconsistent with Regulation 1.411(a)-7(a)(1)(ii)." We reach the same conclusion with regard to the regulations before us.

Section 1.954-3(a)(4)(i), Income Tax Regs., provides the following basic general rule:

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. [Emphasis added.]

The remaining language in subparagraph (4) expands on this basic general rule. Petitioners' focus on the text of these expansions ignores the context provided by the general rule, that the property must have been manufactured or produced by the corporation that is the subject of the inquiry.

Section 1.936-5(b)(6), Q& A-1, Income Tax Regs., requires in each of its alternatives, that the activity be performed "by the possessions corporation". Respondent's focus on this phrase ignores the fact that corporations pay persons (individuals or other entities) to actually do things, and that the regulation2002 U.S. Tax Ct. LEXIS 13">*115 does not tell us whether we are to take into account for these purposes only those things done by employees or officers of the corporation that is the subject of the inquiry.

Neither of the foregoing regulations explicitly allows or disallows "attribution", even though both of these regulations require that the corporation being tested be the manufacturer or the producer. Thus, both regulations present the same question of interpretation in almost the same words. In this respect, the two regulations are consistent with each other, and neither regulation clearly answers the question we face.

"Plain meaning" contentions notwithstanding, we cannot properly lay the findings of fact next to the statute or regulations and just read off the answers to the questions here presented. ¹⁸

118 T.C. 226">*278 2002 U.S. Tax Ct. LEXIS 13">*116 Given that petitioners failed to consider the "by such corporation" language of section 1.954-3(a)(4)(i), Income Tax Regs., and that respondent failed to consider the reality that a corporation engages others to do things on its behalf, we cannot conclude with the requisite degree of certainty that the factual record presented herein is sufficient. The shortcomings of the parties' legal contentions noted above make it far from clear that all of the material facts have even been presented, let alone that there is not a genuine issue with respect thereto. Accordingly, even though we cannot agree with respondent's analysis, we conclude that petitioners have failed to carry their obligation as movants to show that there is no substantial dispute about a material fact and that they are entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242">477 U.S. 242, 477 U.S. 242">255, 91 L. Ed. 2d 202">91 L. Ed. 2d 202, 106 S. Ct. 2505">106 S. Ct. 2505 (1986) (citing Kennedy v. Silas Mason Co., 334 U.S. 249">334 U.S. 249, 92 L. Ed. 1347">92 L. Ed. 1347, 68 S. Ct. 1031">68 S. Ct. 1031 (1948)).

5. Holding

We hold for respondent on the second prong -- that petitioners' motion for partial summary judgment will not be granted as to whether EAPR's activities with respect to the video games2002 U.S. Tax Ct. LEXIS 13">*117 in the years before the Court amount to EAPR's manufacture or production of video games in Puerto Rico within the meaning of subsection (d)(1)(A) of section 954. We hold for petitioners on the first prong -- that petitioners' motion for partial summary judgment will be granted as to whether EAPR's activities with respect to the video games in the years before the Court amount to EAPR's having a substantial business presence in Puerto Rico within the meaning of clause (ii) of section 936(h)(5)(B) without taking into account the requirements of the final flush language of that clause.

An appropriate order will be issued granting in part and denying in part petitioners' motion for partial summary judgment.