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   Combined taxable income:  F's foreign trading gross receipts.......................   $1,000.00  R's cost of goods sold...................................     (550.00)                                                            ------------      Combined gross income................................      450.00                                                            ------------  Less:    R's direct selling expenses............................       50.00    F's expenses...........................................      295.00  Apportionment of R's general and administrative expenses:    R's total G/A expenses.................................      200.00    Combined gross income..................................      450.00    R's and F's total gross income (foreign and domestic)..   18,000.00  Apportionment of G/A expenses:    $200x$450/$18,000......................................        5.00                                                            ------------      Total................................................     (350.00)                                                            ------------  Combined taxable income..................................      100.00                                                            ============ 
   The section 482 method_Transfer price to F and F's profit:  Transfer price to F......................................     $690.00                                                            ============  F's profit:    F's foreign trading gross receipts.....................    1,000.00                                                            ------------    Less:      F's cost of goods sold...............................      690.00      F's expenses.........................................      295.00                                                            ------------          Total............................................     (985.00)                                                            ------------    F's profit.............................................       15.00                                                            ============The gross receipts method_F's profit and transfer price to F:  F's profit_lesser of 1.83% of F's foreign trading gross         18.30   receipts ($18.30) or two times F's profit under the   combined taxable income method ($46.00) (See below)   (Unless otherwise indicated, all examples in this   section assume that the marginal costing method of   § 1.925(b)-1T does not result in a higher profit   than the profit under the full costing combined taxable   income method)..........................................                                                            ============  Transfer price to F:    F's foreign trading gross receipts.....................    1,000.00                                                            ------------    Less:      F's expenses.........................................      295.00      F's profit...........................................       18.30                                                            ------------          Total............................................     (313.30)                                                            ------------    Transfer price.........................................      686.70                                                            ============ 
   The combined taxable income method_F's profit and transfer price to F:  F's profit_23% of combined taxable income ($100).........      $23.00                                                            ============  Transfer price to F:    F's foreign trading gross receipts.....................    1,000.00                                                            ------------    Less:      F's expenses.........................................      295.00      F's profit...........................................       23.00                                                            ------------        Total..............................................     (318.00)                                                            ------------  Transfer price...........................................      682.00                                                            ============ 

With a profit of $23 under the most favorable of the transfer pricing methods, F's exempt foreign trade income under section 923 would be $207.39, computed as follows:

     F's foreign trading gross receipts.......................   $1,000.00  F's costs of purchases (transfer price)..................     (682.00)                                                            ------------  F's foreign trade income.................................      318.00                                                            ============  F's exempt foreign trade income $318x15/23...............      207.39                                                            ============F's taxable income would be $8.00, computed as follows:  F's foreign trade income.................................     $318.00  F's exempt foreign trade income..........................     (207.39)                                                            ------------    F's non-exempt foreign trade income....................      110.61  Less:    F's expenses allocable to non-exempt foreign trade          (102.61)     income $295x$110.61/$318..............................                                                            ------------    F's taxable income.....................................        8.00                                                            ============ 

Of F's total expenses, $192.39 ($295×$207.39/$318) are allocated to F's exempt foreign trade income and are disallowed for purposes of computing F's taxable income.

Example 2.  Assume the same facts as in Example 1 except that the purchaser pays the entire sales price 96 days after delivery, well beyond the 60 day period in which payment must be made to avoid recharacterization of part of the contract price as carrying charges. Therefore, the contract price of $1,000 includes $10 of carrying charges, assuming a discount rate of 10%. See §1.927(d)–1(a) (Q & A2) for computation method for determining amount of carrying charges. Under these facts, F may earn, under the combined taxable income method, the most favorable of the three transfer pricing rules, a profit of $20.73 on the sale. F's profit and the transfer price to F under the transfer pricing rules, assuming that a carrying charge is incurred, would be as follows:

   Combined taxable income:  F's foreign trading gross receipts.......................     $990.00  R's cost of goods sold...................................     (550.00)                                                            ------------      Combined gross income................................      440.00                                                            ------------Less:  R's direct selling expenses..............................       50.00R's apportioned G/A expenses:  $200x$440/$18,000........................................        4.89  F's expenses.............................................      295.00                                                            ------------      Total................................................     (349.89)                                                            ------------      Combined taxable income..............................       90.11                                                            ============The combined taxable income method_F's profit and transfer price to F:  F's profit_23% of combined taxable income ($90.11).......      $20.73                                                            ============Transfer price to F:  F's foreign trading gross receipts.......................      990.00                                                            ------------Less:  F's expenses.............................................      295.00  F's profit...............................................       20.73                                                            ------------      Total................................................     (315.73)                                                            ------------      Transfer price.......................................      674.27                                                            ============ 
   The gross receipts method_F's profit and transfer price to F:  F's profit_lesser of 1.83% of F's foreign trading gross        $18.12   receipts ($18.12) or two times F's profit under the   combined taxable income method ($41.46).................                                                            ============  Transfer price to F: F's foreign trading gross receipts..      990.00                                                            ------------    Less:      F's expenses.........................................      295.00      F's profit...........................................       18.12                                                            ------------        Total..............................................     (313.12)                                                            ------------  Transfer price...........................................      676.88                                                            ============The section 482 method_Transfer price to F and F's profit:  Transfer price to F......................................      690.00                                                            ============  F's profit:    F's foreign trading gross receipts.....................      990.00                                                            ------------    Less:      F's cost of goods sold...............................      690.00      F's expenses.........................................      295.00                                                            ------------        Total..............................................     (985.00)                                                            ------------  F's profit...............................................        5.00                                                            ============ 

Example 3.  R and F are calendar year taxpayers. R, a domestic manufacturing company, owns all the stock of F, a FSC for the taxable year. During 1985, R produces and sells a product line of export property to F for $157, a price which can be justified as satisfying the arm's length price standard of section 482. The sale from R to F is made under a written agreement which provides that the transfer price between R and F shall be that price which allocates to F the maximum amount permitted to be received under the transfer pricing rules of section 925. F resells the export property for $200. R's cost of goods sold attributable to the export property is $115 so that the combined gross income from the sale of the export property is $85 (i.e., $200 minus $115). R incurs $18 in direct selling expenses in connection with the sale of the property. R's deductible general and administrative expenses allocable to all gross income are $120. R's direct selling and its general and administrative expenses were not required to be incurred by F. R's gross income from sources other than the transaction is $5,015 resulting in total gross income of R and F (excluding the transfer price paid by F) of $5,100 (i.e., $85 plus $5,015). F incurs $50 in direct and indirect expenses attributable to resale of the export property. Of those expenses, $45 relate to activities and functions referred to in section 924 (c), (d) and (e). The maximum profit which F may earn with respect to the product line is $3.66, computed as follows:

   Combined taxable income:  F's foreign trading gross receipts.......................     $200.00  R's cost of goods sold...................................     (115.00)                                                            ------------    Combined gross income..................................       85.00                                                            ------------  Less:    R's direct selling expenses............................       18.00    R's apportioned G/A expenses: $120x$85/$5,100..........        2.00    F's expenses...........................................       50.00                                                            ------------      Total................................................      (70.00)                                                            ------------  Combined taxable income..................................       15.00                                                            ============ 
   The combined taxable income method_F's profit:  F's profit_23% of combined taxable income ($15)..........      $ 3.45                                                            ============The gross receipts method_F's profit:  F's profit_lesser of 1.83% of F's foreign trading gross         $3.66   receipts ($3.66) or two times F's profit under the   combined taxable income method ($6.90)..................                                                            ============The section 482 method_F's profit:  F's foreign trading gross receipts.......................      200.00                                                            ------------  Less:    F's cost of goods sold.................................      157.00    F's expenses...........................................       50.00                                                            ------------        Total..............................................     (207.00)                                                            ------------  F's profit (loss)........................................       (7.00)                                                            ============ 

Since the gross receipts method results in a greater profit to F ($3.66) than does either the combined taxable income method ($3.45) or the section 482 method (a loss of $7), and does not exceed twice the profit under the combined taxable income method, F may earn a maximum profit of $3.66. Accordingly, the transfer price from R to F may be readjusted as long as the transfer price is not readjusted below $146.34, computed as follows:

   Transfer price to F:  F's foreign trading gross receipts.......................    $ 200.00  Less:    F's expenses...........................................       50.00    F's profit.............................................        3.66                                                            ------------        Total..............................................      (53.66)                                                            ------------  Transfer price...........................................      146.34                                                            ============ 

Example 4.  R and F are fiscal year May 31 year-end taxpayers. R, a domestic manufacturing company, owns all the stock of F, a FSC for the taxable year. During August of 1987, R produces and sells 100 units of export property A to F under a written agreement which provides that the transfer price between R and F shall be that price which allocates to F the maximum profit permitted to be received under the transfer pricing rules of section 925. Thereafter, the 100 units are resold for export by F for $950. R's cost of goods sold attributable to the 100 units is $650. R incurs costs, both direct and indirect, in the amount of $270 with regard to activities and functions referred to in section 924 (c), (d) and (e) which it was under contract with F to perform for F. R's direct selling expenses are $40. Those expenses were not required to be incurred by F. For purposes of this example, assume that R has no general and administrative expenses other than those relating to the section 924 (c), (d) and (e) activities and functions. F incurs expenses in the amount of $290 attributable to the resale which relate to the activities and functions referred to in section 924 (c), (d) and (e). Of that amount, $270 was paid to R under contract to perform the activities in section 924. The remaining $20 was paid to independent contractors. R chooses not to apply the section 482 transfer pricing method to determine F's profit on the transaction. F may not earn any income under either the gross receipts (see the special no-loss rule of paragraph (e)(1)(i) of this section) or the combined taxable income administrative pricing methods with respect to resale of the 100 units because there is a combined loss of $(30) on the transaction, computed as follows:

   Combined taxable income:  F's foreign trading gross receipts.......................    $ 950.00  R's cost of goods sold...................................     (650.00)                                                            ------------      Combined gross income................................      300.00                                                            ------------  Less:    R's direct selling expenses............................       40.00    F's expenses...........................................      290.00                                                            ------------        Total..............................................     (330.00)                                                            ------------  Combined taxable income (loss)...........................      (30.00)                                                            ============ 

Under paragraph (e)(1)(i) of this section, F is permitted to recover its expenses attributable to the sale ($290) even though such recovery results in a loss or increased loss to the related supplier. Accordingly, the transfer price from R to F may be readjusted as long as the transfer price is not readjusted below $660, computed as follows:

   Transfer price to F:  F's foreign trading gross receipts.......................     $950.00  Less:    F's expenses...........................................     (290.00)                                                            ------------      Transfer price.......................................      660.00                                                            ============ 

Example 5.  Assume the same facts as in Example 4 except that F performs the section 924 (c), (d) and (e) activities and functions and that R chooses to apply the section 482 transfer pricing method. Under the standards of section 482, a transfer price from R to F of $650 is an arm's length price. Accordingly, the transfer price to F and F's profit on the subsequent resale of product A ($10) are as follows:

   The section 482 method_Transfer price to F and F's profit:  Transfer price to F......................................     $650.00                                                            ============F's profit:    F's foreign trading gross receipts.....................      950.00    F's cost of purchases..................................     (650.00)                                                            ------------    F's gross income.......................................      300.00                                                            ------------  Less:    F's expenses...........................................     (290.00)                                                            ------------  F's profit...............................................       10.00                                                            ============ 

This sale of product A results in a loss to R of $40 (transfer price of $650 less R's cost of goods sold of $650 and direct selling expenses of $40). Since R chose to use the section 482 transfer pricing method on this loss transaction, under the special no loss rule of paragraph (e)(1)(iii) of this section, the administrative pricing methods of section 925(a)(1) and (2) may not be used for any other sale transactions, or group of sale transactions, during the same year of other products which fall within the same three digit Standard Industrial Classification as product A. F's profit, if any, on these sales must be computed under the section 482 transfer pricing method.

Example 6.  R and F are calendar year taxpayers. R, a domestic manufacturing company, owns all the stock of F, a FSC for the taxable year. During 1985, R manufactures 100 units of export property A. R enters into a written agreement with F whereby F is granted a sales franchise with respect to export property A and F will receive commissions with respect to these exports equal to the maximum amount permitted to be received under the administrative pricing rules of section 925 (a)(1) and (2). Thereafter, the 100 units are sold for export by R for $1,000. The total sales price of $1,000 was paid by the purchaser to R within 60 days of the sales transaction. The entire $1,000 would have been foreign trading gross receipts had F been the principal on the sale. R's cost of goods sold attributable to the 100 units is $650. R's direct selling expenses so attributable are $50. R's deductible general and administrative expenses, other than those attributable to the section 924 (c), (d) and (e) activities and functions, allocable to all gross income are $200. Apportionment of those supportive expenses on the basis of gross income does not result in a material distortion of income and is a reasonable method of apportionment. R's direct selling expenses and the portion of the general and administrative expenses not relating to the activities and functions referred to in section 924 (c), (d) and (e) were not required to be incurred by F. R's gross income from sources other than the transaction is $17,650 resulting in total gross income of $18,000 ($350 plus $17,650). R and a related person perform on F's behalf the activities and functions referred to in section 924 (c), (d) and (e). In performing these activities, R and the related person incurred expenses, both direct and indirect, of $200 and $45, respectively. F pays $200 to R under contract and $50 to the related person. The maximum profit which F may earn under the franchise pursuant to the administrative pricing rules is $18.30, computed as follows:

   Combined taxable income:  R's gross receipts from the sale.........................   $1,000.00  R's cost of goods sold...................................     (650.00)                                                            ------------    Combined gross income..................................      350.00                                                            ------------  Less:    R's direct selling expenses............................       50.00    F's expenses...........................................      250.00    Apportionment of R's general and administrative     expenses:      R's total G/A expenses...............................      200.00      Combined gross income................................      350.00      R's and F's total gross income (foreign and domestic)   18,000.00                                                            ============      Apportionment of G/A expenses:        $200x$350/$18,000..................................        3.89          Total............................................     (303.89)                                                            ------------  Combined taxable income..................................       46.11                                                            ============ 

As reflected in the above computation, F included on its books $200 of expenses related to the section 924 activities and performed by R on behalf of F. R incurred $253.89 of expenses. These expenses were reflected on its books. Under paragraph (b)(2)(ii) of this section, R and F may elect to include all of the expenses related to the export sales on F's books. This will satisfy the requirements of section 925(c) without requiring an allocation of the expenses between R and F. Under this election, as reflected in the following computation, combined taxable income will still be $46.11 but, as reflected in a later part of this example, the commission due F will be increased by $253.89:

   Combined taxable income:  R's gross receipts from the sale.........................   $1,000.00  R's cost of goods sold...................................     (650.00)                                                            ------------      Combined gross income................................      350.00                                                            ------------Less:  F's expenses.............................................     (303.89)                                                            ------------      Combined taxable income..............................       46.11                                                            ============ 
   The combined taxable income method_F's profit:  F's profit_23% of combined taxable income ($46.11).......      $10.61                                                            ============The gross receipts method_F's profit:  F's profit_lesser of 1.83% of R's gross receipts ($18.30)      $18.30   or two times F's profit under the combined taxable   income method ($21.22)..................................                                                            ============If the election provided for in paragraph (b)(2)(ii) of this section is not made, F may receive a commission from R in the amount of $268.30, computed as follows:  F's expenses.............................................     $250.00  F's profit...............................................       18.30                                                            ------------      F's commission.......................................      268.30                                                            ============This $268.30 is F's foreign trade income. F's exempt foreign trade income is $174.98 ($268.30x15/23). F's taxable income is $6.37, computed as follows:  F's foreign trade income.................................     $268.30  F's exempt foreign trade income..........................     (174.98)                                                            ------------      F's non-exempt foreign trade income..................       93.32                                                            ------------Less:  F's expenses allocable to non-exempt foreign trade income      (86.95)   $250x$93.32/$268.30.....................................                                                            ------------      F's taxable income...................................        6.37                                                            ============ 

Of F's total expenses, $163.05 ($250×$174.98/$268.30) are allocated to F's exempt foreign trade income and are disallowed for purposes of computing F's taxable income.

If R and F make the election provided for in paragraph (b)(2)(ii) of this section, F may receive a commission from R in the amount of $322.19, computed as follows:

     F's expenses.............................................     $303.89  F's profit...............................................       18.30                                                            ------------    F's commission.........................................      322.19                                                            ============With this election, this $322.19 is F's foreign trade income. F's exempt foreign trade income is $210.12 ($322.19x15/23). F's taxable income is still $6.37, computed as follows:  F's foreign trade income.................................     $322.19  F's exempt foreign trade income..........................     (210.12)                                                            ------------    F's non-exempt foreign trade income....................      112.07                                                            ------------  Less:    F's expenses allocable to non-exempt foreign trade          (105.70)     income $303.89x$112.07/$322.19........................                                                            ------------    F's taxable income.....................................        6.37                                                            ============Of F's total expenses, $198.19 ($303.89x$210.12/$322.19) are allocated to F's exempt foreign trade income and are disallowed for purposes of computing F's taxable income. 

Example 7.  Assume the same facts as in Example 6 except that R's direct selling expenses are $60. The profit which F may earn under the franchise pursuant to the administrative pricing rules is $16.62, computed as follows:

   Combined taxable income:  R's gross receipts from the sale.........................   $1,000.00  R's cost of goods sold...................................     (650.00)                                                            ------------    Combined gross income..................................      350.00                                                            ------------  Less:    R's direct selling expenses............................       60.00    R's apportioned G/A expenses...........................        3.89    F's expenses...........................................      250.00                                                            ------------                                                                (313.89)  Combined taxable income..................................       36.11                                                            ============The combined taxable income method_F's profit:  F's profit_23% of combined taxable income ($36.11).......        8.31                                                            ============The gross receipts method_F's profit:  F's profit_lesser of 1.83% of R's gross receipts ($             16.62   18.30) or two times F's profit under the combined   taxable income method ($16.62)..........................                                                            ============F may receive a commission from R in the amount of $266.62, computed as follows:  F's expenses.............................................     $250.00  F's profit...............................................       16.62                                                            ------------    F's commission.........................................      266.62                                                            ============ 

If the election provided for in paragraph (b)(2)(ii) of this section is made by R and F, the profit which F may earn under the franchise pursuant to the administrative pricing rules will remain at $16.62 but will be computed as follows:

   Combined taxable income:  R's gross receipts from the sale.........................   $1,000.00  R's cost of goods sold...................................     (650.00)                                                            ------------    Combined gross income..................................      350.00                                                            ------------  Less: F's expenses.......................................     (313.89)                                                            ------------  Combined taxable income..................................       36.11                                                            ============The combined taxable income method_F's profit:  F's profit_23% of combined taxable income ($36.11).......        8.31                                                            ============The gross receipts method_F's profit:  F's profit_lesser of 1.83% of R's gross receipts ($18.30)       16.62   or two times F's profit under the combined taxable   income method ($16.62)..................................                                                            ============F may receive a commission from R in the amount of $330.51, computed as follows:  F's expenses.............................................      313.89  F's profit...............................................       16.62                                                            ------------    F's commission.........................................      330.51                                                            ============ 

As illustrated by Example 6, F's exempt taxable income and taxable income will be the same regardless of which method is used to compute F's commission.

Example 8.  Assume the same facts as in Example 6 except that F's expenses are $300. With this assumption, there is a combined loss of $(3.89) on the transaction under the full costing combined taxable income method, computed as follows:

   Combined taxable income:  R's gross receipts from the sale.........................   $1,000.00  R's cost of goods sold...................................     (650.00)                                                            ------------    Combined gross income..................................      350.00                                                            ------------  Less:    R's direct selling expenses............................       50.00    R's apportioned G/A expenses...........................        3.89    F's expenses...........................................      300.00                                                            ------------                                                                (353.89)                                                            ------------  Combined taxable income (loss)...........................       (3.89)                                                            ============ 

Since there is a combined loss, F will not have a profit under the full costing combined taxable income method. However, for purposes of this example, it is assumed that under the marginal costing rules of §1.925(b)–1T the maximum combined taxable income is $75 and the overall profit percentage limitation is $30. Accordingly, F's profit would be $6.90 (23% of $30) under the marginal costing rules. F's profit under the gross receipts method will be $13.80 (1.83% of $1,000 limited by section 925(d) to two times the profit determined under marginal costing). The commission F may receive from R is $313.80. Had all of the expenses been reflected on F's books pursuant to the election of paragraph (b)(2)(ii) of this section, F's commission would have been $367.69.

Example 9.  Assume the same facts as in Example 6 except that F's expenses are $300 and that the transaction occurred in 1987. F will not earn a profit under the sales franchise pursuant to the administrative pricing rules. This is shown by the following computation:

   Combined taxable income:  R's gross receipts from the sale................             $1,000.00  R's cost of goods sold..........................              (650.00)                                                   ---------------------    Combined gross income.........................                350.00                                                   ---------------------  Less:    R's direct selling expenses...................                 50.00    R's apportioned G/A expenses..................                  3.89    F's expenses..................................                300.00                                                   ---------------------                                                                (353.89)                                                   ---------------------  Combined taxable income (loss)..................                (3.89)                                                   ===================== 

F will not have a profit under the full costing combined taxable income method since there is a combined loss of $(3.89). Also, F will not have a profit under the gross receipts method due to section 925(d) and the special no loss rule of paragraph (e)(1)(i) of this section. In addition, F will not have a profit under the marginal costing rules because the profit may not exceed full costing combined taxable income, see §1.925 (b)–1T(b)(4). Although F may not earn a profit, it is entitled to recoup its expenses. Therefore, the commission F may receive from R is $300.00. R will bear the entire loss. Had all of the expenses been reflected on F's books pursuant to the election of paragraph (b)(2)(ii) of this section, F's commission would have been $353.89.

Example 10.  Assume the same facts as in Example 6 except that R receives total payment of the sale price of $1,000 on the 96th day after delivery, well beyond the 60 day period in which payment must be made to avoid recharacterization of part of the contract price as carrying charges. Therefore, the contract price of $1,000 includes $10 of carrying charges, assuming a discount rate of 10%. See §1.927(d)–1 (a) (Q & A2) for computation method for determining amount of carrying charges. This $10 of carrying charges is R's income. The profit which F may earn under the franchise pursuant to the administrative pricing rules is $16.66, computed as follows (the election of paragraph (b)(2)(ii) of this section is not made by R and F):

   Combined taxable income:  R's gross receipts from the sale..........................    $990.00  R's cost of goods sold....................................    (650.00)                                                             -----------    Combined gross income...................................     340.00                                                             -----------  Less:    R's direct selling expenses.............................      50.00    R's apportioned G/A expenses: $200x$340/$18,000.........       3.78    F's expenses............................................     250.00                                                             -----------      Total.................................................    (303.78)                                                             -----------  Combined taxable income...................................      36.22                                                             ===========The combined taxable income method_F's profit: F's                $8.33 profit_23% of combined taxable income ($36.22)                                                             ===========The gross receipts method_F's profit:  F's profit_lesser of 1.83% of R's gross receipts ($18.12)      $16.66   or two times F's profit under the combined taxable income   method ($16.66)..........................................                                                             ===========F may receive a commission from R in the amount of $266.66, computed as follows:  F's expenses..............................................    $250.00  F's profit................................................      16.66                                                             -----------    F's commission..........................................     266.66                                                             =========== 

Example 11.  Assume the same facts as in Example 6. In addition, assume that R also manufactures products K, L, M, N, and P all of which are export property as defined in section 927(a). Product K is military property as defined in section 923(a)(5) and §1.923–1T(b)(3)(ii). Assume further that products A, L, and P are included within product line X and that products K, L, M, and N are included within product line W. R has entered into a written agreement with F under which F is granted a sales franchise with respect to exporting the products. Under this agreement, F will receive commissions with respect to those exports equal to the maximum amount permitted to be received under the administrative pricing rules. The table set forth below details F's foreign trading gross receipts, R's cost of goods sold and R's and F's expenses allocable and apportioned under §1.861–8 to the sale of products A, L, M, N, and P. For purposes of this example, it is assumed that R does not incur any general and administrative expenses. Because of the special grouping rule of paragraph (c)(8)(ii) of this section, product L may be included for purposes of the administrative pricing rules in only one product line, at the option of R. Also for these purposes, product K, which is military property, may not be grouped with products L, M, and N. See paragraph (c)(8)(iv) of this section. Under these facts, F will have profits under the franchise agreement from the sale of products A, L, M, N, and P and may receive commissions from R relating to the sale of those products, assuming the election of paragraph (b)(2)(ii) of this section is not made, in the following amounts:

                                                        F's                                          Profit   Expenses  Commissions Product Line X (products A and P)......    $36.34   $490.00     $526.34Product Line W (products L, M, and N)..    $40.48   $421.00     $461.48 

On the sale of product K, R received gross receipts of $150. R's cost of goods sold was $130. R's and F's expenses allocable to product K totaled $10 ($7 of R's expenses and $3 of F's). Under the gross receipts method, F earned a profit of $2.75 (1.83% of $150) and $2.30 under the combined taxable income method. F may receive a commission, assuming the election of paragraph (b)(2)(ii) of this section is made by R and F, from R in the amount of $12.75, computed as follows:

   F's expenses..................................................    $10.00F's profit....................................................      2.75                                                               ---------    F's commission............................................    $12.75                                                               ========= 
 ----------------------------------------------------------------------------------------------------------------                                           Product A   Product L   Product M   Product N   Product P     Total----------------------------------------------------------------------------------------------------------------Product Line X  Combined Taxable Income    R's GR From sale....................    $1,000    ..........  ..........  ..........    $1,000      $2,000    R's cost of goods sold..............      (650)   ..........  ..........  ..........      (650)     (1,300)                                         -----------------------------------------------------------------------      Combined gross income.............       350    ..........  ..........  ..........       350         700                                         -----------------------------------------------------------------------    Less:      R's expenses......................        50    ..........  ..........  ..........        81         131      F's expenses......................       250    ..........  ..........  ..........       240         490                                         -------------        Total...........................      (300)   ..........  ..........  ..........      (321)       (621)                                         -------------    Combined taxable income (loss)......       $50    ..........  ..........  ..........       $29         $79                                         =============  23% of CTI............................    $11.50    ..........  ..........  ..........     $6.67      $18.17                                         =============  1.83% of GR from sale.................    $18.30    ..........  ..........  ..........    $13.34      $36.34                                         =============Product Line W  Combined Taxable Income    R's GR from sale....................  ..........    $1,000        $625      $1,800    ..........    $3,425    R's cost of goods sold..............  ..........      (650)       (445)     (1,600)   ..........    (2,695)                                         -------------      Combined gross income.............  ..........       350         180         200    ..........       730                                         -------------    Less:      R's expenses......................  ..........        81          70          70    ..........       221      F's expenses......................  ..........       230          60         131    ..........       421                                         -------------        Total...........................  ..........      (311)       (130)       (201)   ..........      (642)                                         -------------    Combined taxable income (loss)......  ..........       $39         $50         $(1)   ..........       $88                                         =============  23% of CTI............................  ..........     $8.97      $11.50          $0    ..........    $20.24                                         =============  1.83% of GR From sale.................  ..........    $17.94      $11.44          $0    ..........    $40.48                                         =============----------------------------------------------------------------------------------------------------------------

Example 12.  R and F are calendar year taxpayers. R owns all the stock of F, an FSC for the taxable year. During 1985, R purchases 100 units of export property A from B, an unrelated domestic manufacturing company for $850. R's direct selling expenses so attributable are $20. R enters into a written agreement with F whereby F is granted a sales franchise with respect to export product A and F will receive commissions with respect to these exports equal to the maximum amount permitted to be received under the administrative pricing rules of section 925. Thereafter, the 100 units are sold for export by R for $1,050. R factors the trade receivable to unrelated person X for $1,000. Under §1.924(a)–1T(g)(7), total gross receipts for purposes of computing R's and F's combined taxable income is $1,000 (total receipts ($1,050) less the discount ($50)). This $1,000 would have been foreign trading gross receipts had F been the principal on the sale. For purposes of this example, it is assumed that R did not incur any general and administrative expenses. F incurs expenses in the amount of $110, all of which were performed by R under contract to F. The profit which F may earn under the franchise pursuant to the administrative pricing rules is $9.20 computed as follows:

   Combined taxable income:  R's gross receipts from the sale.........................   $1,000.00  R's cost of goods sold...................................     (850.00)                                                            ------------                                                                 150.00                                                            ------------  Less:    R's direct selling expenses............................       20.00    F's expenses...........................................      110.00                                                            ------------      Total................................................      130.00                                                            ------------  Combined taxable income..................................      $20.00                                                            ============The combined taxable income method_F's profit:  F's profit_23% of combined taxable income ($20)..........       $4.60                                                            ============The gross receipts method_F's profit:  F's profit_lesser of 1.83% of R's gross receipts ($18.30)       $9.20   or two times F's profit under the combined taxable   income, method ($9.20)..................................                                                            ============F may receive a commission from R in the amount of $119.20, computed as follows (the election of § 1.925(a)- 1T(b)(2)(ii) has not been made):  F's expenses.............................................     $110.00  F's profit...............................................        9.20                                                            ------------    F's commission.........................................     $119.20                                                            ============ 

Example 13.  R and F are calendar year taxpayers. R, a domestic manufacturing company, owns all the stock of F, an FSC for the taxable year. During March 1985, R manufactures office equipment, export property within the definition of section 927(a)(1), which it leases on April 1, 1985, to F for a term of 1 year at a monthly rental of $1,000, a rent which satisfies the standard of arm's length rental under section 482. F subleases the product on April 1, 1985, for a term of 1 year at a monthly rental of $1,200. R's cost for the product leased is $40,000. R's other deductible expenses attributable to the product are $200, all of which are incurred in 1985. Those expenses were not incurred under contract to F. F's expenses attributable to sublease of the export property are $1,150, all of which are incurred in 1985 directly by F. R depreciates the property on a straight line basis, using a half-year convention, assuming a 10 year recovery period (see section 168(f)(2)(C), §1.48–1(g)). The profit which F may earn with respect to the transaction is $1,483.50 for 1985 and $600 for 1986, computed as follows:

Computation for 1985

   Combined taxable income:  F's sublease rental receipts for year ($1,200 x 9          $10,800.00   months)................................................                                                           -------------Less:  R's depreciation (($40,000 x1/10)x9/12).................     3,000.00  R's expenses............................................       200.00  F's expense.............................................     1,150.00                                                           -------------      Total...............................................    (4,350.00)                                                           -------------Combined taxable income...................................     6,450.00                                                           =============The combined taxable income method_F's profit:  F's profit_23% of combined taxable income ($6,450)......    $1,483.50                                                           =============The gross receipts method_F's profit:  F's profit_lesser of 1.83% of F's foreign trading gross       $197.64   receipts ($197.64) or two times F's profit under the   combined taxable income method ($2,967)................                                                           =============The section 482 method_F's profit:  F's sublease rental receipts for year...................   $10,800.00                                                           -------------Less:  F's lease rental payments for year......................     9,000.00  F's expenses............................................     1,150.00                                                           -------------      Total...............................................   (10,150.00)                                                           -------------      F's profit..........................................       650.00                                                           ============= 

Since the combined taxable income method results in greater profit to F ($1,483.50) than does either the gross receipts method ($197.64) or the section 482 method ($650), F may earn a profit of $1,483.50 for 1985. Accordingly, the monthly rental payable by F to R for 1985 may be readjusted as long as the monthly rental payable is not readjusted below $907.39, computed as follows:

   Monthly rental payable by F to R for 1985:  F's sublease rental receipts for year...................   $10,800.00                                                           -------------Less:  F's expenses............................................     1,150.00  F's profit..............................................     1,483.50                                                           -------------      Total...............................................    (2,633.50)                                                           -------------      Rental payable for 1985.............................     8,166.50                                                           =============      Rental payable each month ($8,166.50/9 months)......      $907.39                                                           ============= 

Computation for 1986

   Combined taxable income:  F's sublease rental receipts for year ($1,200 x 3 months)   $3,600.00                                                            ------------Less:  R's depreciation (($40,000 x \1/10\) x \3/12\)...........   (1,000.00)                                                            ------------      Combined taxable income..............................    2,600.00                                                            ============The combined taxable income method_F's profit:  F's profit_23% of combined taxable income ($2,600).......      598.00                                                            ============The gross receipts method_F's profit:  F's profit_lesser of 1.83% of F's foreign trading gross         65.88   receipts ($3,600) or two times F's profit under the   combined taxable income method ($1,196).................                                                            ============The section 482 method_F's profit:  F's sublease rental receipts for year....................   $3,600.00                                                            ------------Less:  F's lease rental payments for year.......................   (3,000.00)                                                            ------------      F's profit...........................................      600.00                                                            ============ 

Since the section 482 method results in a greater profit to F ($600) than does either the combined taxable income method ($598) or the gross receipts method ($65.88), F may earn a profit of $600 for 1986. Accordingly, the monthly rental payable by F to R for 1986 may be readjusted as long as the monthly rental payable is not readjusted below $1,000, computed as follows:

   Monthly rental payable by F to R for 1986:  F's sublease rental receipts for year....................   $3,600.00                                                            ------------Less:  F's profit...............................................     (600.00)                                                            ------------  Rental payable for 1986..................................    3,000.00                                                            ============  Rental payable for each month ($3,000/3 months)..........    1,000.00                                                            ============ 

(g) Effective date. The provisions of this section and §1.925(b)–1T apply with respect to taxable year ending after December 31, 1984, except that a corporation may not be a FSC for any taxable year beginning before January 1, 1985.

[T.D. 8126, 52 FR 6443, Mar. 3, 1987, as amended by T.D. 8764, 63 FR 10306, Mar. 3, 1998; T.D. 8944, 66 FR 13426, Mar. 6, 2001]

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