[Title 26 CFR 1.936-4]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.936-4 - Intangible property income in the absence of an election out.]
[From the U.S. Government Printing Office]
26INTERNAL REVENUE102002-04-012002-04-01falseIntangible property income in the absence of an election out.1.936-4Sec. 1.936-4INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.936-4 Intangible property income in the absence of an election out.
The rules in this section apply for purposes of section 936(h) and
also for purposes of section 934(e), where applicable.
Q. 1: If a possessions corporation and its affiliates do not make an
election under either the cost sharing or 50/50 profit split option,
what rules will govern the treatment of income attributable to
intangible property owned or leased by the possessions corporation?
A. 1: Intangible property income will be allocated to the
possessions corporation's U.S. shareholders with the proration of income
based on shareholdings. If a shareholder of the possessions corporation
is a foreign person or a tax-exempt person, the possessions corporation
will be taxable on that shareholder's pro rata amount of the intangible
property income. If any class of the stock of a possessions corporation
is regularly traded on an established securities market, then the
intangible property income will be taxable to the possessions
corporation rather than the corporation's U.S. shareholders. For these
purposes, a United States shareholder includes any shareholder who is a
United States person as described under section 7701(a)(30). The term
``intangible property income'' means the gross income of a possessions
corporation attributable to any intangible property other than
intangible property which has been licensed to such corporation since
prior to 1948 and which was in use by such corporation on September 3,
1982.
Q. 2: What is the source of the intangible property income described
in question 1?
A. 2: The intangible property income is U.S. source, whether taxed
to U.S. shareholders or taxed to the possessions corporation. Such
intangible property income, if treated as income of the possessions
corporation, does not enter into the calculation of the 80-percent
possessions source test or the 65-percent active trade or business test
of section 936(a)(2)(A) and (B).
Q. 3: How will the amount of income attributable to intangible
property be measured?
A. 3: Income attributable to intangible property includes the amount
received by a possessions corporation from the sale, exchange, or other
disposition of any product or from the rendering of a service which is
in excess of the reasonable costs it incurs in manufacturing the product
or rendering the service (other than costs incurred in connection with
intangibles) plus a reasonable profit margin. A reasonable profit margin
shall be computed with respect to direct and indirect costs other than
(i) costs incurred
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in connection with intangibles, (ii) interest expense, and (iii) the
cost of materials which are subject to processing or which are
components in a product manufactured by the possessions corporation.
Notwithstanding the above, certain taxpayers who have been permitted by
the Internal Revenue Service in taxable years beginning before January
1, 1983, to use the cost-plus method of pricing without reflecting a
return from intangibles, but including the cost of materials in the cost
base, will not be precluded from doing so. (Sec. 3.02(3), Rev. Proc. 63-
10, 1963-1 C.B. 490.) Thus, the Internal Revenue Service may continue in
appropriate cases to permit such taxpayers to continue to report their
income as they have been under existing procedures described in the
previous sentence if it is appropriate under all the facts and
circumstances and does not distort the income of the taxpayer.
Q. 4: If there is no intangible property related to a product
produced in whole or in part by a possessions corporation, what method
may the possessions corporation use to compute its income?
A. 4: The taxpayer may compute its income using the appropriate
method as provided under section 482 and the regulations thereunder. The
taxpayer may also elect the cost sharing or profit split method.
[T.D. 8090, 51 FR 21524, June 13, 1986]