Academic journal article Journal of Accountancy

More Flexible Subpart F Provisions

Academic journal article Journal of Accountancy

More Flexible Subpart F Provisions

Article excerpt

The Tax Court recently ruled in Bausch & Lomb Sunglasses Incorporated v. the Commissioner that assembly operations performed by two foreign subsidiaries of Bausch & Lomb constituted "manufacturing" for purposes of the subpart F provisions, and income from the sale of the company's assembled goods was not considered subpart F income. (For more information, see "Significant Changes to Definitions of Foreign Base Company Income," JofA, Jan.96, page 34).

Two controlled foreign corporations (CFCs) of Bausch & Lomb purchased parts from the U.S. parent. The assembled sunglasses were sold primarily outside the CFCs' countries of incorporation. Income from such sales generally constitutes foreign base company sales income, unless the assembly operations performed by the CFCs in their local countries qualifies as "manufacturing." The test questions are whether the assembly operations are substantial.

* Are generally considered to constitute manufacturing of property.

The IRS said the first factor was not met in this case because there was not a significant investment in physical capital, but the court said operations were substantial because the rigorous training programs represented a significant investment in human capital. It also said the amount of time spent on the assembly operation was irrelevant and that the substantiality of such operations should be viewed independently of other segments of the manufacturing process.

As for the second factor, the court said the operations were manufacturing because of

* The use of the cost method of accounting.

* Special grants and tax exemptions the local country gave to one of the CFCs. …

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