I can assure you that the USPTO, the EPO, WIPO and others have repeatedly failed.

Yeah, lawyers NEVER argue about definitions. You are soooooo right!!!!!

What is manufacturing?

Manufacturing is defined at Treas. Reg. ? 1.993-3(c)(2). The regulations use (with some modification) the subpart F definition of manufacturing found at Treas. Reg. ? 1.954-3(a)(4).

In general terms, the subpart F regulation defines manufacturing as any of the following:

?Substantial transformation? of purchased property prior to sale:

Examples of substantial transformation include the conversion of wood pulp to paper, steel rods to nuts, bolts and screws and the canning of fish.

Performs activities on purchased property that are substantial in nature and generally considered to constitute manufacture or production, or construction of property, or

Incurs Conversion costs (direct labor and factory burden) that account for 20% or more of the total cost of goods sold or the adjusted basis for such property.

Conversion costs included assembly and packaging costs but not parts under a service contact. See Treas. Reg. ? 1.993-3(c)(2)(iv).

Packaging, repackaging, labeling and minor assembly are not manufacturing Treas. Reg. ? 1.954-3(a)(4)(iii). But see Bausch and Lomb v. Commissioner, TCM 1996-57 (1996) below.

Selected developments in the definition of manufacturing.

David Fishbein Manufacturing Co. v. Commissioner, 59 TC 338 (1972). This case involved the definition of manufacturing for the purposes of subpart F. The Tax Court held the assembly of bag-closing machines were substantial in nature where taxpayer ?(a) tailors and finishes some of its purchased components in order to place these parts in usable condition; (b) puts these tailored components and others together in a 6-hour, 58-step process to form salable, quality bag-closing machines; and (c) possesses in its plant all of the tools and equipment necessary for these activities?. There is nothing minor, insignificant, or insubstantial about the utilization of proper equipment, by trained personnel, in a time-consuming process which has, as its final result, a high-caliber, portable bag-closing machine.?

Webb Export Corp. v. Commissioner, 91 TC 131 (1988). The DISC ?purchased standing timber, had a normal size crew fell the trees, clean the branches off as necessary and cut the trees into veneer logs.? The activities were held to be substantial in nature and generally considered to constitute production of property within the meaning of Treas. Reg. ? 1.993-3(c)(2). [30] In arriving at this conclusion, the court considered that: ?(1) loggers consider themselves to be producers; (2) standing timber is not particularly useful to manufacturers; (3) substantial activities are required before such materials are useful to manufacturers; and (4) the items considered to be raw materials and who is perceived to be a producer, varies depending upon one?s position in the manufacturing and/or production process.?

Garnac Grain Co. v. Commissioner, 95 TC 7 (1990). The taxpayer?s business consisted primarily of purchasing grain (soybeans, corn, and wheat); cleaning, drying, aerating, fumigating, and blending this grain; and then selling it for export to customers. The court held that taxpayer had not carried their burden of demonstrating that the taxpayer was engaged in production because the taxpayer did not establish that their activities with respect to grain storage and handling are generally considered in the industry to constitute production.

Bausch & Lomb, Inc. v. Commissioner, TCM 1996-57 (1996). The Tax Court held that taxpayer?s full range of activities necessary to assemble sunglass parts into finished, quality sunglasses were substantial in nature. Such activities involved the following: 1) leased production facilities to assemble sunglasses, 2) employed management teams to prepare production plans and order parts from their suppliers, 3) hired and trained the necessary personnel to carry out their operations, 4) inspected purchased parts for defects and prepared those parts for assembly, 5) assembled sunglass parts into finished sunglasses, 6) inspected finished sunglasses for cosmetic and functional defects, and 7) cleaned and packaged sunglasses to prepare them for distribution. The court found that assembly operations required a trained and experienced workforce. While conceding that the assembly operations did not require a large investment in physical capital, the court noted that they required a large investment in human capital. The court also rejected government?s assertion that operations require substantial amounts of time to complete to be substantial in nature. The court also took into consideration that the high-end sunglass industry would consider the operations to constitute the manufacture or production of property. This case expanded the definition of what constitutes manufacturing and clouded the concept of minor assembly.

Audit suggestion. Determining whether activities constitute the production or manufacturing of property can be very fact intensive. If you think you have an issue concerning the definition of manufacturing, contact the DISC Technical Advisor for assistance.

Who must manufacture the property?

The property must be manufactured by someone other than a DISC. [31] See Webb Export, 91 TC 31 (1988), as discussed above, where a DISC violated this rule.

Typically the property is manufactured by the R-S(s).

A R-S is a “related party” that directly supplies to a DISC any property or services that the DISC disposes of in a transaction producing QER or a related party that uses a DISC as a commission agent in a disposition of property or services that produces QER. A R-S is sometimes referred to as the operating company.

If the DISC manufactured the property at a time when it was not a DISC, the property would not qualify as export property to the DISC. [32]

What is the location where the manufacturing must occur?

Generally the property must be manufactured in the U.S. For purposes of IRC ?? 991 to 997, the term United States includes the 50 states, the District of Columbia, and Puerto Rico. [33]

If the property is manufactured in the U.S. and then sustains further manufacturing outside of the U.S. prior to sale it will not be considered export property. [34]

What about where it is clear that the actual manufacturing takes place in the U.S., but one or more of the component parts used in the manufacturing process are imported into the U.S.?

In this case we look to the ?foreign content test? or ?the 50% test? of Treas. Reg. ? 1.993-3(e).

The 50% test says provides no more than 50% of the fair market value (?FMV?), can be attributed to the FMV of articles imported into the U.S.

Articles imported into the U.S. are considered ?foreign content.?

Foreign content is computed under the rules of Treas. Reg. ? 1.993-3(e)(4).

FMV of foreign content is the appraised value as determined under ? 402 of the Tariff Act of 1930 (19 U.S.C. 1401a) in connection with their importation.

The appraised value is the full dutiable value.

Evidence of the FMV of the foreign content may be the Customs invoice issued on the importation of the article or by a certification based upon information contained in the customs invoice and furnished to the holder by a person from whom the articles were purchased. [35]

Generally, the 50% foreign FMV test is applied on an item by item basis. However, if the taxpayer sells a large volume of substantially identical items with substantially identical foreign content in substantially the same proportion, the items can be aggregated to determine the portion of foreign content. Treas. Reg. ? 1.993-3(e)(2).

An article imported into the U.S. is treated as entirely imported even if all or a portion of the article was originally manufactured in the U.S. [36]

A special rule applies for interchangeable parts. The rules applies when identical or similar component articles are imported into the U.S. and others are manufactured in the U.S. The determination of whether or not imported articles are incorporated in the export property will be made on a substitution bases as in the case of the rules relating to draw back accounts under the Customs law. For further clarification please see the example at Treas. Reg. ? 1.993-3(e)(4)(iii)(b).

The next criteria to consider in determining if property qualifies as export property is to determine if the property was ?held? primarily for sale or lease in the ordinary course of business and such sale or lease was for the direct use, consumption, or disposition of the export property outside of the U.S.

The direct use, consumption or disposition outside of the U.S. requirement has three parts, which focus on:

Destination,

Documents to satisfy proof of compliance, and

Use outside the U.S.

Each requirement is discussed below. As evidenced by the number of court cases, the destination test has generated the most controversy. You should carefully review these rules.

Destination test ? Treas. Reg. ? 1.993-3(d)(2) – Property must be sent outside of the U.S. to satisfy the destination test. The FOB point, or the place where title or risk of loss shift from seller or lessor are not important. The key factors are the place of delivery and to whom the export property is delivered.

The destination test is satisfied with respect to property sold or leased by the seller or lessor only if it is delivered by the seller or lessor-

Within the U.S. to a carrier or freight forwarder for ultimate delivery outside the U.S. to a purchaser or lessee (or a subsequent purchaser or sub-lessee).

Within the U.S. to a purchaser or lessee, if the property is ultimately delivered outside the U.S. (including delivery to a carrier or freight forwarder for delivery outside the U.S.) by the purchaser or lessee (or a subsequent purchaser or sub-lessee) within the one year after the sale or lease.

Within or outside the U.S. to a purchaser or lessee which, at the time of the sale or lease, is an interest charge DISC and is not a member of the same controlled group as the seller or lessor.

From the U.S. to a purchaser or lessee (or a subsequent purchaser or sub-lessee) at a point outside the U.S. by means of the seller?s or lessor?s own ship, aircraft, or other delivery vehicle, owned, leased, or chartered by the seller or lessor.

Outside the U.S. to a purchaser or lessee from a warehouse, storage facility, or assembly site located outside the U.S., if the property was previously shipped by the seller or lessor from the U.S.

Outside the U.S. to a purchaser or lessee if the property was previously shipped by the seller or lessor from the U.S. and if the property is located outside the U.S. pursuant to a prior lease by the seller or lessor, and either:

the prior lease terminated at the expiration of its term,

the sale occurred or the term of the subsequent lease began after the time at which the term of the prior lease would have expired, or

the lessee under the subsequent lease is not a related person with respect to the lessor and the prior lease was terminated by the action of the lessor acting alone or together with the lessee.

The Destination Test regulations contain three additional rules in Treas. Reg. ? 1.993-3(d)(2)(ii), (iii) and (iv).

Any relationship between the seller or lessor and any purchaser, subsequent purchaser, lessee, or sublessee is immaterial, (exception for (1)(c) and (1)(f) above).

In no event is the destination test satisfied with respect to property which is subject to any use (other than a resale or sublease), manufacture, assembly, or other processing (other than packaging) by any persons between the time of the sale or lease by such seller or lessor and the delivery, or ultimate delivery outside the U.S.

If property is located outside the U.S. at the time it is purchased by a person or leased by a person as lessee, such property may be export property in the hands of such purchaser or lessee only if it is imported into the U.S. prior to its further sale or lease (including a sublease) outside the U.S. See below for discussion of property manufactured in U.S. and subject to further manufacture.

Selected Cases and Rulings re the destination test. Since the FSC rules are similar to the DISC rules in this regard, many decisions reached for FSCs may also apply to DISCs.

Further manufacturing in the U.S prior to export.

General Electric Co. v. Commissioner, T.C. Memo. 1995-306, rev’d in part, vacated in part, and remanded, 245 F.3d 149 (2d Cir. 2001). [37]

General Electric (?GE?) manufactured aircraft engines and thrust reversers in the U.S. and sold them through its commission DISC to foreign airline companies as well as to U.S. manufacturers. Prior to being exported, these products were installed on the airplane sold by U.S. airframe manufacturers to foreign airlines. The installation process was performed in the U.S. This process involved 110 to 160 hours of constructing a build-up consisting of over 2,000 parts from more than 40 different vendors and then using four bolts to attach the engine to the plane. Finally, an additional 60 to 65 hours were required to attach the reversers to the airplane. The Tax Court held the U.S. airframe manufacturers? activities to constitute further manufacturing, assembling, or other processing under Treas. Reg. ? 1.993-3(d)(2)(iii) disqualifying the aircraft engines and reversers from being export property under Treas. Reg. ? 1.993-3.

However, on appeal, the Second Circuit reversed the decision of the Tax Court on the engines issue and vacated the Tax Court’s judgment on the thrust reversers issue. Specifically, the Second Circuit held that the attachment of engines to an airframe does not constitute assembly or other processing under Treas. Reg. ? 1.993-3(d)(2)(iii). The Second Circuit reasoned that the airframes and engines were distinct from each other physically (for example, routine removal and replacement); legally (for example, under FAA regulations and Government determinations); and commercially (for example, separate marketing and negotiations between the component-maker and the end user of the final product). The Second Circuit described the activities as follows: ?when [the airframe manufacturers] installed the engines on the airframes, [they] were not moving the engines along toward completion, or substantially changing them?. Rather, [the airframe manufacturers] were simply affixing a completed export product (an engine that was itself already in the form in which it was to be delivered) to another product (an airframe).?

In addition, the Second Circuit observed that engines and thrust reversers may differ materially. Because the Tax Court’s analysis did not differentiate between the engines and the thrust reversers, the Second Circuit sent the issue back to the Tax Court for further consideration in light of its opinion.

key difference between conservatism and statism.

How many pages of regulatory guidance would the IRS have to put out under Santorum to give some specific guidance as to the issue that could mean the difference between paying millions in taxes …. or paying $0?

Its kind of like saying a bunch of people in a room could set oil prices in a manner that is superior to the free market . . . . if we just get the right people to put the system together.

This is one of the reasons why I oppose the FAIR tax. A large transaction-based tax is far harder to enforce than an income tax given the aggregate nature of income.

People would be well served to look at politicians through a lens of cold rationality.

nt

Any theoretical physicist worth his or her salt will confirm the physicality of information. I definitely produce work product at part of my job.

If I use an injection molding device to print out words on a plastic tablet, I will be a manufacturer.

We are on the cusp of big revolution in “printing” technology anyway. This will just speed things up.

Precisely what regulatory reforms will Santorum enact by the way?