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EXAMPLE 25.44 A domestic corporation manufactures all of its products in the United States and sells some of its products to foreign distributors, passing title abroad. If
an unrelated foreign distributor buys $10,000 worth of goods and the domestic corporation’s cost of goods sold is $4,000, then gross income amounts to $6,000. Using the 50-50 method, one-half of the income is production activity, and one-half is attributable to sales activities. $3,000 of income is allocable to each activity. The $3,000 of income allocable to production activity is U.S.-source income, and the $3,000 of income allocable to sales activity is foreign-source income.EXAMPLE 25.45 A domestic corporation produces cloth and sells the cloth to an unrelated foreign clothing manufacturer for $100. All of the corporation’s production assets are located within the United States. The cost of the cloth sold, $80, is entirely attributable to production activity. The corporation does not engage in significant sales activities, in relation to its other activities, in its sales to the clothing manufacturer. Therefore, the sale to the clothing manufacturer establishes an IFP of $100. $100 of the gross sales price is treated as attributable to production activity, and no amount of income from the sale is attributable to sales activity. After reducing the gross sales price ($100) by the cost of goods sold ($80), the corporation’s $20 of gross income is treated as attributable to production activity and is U.S.-source income. The domestic corporation also sells cloth to an unrelated foreign retail outlet for $110. If the corporation has elected the IFP method and the cloth is substantially similar to the cloth sold to the clothing manufacturer, the $100 gross sales price will be treated as attributable to production activity, and $10 ($110 - $100 = $10) will be treated as attributable to sales activity. After reducing the gross sales price ($110) by the cost of goods sold ($80), $20 of the gross income is treated as attributable to production activity, and $10 is treated as attributable to sales activity. The $20 is U.S.-source income, and the $10 is foreign-source income.¶25,415 GAINS ON THE SALE OF INTANGIBLESAn intangible is any patent, copyright, secret process or formula, goodwill, trademark, trade brand, franchise, or other like property. How gain from the sale or exchange of an intangible is sourced depends on whether or not payments in consideration of the sale or exchange are contingent on the productivity, use, or disposition of the intangible and whether or not there have been any depreciation adjustments (discussed in ¶25,400) with respect to the intangible. Code Sec. 865(d).To the extent that any gain from the sale or exchange of an intangible does not exceed the depreciation adjustments with respect to the intangible, the portion of the gain that is U.S.-source income is determined by multiplying the gain by a fraction whose numerator is the amount of United States depreciation adjustments with respect to the property and whose denominator is the total amount of depreciation adjustments.