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Úóó(#Ã$òòÚ  Ú0Ú  Úóó Ñ  Ñ k Ô_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú11Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Ó€€The€sections€selected€by€the€Tax€Court€concern€theÐ ° Ðfollowing€matters:Ð xÈ ÐÌ(1)à0  à26€U.S.C.€ðð€179€(2000).€€Section€179€deals€with€the€electionÐ X Ðto€expense€certain€depreciable€business€assets.€€It€states,€inÐ Ð  Ðpart,€that€"[a]€taxpayer€may€elect€to€treat€the€cost€of€anyÐ ˜è Ðsection€179€property€as€an€expense€which€is€not€chargeable€toÐ ` ° Ðcapital€account."€€òòId.óó€ðð€179(a).€€It€defines€"Section€179Ð ( x Ðproperty,"€for€purposes€of€ðð€179,€as€"any€tangible€propertyÐ ð @ Ð(to€which€section€168€applies)€which€is€section€1245€propertyÐ ¸   Ð(as€defined€in€section€1245(a)(3))€and€which€is€acquired€byÐ € Ð  Ðpurchase€for€use€in€the€òòactive€conduct€of€a€trade€orÐ H ˜  Ðbusinessóó."€€òòId.óó€ðð€179(d)(1)€(emphasis€added).€Ð` (#(# ÐÌ(2)à0  à26€U.S.C.€ðð€355€(2000)Ô#†Xä„XX XøC#ÔÔ‡ XøCXXXä„Ô.€€Section€355€deals€with€theÐ  ð  Ðdistribution€of€stock€and€securities€of€a€controlledÐ h¸  Ðcorporation.€€Section€355(a)'s€provisions€apply€Ð0€ (#(# ÐÌà0  àà0` (#(#àonly€if€either€„„€(A)€the€distributing€corporation,€andÐ À Ðthe€controlled€corporation€.€.€.€is€engaged€immediatelyÐ ˆØ Ðafter€the€distribution€in€the€òòactive€conduct€of€a€tradeÐ P  Ðor€businessóó,€or€(B)€immediately€before€the€distribution,Ð h Ðthe€distributing€corporation€had€no€assets€other€thanÐ à0 Ðstock€or€securities€in€the€controlled€corporations€andÐ ¨ø Ðeach€of€the€controlled€corporations€is€engagedÐ pÀ Ðimmediately€after€the€distribution€in€the€òòactive€conductÐ 8ˆ Ðof€a€trade€or€businessóó.ÐP` (#` (# Ðà  àÐ È  Ðà  àòòId.óó€ðð€355(b)(1)€(emphases€added).Ð ° ÐÌ(3)à0  à26€U.S.C.€ðð€367€(2000)Ô#†Xä„XX XøCÿ#ÔÔ‡ XøCXXXä„Ô.€€Section€367€deals€with€foreignÐ @ Ðcorporations.€€It€provides€that,€if€in€connection€with€certainÐ X Ðdefined€exchanges,€United€States€persons€transfer€property€toÐ Ð  Ðforeign€corporations,€"such€foreign€corporation€shall€not,€forÐ ˜è Ðpurposes€of€determining€the€extent€to€which€gain€shall€beÐ ` ° Ðrecognized€on€such€transfer,€be€considered€to€be€aÐ ( x Ðcorporation."€€òòId.óó€ðð€367(a)(1).€€But,€in€general,€ðð367(a)(1)Ô#†Xä„XX XøC] #ÔÔ‡ XøCXXXä„ÔÐ ð @ Ðdoes€"not€apply€to€any€property€transferred€to€a€foreignÐ ¸   Ðcorporation€for€use€by€such€foreign€corporation€in€the€òòactiveÐ € Ð  Ðconduct€of€a€trade€or€businessóó€outside€of€the€United€States."€Ð H ˜  ÐÔ#†Xä„XX XøC« #ÔÔ‡ XøCXXXä„ÔòòId.óó€ðð€367(a)(3)(A)€(emphasis€added).€€Ô#†Xä„XX XøCú #Ô Ñ  Ñ ËÔ_ÔÔ€ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú9Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àSection€936€did€not€entirely€replace€section€931.€€TheÐ ° Ðthen„existing€provision€„„€26€U.S.C.€ðð€931€„„€was€retained,€butÐ xÈ Ðonly€for€qualifying€"individual€citizens,"€as€opposed€toÐ @ Ðcorporations.€€In€addition,€it€was€made€inapplicable€to€Puerto€RicoÐ X Ðby€defining€"possession,"€for€purposes€of€section€931,€not€toÐ Ð  Ðinclude€Puerto€Rico.€€òòóóðð€1051(c),€90€Stat.€at€1645.€€In€the€case€ofÐ ˜è Ðdomestic€corporations€deriving€the€requisite€income€from€PuertoÐ ` ° ÐRico€and€deriving€the€requisite€income€from€active€conduct€of€aÐ ( x Ðtrade€or€business€in€Puerto€Rico,€the€ðð€936€credit€is€available.€Ð ð @ ÐòòSeeóó€26€U.S.C.€ðð€936.€€In€the€case€of€qualifying€U.S.€individualÐ ¸   Ðcitizens,€the€Puerto€Rican€source€income€exclusion€is€now€containedÐ € Ð  Ðin€26€U.S.C.€ðð€933.€€ pÔ_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú3Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àWhen€we€refer€to€the€"tax€years€at€issue"€or€the€"subjectÐ ° Ðyears€of€this€case,"€we€mean€the€three„year€period€made€relevant€byÐ xÈ Ððð€936(a)(2).€€That€is,€the€three„year€period€"immediately€precedingÐ @ Ðthe€close€of€the€taxable€year."€€Here,€because€Ô#†Xä„XX XøC#ÔÔ‡ XøCXXXä„Ôthe€allegedÐ X Ðdeficiency€occurred€for€the€tax€year€ending€August€31,€1992,€theÐ Ð  Ðthree„year€period€runs€from€September€1,€1989,€through€August€31,Ð ˜è Ð1992ò òó ó.€Ô#†Xä„XX XøCW#Ô #Ô_ÔÔ€ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú2Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àPuerto€Rico€is€a€Commonwealth;€it€is€explicitly€withinÐ ° Ðthe€term€"possession"€for€purposes€of€ðð€936.€€26€U.S.C.€ðð€936(d)(1)Ð xÈ Ð("The€term€'possession€of€the€United€States'€includes€theÐ @ ÐCommonwealth€of€Puerto€Rico€.€.€.€.").€€0ÿÿ.Normal Ñ  Ñ zÔ_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú6Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àWe€are€not€persuaded€by€M„PR's€contention€that,€if€ðð€936Ð ° Ðis€ambiguous,€then€this€court€should€strictly€construe€it€againstÐ xÈ Ðthe€government.€€Here,€we€are€interpreting€a€provision€permittingÐ @ Ða€tax€credit,€not€a€provision€levying€a€tax.€€The€Supreme€Court€hasÐ X Ðstated€that€in€the€context€of€a€tax€deduction,€it€is€"not€impressedÐ Ð  Ðby€the€argument€that€...€all€doubts€should€be€resolved€in€favorÐ ˜è Ðof€the€taxpayer."€€òòWhiteóó€v.€òòUnited€Statesóó,€305€U.S.€281,€292Ð ` ° Ð(1938);€òòseeóó€òòalsoóó€òòUnited€Statesóó€v.€òòStewartóó,€311€U.S.€60,€71€(1940)Ð ( x Ð(stating€that€"those€who€seek€an€exemption€from€a€tax€must€rest€itÐ ð @ Ðon€more€than€a€doubt€or€ambiguity");€òòInter„Mountain€Life€Ins.€Co.Ô#†Xä„XX XøC#ÔÔ‡ XøCXXXä„Ôóó,Ð ¸   Ð294€U.S.€at€689„90€(holding€that€deductions€must€be€plainlyÐ € Ð  Ðauthorized,€not€derived€from€ambiguities).€Ô#†Xä„XX XøC#ÔÔ‡ XøCXXXä„Ô€Rather,€it€is€the€dutyÐ H ˜  Ðof€a€court€to€determine€"what€[the]€construction€[of€a€statute]Ð `  Ðfairly€should€be."€€òòWhiteóó,€305€U.S.€at€292.€€Ô#†Xä„XX XøCe#ÔÔ‡ XøCXXXä„ÔM„PR's€argument€wouldÐ Ø(  Ðbe€more€appropriate€were€this€a€case€involving€a€statute€imposingÐ  ð   Ða€tax,€rather€than€a€statute€permitting€a€tax€credit.òòóóÔ#†Xä„XX XøCZ#ÔÔ‡ XøCXXXä„Ô öÔ_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú7Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àM„PR€notes€that€the€Commissioner€has€previously€taken€theÐ ° Ðposition€that€the€"active€conduct"€requirement€is€meant€toÐ xÈ Ðdistinguish€between€investment€income€and€business€income.€€ThatÐ @ Ðproposition€is€different€from€the€proposition€M„PR€urges€here,Ð X Ðwhich€is€that€the€"active€conduct"€requirement€is€met€so€long€asÐ Ð  Ðthe€taxpayer€derives€income€from€any€source€not€wholly€passive.€€ToÐ ˜è Ðsay€that€the€"active€conduct"€requirement€distinguishes€investmentÐ ` ° Ðincome€from€business€income€is€not€to€say€that€all€income€otherÐ ( x Ðthan€investment€income€meets€the€requirement.€€€€€Ô#†Xä„XX XøC#Ô ºÔ_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú12Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àThe€taxpayer€relies€on€cases€arising€under€otherÐ ° Ðprovisions€of€the€Internal€Revenue€Code,€which€hold€that€a€taxpayerÐ xÈ Ðneed€not€manufacture€its€own€product€but€may€be€a€manufacturer€byÐ @ Ðuse€of€a€contract€manufacturer.€€òòSeeóó€òòÔ_ÔSuzyÔ_Ô's€Zooóó€v.€òòÔ_ÔComm'rÔ_Ôóó,€273€F.3dÐ X Ð875,€879€(9th€Cir.€2001);€òòPolaroid€Corp.óó€v.€òòUnited€Statesóó,€235€F.2dÐ Ð  Ð276,€278€(1st€Cir.€1956).€€Those€cases€address€different€problems.€Ð ˜è ÐOne€size€does€not€fit€all.Ô#†Xä„XX XøC#ÔÔ‡ XøCXXXä„Ô ?Ô_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú5Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àHad€the€Treasury€Department€promulgated€a€regulationÐ ° Ðinterpreting€ðð€936(a),€we€would€have€been€required,€absentÐ xÈ Ðcontradictory€statutory€language,€to€defer€to€a€reasonableÐ @ Ðinterpretation.€€òòÔ_ÔKikalosÔ_Ôóó€v.€òòÔ_ÔComm'rÔ_Ôóó,€190€F.3d€791,€795„96€(7th€Cir.Ð X Ð1999);€òòÔ_ÔSnowaÔ_Ôóó€v.€òòÔ_ÔComm'rÔ_Ôóó,€123€F.3d€190,€195„96€(4th€Cir.€1997).€€Ô#†Xä„XX XøC#Ô<ÿÿ:Definition T ¯Ô_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú4Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àThe€Tax€Court€states€that€the€deficiency€was€$815,196.Ð ° ÐòòÔ_ÔMedChemÔ_Ôóó,€116€T.C.€at€309.€€In€contrast,€both€parties,€at€variousÐ xÈ Ðpoints€in€their€briefs,€state€that€the€sum€is€$815,916.€€The€NoticeÐ @ Ðof€Deficiency€uses€both€figures.€€We€assume€that€$815,196€is€theÐ X Ðcorrect€figure.òòóóÔ#†Xä„XX XøC#Ô 7Ô_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú1Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àSection€936(a)(2)'s€other€condition€is€that€at€least€80%Ð ° Ðof€the€corporation's€gross€income€for€the€three„year€periodÐ xÈ Ðimmediately€preceding€the€close€of€the€tax€year€must€be€"derivedÐ @ Ðfrom€sources€within€a€possession€of€the€United€States."€€26€U.S.C.Ð X Ððð936(a)(2)(A).€€The€parties€agree€that€Ô_ÔMedChemÔ_Ô€(P.R.)€meets€thisÐ Ð  ÐÔ#†Xä„XX XøC#ÔÔ‡ XøCXXXä„Ôrequirement.Ô#†Xä„XX XøCé#Ô /Ô_ÔÔ‡ XøCXXXÔÝ ƒ¨kÿÝÓ  ÓÓ=€ä„ÐXdÐd=Óà  àòòÚ  Ú10Ú  ÚóóÝ  ÝÓ=€ä„XÐXdÐXd=Óà ` àSince€1976,€there€have€been€many€amendments€to€theÐ ° Ðpossessions€corporations€taxation€system€in€general€and€to€ððÔ#†Xä„XX XøC#ÔÔ‡ XøCXXXä„Ô€936€inÐ xÈ Ðparticular,€including€those€imposed€by€the€Tax€Equity€and€FiscalÐ @ ÐResponsibility€Act€of€1982,€Pub.€L.€No.€97„248,€96€Stat.€324Ð X Ð(1982),€and€by€the€Tax€Reform€Act€of€1986,€Pub.€L.€No.€99„514,€100Ð Ð  ÐStat.€2085€(1986).€€We€do€not€analyze€these€changes.€€The€text€ofÐ ˜è Ðthe€provision€we€construe,€26€U.S.C.€ðð€936(a)(2)(B),€has€remainedÐ ` ° Ðunchanged€since€1976,€except€that€its€50%€"trade€or€business"Ð ( x Ðrequirement€is€now€a€75%€requirement.Ô#†Xä„XX 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Ðthe€gross€income€of€such€citizen€or€domesticÐ xÈ Ðcorporation€(computed€without€the€benefit€of€thisÐ @ Ðsection)€for€the€3„year€period€immediatelyÐ X Ðpreceding€the€close€of€the€taxable€year€.€.€.€wasÐ Ð  Ðderived€from€sources€within€a€possession€of€theÐ ˜è ÐUnited€States;€andÐ` °¸ (#¸ (# ÐÌà  àà ` àà0 ¸ à(2)€Trade€or€business.€„„€If€„„Ðð @¸ (#¸ (# ÐÌà0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#à(A)€in€the€case€of€such€corporation,€50Ð € Ð  Ðpercent€or€more€of€its€gross€income€(computedÐ H ˜  Ðwithout€the€benefit€of€this€section)€for€suchÐ `  Ðperiod€.€.€.€was€derived€from€the€activeÐ Ø(  Ðconduct€of€a€trade€or€business€within€aÐ  ð  Ðpossession€of€the€United€States€.€.€.€.€Ô#†Xä„XX XøC#ÔÐh¸ (#(# ÐÌÔ‡ XøCXXXä„Ôðð€931,€68A€Stat.€at€291Ô#†Xä„XX XøCÒ#Ô.HÁÝ ƒ!ÝÝ  ÝÔ_ÔÑ  ÑØØÑ€ÑÓ*°,X°` ¨ ƒX°œX*ÓÓ  ÓÓ  ÓÓÓÓÓÑ8€øCXXdÈdÈ8ÑÓ=€ä„XÐXdÐd=ÓÝ ƒÿÝÝ  Ýò òÔ‡Lú§JXXÔÔ‡TLÞ>JJLú§ÔUnited€States€Court€of€AppealsÔ#†TXÄýXJTLÞ>P#ÔÐ ° ÐÓÓà@ ìàÔ‡TRˆO QXTXÄýÔFor€the€First€Circuitó óÔ#†TXÄýX QTRˆO#ÔÔ#†Xä„XXTXÄýo#ÔÔ‡ XøCXXXä„ԈР^® Ðà@<< ìà____________________ˆÐ ªú ÐÌÔ#†Xä„XX XøCƒ#ÔÔ‡ XøCXXXä„ÔNo.€01„2251Ð : Š ÐÌÓ  ÓMEDCHEM€(P.R.),€INC.,Ð Ê  ÐÓXÓÌà@ÄÄìàPetitioner,€Appellant,ˆÐ Z ª ÐÌà@tt)ìàv.ˆÐ ê :  ÐÌÓ  ÓCOMMISSIONER€OF€INTERNAL€REVENUE,Ð zÊ  ÐÌà@@<< ìàRespondent,€Appellee.Ð  Z  ÐÔ#†Xä„XX XøC#ÔÔ‡ XøCXXXä„ÔÌÔ#†Xä„XX XøC«#ÔÓ ÓÔ‡ XøCXXXä„Ôà@<< ìà____________________ˆÐ šê  ÐÌÓ  Óà@@°° ìàAPPEAL€FROM€Ô#†Xä„XX XøCþ#ÔÔ‡ XøCXXXä„ÔTHE€UNITED€STATES€TAX€COURTÐ *z ÐÓZÓÌà@È È ìàà@@Ø Ø ìà[Hon.€David€Ô_ÔLaroÔ_Ô,€òòU.S.€Tax€Court€Judgeóóò òó ó]òòóóˆÐ º  Ðà@<< ìà____________________ˆÐ ‚Ò Ðà ` àà ¨ àà  àà X àà ° àÌà@„„'ìàBeforeˆÐ b ÐÓ  ÓÌÔ_ÔSelyaÔ_Ô,€òòCircuit€Judgeóó,Ð ¢ò ÐÔ#†Xä„XX XøC§#ÔÔ‡ XøCXXXä„ÔÔ_ÔStahlÔ_Ô,€òòSenior€Circuit€Judgeóó,Ð jº Ðand€LynchÔ#†Xä„XX XøCÁ#ÔÔ‡ XøCXXXä„Ô,€òòCircuit€JudgeÔ#†Xä„XX XøCc#ÔÔ‡ XøCXXXä„Ôóó.òòóóÐ 2‚ ÐÌÓAÓà@<< ìà____________________ˆÐ  ÐÌÓ* °X°,X°` ¨ ƒX*Óà  àòòDavid€A.€Ô_ÔHickersonÔ_Ôóó€with€whom€òòLisa€R.€Fineóó€and€òòWeil,€Ô_ÔGotshalÔ_Ô€&Ð R¢ ÐÔ_ÔMangesÔ_Ô,€Ô_ÔLLPÔ_Ôóó€were€on€brief€for€appellant.Ð j  ÐÌà  àòòA.€Duane€Webberóó€and€òòBaker€&€McKenzieóó€on€brief€for€ElectronicÐ ª ú" ÐArts€Puerto€Rico,€Inc.,€amicus€curiae.€€Ð r!Â# ÐÌà  àòòDavid€English€Ô_ÔCarmackÔ_Ôóó,€Attorney,€Tax€Division,€Department€ofÐ #R% ÐJustice,€with€whom€òòEileen€J.€O'Connoróó,€Assistant€Attorney€General,Ð Ê#& Ðand€òòKenneth€W.€Rosenbergóó,€€Attorney,€Tax€Division,€Department€ofÐ ’$â' ÐJustice,€Ô#†Xä„XX XøC·#ÔÔ‡ XøCXXXä„Ôwere€on€brief€for€appellee.€€Ó.°,X°` ¨ ƒX°XC .ÓÐ Z%ª ( ÐÌà@<< ìà____________________ˆÐ ê&:"* ÐÌÓ  ÓJuly€10,€2002Ð z(Ê#, Ðà@@<< ìà____________________Ô#†Xä„XX XøC© #ÔÔ‡ XøCXXXä„ÔÐ B)’$- ÐÐ   *Z%. ÐÔ_ÔØØÔ#†Xä„XX XøCÝ #ÔÓ«ÓÑ8€øCXXdÈXXdÈ8ÑÑ€ ¿r ÑÑ€¿rÑÑ€@¸ÑÓ  Óà ` àò òòòóóÔ€ XøCXXXä„ÔLYNCH,€òòCircuit€Judgeó óóó.€€This€tax€case€requiresÐ ° Ðinterpretation€of€the€Internal€Revenue€Code's€Puerto€Rico€andÐ à ÐPossession€Tax€Credit€provision,€26€U.S.C.€ðð€936€(2000ò òó ó),€whichÐ  p Ðpermits€a€domestic€corporation€to€elect€a€possession€tax€credit€ifÐ °  Ðit€meets€certain€conditions,€òòid.óó€ðð€936(a).€€The€condition€on€whichÐ @  Ðthis€case€turns€is€that€75%€or€more€of€the€gross€income€of€theÐ Ð   Ðcorporation€for€the€three€preceding€years€must€be€"derived€from€theÐ `°  Ðactive€conduct€of€a€trade€or€business€within€a€possession€of€theÐ ð@  ÐUnited€States."€€òòId.óó€ðð936(a)(2)(B).׃/×Ý ƒ#ÃÝòòÚ  Ú1Ú  ÚóóÝ  Ý×  ×€€Ð €Ð  Ðà ` àThe€taxpayer,€MedChem€(P.R.),€Inc.€("M„PR"),€contendsÐ ` Ðthat€it€meets€this€"active€conduct€of€a€trade€or€business"Ð  ð Ðrequirement;€the€Tax€Court€and€the€Commissioner€of€Internal€RevenueÐ 0€ Ðdisagree.€€This€issue€appears€to€be€one€of€first€impression€at€theÐ À Ðcircuit€level.Ð P  Ðà ` àThe€particular€tax€credit€codified€at€ðð936€was€added€byÐ à0 Ðthe€Tax€Reform€Act€of€1976,€Pub.€L.€No.€94„455,€90€Stat.€1520Ð pÀ Ð(1976)€(codified€in€scattered€sections€of€26€U.S.C.),€although€itÐ P  Ðhas€its€roots€in€legislation€from€the€1920s,€òòseeóó€òòóóRevenue€Act€ofÐ à" Ð1921,€Pub.€L.€No.€67„98,€ðð262,€42€Stat.€227,€271€(1921).€€TheÐ  !p$ Ðgovernment€tells€us€that€the€tax€credit€is€in€the€process€of€beingÐ °"& Ðphased€out.€€òòSeeóó€26€U.S.C.€ðð936(j).€€This€case€has,€in€theÐ @$( Ðinterim,€consequences€for€domestic€corporations€involved€inÐ Ð% !* Ðbusiness€activity€in€Puerto€Rico׃×Ý ƒ#ÃÝòòÚ  Ú2Ú  ÚóóÝ  Ý×  ×€and€certain€other€possessions.€Ð ° ÐUnfortunately,€there€are€no€promulgated€regulations€under€ðð€936(a)Ð @ Ðand€domestic€corporations€have€been€forced€to€make€businessÐ Ð  Ðarrangements€in€U.S.€possessions€without€the€prior€guidance€suchÐ ` ° Ðregulations€might€provide.Ð ð @ Ðà ` àBased€primarily€on€ðð€936's€text,€understood€in€theÐ € Ð  Ðcontext€of€the€legislative€history,€we€conclude€that€M„PR€hasÐ `  Ðfailed€to€meet€the€"active€conduct€of€a€trade€or€business"Ð  ð  Ðrequirement€and,€accordingly,€we€affirm€the€Tax€Court's€judgment.€Ð 0€  ÐWe€do€so€without€adopting€the€Tax€Court's€proposed€test€for€whatÐ À Ðconstitutes€the€active€conduct€of€a€trade€or€business€in€a€U.S.Ð P  Ðpossession€for€purposes€of€ðð€936(a).€Ð à0 Ðò òÔ&   ÔÓ  ÓI.Ð pÀ Ðó óÓ¼Óà ` àThe€facts€in€this€case€are€not€in€dispute,€òòMedChemÐ P  Ð(P.R.),€Inc.óó€v.€òòComm'róó,€116€T.C.€308,€310€(2001);€òòseeóó€òògenerallyóó€TaxÐ à0 ÐCt.€R.€122,€although€M„PR€contests€the€inferences€the€Tax€CourtÐ pÀ Ðdrew€from€the€stipulated€record.€€M„PR€is€the€taxpayer€claiÔ'  °Ôming€toÐ P  Ðqualify€for€the€possessions€tax€credit.€€Ð à" Ðà ` àM„PR's€identity€has€gone€through€several€transformations.Ð  !p$ ÐM„PR€was€incorporated€in€Delaware€on€December€8,€1987,€as€MedChemÐ °"& ÐPuerto€Rico,€Inc.€€A€couple€of€weeks€later,€on€December€22,€MedChemÐ @$( ÐPuerto€Rico,€Inc.€changed€its€name€to€BioChem€Products,€Inc.€€Then,Ð Ð% !* Ðon€March€1,€1992,€ò òó óBioChem€Products,€Inc.€changed€its€state€ofÐ `'°", Ðincorporation€to€Massachusetts€and,€on€November€25,€1992,€changedÐ ° Ðits€name€to€MedChem€P.R.,€Inc.€€M„PR€and€all€of€its€predecessors€„„Ð @ Ðall€of€which€we€will€refer€to€as€M„PR€„„€were€at€all€times€whollyÐ Ð  Ðowned€subsidiaries€of€MedChem€Products,€Inc.€("M„USA").€€M„USA€isÐ ` ° Ða€Massachusetts€corporation€with€its€principal€place€of€business€inÐ ð @ ÐWoburn,€Massachusetts.€€Following€the€tax€years€at€issue€in€thisÐ € Ð  Ðcase,׃×Ý ƒ#ÃÝòòÚ  Ú3Ú  ÚóóÝ  Ý×  ×€M„USA€succeeded€M„PR€through€a€merger€of€M„PR€into€M„USA.€€Ð `  Ðà ` àThe€IRS€found€a€deficiency€of€$815,196׃)×Ý ƒ#ÃÝòòÚ  Ú4Ú  ÚóóÝ  Ý×  ×€in€M„PR's€federalÐ  ð  Ðincome€tax€paid€for€the€tax€year€ending€August€31,€1992,€and€aÐ 0€  Ðdeficiency€of€$1,705,019€in€M„USA's€tax€payments€for€the€sameÐ À Ðperiod.€€In€consolidated€cases€in€the€Tax€Court,€M„USA,€asÐ P  Ðsuccessor€by€merger€to€M„PR,€contested€both€of€these€claims€ofÐ à0 Ðdeficiency.€€òòMedChemóó,€116€T.C.€at€309.€€It€is€the€$815,196Ð pÀ Ðliability€that€is€at€issue€here.€Ð P Ðà ` àDuring€the€relevant€three„year€period€„„€that€is,€duringÐ à Ðeach€of€M„PR's€taxable€years€ending€on€August€31,€1990„92€„„€all€ofÐ  p ÐM„PR's€reported€income€was€"intangible€property€income,"€òòseeóó€26Ð °  Ðâ âU.S.C.€ðð936(h)(3),€attributable€to€the€sale€of€Avitene,€a€blood„Ð @" Ðclotting€drug€manufactured€by€Alcon€Puerto€Rico,€Inc.€("A„PR"),€anÐ ° Ðunrelated€company.Ð @ Ðâ âà ` àOn€December€18,€1987,€ten€days€after€M„PR€wasÐ Ð  Ðincorporated,€A„PR€along€with€Alcon€Pharmaceuticals,€Ltd.€and€AlconÐ ` ° ÐLaboratories,€Inc.€(collectively€"Alcon€entities")€sold€the€AviteneÐ ð @ Ðportion€of€their€business€to€M„PR€and€M„USA.€€The€Alcon€entitiesÐ € Ð  Ðsold€the€equipment,€raw€materials,€technology,€and€other€assetsÐ `  Ðassociated€with€Avitene's€manufacturing.€€M„USA€acquired€theÐ  ð  Ðreceivables,€non„competition€agreements,€goodwill,€contract€rights,Ð 0€  Ðrecords,€patents€and€related€know„how,€trademarks,€and€Food€andÐ À ÐDrug€Administration€approvals.€€M„PR€acquired€receivables,Ð P  Ðinventory,€and€title€to€the€machinery€and€equipment€located€withinÐ à0 ÐA„PR's€manufacturing€facility€in€Humacao,€Puerto€Rico.€€ThoseÐ pÀ Ðassets€did€not€include€A„PR's€Avitene€manufacturing€facility€inÐ P ÐHumacao.€Ð à Ðà ` àBefore€the€acquisition,€A„PR€had€been€the€manufacturer€ofÐ  p ÐAvitene.€€M„USA€had€nothing€to€do€with€the€drug.€€Until€ten€daysÐ °  Ðprior€to€the€acquisition,€M„PR€did€not€exist.€€As€part€of€the€sale,Ð @" ÐA„PR€agreed€to€continue€manufacturing€Avitene€for€M„PR€using€A„PR'sÐ Ð $ Ðown€facility€and€labor€and€M„PR's€recently„acquired€raw€materialsÐ `"°& Ðand€equipment.€€A„PR€also€used€the€technology€acquired€by€M„USA.€Ð ð#@( ÐM„PR€held€title€to€the€in„process€and€finished€Avitene.€€A„PRÐ €%Ð * Ðshipped€finished€Avitene€from€its€facility€to€M„USA,€and€titleÐ '`", Ðpassed€to€M„USA,€the€purchaser.€€A„PR€was€solely€responsible€forÐ  (ð#. Ðany€issues€that€arose€until€the€finished€product€was€delivered€toÐ 0*€%0 Ða€carrier€for€shipment€to€M„USA.€€In€return,€A„PR€sent€its€invoicesÐ À+'2 Ðfor€its€manufacturing€services€directly€to€M„USA,€which€paid,€fromÐ ° ÐM„PR's€account,€a€price€equal€to€the€manufacturing€cost€plus€10%.€Ð @ ÐThe€primary€change€effected€by€the€1987€sale€was€that€certainÐ Ð  Ðassets€were€held€in€the€name€of€either€M„PR€or€its€parent,€M„USA.Ð ` ° Ðà ` àThe€reason€M„PR€entered€into€the€processing€agreementÐ ð @ Ðwith€A„PR,€in€which€A„PR€manufactured€Avitene€for€M„PR€using€M„PR'sÐ € Ð  Ðraw€materials€and€equipment,€was€that€M„PR€needed€to€ensure€aÐ `  Ðsteady€supply€of€Avitene€until€it€built€its€own€manufacturingÐ  ð  Ðfacility€in€Puerto€Rico.€€As€it€turns€out,€M„PR€later€abandoned€itsÐ 0€  Ðplan€to€construct€its€own€Avitene€facility€in€Puerto€Rico.€Ð À Ðà ` àDuring€much€of€the€relevant€three„year€period,€M„PR€hadÐ P  Ðno€employees.€€Its€one€employee,€Mr.€Perez,€was€a€former€A„PRÐ à0 Ðemployee.€€He€worked€for€M„PR€from€March€1988€to€June€1990€out€ofÐ pÀ Ða€one„room€office€that€M„PR€maintained.€€Mr.€Perez€spent€much€ofÐ P Ðhis€time€planning€M„PR's€transition€to€its€own€AviteneÐ à Ðmanufacturing€facility.€€M„PR€also€paid€three€independentÐ  p Ðcontractors€to€assist€Mr.€Perez.€€M„PR€treated€the€independentÐ °  Ðcontractors€as€nonemployees€for€payroll€and€tax€purposes.€€M„USAÐ @" Ðand€A„PR€employed€the€individuals,€other€than€Mr.€Perez€and€theÐ Ð $ Ðindependent€contractors,€associated€with€the€Avitene€manufacturingÐ `"°& Ðand€sales€business.€€Ð ð#@( Ðà ` àAt€the€time€of€the€1987€processing€agreement,€M„PR€and€M„Ð €%Ð * ÐUSA€had€hoped€to€establish€their€own€manufacturing€facility€inÐ '`", ÐPuerto€Rico.€€M„PR€purchased€land€in€Puerto€Rico,€on€which€itÐ  (ð#. Ðplanned€to€build€its€own€Avitene€manufacturing€facility.€€In€earlyÐ 0*€%0 Ð1990€M„USA€suffered€financial€reverses€causing€it€to€lay€off€aÐ À+'2 Ðthird€of€its€workforce€and€to€default€on€$10€million€in€debt.€€AsÐ ° Ða€result,€M„PR€suspended€its€plans€to€construct€a€manufacturingÐ @ Ðfacility€in€Puerto€Rico.€€M„PR€then€wrote€off€its€capitalÐ Ð  Ðexpenditures€that€had€been€made€on€the€new€facility€and€closed€itsÐ ` ° ÐPuerto€Rico€office.€€When€the€office€closed,€Perez€transferred€M„Ð ð @ ÐPR's€business€records€to€A„PR€and€M„USA.€€As€of€July€1,€1990,€allÐ € Ð  ÐM„PR€checks€were€issued€by€M„USA€from€M„USA's€Woburn,€MassachusettsÐ `  Ðoffice.€Ð  ð  Ðà ` àIn€early€1990€M„USA€decided€to€move€the€manufacturingÐ 0€  Ðequipment€and€processes€from€A„PR's€Humacao€facility€to€M„USA'sÐ À Ðfacility€in€Woburn.€€Significant€elements€of€the€equipment€wereÐ P  Ðmoved€from€Humacao€to€Woburn€by€June€1990€and,€by€January€1991,€allÐ à0 Ðof€the€manufacturing€equipment€necessary€to€perform€the€first€phaseÐ pÀ Ðof€the€manufacturing€process€had€been€moved€to€Woburn.€€In€OctoberÐ P Ð1992,€first„phase€Avitene€production€commenced€in€Woburn.€€By€AprilÐ à Ð1994,€M„USA€had€substantially€completed€the€construction,€inÐ  p ÐWoburn,€of€its€Avitene€finished€goods€manufacturing€facility.Ð °  ÐÔ& p Ôà@88)ìàò òII.ó óˆÐ @" Ðà ` àFor€its€tax€year€ending€August€31,€1992Ô'p@";Ô,€M„PR€claimed€aÐ  !p$ Ðtax€credit€under€ðð€936.€€The€Commissioner€determined€that€M„PR'sÐ °"& ÐAvitene€income€was€not€"derived€from€the€active€conduct€of€a€tradeÐ @$( Ðor€business"€within€a€possession€as€ðð€936(a)(2)(B)€requires.€Ð Ð% !* ÐAccordingly,€the€Commissioner€issued€a€notice€of€deficiency€in€theÐ `'°", Ðamount€of€$815,196.Ð ð(@$. Ðà ` àM„USA,€as€successor€by€merger€to€M„PR,€contested€theÐ €*Ð%0 Ðasserted€deficiency.€€òòóóOn€June€27,€2001,€the€Tax€Court€entered€itsÐ ,`'2 ÐÑ@¸Ñâ âÑ  Ñâ âÑ  Ñfinal€decision,€finding€that€M„PR€was€deficient,€in€the€sum€ofÐ ° Ð$815,196,€in€its€federal€income€tax€payments.€€The€Tax€CourtÐ @ Ðconcluded€that€M„PR€did€not€meet€ðð936(a)(2)(B)'s€"active€conductÐ Ð  Ðof€a€trade€or€business€within€a€possession"€requirement.€€òòMedChemóó,Ð ` ° Ð116€T.C.€at€309,€òòóó328„29.€€The€Tax€Court€held€that€Ð ð @ ÐÓÓà0 ` àà ° àà ` àfor€purposes€of€section€936(a),€a€taxpayer€activelyÐ € Ð  Ðconducts€a€trade€or€business€in€a€U.S.€possession€only€ifÐ H ˜  Ðit€participates€regularly,€continually,€extensively,€andÐ `  Ðactively€in€the€management€and€operation€of€its€profit„Ð Ø(  Ðmotivated€activity€in€that€possession.€.€.€.€€[F]or€theÐ  ð  Ðpurpose€of€this€participation€requirement,€the€servicesÐ h¸  Ðunderlying€€a€manufacturing€contract€may€be€imputed€to€aÐ 0€  Ðtaxpayer€only€to€the€extent€that€the€performance€of€thoseÐ øH  Ðservices€is€adequately€supervised€by€the€taxpayers's€ownÐ À Ðemployees.ЈØ` (#` (# ЀÌÓè?ÓòòId.óó€at€336„37.€€Ð h Ðà ` àThe€Tax€Court€concluded€that€M„PR€did€not€meet€this€test.€Ð ¨ø ÐòòId.óó€at€337.€€It€concluded€that€A„PR€and€M„USA€(located€in€aÐ 8ˆ Ðmainland€U.S.€facility)€performed,€directed,€and€controlled€all€ofÐ È Ðthe€business€activities€related€to€the€manufacture€of€Avitene.€€òòId.óóÐ X¨ Ðat€339.€€The€Tax€Court€found€that,€under€the€processing€agreement,Ð è8 ÐA„PR€used€its€own€personnel€to€manufacture,€test,€and€package€theÐ xÈ! ÐAvitene€at€its€Humacao€facility.€€òòId.óó€at€317.€€A„PR€employeesÐ  X# Ðperformed€all€of€the€tasks€required€in€the€manufacturing€process,Ð ˜!è% Ðincluding€the€supervision€of€that€manufacturing.€€òòId.óó€at€317,€339.€Ð (#x' ÐIt€was€M„USA€which€distributed,€marketed,€and€sold€the€drug€in€theÐ ¸$ ) ÐUnited€States.€€òòId.óó€€at€339.€€Indeed,€the€processing€agreementÐ H&˜!+ Ðprohibited€M„PR€from€taking€a€managerial€role€in€the€manufacturingÐ Ø'(#- Ðprocess.€€òòId.óó€at€346.€€Any€risks€associated€with€M„PR's€activitiesÐ h)¸$/ Ðappear€to€be€minimal,€as€M„USA€had€guaranteed€payment€of€any€debt,Ð ø*H&1 Ðand€performance€of€any€of€M„PR's€obligations,€arising€from€theÐ ˆ,Ø'3 ÐÑ¿r Ñâ âÑ  Ñâ âÑ  Ñasset€purchase€agreements.€€òòId.óó€at€316.€€M„USA€consistentlyÐ ° Ðreported,€including€to€the€FDA€and€to€the€SEC,€that€the€unrelatedÐ @ Ðentity,€A„PR,€was€the€drug's€manufacturer.€€òòId.óó€€This€informationÐ Ð  Ðwas€also€contained€on€the€labels€of€the€drugs.€€òòId.óó€at€315„16.€€€€Ð ` ° Ðà ` àM„PR€appeals€the€Tax€Court's€decision.€€Ð ð @ ÐÔ& P Ôà@üü(ìàò òIII.ó óˆÐ € Ð  Ðò òA.€Standard€of€Reviewó óÐ `°  Ðà ` àThis€court€reviews€thÔ'P€ WJÔe€Tax€Court's€decisions€"in€the€sameÐ @  Ðmanner€and€to€the€same€extent€as€decisions€of€the€district€courtsÐ Ð  Ðin€civil€actions€tried€without€a€jury."€€26€U.S.C.€ðð€7482(a)(1)Ð `° Ð(2000);€òòseeóó€òòalsoóó€òòSilvermanóó€v.€òòComm'róó,€86€F.3d€260,€261€(1st€Cir.Ð ð@ Ð1996).€€Our€standard€of€review€is€two„fold.€€We€review€de€novo€theÐ €Ð ÐTax€Court's€statutory€and€other€legal€interpretations.€òòóó€òòAlexanderóóÐ ` Ðv.€òòIRSóó,€72€F.3d€938,€941€(1st€Cir.€1995).€€We€review€its€factualÐ  ð Ðfindings,€including€those€based€on€inferences€from€stipulatedÐ 0€ Ðfacts,€for€clear€error.òòóó€€òòManzolióó€v.€òòComm'róó,€904€F.2d€101,€103€(1stÐ À ÐCir.€1990).€€To€the€extent€that€M„PR€is€making€a€clear€errorÐ P   Ðargument€with€respect€to€the€Tax€Court's€factual€findings,€weÐ à0" Ðreject€the€argument.Ð p!À$ Ðà ` àThere€are€no€Treasury€Department€regulations€interpretingÐ #P& Ððð€936(a),׃&×Ý ƒ#ÃÝòòÚ  Ú5Ú  ÚóóÝ  Ý×  ×€nor€is€the€term€"active€conduct€of€a€trade€or€business"Ð $à( Ðdefined€for€purposes€of€ðð€936.€€There€are,€however,€some€guides€toÐ  &p!* Ðstatutory€interpretation,€which€assist€us.€€"It€is€well€establishedÐ ° Ðin€the€tax€law€that€an€[IRS€determination€that€a€taxpayer€owes€theÐ @ ÐFederal€Government€a€certain€amount€of€unpaid€taxes]€is€entitled€toÐ Ð  Ða€legal€presumption€of€correctness€„„€a€presumption€that€can€helpÐ ` ° Ðthe€Government€prove€its€case€against€a€taxpayer€in€court."€€òòUnitedÐ ð @ ÐStatesóó€v.€òòFior€D'Italia,€Inc.óó,€No.€01„463,€2002€U.S.€LEXIS€4418,€atÐ € Ð  Ð*9„10€(U.S.€June€17,€2002).€€Furthermore,€income€tax€deductions€andÐ `  Ðcredits€are€matters€of€legislative€grace;€the€taxpayer€bears€theÐ  ð  Ðburden€of€proving€entitlement€to€any€deduction€or€credit€claimed.€Ð 0€  ÐòòIndopco,€Inc.óó€v.€òòComm'róó,€503€U.S.€79,€84€(1992);€òòNew€Colonial€IceÐ À ÐCo.óó€v.€òòHelveringóó,€292€U.S.€435,€440€(1934);€òòNorfolk€S.€Corpóó.€v.Ð P  ÐòòComm'róó,€104€T.C.€13,€36€(investment€tax€credit),€òòsupplementedóó€òòbyóóÐ à0 Ð104€T.C.€417€(1995),€òòaff'dóó,€140€F.3d€240€(4th€Cir.€1998).€Ð pÀ ÐMoreover,€a€deduction€or€credit€should€be€allowed€only€where€thereÐ P Ðis€"clear€provision€therefor."€€òòNew€Colonial€Ice€Co.óó,€292€U.S.€atÐ à Ð440;€òòseeóó€òòalsoóó€òòHelveringóó€v.€òòInter„Mountain€Life€Ins.€Co.óó,€294€U.S.Ð  p Ð686,€689€(1935)€(stating€that€"[d]eductions€are€allowed€only€whenÐ °  Ðplainly€authorized")òòóó.׃"×Ý ƒ#ÃÝòòÚ  Ú6Ú  ÚóóÝ  Ý×  ×€€òòóóÐ @" Ðò òB.€Positions€of€the€PartiesÐ ° Ðó óà ` àThe€parties€have€presented€the€court€with€differentÐ à Ðinterpretations€of€the€meaning€of€ðð€936(a).€€The€Tax€Court€has,€inÐ  p Ðits€ruling,€left€each€side€dissatisfied.€€Both€sides'Ð °  Ðinterpretations€diverge€from€the€Tax€Court's,€although€theÐ @  Ðgovernment's€position€is€much€closer€to€the€Tax€Court's€conclusion.Ð Ð   Ðà ` àThe€Tax€Court€rejected€M„PR's€statutory€plain€meaningÐ `°  Ðargument.€€òòMedChemóó,€116€T.C.€at€328„29.€€Instead,€it€crafted€a€testÐ ð@  Ðthat,€in€the€absence€of€a€statutory€or€regulatory€definition€ofÐ €Ð  Ð"active€conduct€of€a€trade€or€business"€for€purposes€of€ðð€936(a),Ð ` Ðlooks€to€regulations€defining€the€phrase€as€it€is€used€elsewhere€inÐ  ð Ðthe€code,€òòóóbearing€in€mind€the€section's€legislative€intent,€òòid.óó€atÐ 0€ Ð330„33.€€Applying€this€test,€the€Tax€Court€rejected€interpretationsÐ À Ðmore€helpful€to€the€taxpayer,€provided€in€other€regulations,€òòseeóó,Ð P  Ðòòe.g.óó,ò ò€ó ó26€C.F.R.€ðð€1.936„5(c)€(2001).€€The€applicable€test,€the€TaxÐ à0 ÐCourt€held,€was€whether€the€taxpayer€"participates€regularly,Ð À Ðcontinually,€extensively,€and€actively€in€the€management€andÐ P   Ðoperation€of€its€profit„motivated€activity€in€that€possession."€Ð à0" ÐòòMedChemóó,€116€T.C.€at€336.€€It€held€that€to€impute€a€contractor'sÐ p!À$ Ðactivities€to€the€taxpayer,€the€taxpayer€had€to€"adequatelyÐ #P& Ðsupervise[]"€the€provision€of€these€services€with€its€ownÐ $à( Ðemployees.€€òòId.óó€at€337.€€The€Tax€Court€found€the€facts€about€M„PR'sÐ  &p!* Ðâ ârelationship€with€the€contract€manufacturer€inadequate€under€itsÐ °'#, ÐÑ ¿r Ñâ  âÑ  Ñâ  âÑ  Ñnewly€crafted€test,€and€thus€found€that€M„PR€is€not€entitled€to€theÐ ° Ðcredit.€€òòId.óó€at€337„43.Ð @ Ðâ âà ` àThe€Commissioner€rejects€M„PR's€"plain€meaning"€readingÐ Ð  Ðof€the€statute€and€generally€rejects€the€proposition€that€use€ofÐ ` ° Ðcontract€manufacturers€in€possessions€is€ever€sufficient€to€qualifyÐ ð @ Ðfor€the€ðð€936(a)€tax€credit,€but€allows€for€rare€exceptions€whereÐ € Ð  Ðthe€taxpayer€corporation€is€very€heavily€involved€in€the€operationÐ `  Ðand€management€of€the€contract€manufacturer.€€The€CommissionerÐ  ð  Ðseeks€affirmance€of€the€Tax€Court's€result,€but€at€oral€argumentÐ 0€  Ðprotested€the€Tax€Court's€test,€which€is€more€beneficial€toÐ À Ðtaxpayers€than€the€IRS's€proposed€test€for€what€constitutes€theÐ P  Ðactive€conduct€of€a€trade€of€business.€€The€IRS€proposes€thatÐ à0 Ðoutsourced€manufacturing€may€never€(well,€hardly€ever)€qualify€forÐ pÀ Ðthe€tax€credit.€€Only€in€rare€instances,€when€the€taxpayer€isÐ P Ðheavily€involved€in€the€management€and€control€of€operations€of€aÐ à Ðcontract€manufacturer,€says€the€IRS,€might€it€qualify.Ð  p Ðà ` àThe€taxpayer,€M„PR,€on€the€other€hand,€argues€that€theÐ °  Ðstatute's€plain€meaning€does€not€preclude€tax€credits€to€taxpayersÐ @" Ðwho€use€contract€manufacturers€located€in€the€possessions€and€that,Ð Ð $ Ðif€more€were€required,€it€has,€on€the€facts,€provided€the€requisiteÐ `"°& Ðmore.€€M„PR€says€the€Tax€Court€is€wrong€in€its€statutoryÐ ð#@( Ðinterpretation€and€in€its€choice€of€test.€€M„PR€asserts€that€theÐ €%Ð * ÐTax€Court's€test€is€inconsistent€with€regulations€applicable€toÐ '`", Ðother€parts€of€ðð€936.Ð  (ð#. Ðà ` àWe€affirm€the€denial€of€the€credit€and€the€finding€ofÐ 0*€%0 Ðdeficiency.€€In€doing€so,€we€assess€and€reject€the€taxpayer's€plainÐ À+'2 Ðmeaning€arguments,€look€to€the€Act's€legislative€history€forÐ ° Ðfurther€guidance€regarding€congressional€intent€in€enacting€ðð€936,Ð @ Ðand€compare€the€section€at€issue€with€the€now„repealed€WesternÐ Ð  ÐHemisphere€Trade€Corporation€provisions€of€the€Internal€RevenueÐ ` ° ÐCode€of€1954.€€We€conclude€that,€on€the€facts€presented,€€M„PR€doesÐ ð @ Ðnot€fall€within€the€language€of€the€statute€or€Congress's€intent.€Ð € Ð  ÐWe€do€so€without€adopting€the€Tax€Court's€proposed€test.€Ð `  Ðò òÔ&  ÔC.€The€Statute€and€Plain€MeaningÐ  ð  Ðó óà ` àBefore€analyzing€the€statute,€we€think€it€helpful€toÐ €Ð  ÐÔ' ˜iÔunderstand€the€context€in€which€the€statutory€interpretationÐ ` Ðquestion€arises.€€"Possessions€corporations€.€.€.€are€U.S.„Ð  ð Ðchartered€companies€that€are€effectively€exempt€under€section€936Ð 0€ Ðof€the€Internal€Revenue€Code€from€Federal€tax€on€business€incomeÐ À Ðand€qualified€passive€investment€income€from€Puerto€Rico€andÐ P  Ðcertain€other€U.S.€possessions."€€Dep't€of€the€Treasury,€òòTheÐ à0 ÐOperation€and€Effect€of€the€Possessions€Corporation€System€ofÐ pÀ ÐTaxation,€Sixth€Reportóó€1€(1989)€(footnotes€omitted).Ð P  Ðà ` àThe€Treasury€Department€has€described€the€generalÐ à" Ðoperation€of€the€possessions€corporation€tax€system:Ð  !p$ ÐÓÓà0 ` àThe€possessions€corporation€system€of€taxation€is€a€set€Ð °"& Ðof€rules€under€which€a€U.S.€corporation€derivingÐ x#È' Ðqualifying€income€from€possessions€and€Puerto€Rico€paysÐ @$( Ðno€income€tax€to€the€United€States.€€As€a€U.S.Ð %X ) Ðcorporation,€a€possessions€corporation€is€subject€toÐ Ð% !* Ðfederal€tax€on€its€worldwide€income.€€However,€a€specialÐ ˜&è!+ Ðcredit€available€under€section€936€fully€offsets€theÐ `'°", Ðfederal€tax€on€income€from€a€trade€or€business€in€PuertoÐ ((x#- ÐRico€and€from€qualified€possession€source€investmentÐ ð(@$. Ðincome€(QPSII).€€A€U.S.€parent€corporation€can,€in€turn,Ð ¸)%/ Ðoffset€dividends€received€from€a€wholly€owned€936Ð €*Ð%0 Ðâ âsubsidiary€with€a€100€percent€dividends„receivedÐ H+˜&1 Ðdeduction,€which€frees€the€dividend€income€from€federalÐ ° Ðtax.ÐxÈ` (#` (# Ðâ âÌÓnmÓòòId.óó€atòòóó€5.Ð X Ðà ` àWith€this€context,€we€turn€to€the€statutory€language.€Ð ˜è ÐThe€code€section€at€issue€provides,€in€relevant€part:Ð ( x ÐÓÓà ` àðð€936.€Puerto€Rico€and€possession€tax€creditÐ ¸   Ðà ` à(a)€Allowance€of€creditÐ € Ð  Ðà0 ` à(1)€In€general€ÐH ˜ ` (#` (# Ðà0 ` àà ° àà ` à€€€€Except€as€otherwise€provided€in€this€section,€if€aÐ `  Ðdomestic€corporation€elects€the€application€of€thisÐ Ø(  Ðsection€and€if€the€conditions€of€both€subparagraph€(A)Ð  ð  Ðand€subparagraph€(B)€of€paragraph€(2)€are€satisfied,Ð h¸  Ðthere€shall€be€allowed€as€a€credit€against€the€taxÐ 0€  Ðimposed€by€this€chapter€an€amount€equal€to€the€portion€ofÐ øH  Ðthe€tax€which€is€attributable€to€the€sum€of€„„€ÐÀ` (#` (# Ðà0 ` àà0¨ ` (#` (#à(A)€the€taxable€income,€from€sources€without€theÐ ˆØ ÐUnited€States,€from€„„€ÐP ¨ (#¨ (# Ðà0 ` àà0¨ ` (#` (#àà0¨ (#¨ (#à(i)€the€active€conduct€of€a€trade€orÐ h Ðbusiness€within€a€possession€of€the€UnitedÐ à0 ÐStates,€or€Ð¨ø(#(# Ðà0 ` àà0¨ ` (#` (#àà0¨ (#¨ (#à(ii)€the€sale€or€exchange€of€substantiallyÐ pÀ Ðall€of€the€assets€used€by€the€taxpayer€inÐ 8ˆ Ðthe€active€conduct€of€such€trade€orÐ P Ðbusiness,€and€ÐÈ(#(# Ðà0 ` àà0¨ ` (#` (#à(B)€the€qualified€possession€source€investmentÐ à Ðincome.€ÐX¨¨ (#¨ (# Ðà0 ` à(2)€Conditions€which€must€be€satisfied€Ð p` (#` (# Ðà ` à€€€€The€conditions€referred€to€in€paragraph€(1)€are:€Ð è8 Ðà0 ` àà0¨ ` (#` (#à(A)€3„year€periodа ¨ (#¨ (# Ðà0 ` àà0¨ ` (#` (#à€€€€If€80€percent€or€more€of€the€gross€income€ofÐ xÈ! Ðsuch€domestic€corporation€for€the€3„year€periodÐ @" Ðimmediately€preceding€the€close€of€the€taxableÐ  X# Ðyear€(or€for€such€part€of€such€period€immediatelyÐ Ð $ Ðpreceding€the€close€of€such€taxable€year€as€mayÐ ˜!è% Ðbe€applicable)€was€derived€from€sources€within€aÐ `"°& Ðpossession€of€the€United€States€(determinedÐ (#x' Ðwithout€regard€to€section€904(f));€and€Ðð#@(¨ (#¨ (# Ðà0 ` àà0¨ ` (#` (#à(B)€Trade€or€businessи$ )¨ (#¨ (# Ðà0 ` àà0¨ ` (#` (#àà ` àà ¨ à€€€€If€75€percent€or€more€of€the€gross€income€ofÐ €%Ð * Ðsuch€domestic€corporation€for€such€period€or€suchÐ H&˜!+ Ðpart€thereof€was€derived€from€the€active€conductÐ '`", Ðof€a€trade€or€business€within€a€possession€of€theÐ Ø'(#- ÐUnited€States.Р(ð#.¨ (#¨ (# ÐÌÓ_rÓ26€U.S.C.€ðð€936(a)(1)„(2).€€A€separate€subsection€of€ðð€936€governsÐ 0*€%0 Ðthe€tax€treatment€of€possessions€corporations'€intangible€propertyÐ À+'2 Ðincome.€€òòóó26€U.S.C.€ðð936(h).€€The€Treasury€Department€has€issuedÐ ° Ðregulations€under€ðð936(h),€òòseeóó€26€C.F.R.€ðððð1.936„4€to€„7€(2001),Ð @ Ðalthough€not€under€ðð936(a).€ò òó ó€It€is€the€ðð936(a)€"derived€from€theÐ Ð  Ðactive€conduct€of€a€trade€or€business"€language€that€is€at€issueÐ ` ° Ðhere.€€26€U.S.C.€ðð936(a)(2)(B).€Ð ð @ Ðà ` àM„PR€argues€that€ðð€936(a)€"requires€only€that€theÐ € Ð  Ðtaxpayer€òòderive€its€incomeóó€from€an€òòactiveóó€business€rather€than€aÐ `  Ðòòpassiveóó€investment."€€Its€argument€is€really€two„fold:€first,€thatÐ  ð  Ð"active€conduct"€means€all€non„passive€conduct;€second,€that€theÐ 0€  Ðtaxpayer€corporation€need€only€derive€its€income€from€some€non„Ð À Ðpassive€source,€meaning€that€the€taxpayer€can€qualify€by€derivingÐ P  Ðits€income€from€the€active€conduct€of€a€third€party€rather€thanÐ à0 Ðfrom€the€taxpayer's€own€active€conduct.€€This€interpretation,€ifÐ pÀ Ðaccepted,€would€mean€that€a€domestic€corporation€that€gets€itsÐ P Ðincome€from€the€sale€of€a€pharmaceutical€product€manufactured€by€aÐ à Ðcontract€manufacturer€in€Puerto€Rico,€as€here,€would€qualify€forÐ  p Ðthe€tax€credit.€€We€deal€with€each€argument€in€turn,€rejecting€bothÐ °  Ðparts€as€contrary€to€the€text€of€the€statute.€€Ð @" Ðà ` àFirst,€M„PR's€interpretation,€construing€income€"derivedÐ Ð $ Ðfrom€the€active€conduct€of€a€trade€or€business"€to€mean€incomeÐ `"°& Ð"derived€from€an€active,€rather€than€passive,€business,"€rendersÐ ð#@( Ðthe€statutory€term€"active"€surplusage.€€The€phrase€"active€conductÐ €%Ð * Ðof€a€trade€or€business"€does€not€mean€that€all€income€derived€fromÐ '`", Ðâ âanything€that€is€not€a€passive€investment€qualifies€for€theÐ  (ð#. Ðcredit.׃#×Ý ƒ#ÃÝòòÚ  Ú7Ú  ÚóóÝ  Ý×  ×€€We€accept€the€Commissioner's€view€that€the€phraseÐ ° Ðâ â"conduct€of€a€trade€or€business"€alone,€without€the€term€"active,"Ð @ Ðdistinguishes€section€936(a)€income€from€passive€investment€income.€Ð Ð  ÐM„PR's€construction€renders€the€term€"active"€redundant.€€That€isÐ ` ° Ðnot€a€permissible€form€of€interpretation.€€òòE.g.óó,€òòNew€England€PowerÐ ð @ Ð&€Marine,€Inc.óó€v.€òòTown€of€Tyngsboroughóó€(òòIn€re€Middlesex€PowerÐ € Ð  ÐEquip.€&€Marine,€Inc.óó),€No.€01„2314,€2002€WL€1248226,€at€*4€(1stÐ `  ÐCir.€June€11,€2002)€(stating€that€"[w]e€assume€each€term€was€meantÐ  ð  Ðto€have€separate€content€in€order€to€avoid€redundancy").€€Ð 0€  Ðà ` àGiven€that€the€statutory€term€"active"€is€not€surplusage,Ð À Ðwe€must€determine€what€independent€meaning€it€adds€to€the€statutoryÐ P  Ðphrase€"active€conduct."€€Because€"active"€modifies€"conduct,"€weÐ à0 Ðconclude€that€"active€conduct"€means€something€more€than€simply€aÐ pÀ Ðminimal€level€of€involvement€in€the€process€of€conducting€a€tradeÐ P Ðor€business.€€Not€all€conduct€of€a€trade€or€business€qualifiesÐ à Ðunder€ðð€936(a)(2)(B);€only€"active€conduct"€qualifies.€€Because€theÐ  p Ð"conduct€of€a€trade€or€business"€itself€requires€some€level€ofÐ °  Ðactivity,€the€adjective€"active"€must,€in€context,€signifyÐ @" Ðsomething€more€than€a€non„zero€level€of€activity.Ð Ð $ Ðà ` àThe€òòOxford€English€Dictionaryóó's€first€definition€of€theÐ `"°& Ðnoun€"conduct"€is€"[t]he€action€of€conducting€or€leading,"€and,€asÐ ð#@( Ðthe€term€relates€to€a€business,€it€is€defined€as€"[t]he€action€orÐ ° Ðmanner€of€conducting,€directing,€managing,€or€carrying€on€(anyÐ @ Ðbusiness€.€.€.€etc.)."€€òòOxford€English€Dictionaryóó€(2d€ed.€1989),Ð Ð  Ðhttp://dictionary.oed.com.€€Similarly,€òòWebster'sóó€defines€the€nounÐ ` ° Ð"conduct"€as€"the€act,€manner,€or€process€of€carrying€out€.€.€.€orÐ ð @ Ðcarrying€forward€(as€a€business,€government,€or€war)."€€òòWebster'sÐ € Ð  ÐThird€New€International€Dictionary€of€the€English€LanguageÐ `  ÐUnabridgedóó€473€(P.B.€Gove€et€al.€eds.€1993).€€"Active,"€in€turn,€isÐ  ð  Ðgenerally€defined€as€"[c]haracterized€by€action"€and€is€defined€inÐ 0€  Ðterms€such€as€"[o]riginating€or€communicating€action,"€"practical,"Ð À Ð"working,€effective,€having€practical€operation€or€results."€Ð P  Ðò òó óòòOxford€English€Dictionaryò òóóó ó,€òòsupraóó;€òòseeóó€òòalsoóó€òòWebster's€Third€NewÐ à0 ÐInternational€Dictionary€of€the€English€Language€Unabridgedóó,€òòsupraóó,Ð pÀ Ðat€22€(defining€"active"€as€"characterized€by€action€rather€than€byÐ P Ðcontemplation€or€speculation").€Ð à Ðà ` àThe€mere€act,€without€more,€of€purchasing€products€thatÐ  p Ðanother€unrelated€entity€has€taken€the€action€to€manufacture,€andÐ °  Ðreselling€the€products€to€others€outside€the€possession,€does€notÐ @" Ðfit€within€the€meaning€of€"active€conduct€of€a€trade€or€business."€Ð Ð $ ÐIn€such€a€case,€it€is€the€unrelated€entity€controlling€andÐ `"°& Ðdirecting€the€manufacturing€that€is€actively€conducting€the€tradeÐ ð#@( Ðor€business.€€Ð €%Ð * Ðà ` àHere,€the€Tax€Court€was€"not€even€able€to€find€that€M„Ð '`", ÐP.R.€had€any€meaningful€business€activity€in€Puerto€Rico."€Ð  (ð#. ÐòòMedChemóó,€116€T.C.€at€337.€€It€found€that€M„PR's€"involvement€inÐ 0*€%0 ÐPuerto€Rico€during€the€3„year€period€failed€even€to€qualify€as€aÐ À+'2 Ðtrade€or€business€in€Puerto€Rico,"€òòid.óó€at€338,€never€mind€as€anÐ ° Ðactively€conducted€trade€or€business.€€It€concluded€that€A„PR€andÐ @ ÐM„USA,€but€not€M„PR,€directed€and€controlled€"[a]ll€of€the€businessÐ Ð  Ðactivities€connected€to€Avitene,"€òòid.óó,€and€that€A„PR€"performedÐ ` ° Ðevery€task€required€in€the€manufacturing€process,"€without€theÐ ð @ Ðability€of€M„PR€"to€manage,€direct,€or€control€any€part€of€theÐ € Ð  Ðmanufacturing€process,"€òòid.óó€at€339.€€These€findings€were€notÐ `  Ðclearly€erroneous.€€On€these€facts,€we€are€confident€in€theÐ  ð  Ðconclusion€that€M„PR€did€not€itself€actively€conduct€a€trade€orÐ 0€  Ðbusiness.€€Ð À Ðà ` àThe€remaining€question€is€whether€A„PR's€manufacturingÐ P  Ðactivities€may€be€attributed€to€M„PR€for€the€purposes€of€ðð€936(a).€Ð à0 ÐThe€answer€to€this€question€hinges€on€M„PR's€second€claim,€that€theÐ pÀ Ðstatutory€phrase€requires€only€that€the€income€"derived"€by€theÐ P Ðtaxpayer€be€from€some€third€party€engaged€in€the€active€conduct€ofÐ à Ða€trade€or€business.€€We€reject€this€claim€as€well.€€Both€the€TaxÐ  p ÐCourt€and€the€Commissioner€interpret€ðð€936(a)€as€requiring€that€theÐ °  Ðtaxpayer,€not€someone€else,€be€the€entity€engaged€in€the€activeÐ @" Ðconduct€of€a€trade€or€business.€€We€agree.Ð Ð $ Ðà ` àFirst,€this€reading€is€the€most€natural€reading€of€theÐ `"°& Ðstatutory€requirement€that€at€least€75%€of€the€taxpayer's€grossÐ ð#@( Ðincome€during€the€relevant€period€be€"derived€from€the€activeÐ €%Ð * Ðconduct€of€a€trade€or€business€within€a€possession€of€the€UnitedÐ '`", ÐStates."€€26€U.S.C.€ðð€936(a)(2)(B).€€M„PR€correctly€notes€thatÐ  (ð#. ÐCongress€could€have€more€explicitly€said,€"the€active€conduct€òòbyÐ 0*€%0 Ðthe€taxpayeróó€of€a€trade€or€business"€and€it€did€not.€€But€CongressÐ À+'2 Ðmight€have€concluded€that€the€addition€of€the€phrase€would€beÐ ° Ðredundant,€given€the€preceding€discussion€and€especially€given€thatÐ @ Ðthe€taxpayer€corporation€is€the€only€actor€referenced€in€ððÐ Ð  Ð936(a)(1)„(2).€€Congress€could€also€have€said€"the€active€conductÐ ` ° Ðòòby€the€taxpayer€or€any€contract€manufactureróó€of€a€trade€orÐ ð @ Ðbusiness,"€which€is€M„PR's€reading,€and€it€did€not.€€ViewedÐ € Ð  Ðmyopically,€the€statutory€phrase€is€silent€on€whose€"active€conductÐ `  Ðof€a€trade€or€business"€it€refers€to,€but,€viewed€in€context,€theÐ  ð  Ðbest€reading€is€that€it€means€the€taxpayer's€own€active€conduct.€Ð 0€  ÐAmbiguity€in€this€instance€does€not€assist€M„PR€because€a€deductionÐ À Ðor€credit€should€be€allowed€only€where€there€is€"clear€provisionÐ P  Ðtherefor."€€òòNew€Colonial€Ice€Co.óó,€292€U.S.€at€440.€€M„PR€has€simplyÐ à0 Ðnot€met€its€burden€of€proving€entitlement€to€the€ðð€936€creditÐ pÀ Ðclaimed.òòóóÐ P Ðòòóóà ` àTo€read€the€statute€as€requiring€only€that€the€income€beÐ à Ðderived€from€a€third€party's€active€conduct€would€eliminate€theÐ  p Ðdistinction€between€active€conduct€income€and€all€other€income,Ð °  Ðincluding€passive€investment€income.€€Virtually€all€passiveÐ @" Ðinvestment€income,€for€example,€is€derived,€somewhere€down€theÐ Ð $ Ðchain,€by€some€entity's€active€conduct€of€a€trade€or€business.€€Ð `"°& Ðà ` àFinally,€as€discussed€below,€the€legislative€historyÐ ð#@( Ðconfirms€Congress's€intent€to€require€the€taxpayer€claiming€theÐ €%Ð * Ðcredit€to€itself€be€engaged€in€the€active€conduct€of€a€trade€orÐ '`", Ðbusiness.€€If€M„PR's€interpretation€were€correct,€then€upon€theÐ  (ð#. Ð1976€enactment€of€ðð€936,€òòseeóó€Tax€Reform€Act€of€1976,€Pub.€L.€No.Ð 0*€%0 Ð94„455,€ðð€1051,€90€Stat.€1520,€1643„47€(1976)€(current€version€atÐ À+'2 Ð26€U.S.C.€ðð€936€(2000)),€all€domestic€corporations€that€hadÐ ° Ðcontract€manufacturers€in€Puerto€Rico€(and€otherwise€met€theÐ @ Ðnumerical€requirements)€would€automatically€have€become€eligibleÐ Ð  Ðfor€the€tax€credit.€€This€is,€in€our€view,€highly€improbable€on€itsÐ ` ° Ðface.€€It€is€particularly€improbable€given€the€legislative€historyÐ ð @ Ðdiscussed€below.Ð € Ð  ÐÓÓò òÔ&  ÔD.€Legislative€History€and€Western€Hemisphere€TradingÐ `  Ѐ€€CorporationsÐ P  Ðó óÌÓ,©Óò òà ` à1.€Legislative€history.€€Ð ¸  Ðó óÔ'A©Ôà ` àAs€stated€above,€at€issue€in€this€case€is€the€properÐ ˜è  Ðinterpretation€of€ðð936's€"active€conduct€of€a€trade€or€business"Ð (x Ðlanguage.€€Section€936€in€general,€and€the€"active€conduct€of€aÐ ¸ Ðtrade€or€business"€language€in€particular,€have€their€roots€in€muchÐ H˜ Ðolder€legislation.€€Before€analyzing€the€legislative€history€as€itÐ Ø( Ðpertains€to€the€meaning€of€the€relevant€statutory€phrase,€weÐ h¸ Ðdescribe€ðð936's€predecessors.€€Ð øH Ðà ` àBoth€ðð936€and€the€basic€structure€of€today's€possessionsÐ ˆØ Ðcorporation€tax€system€have€their€genesis€in€a€provision€of€theÐ h! ÐRevenue€Act€of€1921.€€òòSeeóó€Revenue€Act€of€1921,€Pub.€L.€No.€67„98,Ð ¨ ø# Ððð262,€42€Stat.€227,€271€(1921).€€The€phrase€we€interpret€„„Ð 8"ˆ% Ð"derived€from€the€active€conduct€of€a€trade€or€business"€„„€firstÐ È#' Ðappeared€in€the€Revenue€Act€of€1921,€though€in€a€slightly€differentÐ X%¨ ) Ðcontext.€€òòCompareóó€òòid.óó€òòwithóó€26€U.S.C.€ðð936(a)(2)(B).€€The€1921€ActÐ è&8"+ Ðexempted€a€domestic€corporation€from€federal€taxes€on€foreign„Ð x(È#- Ðsource€income€if,€for€the€three€years€preceding€the€close€of€theÐ *X%/ Ðtaxable€year,€it€derived€at€least€80%€of€its€gross€income€fromÐ ˜+è&1 Ðsources€within€a€possession€and€50%€or€more€of€its€gross€incomeÐ ° Ð"from€the€active€conduct€of€a€trade€or€business"€within€theÐ @ Ðpossessions.€€ðð€262,€42€Stat.€at€271òòóó.€€Congress€enacted€thisÐ Ð  Ðsection€of€the€1921€Act€to€eliminate€the€competitive€disadvantageÐ ` ° Ðthat€U.S.€corporations€were€suffering€as€a€result€of€doubleÐ ð @ Ðtaxation€of€income€earned€outside€the€U.S.òòóó€and€to€encourage€U.S.Ð € Ð  Ðbusiness€investments€in€U.S.€possessions.€ò òó ó€òòSeeóó€S.€Rep.€No.€67„275Ð `  Ð(1921),€òòreprintedóó€òòinóó€1939„1€C.B.€(pt.€2)€181,€187;€òòseeóó€òògenerallyóóÐ  ð  ÐòòCoca„Cola€Co.óó€v.€òòComm'róó,€106€T.C.€1,€21€(1996)€(describing€the€1921Ð 0€  ÐAct€and€its€progeny);€N.H.€Kaufman,€Comment,€òòPuerto€Rico'sÐ À ÐPossessions€Corporations:€Do€the€TEFRA€Amendments€Go€Too€Far?óó,€1984Ð P  ÐWis.€L.€Rev.€531,€533„37€(same).€€Ð à0 Ðà ` àCongress€carried€forward,€without€material€change,€theÐ pÀ Ð1921€Act's€possessions€corporation€exemption€into€section€931€ofÐ P Ðthe€Internal€Revenue€Code€of€1954.€€òòSeeóó€Internal€Revenue€Code€ofÐ à Ð1954,€Pub.€L.€No.€83„591,€ðð€931,€68A€Stat.€3,€291€(1954).€€SectionÐ  p Ð931€used€the€same€language€as€the€1921€Act's€section€262,Ð °  Ðrequiring,€among€other€things,€that€50%€or€more€of€theÐ @" Ðcorporation's€gross€income€be€"derived€from€the€active€conduct€ofÐ Ð $ Ða€trade€or€business."€€ðð931(a)(2),€68A€Stat.€at€291.׃o×Ý ƒ#ÃÝòòÚ  Ú8Ú  ÚóóÝ  Ý×  ×€€Section€931Ð `"°& Ðremained€in€effect€without€material€change€until€the€mid„1970s,Ð ° Ðwhen€Congress€enacted€legislation€approximating€the€current€versionÐ @ Ðof€26€U.S.C.€ðð€936.€€òòSeeóó€òòG.D.€Searle€&€Co.óó€v.€òòComm'róó,€88€T.C.€252,Ð Ð  Ð350„52€(1987)€(describing€the€genesis€of€ðð€936).€€Ð ` ° Ðà ` àSection€1051€of€the€1976€Tax€Reform€Act€added€a€new€U.S.Ð ð @ ÐCode€section,€26€U.S.C.€ðð€936.€€òòSeeóó€Tax€Reform€Act€of€1976,€Pub.€L.Ð € Ð  ÐNo.€94„455,€ðð€1051,€90€Stat.€1520,€1643„47€(1976)€(current€versionÐ `  Ðat€26€U.S.C.€ðð€936€(2000)).€€Section€936€partially€replaced€sectionÐ  ð  Ð931,€as€it€relates€to€Puerto€Rico.׃ì×Ý ƒ#ÃÝòòÚ  Ú9Ú  ÚóóÝ  Ý×  ×€€òòSeeóó€òòid.óó€€The€1976€legislationÐ 0€  Ðeffected€a€number€of€revisions€in€prior€law.€€To€focus€on€theÐ ° Ðrevision€central€to€this€case,€the€new€ðð€936€transformed€the€oldÐ @ Ðsection€931€òòexemptionóó€mechanism€into€a€tax€òòcreditóó.€€The€creditÐ Ð  Ðpermits€domestic€corporations€to€offset€U.S.€taxes€on€incomeÐ ` ° Ð"derived€from€the€active€conduct€of€a€trade€or€business"€in€PuertoÐ ð @ ÐRico,€if€certain€prerequisites€are€met.€€ðð€1051(b),€90€Stat.€atÐ € Ð  Ð1644.׃1×Ý ƒ#ÃÝòòÚ  Ú10Ú  ÚóóÝ  Ý×  ×€€We€rely€on€the€Treasury€Department's€1989€Report,€whichÐ `  Ðdescribed€the€transition€from€the€1921€Act€to€the€1976€Actòòóó:Ð  ð  ÐÓÓà0 ` àThe€possessions€corporation€exemption€remained€unchangedÐ 0€  Ðuntil€the€Tax€Reform€Act€of€1976.€€Many€U.S.€firmsÐ øH  Ðestablished€plants€in€Puerto€Rico€after€1948,€when€PuertoÐ À ÐRico€enacted€a€program€of€tax€exemption€for€manufacturingÐ ˆØ Ðfirms.€€Before€the€1976€Act€was€implemented,€proponentsÐ P  Ðof€continued€U.S.€tax€exemption€argued€that€theÐ h Ðpossessions€corporation€system€of€taxation€was€needed€toÐ à0 Ðoffset€the€U.S.€minimum€wage€requirement,€the€requirementÐ ¨ø Ðto€use€U.S.€flag€vessels€in€transporting€goods€to€theÐ pÀ ÐUnited€States,€and€other€Federally€imposed€requirementsÐ 8ˆ Ðthat€tended€to€reduce€Puerto€Rico's€ability€to€competeÐ P Ðwith€neighboring€countries€for€U.S.€investment.ÐÈ` (#` (# ÐÌà0 ` àBy€enacting€the€Tax€Reform€Act€of€1976,€Congress€wantedÐ X¨ Ðto€leave€undisturbed€the€tax€exemption€of€earnings€fromÐ  p Ða€trade€or€business€in€Puerto€Rico€or€from€investmentsÐ è8 Ðmade€with€those€earnings€for€Puerto€Rican€use.€€At€theÐ °  Ðsame€time,€Congress€wished€to€end€the€exemption€forÐ xÈ! Ðpassive€income€from€funds€invested€in€foreign€capitalÐ @" Ðmarkets€and€to€hasten€their€repatriation€if€not€used€inÐ  X# Ðthe€possession.€.€.€.ÐÐ $` (#` (# ÐÌà0 ` àTo€continue€promoting€Puerto€Rico's€industrialÐ `"°& Ðdevelopment,€the€Tax€Reform€Act€of€1976€therefore€leftÐ (#x' Ðintact€the€exemption€for€income€derived€by€U.S.Ð ð#@( Ðcorporations€from€operations€in€a€possession.€€It€alsoÐ ° Ðexempted€from€tax€the€dividends€remitted€by€a€possessionsÐ xÈ Ðcorporation€to€its€U.S.€parent.€€To€prevent€the€avoidanceÐ @ Ðof€tax€on€income€invested€in€foreign€countries€byÐ X Ðpossessions€corporations,€however,€the€Tax€Reform€ActÐ Ð  Ðeliminated€the€exemption€for€income€derived€outside€theÐ ˜è Ðpossessions.€€The€changes€in€the€tax€treatment€ofÐ ` ° Ðpossessions€corporations€were€effected€by€removingÐ ( x Ðpossessions€corporations€from€section€931€of€the€InternalÐ ð @ ÐRevenue€Code€and€placing€them€into€a€newly€created€CodeÐ ¸   Ðsection€936.Ѐ Ð ` (#` (# ÐÌÓv½ÓòòThe€Operation€and€Effect€of€the€Possessions€Corporation€System€ofÐ `  ÐTaxationóó,€òòsupraóó,€at€6.ò ò€ó ó€Ð  ð  Ðà ` àAs€to€the€problem€before€us,€the€Treasury€ReportÐ €Ð  Ðdescribed€the€effect€of€the€change:Ð ` ÐÓÓà0 ` àòòChange€in€the€scope€of€and€method€of€effecting€the€taxÐ  ð Ðexemptionóó.€€Before€1976,€a€possessions€corporation€wasÐ h¸ Ðexempt€from€U.S.€tax€on€all€income€derived€from€sourcesÐ 0€ Ðoutside€the€United€States.€€Under€the€Tax€Reform€Act€ofÐ øH Ð1976,€the€exemption€was€limited€to€two€kinds€of€income:ÐÀ` (#` (# ÐÌà0 ` à„„à0¨ ` (#` (#àIncome€from€the€active€conduct€of€a€trade€orÐ P  Ðbusiness€in€a€possession,€or€from€the€sale€orÐ h Ðexchange€of€substantially€all€of€the€assets€usedÐ à0 Ðby€the€corporation€in€the€active€conduct€of€suchÐ ¨ø Ðtrade€or€business;€andÐpÀ¨ (#¨ (# ÐÌà0 ` à„„à0¨ ` (#` (#àQPSII,€which€is€non„business€income€derived€fromÐ P  Ðthe€possession€in€which€the€corporation€has€itsÐ È! Ðtrade€or€business€and€which€is€attributable€toÐ à" Ðthe€investment€of€funds€derived€from€such€tradeÐ X ¨# Ðor€business€for€use€within€the€possession.Ð !p$¨ (#¨ (# ÐÌà0 ` àRather€than€exempting€the€income€from€U.S.€taxation,Ð °"& Ðsection€936€provides€a€credit€equal€to€(and,€therefore,Ð x#È' Ðfully€offsetting)€the€U.S.€tax€on€the€income.€€TheÐ @$( Ðsection€936€credit€is€not€available€for€other€incomeÐ %X ) Ðearned€by€a€possessions€corporation.€€However,€a€regularÐ Ð% !* Ðforeign€tax€credit€may€be€claimed€for€foreign€(includingÐ ˜&è!+ Ðpossession)€taxes€paid€or€accrued€with€respect€to€incomeÐ `'°", Ðthat€does€not€qualify€for€the€936€credit.Ð((x#-` (#` (# ÐÌâ âÓ”ÈÓòòId.óó€at€7€(footnote€omitted).Ð ¸)%/ Ðà ` àThe€House€and€Senate€Reports€are€virtually€identical€onÐ ° Ðâ âthe€pertinent€provision.€€òòSeeóó€H.R.€Rep.€No.€94„658,€at€253„60Ð @ Ð(1975),€òòreprintedóó€òòinóó€1976€U.S.C.C.A.N.€2897,€3149„56;€S.€Rep.€No.Ð Ð  Ð94„938,€at€277„84€(1976),€òòreprintedóó€òòinóó€1976€U.S.C.C.A.N.€3438,Ð ` ° Ð3707„13.€€The€Reports€discuss€the€tax€treatment€of€corporationsÐ ð @ Ðconducting€trade€or€business€in€possessions€of€the€U.S.€as€well€asÐ € Ð  Ðissues€arising€under€the€now„repealed€Western€Hemisphere€TradeÐ `  ÐCorporation€provisions€of€the€Internal€Revenue€Code€of€1954,Ð  ð  Ððððð921„922,€68A€Stat.€at€290„91€(repealed€in€1976€for€taxable€yearsÐ 0€  Ðafter€1979).€€òòSeeóó€H.R.€Rep.€No.€94„658€at€253„60;€S.€Rep.€No.€94„Ð À Ð938€at€277„84.Ð P  Ðà ` àDescribing€the€law€as€it€existed€prior€to€the€enactmentÐ à0 Ðof€the€Tax€Reform€Act€of€1976,€the€House€and€Senate€Reports€reciteÐ pÀ Ðthat€Ð P ÐÓÓà0 ` à[u]nder€present€law,€corporations€òòoperatingóó€a€trade€orÐ à Ðbusiness€in€a€possession€of€the€United€States€areÐ X¨ Ðentitled€to€exclude€from€gross€income€all€income€fromÐ  p Ðsources€without€the€United€States,€including€foreignÐ è8 Ðsource€income€earned€outside€of€the€possession€in€whichÐ °  Ðthey€conduct€business€operations,€if€they€meet€twoÐ xÈ! Ðconditions.€€Ð@"` (#` (# ÐÌÓFÔÓH.R.€Rep.€No.€94„658€at€253„54€(emphasis€added);€òòseeóó€òòalsoóó€S.€Rep.Ð Ð $ ÐNo.€94„938€at€277.€€With€this€in€mind,€a€new€provision,€26€U.S.C.Ð `"°& Ððð€936,€was€added€"for€the€tax€treatment€of€U.S.€corporationsÐ ð#@( Ðòòoperatingóó€in€Puerto€Rico."€€H.R.€Rep.€No.€94„658€at€256€(emphasisÐ €%Ð * Ðadded);€òòseeóó€òòalsoóó€S.€Rep.€No.€94„938€at€279.€€€We€think€thisÐ '`", Ðlanguage€supports€the€Commissioner's€view€that€the€taxpayer€must€beÐ  (ð#. Ðâ âthe€one€actively€conducting€the€trade€or€business.€€Ð 0*€%0 Ðà ` àAs€to€the€changes€in€the€possessions€tax€creditÐ ° Ðâ âlegislation,€Congress€stated€that€it€sought€to€"assist€the€U.S.Ð @ Ðpossessions€in€obtaining€employment„producing€investments€by€U.S.Ð Ð  Ðcorporations,€while€at€the€same€time€encouraging€those€corporationsÐ ` ° Ðto€bring€back€to€the€United€States€the€earnings€from€theseÐ ð @ Ðinvestments€to€the€extent€they€cannot€be€reinvested€productively€inÐ € Ð  Ðthe€possession."€€H.R.€Rep.€No.€94„658€at€255;€òòseeóó€òòalsoóó€S.€Rep.€No.Ð `  Ð94„938€at€279€(using€the€same€language).€€The€congressional€historyÐ  ð  Ðreflects€a€dual€intention€to€stimulate€investment,€both€active€andÐ 0€  Ðpassive,€in€Puerto€Rico€and€to€encourage€the€growth€of€new€jobs€inÐ À ÐPuerto€Rico.€€H.R.€Rep.€No.€94„658€at€255;€S.€Rep.€No.€94„938€atÐ P  Ð279€(same).€€Those€are€related€but€not€identical€objectives.€Ð à0 ÐCongress's€emphasis€on€the€creation€of€new€jobs€by€operatingÐ pÀ Ðcompanies€is€also€reflected€by€the€fact€that€Congress€mandated€thatÐ P Ðthe€Department€of€the€Treasury€report€to€it€periodically€on€theÐ à Ðprogress€in€meeting€that€goal.€€òòSeeóó€H.R.€Rep.€No.€94„658€at€259Ð  p Ð(stating€that€the€Department€of€the€Treasury's€reports€are€toÐ °  Ðinclude,€among€other€things,€"an€analysis€of€.€.€.€theÐ @" Ð[provision's]€effects€on€investment€and€employment€in€theÐ Ð $ Ðpossessions");€S.€Rep.€No.€94„938€at€282€(same).Ð `"°& Ðà ` àAlthough€the€Department€of€the€Treasury€has€notÐ ð#@( Ðpromulgated€regulations€under€ðð€936(a),€its€reports€provide€dataÐ €%Ð * Ðboth€on€how€Treasury€has€interpreted€that€section€and€on€theÐ '`", Ðcontext€of€the€legislation.€€We€look,€in€particular,€to€Treasury'sÐ  (ð#. Ð1989€Report.€€òòSeeóó€òòThe€Operation€and€Effect€of€the€PossessionsÐ 0*€%0 ÐCorporation€System€of€Taxationóó,€òòsupraóó.ò ò€ó ó€The€1989€Report€providesÐ À+'2 Ðinsight€into€Treasury's€interpretation€of€ðð€936.€€For€example,€theÐ ° Ð1989€Report€says€"[b]y€enacting€section€936,€Congress€sought€toÐ @ Ðassist€Puerto€Rico€in€obtaining€employment„producing€investments."€Ð Ð  ÐòòId.óó€at€3;€òòseeóó€òòalsoóó€òòid.óó€at€46€(same).€€Accordingly,€Treasury€matchedÐ ` ° Ð"possessions€corporations'€U.S.€income€tax€returns€with€payroll€andÐ ð @ Ðemployment€data€from€the€companies'€federal€unemployment€insuranceÐ € Ð  Ðtax€returns"€to€determine€"whether€this€objective€has€beenÐ `  Ðattained."€€òòId.óó€at€46.€€In€particular,€Treasury€sought€to€measureÐ  ð  Ðthe€"direct€employment€associated€with€section€936€companies."€€òòId.óóÐ 0€  Ðà ` àFor€example,€as€of€1989,€Puerto€Rican€business€expansionÐ À Ðhad€"been€concentrated€in€four€high„technology€industries:Ð P  Ðchemicals€(including€pharmaceuticals),€scientific€instruments,Ð à0 Ðelectrical€and€electronic€equipment,€and€machinery."€€òòId.óó€at€27.€Ð pÀ ÐFrom€1970€to€1988,€the€chemical€industry's€earned€income€grew€fromÐ P Ð11%€to€44%€of€total€income€originating€in€Puerto€RicanÐ à Ðmanufacturing.€€òòId.óó€€Nearly€all€of€the€investments€in€thoseÐ  p Ðindustries€were€made€by€possessions€corporations.€€òòId.óó€at€27„29.€Ð °  ÐIndeed,€in€1983,€about€62%€of€the€employees€in€the€Puerto€RicanÐ @" Ðmanufacturing€sector€were€employed€by€possessions€corporations;Ð Ð $ Ðthis€represents€about€12%€of€Puerto€Rico's€total€employment.€€òòò òó óId.óóÐ `"°& Ðat€3.òòóó€€As€the€1989€Treasury€Department€Report€makes€clear,€most€ofÐ ð#@( Ðthe€corporations€that€qualified€to€receive€the€possessions€taxÐ €%Ð * Ðcredit€were€manufacturing€corporations.€€òòId.óó€at€31.€Ð '`", Ðà ` àOn€the€whole,€the€views€on€eligibility€for€the€tax€creditÐ  (ð#. Ðexpressed€both€in€the€legislative€history€and€in€the€TreasuryÐ 0*€%0 ÐDepartment's€Report€are€more€consistent€with€those€of€theÐ À+'2 ÐCommissioner€and€the€Tax€Court€than€those€of€M„PR.€€Those€views€areÐ ° Ðnot€binding€on€us,€but€they€have€some€weight.€€Both€sources€tend€toÐ @ Ðsupport€the€Commissioner's€view€that€ðð€936(a)€requires€that€theÐ Ð  Ðtaxpayer€itself€actively€conduct€a€trade€or€business,€with€theÐ ` ° Ðexpectation€being€that€this€active€conduct€by€the€taxpayer€wouldÐ ð @ Ðincrease€employment€and€investment€in€Puerto€Rico.€€Both€sourcesÐ € Ð  Ðcontemplate€that€the€taxpayer€be€the€party€employing€workers€in€theÐ `  ÐPuerto€Rican€economy.€€Ð  ð  Ðà ` àHere,€the€Tax€Court's€conclusion,€which€was€not€clearlyÐ 0€  Ðerroneous,€was€that€M„PR's€investment€in€Puerto€Rico's€economy€wasÐ À Ðvirtually€nonexistent.€€ò òó óòòMedChemóó,€116€T.C.€at€337.€€M„PR'sÐ P  Ðactivities€in€Puerto€Rico€"failed€even€to€qualify€as€a€trade€orÐ à0 Ðbusiness€in€Puerto€Rico,"€òòid.óó€at€338,€much€less€as€an€activelyÐ pÀ Ðconducted€one.€€A„PR€and€M„USA€directed€and€controlled€"[a]ll€ofÐ P Ðthe€business€activities€connected€to€Avitene."€€òòId.óó€€Furthermore,Ð à Ðduring€the€relevant€three„year€period,€M„PR€placed€only€oneÐ  p Ðemployee€in€Puerto€Rico.€€That€employee,€Mr.€Perez,€worked€for€M„PRÐ °  Ðout€of€a€one„room€office€for€less€than€one€year€of€the€requisiteÐ @" Ðthree„year€period.Ð Ð $ Ðò òà ` àÔ&  Ô2.€€Western€Hemisphere€Trade€CorporationsÐ `"°& Ðó óà ` àM„PR€urges€that€we€follow€the€construction€that€someÐ @$( Ðcourts€have€given€to€the€phrase€"active€conduct€of€a€trade€orÐ Ð% !* Ðbusiness"€under€the€Ô'`"{ðÔWestern€Hemisphere€Trade€Corporation€("WHTC")Ð `'°", Ðprovisions€of€the€Internal€Revenue€Code€of€1954,€ðð€921,€68A€Stat.Ð ð(@$. Ðat€290,€that€were€repealed€in€1976.òòóó€€Section€921€defined€"WesternÐ €*Ð%0 ÐHemisphere€trade€corporation"€to€mean€"a€domestic€corporation€allÐ ,`'2 Ðof€whose€business€.€.€.€is€done€in€any€.€.€.€countries€in€North,Ð ° ÐCentral,€or€South€America,€or€in€the€West€Indies,€and€whichÐ @ Ðsatisfies"€two€requirements.€€òòId.óó€€One€requirement€was€that€atÐ Ð  Ðleast€95%€of€the€corporation's€gross€income€for€the€three€precedingÐ ` ° Ðyears€be€derived€from€sources€outside€of€the€United€States.€€òòId.óó€Ð ð @ ÐThe€other€was€that€at€least€90%€of€the€corporation's€gross€incomeÐ € Ð  Ðfor€the€three€preceding€years€be€"derived€from€the€active€conductÐ `  Ðof€a€trade€or€business."€€òòId.óó€€Ð  ð  Ðà ` àAlthough€at€first€cut€the€WHTC€provision€appears€to€be€anÐ 0€  Ðapt€point€of€comparison,€ultimately€this€analogy€does€not€assist€M„Ð À ÐPR.€€This€is€primarily€because€of€the€important€differences€betweenÐ P  Ðthe€purposes€of€the€WHTC€provision€and€ðð€936.€€Ð à0 Ðà ` àCongress€may,€particularly€in€the€internal€revenue€code,Ð pÀ Ðuse€the€same€phrase,€such€as€"active€conduct€of€a€trade€orÐ P Ðbusiness,"€in€attempts€to€reach€different€ends.€€The€Supreme€CourtÐ à Ðmade€this€point€in€òòCommissioneróó€v.€òòGroetzingeróó,€480€U.S.€23€(1987).€Ð  p ÐAfter€noting€that€the€phrase€"trade€or€business"€appeared€in€overÐ °  Ðfifty€sections€of€the€Code,€òòóóthe€Court€stated:€"[I]n€this€opinionÐ @" Ðour€interpretation€of€the€phrase€'trade€or€business'€is€confined€toÐ Ð $ Ðthe€specific€sections€of€the€Code€at€issue€here.€€We€do€not€purportÐ `"°& Ðto€construe€the€phrase€where€it€appears€in€other€places."€€òòId.óó€atÐ ð#@( Ð27€&€n.8.€€òòóóOther€circuits€construing€the€phrase€"trade€or€business"Ð €%Ð * Ðhave€also€concluded€that€the€phrase€has€different€meanings€inÐ '`", Ðdifferent€sections€of€the€Internal€Revenue€Code.€€In€òòHughesóó€v.Ð  (ð#. ÐòòCommissioneróó,€38€F.2d€755€(10th€Cir.€1930),€for€example,€the€TenthÐ 0*€%0 ÐCircuit,€construing€the€statutory€phrase€"trade€or€business"€inÐ À+'2 Ðsection€204(a)€of€the€Revenue€Act€of€1921,€Pub.€L.€No.€67„98,Ð ° Ððð204(a),€42€Stat.€227,€231€(1921),€stated€that€"[w]e€are€hereÐ @ Ðconcerned€only€with€the€meaning€of€this€phrase€as€used€in€thisÐ Ð  Ðsection.€€The€same€phrase,€in€other€statutes,€or€in€other€sections,Ð ` ° Ðin€a€different€context,€and€for€a€different€purpose,€may€or€may€notÐ ð @ Ðbe€helpful."€€òòHughesóó,€38€F.2d€at€757.€€This€is€not€to€say€that€theÐ € Ð  ÐWHTC€provision€is€necessarily€inapposite,€but€rather€simply€toÐ `  Ðemphasize,€as€we€have€emphasized€in€other€contexts,€that€"the€sameÐ  ð  Ðwords€may€play€different€roles€in€different€contexts."€€òòWalkeróó€v.Ð 0€  ÐòòExeteróó,€284€F.3d€42,€45€n.4€(1st€Cir.€2002).€€The€relevance€of€theÐ À ÐWHTC€provision,€then,€turns€on€its€similarity€to€the€provision€atÐ P  Ðissue€here.€€Ð à0 Ðà ` àThe€Tax€Court€has€described€the€legislative€history€ofÐ pÀ Ðthe€WHTC€provision€as€disclosing€a€congressional€"desire€to€offsetÐ P Ðthrough€a€tax€preference€the€competitive€disadvantage€suffered€byÐ à Ðcertain€American€corporations€abroad€on€account€of€the€less€onerousÐ  p Ðtaxes€to€which€their€non„American€competitors€were€subject."€Ð °  ÐòòKewanee€Oil€Co.óó€v.€òòComm'róó,€62€T.C.€728,€737€(1974).€€Accordingly,Ð @" ÐÓÓà0 ` à[i]t€follows€that€when€the€"active€conduct"€requirementÐ Ð $ Ðis€read€in€the€context€from€which€it€arose,€namely€theÐ ˜!è% Ðthreat€of€foreign€competition,€one€might€well€concludeÐ `"°& Ðthat€in€passing€the€Western€Hemisphere€provisionsÐ (#x' ÐCongress€intended€to€grant€relief€to€United€StatesÐ ð#@( Ðbusiness€activity€in€the€Americas€only€to€the€extent€thatÐ ¸$ ) Ðthe€beneficiary€corporation€conducted€active€businessÐ €%Ð * Ðoperations€abroad€vulnerable€to€the€competitive€threatÐ H&˜!+ Ðposed€by€the€tax„advantaged€corporations€of€otherÐ '`", Ðcountries.ÐØ'(#-` (#` (# ÐÌÓšÓòòId.óó€at€737„38.Ð h)¸$/ Ðà ` àLike€the€WHTC€provision,€the€possessions€tax€credit€wasÐ ø*H&1 Ðmeant€to€offset€the€competitive€disadvantage€suffered€by€AmericanÐ ˆ,Ø'3 Ðcompanies.€€The€possessions€tax€credit,€however,€was€meant€not€onlyÐ ° Ðto€offset€certain€impediments€for€U.S.€corporations€investing€inÐ @ ÐPuerto€Rico,€but€also€to€increase€investment€and€employment„Ð Ð  Ðproducing€opportunities€in€Puerto€Rico.€€This€is€a€difference€thatÐ ` ° Ðmakes€a€difference.€€To€the€extent€that€the€WHTC€provision€wasÐ ð @ Ðmeant€to€increase€the€foreign€competitiveness€of€domesticÐ € Ð  Ðcorporations,€the€geographic€location€of€those€corporations'Ð `  Ðoperations€was€relevant€only€to€a€limited€extent€„„€that€is,€it€wasÐ  ð  Ðimportant€only€to€ensure€that€the€domestic€corporation€actuallyÐ 0€  Ðengaged€in€some€foreign€commerce.€€In€contrast,€the€possessions€taxÐ À Ðcredit€was€meant,€in€addition€to€advancing€the€competitiveness€ofÐ P  Ðdomestic€corporations,€to€stimulate€investment€in€particularÐ à0 Ðplaces,€including€Puerto€Rico.€€On€this€account,€unlike€the€WHTCÐ pÀ Ðprovision,€the€location€of€the€corporation's€trade€or€business€wasÐ P Ðcritical€to€advancing€this€goal.€€After€all,€the€goal€is€promotingÐ à Ðinvestment€in€the€possessions€„„€a€goal€the€attainment€of€which€isÐ  p Ðintrinsically€tied€to€the€location€of€the€investments€made.€Ð °  Ðà ` àM„PR€relies€on€òòFrankóó€v.€òòInternational€Canadian€Corp.óó,€308Ð @" ÐF.2d€520€(9th€Cir.€1962),€a€Ninth€Circuit€decision€applying€theÐ Ð $ ÐWHTC€provision€of€section€109€of€the€Internal€Revenue€Code€of€1939òòóó.€Ð `"°& ÐIt€is€far€from€clear€that€this€court€would€have€viewed€òòFrankóó'sÐ ð#@( Ðfacts€the€same€way€and€reached€the€same€outcome€as€did€the€NinthÐ €%Ð * ÐCircuit,€even€under€the€WHTC.€€Ð '`", Ðà ` àIn€òòFrankóó,€the€Pennsylvania€Salt€Manufacturing€CorporationÐ  (ð#. Ðof€Washington,€a€domestic€corporation€that€regularly€conductedÐ 0*€%0 Ðbusiness€activities€in€British€Columbia,€decided€to€assume€newÐ À+'2 Ðshipping€responsibilities.€€òòId.óó€at€522„23.€€For€legitimate€businessÐ ° Ðreasons€having€to€do€with€the€most€favored€nation€clauses€in€itsÐ @ Ðcontracts€and€the€Robinson„Patman€Act's€prohibitions,€òòóóWashingtonÐ Ð  Ðdecided€to€form€a€new€corporation,€named€International€CanadianÐ ` ° ÐCorporation,€as€a€WHTC,€in€order€to€perform€the€shipping.€€òòId.óó€Ð ð @ ÐInternational,€in€turn,€had€one€full„time€employee€and€assumed€theÐ € Ð  Ðparent's€sales€functions.€€òòId.óó€€International€did€utilize€servicesÐ `  Ðof€Washington's€employees€and€paid€for€those€services.€€òòId.óó€at€523.€Ð  ð  ÐThe€Ninth€Circuit€held,€on€review€of€a€district€court€decision,Ð 0€  Ðthat€International,€which€came€into€existence€for€legitimateÐ À Ðbusiness€reasons€unrelated€to€the€WHTC€provision,€was€notÐ P  Ðdisqualified€from€the€WHTC€credit€although€it€had€assumed€formerÐ à0 Ðbusiness€of€Washington,€utilized€and€paid€for€help€fromÐ pÀ ÐWashington's€employees,€and€did€not€have€a€source€of€supply€orÐ P Ðcustomers€independent€of€Washington's.€€òòId.óó€at€526„27.€€The€courtÐ à Ðfound€that€International€clearly€was€active,€earning€its€income€byÐ  p Ðperforming€a€variety€of€services€relating€to€the€sale€of€chemicalÐ °  Ðproducts.€€òòId.óó€at€525„27.€€Ð @" Ðà ` àThe€Ninth€Circuit's€opinion€is€of€limited€utility€becauseÐ Ð $ Ðof€the€factual€distinctions€between€it€and€the€case€here.€€ForÐ `"°& Ðexample,€òòFrankóó€found€that€International's€existence€was€justifiedÐ ð#@( Ðby€a€legitimate€business€purpose.€€òòId.óó€at€526.€€At€least€from€earlyÐ €%Ð * Ð1990,€when€M„USA€had€decided€not€to€build€a€manufacturing€plant€inÐ '`", ÐPuerto€Rico,€it€is€difficult€to€view€M„PR€as€anything€other€than€aÐ  (ð#. Ðcorporate€shell€with€little€business€reason€to€exist€other€than€toÐ 0*€%0 Ðattempt€to€secure€the€ðð€936€credit.€€Furthermore,€as€alreadyÐ À+'2 Ðdiscussed,€the€divergent€policy€goals€of€the€possessions€tax€creditÐ ° Ðand€the€WHTC€provision€mean€that€the€analogy€is€strained€from€theÐ @ Ðstart.€€Nothing€in€the€history€of€the€WHTC€leads€us€to€theÐ Ð  Ðtaxpayer's€interpretation.Ð ` ° Ðò òE.€€Analogy€to€Other€Regulatory€DefinitionsÐ ð @ Ðó óà ` àThe€Tax€Court€found€twenty„two€uses€of€the€phrase€"activeÐ Ð   Ðconduct€of€a€trade€or€business"€in€the€Internal€Revenue€Code.€Ð `°  ÐòòMedChemóó,€116€T.C.€at€330€&€n.13.€€M„PR€argues€that€the€Tax€CourtÐ ð@  Ðerred€in€looking€by€analogy€to€regulations€interpreting€"activeÐ €Ð  Ðconduct€of€a€trade€or€business"€as€used€in€26€U.S.C.€ðððð€179,€355,Ð ` Ðand€367,€for€purposes€of€interpreting€the€phrase€as€used€in€ðð€936.׃×Ý ƒ#ÃÝòòÚ  Ú11Ú  ÚóóÝ  Ý×  ׀Р ð ÐThe€argument€is€that€the€purposes€of€those€sections€are€soÐ ° Ðdifferent€from€the€purpose€of€ðð€936€that€their€selection€wasÐ @ Ðarbitrary.Ð Ð  Ðà ` àWe€do€not€think€the€selection€was€arbitrary.€€We€analyzeÐ ` ° Ðone€example€to€demonstrate€our€point.€€M„PR€says€the€regulationÐ ð @ Ðunder€ðð€179€is€not€analogous€because€that€regulation€is€explicit:Ð € Ð  Ðit€refers€to€a€trade€or€business€"actively€conducted€òòbyóó€òòtheóóÐ `  Ðòòtaxpayeróó."€€26€C.F.R.€ðð€1.179„2(c)(6)€(2001)€(emphasis€added).€€ItÐ  ð  Ðstates,€in€part,€that€"a€taxpayer€generally€is€considered€toÐ 0€  Ðactively€conduct€a€trade€or€business€if€the€taxpayer€meaningfullyÐ À Ðparticipates€in€the€management€or€operations€of€the€trade€orÐ P  Ðbusiness.€€A€mere€passive€investor€in€a€trade€or€business€does€notÐ à0 Ðactively€conduct€the€trade€or€business."€€òòId.óó€€As€stated€earlier,Ð pÀ Ðour€view€is€that€the€"by€the€taxpayer"€requirement€is€implicit€inÐ P Ððð€936,€and€so€the€analogy€to€26€C.F.R.€ðð€1.179„2(c)(6)€is€notÐ à Ðstrained.€Ð  p Ðà ` àM„PR€argues€that€the€more€appropriate€analogy€is€to€26Ð °  Ðâ âU.S.C.€ðð€936(h)(5),€and€guidance€provided€thereunder,€which,€M„PRÐ @" Ðsays,€contemplates€the€use€of€contract€manufacturers.€€That€sectionÐ ° Ðstates,€in€relevant€part,€that€Ð @ Ðâ âÓÓà0 ` àan€electing€corporation€shall€not€be€treated€as€having€aÐ Ð  Ðsignificant€business€presence€in€a€possession€withÐ ˜è Ðrespect€to€a€product€produced€in€whole€or€in€part€by€theÐ ` ° Ðelecting€corporation€in€the€possession€.€.€.€unless€suchÐ ( x Ðproduct€is€manufactured€or€produced€in€the€possession€byÐ ð @ Ðthe€electing€corporation€within€the€meaning€of€subsectionÐ ¸   Ð(d)(1)(A)€of€section€954.Óß ÓЀ Ð ` (#` (# Ð26€U.S.C.€ðð€936(h)(5).€€Section€954(d)(1)(A)€states€that€Ð `  ÐÓÓà0 ` àthe€term€"foreign€base€company€sales€income"€means€incomeÐ  ð  Ð.€.€.€derived€in€connection€with€the€purchase€of€personalÐ h¸  Ðproperty€from€a€related€person€and€its€sale€to€anyÐ 0€  Ðperson,€the€sale€of€personal€property€to€any€person€onÐ øH  Ðbehalf€of€a€related€person,€the€purchase€of€personalÐ À Ðproperty€from€any€person€and€its€sale€to€a€relatedÐ ˆØ Ðperson,€or€the€purchase€of€personal€property€from€anyÐ P  Ðperson€on€behalf€of€a€related€person€where€„„€(A)€theÐ h Ðproperty€which€is€purchased€(or€in€the€case€of€propertyÐ à0 Ðsold€on€behalf€of€a€related€person,€the€property€which€isÐ ¨ø Ðsold)€is€manufactured,€produced,€grown,€or€extractedÐ pÀ Ðoutside€the€country€under€the€laws€of€which€theÐ 8ˆ Ðcontrolled€foreign€corporation€is€created€or€organized.€Óe#ÓÐP` (#` (# Ð26€U.S.C.€ðð€954(d)(1)€(2000).€€M„PR€says€that€it€relied€on€aÐ à ÐRevenue€Ruling€concluding€that,€under€ðð€954,€when€a€"controlledÐ  p Ðforeign€corporation"€contracts€out€a€manufacturing€process€toÐ °  Ðanother€manufacturer,€the€contract€manufacturer's€performance€isÐ @" Ðconsidered€to€be€performance€by€the€controlled€foreign€corporation.€Ð Ð $ ÐòòSeeóó€Rev.€Rul.€75„7,€1975„1€C.B.€244.€€M„PR€says€ðð€936(a)(2)€must€beÐ `"°& Ðread,€in€light€of€Revenue€Ruling€75„7,€not€to€require€the€taxpayerÐ ð#@( Ðactually€to€supervise€the€contract€manufacturer's€activities.Ð €%Ð * Ðà ` àThe€two€sections,€however,€measure€different€things.€€AsÐ '`", Ðthe€Commissioner€points€out,€the€Revenue€Ruling€allows€contractÐ  (ð#. Ðmanufacturing€to€be€taken€into€account€in€narrow€situations,€notÐ 0*€%0 Ðpresent€here.€€Section€936(h)(1)€taxes€"intangible€property€income"Ð À+'2 Ðto€the€U.S.€shareholder€of€the€ðð€936€corporation€unless€the€ðð€936Ð ° Ðcorporation€elects€either€the€cost€sharing€or€profit€split€method.€Ð @ ÐòòSeeóó€26€U.S.C.€ðð€936(h)(5)(C).€€To€make€that€election,€the€ðð€936Ð Ð  Ðcorporation€must€have€a€"significant€business€presence"€("SBP")€inÐ ` ° Ðthe€possession€as€to€that€product€or€service.€€In€order€to€show€aÐ ð @ Ð"significant€business€presence"€certain€numerical€tests€must€be€metÐ € Ð  Ðand,€in€addition,€the€product€must€be€manufactured€or€produced€inÐ `  Ðthe€possession€within€the€meaning€of€ðð€954(d)(1)(A).€€For€theseÐ  ð  Ðstated€purposes,€contract€manufacturing€costs€may€be€attributed€toÐ 0€  Ðthe€taxpayer€as€allowed€by€the€regulations.€€Those€regulations,€òòforóóÐ À Ðòòpurposesóó€òòofóó€òòtheóó€òòSBPóó€òòrequirementóó,€permit€a€possessions€corporationÐ P  Ðto€treat€the€cost€of€contract€manufacturing€as€a€cost€of€directÐ à0 Ðlabor.€€òòSeeóó€26€C.F.R.€ðð1.936„5(c).€€The€purpose€appears€to€be€toÐ pÀ Ðpermit€a€taxpayer€who€òòhasóó€òòalreadyóó€òòsatisfiedóó€the€75%€"active€conductÐ P Ðof€a€trade€or€business"€requirement€òòthenóó€to€obtain€ðð€936€credit€forÐ à Ðthe€contract€manufactured€product.€€We€reject€the€argument€that€theÐ  p Ðsection€936(h)(5)€provisions€govern€by€analogy€the€initial€questionÐ °  Ðof€what€is€meant€by€the€active€conduct€of€a€trade€or€business.׃%×Ý ƒ#ÃÝòòÚ  Ú12Ú  ÚóóÝ  Ý×  ×Ð @" Ðò òÔ&  ÔF.€Application€of€Section€936(a)€to€the€FactsÐ Ð $ Ðó óà ` àUnder€our€understanding€of€the€statutory€term,€theÐ °"& ÐÔ'Ø'?2Ôrequisite€gross€income€of€M„PR,€over€the€relevant€three„year€timeÐ @$( Ðperiod,€was€not€"derived€from€the€active€conduct€of€a€trade€orÐ ° Ðbusiness€within€a€possession€of€the€United€States."€€26€U.S.C.€ððÐ @ Ð936(a)(2)(B).€€This€is€because€M„PR€was€not€engaged€in€the€activeÐ Ð  Ðconduct€of€a€trade€or€business€in€Puerto€Rico€for€the€threeÐ ` ° Ðpreceding€years.€€The€Tax€Court€was€"not€even€able€to€find€thatÐ ð @ ÐMedChem€P.R.€had€any€meaningful€business€activity€in€Puerto€Rico."€Ð € Ð  ÐòòMedChemóó,€116€T.C.€at€337.€€We€agree€that,€whatever€M„PR's€presenceÐ `  Ðin€Puerto€Rico,€over€the€relevant€time„period,€it€did€not€activelyÐ  ð  Ðconduct€a€trade€or€business€there.€€A„PR€and€M„USA,€but€not€M„PR,Ð 0€  Ðdirected€and€controlled€all€of€the€Avitene€business€activities.€€A„Ð À ÐPR€performed€the€tasks€required€in€the€manufacturing€process,Ð P  Ðwithout€the€ability€of€M„PR€to€control€any€part€of€that€process.Ð à0 Ðà ` àDuring€much€of€the€relevant€three„year€period,€M„PR€hadÐ pÀ Ðno€employees.€€Its€one€employee,€Mr.€Perez,€was€a€former€A„PRÐ P Ðemployee€who€worked€out€of€a€one„room€office€maintained€by€M„PR.€Ð à ÐHe€worked€for€M„PR€from€March€1988€to€June€1990,€though€only€aboutÐ  p Ðten€months€of€his€employment€occurred€during€the€relevant€three„Ð °  Ðyear€period.€€M„PR€argues€that,€for€other€reasons,€A„PR€activitiesÐ @" Ðmust€be€attributed€to€M„PR,€and€that€A„PR€employees€are€M„PR'sÐ Ð $ Ðemployees.€€The€Tax€Court€adopted€as€its€definition€of€an€employeeÐ `"°& Ðof€M„PR€the€definition€used€by€the€IRS€to€determine€if€anÐ ð#@( Ðindividual€is€an€employee€for€payroll€tax€and€withholding€purposes.€Ð €%Ð * ÐòòSeeóó€òòMedChemóó,€116€T.C.€at€341„43€(citing€26€C.F.R.€ðð€31.3401(c)„1(b)Ð '`", Ð(stating,€among€other€things,€that€"if€an€individual€is€subject€toÐ  (ð#. Ðthe€control€or€direction€of€another€merely€as€to€the€result€to€beÐ 0*€%0 Ðaccomplished€by€the€work€and€not€as€to€the€means€and€methods€forÐ À+'2 Ðaccomplishing€the€result,€he€is€not€an€employee")).€€Under€thatÐ ° Ðapproach,€neither€A„PR€nor€the€contract€employees€meet€the€test.€Ð @ ÐNor€do€those€M„USA€employees€who€served€as€M„PR€officers€butÐ Ð  Ðreceived€no€compensation€from€M„PR.€€We€think€the€Tax€Court'sÐ ` ° Ðapproach€was€correct€because€we€agree€that€none€of€the€purported€M„Ð ð @ ÐPR€employees€were€subject€to€M„PR's€control€as€to€the€means€andÐ € Ð  Ðmethods€of€carrying€out€the€production€and€sale€of€Avitene.€€EvenÐ `  Ðwere€this€not€the€case,€we€also€think€it€significant€that,€untilÐ  ð  Ðthis€litigation,€M„PR€consistently€treated€these€individuals€asÐ 0€  Ðnonemployees€for€tax€purposes.€€Ð À Ðà ` àFinally,€M„PR€makes€a€policy€argument€that€it€should€beÐ P  Ðwithin€the€scope€of€the€tax€credit€because€it€created€jobs€in€theÐ à0 Ðsense€that€it€could€have€chosen€earlier€to€move€the€AviteneÐ pÀ Ðproduction€process€out€of€Puerto€Rico.€€Had€it€done€so,€there€wouldÐ P Ðhave€been€a€net€job€loss.€€But€avoiding€the€destruction€of€jobs€isÐ à Ðnot€the€same€as€creating€new€job€opportunities,€which€was€part€ofÐ  p ÐCongress's€concern.€€It€would€seem€contrary€to€congressional€intentÐ °  Ðto€create€incentives€for€American€companies€to€threaten€the€loss€ofÐ @" Ðcontract€manufacturing€jobs€in€Puerto€Rico€unless€the€AmericanÐ Ð $ Ðcompanies€were€given€the€possessions€tax€credit.€€MoreÐ `"°& Ðsignificantly,€M„PR's€argument€is€too€broad.€€All€investment,€ofÐ ð#@( Ðwhatever€nature,€in€Puerto€Rico€may€be€thought€to€contribute€to€jobÐ €%Ð * Ðproducing€opportunities.€€But€Congress€did€not€intend€the€credit€toÐ '`", Ðapply€whatever€the€nature€of€the€investment.€€Congress€limited€theÐ  (ð#. Ðcredit€to€those€involved€in€the€"active€conduct€of€a€trade€orÐ 0*€%0 Ðbusiness."€€And€that€does€not€describe€what€the€taxpayer€here€did.Ð À+'2 Ðò òÔ&  ÔG.€ConclusionÐ ° Ðó óà ` àWe€have€no€basis,€in€the€statute€or€on€the€facts,€toÐ à ÐÔ'°•DÔupset€the€Tax€Court's€reasonable€conclusion€that€the€taxpayers€oweÐ  p Ðthe€deficiency€assessed.€€This€case€has€not€required€us€to€evaluateÐ °  Ðthe€Tax€Court's€proposed€rule;€each€cÔ% €² Ôase€will€bring€factualÐ @  Ðvariations,€which€bring€with€them€legal€consequences.Ð Ð   Ðò òó óÓ  Óà ` àWe€affirm€the€judgment€of€the€Tax€Court.