Court is whether Congress intended the results that flow from petitioner's application of the production cost ratio (PCR) to the U.S. affiliates' expenses known to be factually related to the gross income derived from CRI's component concentrate. Respondent argues further that the factual relationship test found in section 1.861-8(b) and (c), Income Tax Regs., is adopted in section 936(h)(5)(C)(ii)(II) through its overall incorporation of the standards contained in section 861. Respondent claims that Q&A-12 must be read in the context of the statute and is to be applied only as a supplement to Q&A-1, which determines, according to respondent, the expenses allocable and apportionable to the possession product in all cases including those cases in which the possession product is sold in a component form. A possession product is an item of property which is the result of a production process carried on in a possession. Sec. 1.936-5(a), A-1, Income Tax Regs. Possession products encompass component products, integrated products, and end-product forms. Id. A component product is a product which is subject to further processing before sale to an unrelated party. Id. An integrated product is (1) a product not subject to any further processing before sale to an unrelated party and (2) a product which includes all component products from which it is produced. Id. A possessions corporation may treat a component product or an integrated product as its possession product even though the final stage or stages of production occur outside the possession. Id. Further processing includes transformation, incorporation, assembly, or packaging. Id. For our purposes, the integrated product is syrup or soft drinks, the component product is concentrate, and the possession product is the component concentrate. Again, CRI is both the possessions corporation and the electing corporation within the meaning of section 936. CRI incurs costs in producing and shipping concentrate to the United States. Production costs include direct labor costs and overhead incident to and necessary for production but do not include direct material costs and interest. Secs. 1.9366(b)(1), Q&A-12, 1.936-5(b)(4), 1.471-11(b), Income Tax Regs. USA and the CBO's incur expenses in selling the syrup and soft drinks. U.S. affiliate expenses allocable and apportionable to the integrated product, i.e., syrup and soft drink, are determined under section 1.861-8, Income Tax Regs., as described in section 1.936-6(b)(1), Q&A−1, Income Tax Regs. These expenses include, inter alia, research and development, experimental, interest, marketing, distribution, and advertising expenses. Sec. 1.936-6(b)(1), Income Tax Regs. We provide the following examples for illustration: Example 1 When petitioner sells concentrate as concentrate, i.e., in unchanged form, to unrelated third parties, CTI is determined as follows: Gross income from the sale of concentrate per unit 1 $2.24 (1.48) .76 Combined taxable income 1 Concentrate is sold in units; syrup and soft drinks are sold in equivalent gallons. In this example, the PCR is not applicable because the concentrate is being sold in unchanged form and not as a component of something larger. Here, Q&A-1 determines the computation of CTI, requiring that all expenses factually related to the concentrate be allocated and apportioned in full to the income derived from the sale of the concentrate as concentrate. Thus, 50 percent of the CTI is 38 cents per unit, resulting in a tax credit equal to the tax attributable to 38 cents per unit of concentrate sold. Example 2 When the concentrate is sold as a component of a beverage product to unrelated third parties, CTI is determined as follows: Gross income from the sale of concentrate as a compo nent of syrup $2.24 Total USA expenses (1.48) Production costs incurred per unit of possession product .10 If the possession product is a component product, as here, combined taxable income is determined under Q&A-12. The plain language of Q&A-12 requires (1) the determination of five factors relating to sales, costs, and expenses and (2) the application of those factors when using the allocation and apportionment method provided therein. The five factors to be determined under Q&A-12 are as follows: (1) The electing corporation must determine the sale price of the component product. The sale price is derived from either an independent sale price from comparable uncontrolled transactions, or if an independent sale price from comparable uncontrolled transactions cannot be determined, then the sale price is determined using a production cost ratio method. This first requirement is not at issue for purposes of the instant motion; (2) the possessions corporation must determine its costs attributable to the possession product under section 1.861–8, Income Tax Regs.; (3) the possessions corporation must determine its expenses allocable and apportionable to the possession product under section 1.861-8, Income Tax Regs.; (4) each member of the affiliated group must determine its costs attributable to the possession product under section 1.861-8, Income Tax Regs.; and (5) each member of the affiliated group must determine its expenses allocable and apportionable to the integrated product under section 1.861-8, Income Tax Regs. Finally, Q&A-12 requires that each affiliate apportion to the possession product on the basis of the ratio of the production costs for the possession product to the total production costs for the integrated product, the expenses the affiliate allocated and apportioned to the integrated product. In our second example, the total production costs associated with the integrated product equal 80 cents per unit, and the production costs associated with the possession product equal 10 cents per unit, resulting in a PCR of 12.5 percent. The PCR is then applied to the total expense amount of $1.48 per unit, resulting in approximately 19 cents per unit expense allocation. The CTI equals $2.05 per unit, resulting in a tax credit equal to the tax attributable to approximately $1.03 per unit of beverage product sold. In this example, only 12.5 percent of the expenses known to be factually related to the sale of the integrated product are allocated and apportioned to the income derived from the sale of the possession product. This results in an increased CTI figure, which in turn increases the amount of the section 936 possessions tax credit. Thus, where production costs at the possession level are small in relation to the total production costs, as in the instant case, a low PCR is produced, resulting in the allocation of a relatively small percentage of the total amount of expenses to the income derived from the sale of the possession product. Respondent argues that the application of the PCR in the instant case results in unapportioned USA expenses totaling $227,213,515 in 1985, representing approximately 89.84 percent of the total amount of expenses for that year, and unapportioned expenses totaling $263,021,507 in 1986, representing 91.7 percent of the total expenses for that year. Both parties acknowledge that regardless of the form in which the concentrate is sold, i.e., one unit of concentrate, 79.26 gallons of syrup, or 515 gallons of soft drink, petitioner incurs approximately the same amount of expense with respect to each product. Petitioner argues, however, that the regulations under section 936 contain only one provision prescribing the manner of calculating combined taxable income with respect to a component product; i.e., Q&A-12. Under the plain meaning of this regulation, Q&A-12 controls the computation of combined taxable income with respect to possession products that are component products, according to petitioner. The concentrate produced by CRI, which is converted into syrup or into bottle and can soft drinks before sale to unrelated parties, is a component product. According to petitioner, under the plain, unambiguous terms of the regulation, Q&A-12 governs the computation of combined taxable income with respect to such concentrate, mandating the application of the production cost ratio. Petitioner further asserts that the application of Q&A-12 to component concentrate is consistent with the regulatory scheme in general. In petitioner's view, the language in the question portion of Q&A-12 is broad and unqualified, and nothing in the regulations under section 936 indicates that any other rules may apply with respect to component products, according to petitioner. Petitioner argues that the language in Q&A-12 clearly states that the role of Q&A-1, with respect to component products, is to determine U.S. affiliate expenses at the integrated product level; i.e., to determine the aggregate of U.S. affiliate expenses allocable and apportionable to the gross income from the integrated product containing the component product. Q&A-12 then prescribes the PCR as the exclusive basis for allocating and apportioning those expenses to the component possession product. Petitioner argues that under the plain meaning of the regulation, the PCR applies to all U.S. affiliate expenses allocable and apportionable to the integrated product; i.e., syrup and soft drinks. Furthermore, argues petitioner, the example in Q&A-12 confirms this interpretation. In the example, expenses of the U.S. affiliates are allocated and apportioned to the integrated product, computers, and then apportioned to the component product, central processing units, using the PCR. Thus, petitioner argues, the example provided in Q&A-12 supports the plain meaning of the regulation. Respondent contends that on the facts before us, section 936(h)(5)(C)(ii)(II), as interpreted by Q&A-1, requires that all expenses that USA incurs, and those CBO expenses that are factually related to concentrate gross income, be apportioned in full to such income. Respondent argues that Congress did not intend the results that flow from petitioner's application of the PCR to U.S. affiliates' expenses known to be factually related to, and therefore allocable and apportionable solely to, the gross income derived from CRI's component concentrate. With respect to expenses incurred by petitioner's corporate and USA divisions, the amount of expenses apportionable to CRI's component concentrate gross income can be precisely quantified, according to respondent. Petitioner concedes, for purposes of the instant motion, that USA incurred approximately the same amount of expense, on a |