congressional mandate in a proper manner. United States v. Vogel Fertilizer Co. 455 U.S. 16, 24-26 (1982); CWT Farms, Inc. v. Commissioner, supra at 801.

As legislative regulations are essentially substantive rules of law, the rules of interpretation applicable to statutes are appropriate tools of analysis. KCMC, Inc. v. FCC, 600 F.2d 546, 549 (5th Cir. 1979); Intel Corp. & Consol. Subs. v. Commissioner, 100 T.C. 616, 630 (1993), affd. 67 F.3d 1445 (9th Cir. 1995); Phillips Petroleum Co. v. Commissioner, 101 T.C. 78, 97 (1993), affd. without published opinion 70 F.3d 1282 (10th Cir. 1995). Statutes are to be construed so as to give effect to their plain and ordinary meaning unless to do so would produce an absurd result. Green v. Bock Laundry Machine Co., 490 U.S. 504, 509 (1989); United States v. NEC Corp., 931 F.2d 1493, 1498 (11th Cir. 1991); Blue Cross & Blue Shield v. Weitz, 913 F.2d 1544, 1548 (11th Cir. 1990); Exxon Corp. v. Commissioner, 102 T.C. 721 (1994).

Where a statute is clear on its face, we require unequivocal evidence of legislative purpose before construing the statute so as to override the plain meaning of the words used therein. Halpern v. Commissioner, 96 T.C. 895 (1991). All parts of a statute must be read together, and each part should be given its full effect. D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, 208 (1932); Estate of Dupree v. United States, 391 F.2d 753, 757 (5th Cir. 1968); McNutt-Boyce Co. v. Commissioner, 38 T.C. 462, 469 (1962), affd. per curiam 324 F.2d 957 (5th Cir. 1963). Unless exceptional circumstances dictate otherwise, when we find the terms of a statute unambiguous, judicial inquiry is complete. Burlington N. R.R. v. Oklahoma Tax Commn., 481 U.S. 454, 461 (1987); United States v. NEC Corp., supra at 1498.

Thus, the party who seeks to convince a court to adopt a reading of a statute which is at odds with its plain meaning labors under a heavy burden. United States v. NEC Corp., supra at 1499.

Consistent with the foregoing, we examine the historical development of section 936 and determine whether the regulation implements the congressional mandate in a reasonable

manner.

D. Analysis: Section 1.936-6(b)(1), Q&A−1 & Q&A-12,
Income Tax Regs.

Section 936 has its genesis in section 262 of the Revenue Act of 1921, ch. 136, 42 Stat. 271, which exempted a U.S. corporation from Federal taxes on foreign-source income if it derived at least 80 percent of its income from sources within a possession and satisfied certain other requirements. The requirements for exemption from tax as a possessions corporation were carried forward without material change into section 931 of the Internal Revenue Code of 1954. In the Tax Reform Act of 1976, Congress eliminated the exemption and in its place enacted the tax credit mechanism of section 436. Tax Reform Act of 1976, Pub. L. 94-455, sec. 1051, 90 Stat. 1643.

Congressional intent for section 931 and its predecessors consistently has been the encouragement of American business investments in possessions of the United States. American companies operating in the possessions originally were subjected to double taxation by the imposition of both the Federal corporate income tax and the taxes levied by the possessions governments. Tariff Act of 1913, ch. 16, sec. II, 38 Stat. 166; Revenue Act of 1918, ch. 18, 40 Stat. 1057.

Congress perceived that the tax burden so created placed American businesses at a competitive disadvantage when compared with their British and French counterparts not subject to taxation upon the profits they earned abroad unless paid back to the home company. Congress consequently enacted the original version of section 931 to remove that competitive disadvantage. H. Rept. 350, 67th Cong., 1st Sess. 1 (1921), 1939-1 C.B. (Part 2) 168, 174.

Section 931 provided corporations an exclusion for possession-source income if they met the "80-percent source" test and the "50-percent active trade or business" test.6 Because

6 Sec. 931 provided as follows:

SEC. 931. INCOME FROM SOURCES WITHIN POSSESSIONS OF THE UNITED STATES. (a) GENERAL RULE.-In the case of citizens of the United States or domestic corporations, gross income means only gross income from sources within the United States if the conditions of both paragraph (1) and paragraph (2) are satisfied:

(1) THREE-YEAR PERIOD.-If 80 percent or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possesContinued

of the exclusion, and because dividends received by a domestic corporation from its wholly owned possessions subsidiary were not eligible for the intercorporate dividends received deductions under section 246(a)(2)(B), possessions corporations amassed large amounts of income not repatriated to the United States.

To encourage investment of possessions-source earnings in the United States, Congress, in 1976, enacted section 936. Tax Reform Act of 1976, Pub. L. 94-455, sec. 1051, 90 Stat. 1643. The Tax Reform Act of 1976 revised prior law, providing for a more efficient system for exemption of possessions corporations in order to prevent the possessions from losing a significant source of capital. In place of the exemption mechanism contained in section 931, section 936 permits a U.S. corporation to elect a tax credit to offset the U.S. tax on its possessions income. Thus, the current version of the investment incentive takes the form of a tax credit rather than an exemption.

It is clear from the legislative record that Congress was aware of the highly favorable tax benefits afforded U.S. corporations operating in Puerto Rico. It is equally clear that Congress intended to retain and reaffirm such tax benefits by enacting section 936. The Senate Finance Committee and the House of Representatives Committee on Ways and Means stated the following, in virtually identical reports:

The special exemption provided (under sec. 931) in conjunction with investment incentive programs established by possessions of the United States, especially the Commonwealth of Puerto Rico, have been used as an inducement to U.S. corporate investment in active trades and businesses in Puerto Rico and the possessions. Under these investment programs little or no tax is paid to the possessions for a period as long as 10 to 15 years and no tax is paid to the United States as long as no dividends are paid to the parent corporation.

Because no current U.S. tax is imposed on the earnings if they are not repatriated, the amount of income which accumulates over the years from these business activities can be substantial. The amounts which may be allowed to accumulate are often beyond what can be profitably invested within the possession where the business is conducted. As a result, corporations generally invest this income in other possessions or in foreign

sion of the United States; and

(2) TRADE OR BUSINESS.-If

(A) in the case of such corporation, 50 percent or more of its gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States * * *

countries either directly or through possessions banks or other financial institutions. In this way possessions corporations not only avoid U.S. tax on their earnings from businesses conducted in a possession, but also avoid U.S. tax on the income obtained from reinvesting their business earnings abroad.

The committee after studying the problem concluded that it is inappropriate to disturb the existing relationship between the possessions investment incentives and the U.S. tax laws because of the important role it is believed they play in keeping investment in the possessions competitive with investment in neighboring countries. ***

[S. Rept. 94-938, at 277-278 (1976), 1976-3 C.B. (Vol. 3) 57, 315-316; H. Rept. 94-658, at 253, 254-255 (1975), 1976-3 C.B. (Vol. 2) 695, 945, 946-947; emphasis added.]

Thus, under both section 936 and its predecessor, section 931, possessions corporations are and have been effectively exempt from tax on income from possessions sources. This exemption applied to income from intangibles created by such corporation or acquired from an unrelated party. In 1982, Congress added subsection (h) to section 936.7 Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 213, 96 Stat. 452. Subsection (h) was added in order to lessen the abuse caused by taxpayers claiming tax-free income generated by intangibles developed outside of Puerto Rico. See H. Conf. Rept. 97-760, at 505 (1982), 1982-2 C.B. 600, 617.

Section 936(h)(1) provides that any income of an electing corporation attributable to intangible property is deemed to be the income of, and is taxable to, the shareholders of the section 936 corporation. Where income is derived from the sale of an intangible possessions product, taxable income generally is computed under section 936(b)(1)–(4). A section 936 corporation may, however, "elect out" under section 936(h)(5) and choose to compute its taxable income under one of two methods: (1) The cost-sharing method; or (2) the profit-split method. Pursuant to either method, the stockholders of the section 936 corporation are taxed on a share of the income generated from intangible assets.

Congress recognized in enacting section 936(h) that some section 936 corporations produce products that are not sold to unrelated parties, but rather are transferred to affiliates

7 Sec. 936(h) was added to the Code in response to issues raised in Eli Lilly & Co. v. Commissioner, 84 T.C. 996 (1985), affd. in part, revd. in part and remanded 856 F.2d 855 (7th Cir. 1988). See H. Conf. Rept. 97-760, at 504 n.* (1982), 1982–2 C.B. 600, 617.

and used as component parts in the production of other products that are then sold by the affiliates to unrelated parties. The statute, however, does not provide any specific rules for the computation of combined taxable income in such a case. Rather, Congress directed the Treasury to write the rules with respect to such component products. Sec. 936(h)(7). The conference report accompanying the enactment of section 936(h) instructs the Secretary to:

prescribe regulations providing for appropriate treatment in cases where the island affiliate *** produces a component which it sells to an affiliate for incorporation into a product sold to third parties. [H. Conf. Rept. 97-760, supra at 508, 1982-2 C.B. at 619.8]

We conclude that section 1.936-6(b)(1), Q&A-12, Income Tax Regs., establishes a permissible method for computing CTI where the possession product is a component product. In evaluating the regulations under section 936, we are mindful of the Supreme Court's admonition: "The choice among reasonable interpretations is for the Commissioner, not the courts." National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, 488 (1979). Provided that Q&A-12 is neither unreasonable nor plainly inconsistent with the statute, it will be upheld. Bingler v. Johnson, 394 U.S. 741, 750 (1969); RJR Nabisco, Inc. v. United States, 955 F.2d at 1464.

The legislative history of section 936, as a whole, is silent on the precise issue before us. The legislative history does, however, make clear Congress' consistent intention to maintain the favorable tax benefit of operating in a U.S. possession, and we find that the application of the PCR in Q&A−12 in the instant case is fully consistent with that intention.

The regulatory scheme under section 936 is technical and complex, and we find that the Commissioner considered the treatment of possession products in a detailed and reasoned fashion before making a final decision. Section 936 does not specifically define the term “CTI", nor does the statute provide a clear method for allocating and apportioning expenditures in computing CTI under the facts before us. The term

8 Sec. 936(h)(7) was redesignated as sec. 936(h) (8) by the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 1012(h)(2)(B), 102 Stat. 3502.

9 As is customary, the IRS invited interested members of the public to submit written comments with respect to proposed regulations interpreting sec. 936 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. Numerous comments were received and considered. See 47 Fed. Reg. 53746 (Nov. 29, 1982).