(iv) Is the transferred property used or held for use in the trade or business? Rules concerning these four determinations are provided in paragraph (b)(2), (3), (4), and (5) of this section. (2) Trade or business. Whether the activities of a foreign corporation constitute a trade or business must be determined under all the facts and circumstances. In general, a trade or business is a specific unified group of activities that constitute (or could constitute) an independent economic enterprise carried on for profit. For example, the activities of a foreign selling subsidiary could constitute a trade or business if they could be independently carried on for profit, even though the subsidiary acts exclusively on behalf of, and has operations fully integrated with, its parent corporation. To constitute a trade or business, a group of activities must ordinarily include every operation which forms a part of, or a step in, a process by which an enterprise may earn income or profit. In this regard, one or more of such activities may be carried on by independent contractors under the direct control of the foreign corporation. (However, see paragraph (b)(3) of this section.) The group of activities must ordinarily include the collection of income and the payment of expenses. If the activities of a foreign corporation do not constitute a trade or business, then the exception provided by this section does not apply, regardless of the level of activities carried on by the corporation. *** (3) Active conduct. Whether a trade or business is actively conducted must be determined under all the facts and circumstances. In general, a corporation actively conducts a trade or business only if the officers and employees of the corporation carry out substantial managerial and operational activities. A corporation may be engaged in the active conduct of a trade or business even though incidental activities of the trade or business are carried out on behalf of the corporation by independent contractors. In determining whether the officers and employees of the corporation carry out substantial managerial and operational activities, however, the activities of independent contractors shall be disregarded. On the other hand, the officers and employees of the corporation are considered to include the officers and employees of related entities who are made available to and supervised on a day-to-day basis by, and whose salaries are paid by (or reimbursed to the lending related entity by), the transferee foreign corporation. *** The rule of this paragraph (b)(3) is illustrated by the following example. Example. X, a domestic corporation, and Y, a foreign corporation not related to X, transfer property to Z, a newly formed foreign corporation organized for the purpose of combining the research activities of X and Y. Z contracts all of its operational and research activities to Y for an arm'slength fee. Z's activities do not constitute the active conduct of a trade or business. (4) Outside of the United States. Whether a foreign corporation conducts a trade or business outside of the United States must be determined under all the facts and circumstances. Generally, the primary managerial and employee benefits, and that all of these individuals worked at the Alcon P.R. and MedChem U.S.A. facilities. We conclude and hold that MedChem P.R. does not meet the "active conduct of a trade or business within a possession" requirement of section 936(a)(2)(B). In so holding, we note that petitioners rely erroneously on Suzy's Zoo v. Commissioner, 114 T.C. 1 (2000), for a contrary holding. There, the taxpayer was a corporation that sold greeting cards and other paper products bearing copies of one or more of the taxpayer's cartoon characters. The taxpayer's employees developed the characters, and the taxpayer transferred the characters to printing companies to print the paper products in accordance with the taxpayer's specifications. The printers used their own ink and paperstock, and they held title to and bore the risk of loss of the supplies and printed goods until the goods were sent back to the taxpayer for its acceptance or rejection. The printers could not sell any images of the characters, and they could not sell any of the taxpayer's paper products. The taxpayer argued that, for purposes of section 263A, the printers produced the finished goods, and it resold them. We disagreed. We held that the taxpayer was the producer of the finished goods. We noted that the printing of the characters onto the paper products was ministerial and that the critical step in the manufacturing of the finished good was the drawing of the characters. In contrast with the situation there, where the thrust of the work as to the finished product was performed by the taxpayer, the thrust of the work here as to the manufacturing of Avitene was performed by Alcon P.R. The Avitene manufacturing process was not ministerial but required specialized skill and expertise, unlike the reproduction process in Suzy's Zoo. We have rejected all arguments not discussed herein as without merit or irrelevant. To reflect the foregoing, Decisions will be entered under Rule 155. businesses at a competitive disadvantage when compared with their British and French counterparts, which were not subject to taxation upon the profits they earned abroad unless paid back to the home company. Congress enacted section 931 to remove that competitive disadvantage. See H. Rept. 350, 67th Cong., 1st Sess. 1 (1921), 1939-1 C.B. (Part 2) 168, 174. In its original form, section 931 allowed a corporation to exclude its possession-source income if it met an "80-percent source" test and a "50-percent active trade or business" test. Because 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. In the Tax Reform Act of 1976, Pub. L. 94-455, sec. 1051, 90 Stat. 1643, Congress revised the prior law in order to provide for a more efficient system exempting possessions corporations so that the possessions would not lose a significant source of capital. See Coca-Cola Co. & Subs. v. Commissioner, supra at 22. In place of the exemption mechanism contained in section 931, Congress enacted section 936 to permit 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 Ways and Means Committee 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. Post-Sec. 936(a)(2)(B) Period (Aug. 31, 1992, to Apr. 1994) October 1992 July 1993 April 1994 MedChem U.S.A. starts manufacturing Avitene in MedChem U.S.A. begins constructing a new Avitene APPENDIX B PROCESSING AGREEMENT PROCESSING AGREEMENT dated as of December 18, 1987 by and between MEDCHEM PUERTO RICO, INC. (“MedChem [P.R.]"), a Delaware corporation, and ALCON (PUERTO RICO) INC. (“Alcon [P.R.]"), a Delaware corporation. In consideration of the mutual covenants and agreements contained in this Agreement, MedChem [P.R.] and Alcon [P.R.] covenant and agree as follows: 1. Definitions. As used in this Agreement, the following terms have the meanings set forth below: 1.1 Acceptance Tests-chemical, physical and performance tests conducted in accordance with the analytical procedures described in *** [a referenced schedule], to be applied to Avitene in order to determine whether Avitene conforms to the Product Specifications. 1.4 Conversion Process-the manufacturing process by which raw materials are converted into the finished Avitene product. * 1.6 Delivery-the delivery by Alcon [P.R.] of Avitene processed under this Agreement. 1.7 Equipment-the machinery and equipment owned by MedChem [P.R.] and required for the processing of Avitene. 1.8 Humacao Plant-Alcon [P.R.J's Avitene processing facility in Humacao, Puerto Rico. 1.10 Order-a writing from MedChem [P.R.] authorizing or directing Alcon [P.R.] to process and Deliver Avitene. 1.11 Product Specifications-the specifications for Avitene set forth *** [in a referenced schedule]. 1.12 Proprietary Information-all patents, trademarks, trade secrets, copyrights, inventions, designs, logos, and any other proprietary rights To accomplish these two major changes, the committee's amendment revises present law to provide for a more efficient system for exemption of possessions corporations. Under the amendment, these corporations are generally to be taxed on worldwide income in a manner similar to that applicable to any other U.S. corporation, but a full 48 percent foreign tax credit is to be given for the business and qualified investment income from possessions regardless of whether or not any tax is in fact paid to the government of the possession. The effect of this revised treatment will be to exempt from tax the income from business activities and qualified investments in the possessions, to allow a dividends received deduction for dividends from a possessions corporation to its U.S. parent corporation, and to tax currently all other foreign source income of possessions corporations (with allowance for the usual foreign tax credit). The committee believes that this revised treatment will assist the U.S. possessions in obtaining employment-producing investments by U.S. corporations, while at the same time encouraging those corporations to bring back to the United States the earnings from these investments to the extent they cannot be reinvested productively in the possession. [S. Rept. 94-938, at 277-278 (1976), 1976-3 C.B. (Vol. 3) 57, 315-316; fn. refs. omitted.] See also H. Rept. 94-658, at 254-255 (1975), 1976-3 C.B. (Vol. 2) 945, 946-947. On the basis of our understanding of the legislative record, we believe that Congress promulgated the "active conduct of a trade or business" requirement of section 936(a) intending to prevent a domestic corporate taxpayer from availing itself of the possessions tax credit unless it established and regularly operated an employment-producing, profit-motivated business activity in a U.S. possession. We also believe that Congress expected the taxpayer to participate meaningfully in the management and operation of that activity and to invest significantly in that activity, the expected result of which would be to strengthen the economy of the possession where the activity was located. In light of Congress' intent for section 936, the Secretary's interpretations of the subject phrase for purposes of other sections of the Code, and the Supreme Court's interpretation of the phrase "trade or business" in section 162(a), we believe that, for purposes of section 936(a), a taxpayer actively conducts a trade or business in a U.S. possession only if it participates regularly, continually, extensively, and actively in the management and operation of its profit-motivated activity in that possession. Cf. Commissioner v. Groetzinger, 480 U.S. at 26; Higgins v. Commissioner, 312 U.S. at 217; Stanton v. Commissioner, |