forth rules as to an employer's obligation to withhold Federal income taxes on the payment of wages, provides: Generally the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. ** In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee. * See also secs. 31.3121(d)-1(c)(1), 31.3306(i)-1(b), Employment Tax Regs. (providing language virtually identical to sec. 31.3401(c)-1(b), Employment Tax Regs., in the case of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively). Here, we find nothing in the record to persuade us that MedChem P.R. had the right to direct or control any of the purported MedChem P.R. employees in their performance of Avitene-related services. Although petitioners invite us to find that MedChem P.R. directed and controlled the Avitenerelated work of these individuals by virtue of the fact that they interacted with one or more individuals who served concurrently as an officer and/or director of MedChem P.R. and MedChem U.S.A., the record indicates to the contrary. All of the individuals who worked on an Avitene matter were directed and controlled by either Alcon P.R. or MedChem U.S.A. In fact, MedChem P.R. was expressly prohibited by the processing agreement from taking a managerial role in the manufacturing process. Moreover, MedChem P.R. never even directed or controlled any of its officers, except possibly Mr. Perez up until July 1, 1990. We also believe it most telling that MedChem P.R. did not hold any of these individuals out or report them as employees until the commencement of this litigation, that each of these individuals was hired and directly paid by MedChem U.S.A. or Alcon P.R., that MedChem P.R. never paid employment taxes as to these individuals, that MedChem P.R. never provided these individuals with workers' compensation insurance or 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. APPENDIX A Pre-Sec. 936(a)(2)(B) Test Period (1987 to Aug. 31, 1989) Dec. 18, 1987 Feb. 29, 1988 June 21, 1989 Petitioners buy the Avitene business from Alcon MedChem P.R. hires Mr. Perez and establishes MedChem P.R. purchases land for the construction Sec. 936(a)(2)(B) Test Period (Sept. 1, 1989, to Aug. 31, 1992) Feb. 2, 1990 Feb. 28, 1990 June 30, 1990 July 1, 1990 December 1990 March 1991 April 1992 August 1992 District Court issues preliminary injunction as MedChem U.S.A. initiates plans to locate an Petitioners move their bulk nonwoven web manu- FDA audits the Avitene manufacturing process and 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.]'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 owned by MedChem [P.R.] which relate to the production and processing of Avitene. 1.13 Processing Fee and Option C Processing Fee-the fees paid by MedChem [P.R.] to Alcon [P.R.] for each Order filled by Alcon [P.R.] pursuant to Section 9. 2. Processing. 2.1 In General. Subject to the provisions of Section 5, and in return for a Processing Fee as defined in Section 9, Alcon [P.R.] agrees to process from raw materials owned and supplied by MedChem [P.R.] all of MedChem [P.R.]'s requirements of Avitene for sale by MedChem [P.R.] to third parties. The raw materials used in the Conversion Process as well as the finished Avitene Product will remain the sole property of MedChem [P.R.] throughout Alcon [P.R.J's physical possession thereof. Alcon [P.R.] agrees to commit its Humacao Plant for the processing of Avitene to satisfy MedChem [P.R.J's requirements, subject to the provisions of Section 5. In the event that MedChem [P.R.J's requirements of Avitene ever exceed the capacity of the Humacao Plant as of the date hereof, MedChem [P.R.] shall, at its expense, obtain such additional Equipment as is necessary to increase production capacity at the Humacao Plant, or shall use reasonable efforts to obtain access elsewhere to additional production capacity in order to meet the requirements that the Humacao Plant is unable to satisfy. 2.2 Specifications. Alcon [P.R.] agrees to process Avitene in accordance with the Product Specifications and Good Manufacturing Practices as defined by applicable laws and regulations*** 2.3 Processing Method. To assist Alcon [P.R.] in satisfying its obligations under this Agreement, MedChem [P.R.] shall grant to Alcon [P.R.] pursuant to the terms of Section 4 the right to use the Equipment, without charge therefor. Alcon [P.R.] shall furnish all labor, variable and fixed overhead and quality assurance required for the processing of Avitene hereunder. MedChem [P.R.] will employ a plant manager and other appropriate personnel who will inspect, advise and make corrections when appropriate with respect to the Conversion Process; however, MedChem [P.R.] employees will not participate in the Alcon [P.R.] management process. Alcon [P.R.] shall be responsible for all maintenance of the Equipment used in the Conversion Process and for the compliance of such Equipment with applicable regulations of governmental agencies, including but not limited to regulations promulgated by the U.S. Food and Drug Administration and the Environmental Protection Agency; the cost of such maintenance and compliance shall be borne initially by Alcon [P.R.] but shall be included in the Processing Cost (as such term is defined in Section 9). Alcon [P.R.] shall also be responsible for required validation studies on devices, formulae or processes used in the Conversion Process. In the event that Alcon [P.R.] is required by a regulatory authority to perform additional validation studies for purposes of validating new devices, new manufacturing procedures and/or new raw material and finished product assay procedures in order to continue lawfully to engage in the processing of Avitene for MedChem [P.R.] (and MedChem [P.R.], after notice from Alcon |