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USAco, a domestic corporation, wholly owns a foreign subsidiary in Hong Kong called HKco. USAco sells HKco the seven components necessary to make sunglasses. Following one page of directions written in Chinese, HKco employees put the components together to make the sunglasses for HKco's sale throughout Europe. In order to determine whether USAco has any foreign base company sales income under Subpart F, the IRS needs to analyze whether HKco's activities constitute manufacturing.
Problem 1: What procedures can the IRS employ to gather the information needed to make this determination? What if the company fails to comply with initial attempts to gather information?
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