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CCH (cch.taxgroup.com) reports:

In an advance payment transaction (APT), a corporation overstated its foreign sales corporation's (FSC) exempt income by reporting costs using the annual accounting method instead of applying "total costs" as contemplated under the FSC administrative pricing rules. The corporation maintained that, under the annual accounting method embodied in Code Secs. 451 and 461, a matching of income and expenses was not required, and, therefore, its FSC did not have to include in its combined taxable income (CTI) calculation for the year at issue costs related to the transaction that were incurred in the following year. This had the effect of increasing the amount of the FSC's income on which the tax exemption was computed.
The IRS maintained that, in computing CTI under Temporary Reg. §1.925(a)-1T(c)(6), total costs attributable to the APT had to be included in the year at issue regardless of whether they were incurred in a later year. The IRS was granted summary judgment because the FSC exemption was designed to approximate arm's-length pricing and, therefore, the administrative pricing rules required that the transfer price not be reduced by omitting costs in computing CTI.
CCH Comment. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 ( P.L.106-519) repealed the law governing the taxation of FSCs generally effective for transactions after September 30, 2000. The rules governing the taxation of FSCs were replaced with an exclusion from gross income for extraterritorial income (ETI). The American Jobs Creation Act of 2004 (P.L.108-357
) repealed the ETI regime for post-2004 transactions subject to transitional rules in 2005 and 2006.
The Proctor & Gamble Company, DC Ohio, 2007-2 USTC ¶50,663
Other References:
Code Sec. 451
CCH Reference - 2007FED ¶21,017.80
Code Sec. 461
CCH Reference - 2007FED ¶21,817.166
Code Sec. 925
CCH Reference - 2007FED ¶28,163.50
Tax Research Consultant
CCH Reference - TRC INTLOUT: 15,350
CCH Reference - TRC INTLOUT: 15,354