[Title 26 CFR 1.992-1]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.992-1 - Requirements of a DISC.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01falseRequirements of a DISC.1.992-1Sec. 1.992-1INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.992-1  Requirements of a DISC.

    (a) ``DISC'' defined. The term ``DISC'' refers to a domestic 
international sales corporation. The term ``DISC'' means a corporation 
which, for a taxable year--
    (1) Is duly incorporated and existing under the laws of any State or 
the District of Columbia,
    (2) Satisfies the gross receipts test described in paragraph (b) of 
this section,
    (3) Satisfies the assets test described in paragraph (c) of this 
section,
    (4) Satisfies the capitalization requirement described in paragraph 
(d) of this section,
    (5) Satisfies the requirement that an election to be treated as a 
DISC be in effect for such year, as described in paragraph (e) of this 
section,
    (6) [Reserved]
    (7) Maintains separate books and records, and
    (8) Is not an ineligible corporation described in paragraph (f) of 
this section.

[[Page 635]]


A corporation which satisfies the requirements described in 
subparagraphs (1) through (8) of this paragraph for a taxable year is 
treated as a separate corporation for Federal tax purposes and qualifies 
as a DISC, even though such corporation would not be treated (if it were 
not a DISC) as a corporate entity for Federal income tax purposes. An 
association cannot qualify as a DISC even if such association is taxable 
as a corporation pursuant to section 7701(a)(3). In addition, a 
corporation created or organized in, or under the law of, a possession 
of the United States cannot qualify as a DISC. The rules contained in 
this paragraph constitute a relaxation of the general rules of corporate 
substance otherwise applicable under the Code. The separate 
incorporation of a DISC is required under section 992(a)(1) to make it 
possible to keep a better record of the income which is subject to the 
special treatment provided by sections 991 through 996, but this does 
not necessitate in all other respects the separate relationships which 
otherwise would be required between a parent corporation and its 
subsidiary. However, this relaxation of the general rules of corporate 
substance does not apply with respect to other corporations in other 
contexts. In the case of a transaction between a DISC and a person 
related to such DISC for purposes of section 482, see Sec. 1.993-1(l) 
for rules for determining whether income is income of a DISC to which 
the intercompany pricing rules authorized by section 994 apply.
    (b) Gross receipts test. In order for a corporation described in 
paragraph (a)(1) of this section to be a DISC for a taxable year, 95 
percent or more of its gross receipts (as defined in Sec. 1.993-6) for 
such year must consist of qualified export receipts (as defined in 
Sec. 1.993-1). Gross receipts for a taxable year are determined in 
accordance with the method of accounting adopted by the corporation 
pursuant to Sec. 1.991-1(b)(2). However, for rules regarding gross 
receipts in the case of a commission sale by such corporation, see 
Sec. 1.993-6.
    (c) Assets test--(1) In general. In order for a corporation 
described in paragraph (a)(1) of this section to be a DISC for a taxable 
year, the adjusted basis (determined under section 1011) of its 
qualified export assets at the close of such year must equal or exceed 
95 percent of the sum of the adjusted bases (determined under section 
1011) of all assets of such corporation at the close of such year.
    (2) Assets acquired to meet assets test. For purposes of determining 
whether the requirements of subparagraph (1) of this paragraph are 
satisfied by a corporation at the end of a taxable year, an asset which 
is a qualified export asset is treated as not being an asset of such 
corporation at such time if such asset is held for a total of 60 days or 
less and is acquired directly or indirectly through borrowing, unless 
the acquisition of such asset is established to the satisfaction of the 
Commissioner or his delegate to have been for bona fide purposes. Such 
acquisition is deemed to have been for bona fide purposes if, for 
example, it is made in the usual course of the corporation's trade or 
business.
    (d) Capitalization requirement--(1) In general. To qualify as a DISC 
for a taxable year, a corporation must have, on each day of that taxable 
year, only one class of stock. The par value (or, in the case of stock 
without par value, the stated value) of the corporation's outstanding 
stock must be on each day of the taxable year at least $2,500. In the 
case of a corporation which elects to be treated as a DISC for its first 
taxable year, the requirements of this paragraph (d)(1) are satisfied if 
the corporation has no more than one class of stock at any time during 
the year and if the par value (or, in the case of stock without par 
value, the stated value) of the corporation's outstanding stock is at 
least $2,500 on the last day of the period within which the election 
must be made and on each succeeding day of the year. For purposes of 
this paragraph (d)(1), the stated value of shares is the aggregate 
amount of the consideration paid for such shares which is not allotted 
to paid in surplus, or other surplus. The law of the State of 
incorporation of the DISC determines what consideration may be used to 
capitalize the DISC. A corporation will not be a qualified DISC unless 
at least $2,500 of valid consideration was used for this purpose. If a 
corporation has a realized or unrealized loss during a taxable year

[[Page 636]]

which results in the impairment of all or part of the capital required 
under this paragraph (d)(1), that impairment does not result in 
disqualification under this paragraph (d)(1), provided that the 
corporation does not take any legal or formal action under State law to 
reduce capital for that year below the amount required under this 
paragraph (d)(1).
    (2) Treatment of debt payable to shareholders--(i) In general. 
Purported debt of a DISC payable to any person, whether or not such 
person is a shareholder or a member of a controlled group (as defined in 
Sec. 1.993-1(k)) of which such DISC is a member, is treated as debt for 
all purposes of the Code, provided that such purported debt--
    (a) Would qualify as debt for purposes of the Code if the DISC were 
a corporation which did not qualify as a DISC,
    (b) Qualifies under subdivision (ii) of this subparagraph, or
    (c) Are trade accounts payable described in subdivision (iii) of 
this subparagraph.

Such debt is not treated as stock, and interest payable by the DISC on 
such debt is treated as interest by both the DISC and the holder of such 
debt. Payment of the principal of such debt by a DISC does not 
constitute the payment of a dividend by such DISC. The provisions of 
this subparagraph apply for a taxable year of a DISC, even though debt 
described in this subparagraph would be treated as stock of the 
corporation if such corporation did not qualify as a DISC for such year.
    (ii) Safe harbor rule. Purported debt of a DISC will in no event be 
treated as other than debt for purposes of subdivision (i) of this 
subparagraph if--
    (a) It is a written obligation to pay a sum certain on or before a 
fixed maturity date,
    (b) Interest is payable on such purported debt at an arm's length 
interest rate (as determined under Sec. 1.482-2(a)(2)), expressed as a 
fixed dollar amount or a fixed percentage of principal,
    (c) Such purported debt is not convertible into stock or into other 
purported debt unless such other purported debt qualifies under this 
subparagraph as debt of the DISC,
    (d) Such purported debt does not confer voting rights upon its 
holder, except in the event of default thereon, and
    (e) Interest and principal are paid in accordance with the terms of 
such purported debt or with any modification of such terms consistent 
with (a) through (d) of this subdivision.

The determination of whether purported debt of a DISC constitutes debt 
described in this subdivision is made without regard to the proportion 
of debt of the DISC held by any of its shareholders, to the ratio of the 
outstanding debt of the DISC to its equity, or to the amount of 
outstanding debt of such DISC. The provisions of (e) of this subdivision 
do not prevent the modification of the terms of debt of a DISC where, 
for example, a DISC becomes unable to make timely payments of principal 
required under such terms, provided that such modification is consistent 
with (a) through (d) of this subdivision.
    (iii) Trade accounts payable. Trade accounts payable of a DISC which 
arise in the normal course of its trade or business (such as in 
consideration for inventory or supplies) constitute debt of the DISC 
(whether or not such accounts payable are debt described in subdivision 
(i) (a) or (b) of this subparagraph), provided that such accounts are 
payable within 15 months after they arise. If such accounts are payable 
more than 15 months after they arise, they are debt of such DISC only if 
they are debt described in subdivision (i) (a) or (b) of this 
subparagraph.
    (iv) Relation of subparagraph to other corporations. The provisions 
of this subparagraph generally constitute a relaxation of the ordinary 
rules used in determining whether purported debt of a corporation is 
debt or equity. This relaxation is in recognition of the principle that 
a corporation may qualify as a DISC even though it has relatively little 
capital. This relaxation does not apply with respect to purported debt 
of other corporations in other contexts. The provisions of subdivisions 
(i), (ii), and (iii) of this subparagraph apply only for taxable years 
for which a corporation qualifies (or is treated) as a DISC.
    (3) Classes of stock. [Reserved]

[[Page 637]]

    (e) Election in effect. In order for a corporation to be a DISC for 
a taxable year, an election to be treated as a DISC must be made by such 
corporation pursuant to Sec. 1.992-2 and must be in effect for such 
taxable year. A corporation does not become or remain a DISC solely by 
making such an election. A corporation is a DISC for a taxable year only 
if such an election is in effect for that year and the corporation also 
satisfies the requirements of paragraphs (a) through (d) of this 
section. See Sec. 1.992-2 for rules regarding the time and manner of 
making such an election.
    (f) Ineligible corporations. The following corporations shall not be 
eligible to be treated as a DISC--
    (1) A corporation exempt from tax by reason of section 501,
    (2) A personal holding company (as defined in section 542),
    (3) A financial institution to which section 581 or 593 applies,
    (4) An insurance company subject to the tax imposed by subchapter L,
    (5) A regulated investment company (as defined in section 851(a)),
    (6) A China Trade Act corporation receiving the special deduction 
provided in section 941(a), or
    (7) An electing small business corporation (as defined in section 
1371(b)).
    (g) Status as DISC after having filed return as a DISC. Under 
section 992(a)(2), notwithstanding the failure of a corporation to meet 
the requirements of paragraph (a) of this section for a taxable year, 
such corporation will be treated as a DISC for purposes of the Code for 
such taxable year (and, thus, will not be able to claim that it is not 
eligible to be a DISC) if--
    (1) Such corporation files a return as a DISC for such taxable year,
    (2) Such corporation does not notify the district director, more 
than 30 days before the expiration of the period of limitation 
(including extensions thereof) on assessment for underpayment of tax for 
such taxable year (as determined under section 6501 and the regulations 
thereunder), that it is not a DISC for such taxable year, and
    (3) The Internal Revenue Service has not issued, within such period 
of limitation (including extensions thereof) on assessment for 
underpayment of tax for such taxable year, a notice of deficiency based 
on a determination that such corporation is not a DISC for such taxable 
year.

A corporation is treated as a DISC, for all purposes, pursuant to the 
provisions of this paragraph for any taxable year for which it meets the 
requirements of this paragraph, even if such corporation is an 
ineligible corporation described in paragraph (f) of this section for 
such taxable year. Thus, for example, a corporation which is treated as 
a DISC for a taxable year pursuant to this paragraph is treated as a 
DISC for that taxable year for purposes of Sec. 1.992-2(e)(3) (relating 
to the termination of a DISC election if a corporation is not a DISC for 
each of any 5 consecutive taxable years). If a corporation is treated as 
a DISC for a taxable year pursuant to this paragraph, persons who held 
stock of such corporation at any time during such taxable year are 
treated, with respect to such stock, as holders of stock in a DISC for 
the period or periods during which they held such stock within such 
taxable year.
    (h) Definition of ``former DISC''. Under section 992(a)(3), the term 
``former DISC'' refers to a corporation which is not a DISC for a 
taxable year but which was (or was treated as) a DISC for a prior 
taxable year. However, a corporation is not a former DISC for a taxable 
year unless such corporation has, at the beginning of such taxable year, 
undistributed previously taxed income (as defined in Sec. 1.996-3(c) or 
accumulated DISC income (as defined in Sec. 1.996-3(b)). A corporation 
which is a former DISC for a taxable year is a former DISC for all 
purposes of the Code.

(Secs. 385 and 7805 of the Internal Revenue Code of 1954 (83 Stat. 613 
and 68A Stat. 917; 26 U.S.C. 385 and 7805))

[T.D. 7323, 39 FR 34403, Sept. 25, 1974, as amended by T.D. 7420, 41 FR 
20654, May 20, 1976; 41 FR 22267, June 2, 1976; T.D. 7747, 45 FR 86459, 
Dec. 31, 1980; T.D. 7920, 48 FR 50712, Nov. 3, 1983; T.D. 8371, 56 FR 
55234, Oct. 25, 1991]