[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]