any taxable year beginning after October 31, 1971, see section 971(a)(3). [T.D. 7323, 39 FR 34402, Sept. 25, 1974]

§1.992 Statutory provisions; requirements of a domestic international sales corporation.

SEC. 992. Requirements of a domestic international sales corporation—(a) Definition of "DISC" and "Former DISC”—(1) DISC. For purposes of this title, the term "DISC" means, with respect to any taxable year, a corporation which is incorporated under the laws of any State and satisfies the following conditions for the taxable year:

(A) 95 percent or more of the gross receipts (as defined in section 993(f) of such corporation consist of qualified export receipts (as defined in section 993(a)),

(B) The adjusted basis of the qualified export assets (as defined in section 993(b)) of the corporation at the close of the taxable year equals or exceeds 95 percent of the sum of the adjusted basis of all assets of the corporation at the close of the taxable year,

(C) Such corporation does not have more than one class of stock and the par or stated value of its outstanding stock is at least $2,500 on each day of the taxable year, and (D) The corporation has made an election pursuant to subsection (b) to be treated as a DISC and such election is in effect for the taxable year.

(2) Status as DISC after having filed a return as a DISC. The Secretary or his delegate shall prescribe regulations setting forth the conditions under and the extent to which a corporation which has filed a return as a DISC for a taxable year shall be treated as a DISC for such taxable year for all purposes of this title, notwithstanding the fact that the corporation has failed to satisfy the conditions of paragraph (1).

(3) "Former DISC". For purposes of this title, the term "former DISC" means, with respect to any taxable year, a corporation which is not a DISC for such year but was a DISC in a preceding taxable year and at the beginning of the taxable year has undistributed previously taxed income or accumulated DISC income.

(b) Election—(1) Election. (A) An election by a corporation to be treated as a DISC shall be made by such corporation for a taxable year at any time during the 90-day period immediately preceding the beginning of the taxable year, except that the Secretary or his delegate may give his consent to the making of an election at such other times as he may designate.

(B) Such election shall be made in such manner as the Secretary or his delegate

shall prescribe and shall be valid only if all persons who are shareholders in such corporation on the first day of the first taxable year for which such election is effective consent to such election.

(2) Effect of election. If a corporation makes an election under paragraph (1), then the provisions of this part shall apply to such corporation for the taxable year of the corporation for which made and for all succeeding taxable years and shall apply to each person who at any time is a shareholder of such corporation for all periods on or after the first day of the first taxable year of the corporation for which the election is effective.

(3) Termination of election—(A) Revocation. An election under this subsection made by any corporation may be terminated by revocation of such election for any taxable year of the corporation after the first taxable year of the corporation for which the election is effective. A termination under this paragraph shall be effective with respect to such election

(i) For the taxable year in which made, if made at any time during the first 90 days of such taxable year, or

(ii) For the taxable year following the taxable year in which made, if made after the close of such 90 days, and for all succeeding taxable years of the corporation. Such termination shall be made in such manner as the Secretary or his delegate shall prescribe by regulations.

(B) Continued failure to be DISC. If a corporation is not a DISC for each of any 5 consecutive taxable years of the corporation for which an election under this subsection is effective, the election shall be terminated and not be in effect for any taxable year of the corporation after such 5th year.

(c) Distributions to meet qualification requirements— (1) In general. Subject to the conditions provided by paragraph (2), a corporation which for a taxable year does not satisfy a condition specified in paragraph (1)(A) (relating to gross receipts) or (1)(B) (relating to assets) of subsection (a) shall nevertheless be deemed to satisfy such condition for such year if it makes a pro rata distribution of property after the close of the taxable year to its shareholders (designated at the time of such distribution as a distribution to meet qualification requirements) with respect to their stock in an amount which is equal to

(A) If the condition of subsection (a)(1)(A) is not satisfied, the portion of such corporation's taxable income attributable to its gross receipts which are not qualified export receipts for such year,

(B) If the condition of subsection (a)(1)(B) is not satisfied, the fair market value of those assets which are not qualified export

assets on the last day of such taxable year,

or

(C) If neither of such conditions is satisfied, the sum of the amounts required by subparagraphs (A) and (B).

(2) Reasonable cause for failure. The conditions under paragraph (1) shall be deemed satisfied in the case of a distribution made under such paragraph

(A) If the failure to meet the requirements of subsection (a)(1)(A) or (B), and the failure to make such distribution prior to the date on which made, are due to reasonable cause; and

(B) The corporation pays, within the 30day period beginning with the day on which such distribution is made, to the Secretary or his delegate, if such corporation makes such distribution after the 15th day of the ninth month after the close of the taxable year, an amount determined by multiplying (1) the amount equal to 4 1/2 percent of such distribution, by (ii) the number of its taxable years which begin after the taxable year with respect to which such distribution is made and before such distribution is made. For purposes of this title, any payment made pursuant to this paragraph shall be treated as interest.

(3) Certain distributions made within 81⁄2 months after close of taxable year deemed for reasonable cause. A distribution made on or before the 15th day of the 9th month after the close of the taxable year shall be deemed for reasonable cause for purposes of paragraph (2)(A) if—

(A) At least 70 percent of the gross receipts of such corporation for such taxable year consist of qualified export receipts, and (B) The adjusted basis of the qualified export assets held by the corporation on the last day of each month of the taxable year equals or exceeds 70 percent of the sum of the adjusted basis of all assets held by the corporation on such day.

(d) 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)).

(e) Coordination with personal holding company provisions in case of certain produced film rents. If—

(1) A corporation (hereinafter in this subsection referred to as "subsidiary”) was established to take advantage of the provisions of this part, and

(2) A second corporation (hereinafter in this subsection referred to as "parent") throughout the taxable year owns directly at least 80 percent of the stock of the subsidiary, then, for purposes of applying subsection (d)(2) and section 541 (relating to personal holding company tax) to the subsidiary for the taxable year, there shall be taken into account under section 543(a)(5) (relating to produced film rents) any interest in a film acquired by the parent and transferred to the subsidiary as if such interest were acquired by the subsidiary at the time it was acquired by the parent.

[Sec. 992 as added by sec. 501, Rev. Act 1971 (85 Stat. 535)]

[T.D. 7323, 39 FR 34403, Sept. 25, 1974]

§ 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) Has its own bank account on each day of the taxable year, except as provided in paragraph (i) of this section,

(7) Maintains separate books and records, and

(8) Is not an ineligible corporation described in paragraph (f) of this section.

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 pur suant 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 § 1.993-1(1) 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 § 1.9936) for such year must consist of qualified export receipts (as defined in § 1.993-1). Gross receipts for a taxable year are determined in accordance with the method of accounting adopted by the corporation pursuant to § 1.991-1(b)(2). However, for rules regarding gross receipts in the case of a commission sale by such corporation, see § 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 sec

tion 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. In order for a corporation to be a DISC for a taxable year, such corporation must have, on each day of such taxable year, only one class of stock, and the par value (or, in the case of stock without par value, the stated value) of such corporation's outstanding stock, and the amount of cash or other property which was paid in, must be, on each day of such 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 subparagraph are satisfied if such corporation has no more than one class of stock at any time during such period and if the par value (or, in the case of stock without par value, the stated value) of such corporation's outstanding stock, and the amount of cash or other property paid in, is at least $2,500 on the last day of the period within which such election must be made and on each succeeding day of such year. For purposes of this subparagraph, property paid in does not include notes or other evidences of indebtedness, under which a shareholder of such corporation is an obligor, received by such corporation in return for its stock. For purposes of this subparagraph, 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. If a corporation has a realized or unrealized loss during a taxable year which results in the impairment of all or part of the capital required under this subparagraph, such impairment does not result in disqualification under this subparagraph, provided that such corporation does not take any legal or formal action under State law to reduce capital for such year below the amount required under this subparagraph. For example, if a corporation issues ten shares of stock at a par value of $250 each, and received property other than cash worth $2,500 in return, and because of market fluctuations the value of such property is reduced to $1,500 at any time during a taxable year, such corporation is not disqualified from being treated as a DISC for that year solely because of such impairment of its capital. The sale, exchange, or other disposition of cash or other property paid in for stock shall not result in the failure of a corporation to qualify as a DISC pursuant to this subparagraph, unless such transaction is a purchase of, or exchange for, a note or other evidence of indebtedness under which a shareholder of such corporation is an obligor.

(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 § 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 dept

(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 (1) 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 §1.4822(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 subpar

agraph), 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]

(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 § 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 § 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 § 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.