General Dynamics Corporation and Subsidiaries - Page 5

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          GENDYN owned 100 percent of GENDYN/DISC's sole class of voting              
          stock.  GENDYN/DISC had no employees or business operations and             
          existed for the sole purpose of receiving commissions from                  
          GENDYN.  On the date of the incorporation, GENDYN and GENDYN/DISC           
          entered into an Export Sales Commission Agreement.  On May 24,              
          1972, GENDYN/DISC elected to be treated as a domestic                       
          international sales corporation (DISC) under section 992(b), and            
          it filed Federal income tax returns (Forms 1120-DISC) on the                
          basis of a fiscal year ended March 31.                                      
               GENDYN/DISC, through the period ended December 31, 1984,               
          reported the commissions it earned on GENDYN's sales of export              
          property based on the completed contract method of accounting in            
          accordance with section 1.993-6(e)(1), Income Tax Regs.                     
               At the end of each year, commissions on export property                
          sales involving long-term contracts were deducted by GENDYN and             
          included in income by GENDYN/DISC in its appropriate taxable                
          period.  Commissions were normally computed under the 50-50                 
          combined taxable income method (50-percent method) provided for             

          sales corporation and began use of a foreign sales corporation.             
          Although some differences exist between the two sets of statutory           
          provisions and the entities created to comply with the statutes,            
          for purposes of resolving the issues in this case we need not               
          make any distinctions.  The foreign sales corporation became a              
          petitioner in these consolidated cases because it was the                   
          surviving entity.  Accordingly, the domestic international sales            
          corporation will be referred to as GENDYN/DISC and the foreign              
          sales corporation will be referred to as GENDYN/FSC.  When                  
          referred to generally, they will be referred to, along with the             
          other entities collectively, as petitioners.                                

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