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income tax computations (prior year period costs). Instead, in
computing the amount of foreign sales corporation commission
income to be deferred or excluded, petitioners used only the
period costs incurred in the year of completion (current period
costs) and allocated to the particular contract under section
1.451-3(d)(5)(iii), Income Tax Regs.
Respondent determined that petitioners’ approach resulted in
a permanent exclusion and/or distortion in the form of
exaggerated amounts of deferral or exclusion of DISC or FSC
income because of an understatement of the amount of cost. The
additional deferral or exclusion claimed by petitioners, in
respondent's view, does not harmonize with Congress' intent. The
parties, to a great degree, rely on the same statutes and
regulations but arrive at opposite conclusions. First, we
analyze the pertinent statutory and regulatory material.
A. Statutory Background and Framework for DISC’s and FSC’s
In 1971, Congress enacted3 the DISC provisions4 as a tax
incentive to encourage and increase exports. The legislation
allowed domestic corporations to defer taxes on a significant
portion of profits from export sales similar to the tax benefits
available to corporations manufacturing abroad through foreign
3 Revenue Act of 1971, Pub. L. 92-178, sec. 501, 85 Stat.
497, 535.
4 Secs. 991-997.
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