General Dynamics Corporation and Subsidiaries - Page 14

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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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