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B. Allocation of Income From Export Sales to DISC’s
1. Statutory Requirement
Under the DISC provisions, Congress created intercompany
pricing rules for the purpose of limiting the amount of income
that the parent can allocate to the DISC and thereby limiting the
amount of tax incentive by means of income deferral. The pricing
rules provide for the price at which the parent corporation is
deemed to have sold its products to the DISC, regardless of the
price actually paid. Bently Labs., Inc. v. Commissioner, 77 T.C.
152, 163 (1981). Section 994(a) provides three alternative
pricing methods for DISC’s: (1) 4 percent of qualified export
receipts on the sale of export property; (2) 50 percent of the
combined taxable income of the DISC and its related supplier (the
parent corporation); or (3) the arm's-length price, computed in
accordance with section 482.6 Taxpayers may use the method that
produces the largest amount of income allocation to the DISC’s.
Similarly, section 925 provides three pricing methods for FSC’s:
(1) 1.83 percent of foreign trading gross receipts; (2) 23
percent of combined taxable income; and (3) the arm's-length
price, computed in accordance with section 482. Sec. 925(a).
The CTI methods are at issue in this case.
6 Under the first two methods, the DISC is entitled to
include 10 percent of its export promotion expenses as additional
taxable income. Sec. 994(a)(1) and (2); sec. 1.994-1(a)(1),
Income Tax Regs.
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