General Dynamics Corporation and Subsidiaries - Page 17

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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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