§994 — Inter-company pricing rules
37 cases·8 followed·3 distinguished·3 questioned·3 overruled·20 cited—22% support
Statute Text — 26 U.S.C. §994
In the case of a sale of export property to a DISC by a person described in section 482, the taxable income of such DISC and such person shall be based upon a transfer price which would allow such DISC to derive taxable income attributable to such sale (regardless of the sales price actually charged) in an amount which does not exceed the greatest of—
4 percent of the qualified export receipts on the sale of such property by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts,
50 percent of the combined taxable income of such DISC and such person which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts, or
taxable income based upon the sale price actually charged (but subject to the rules provided in section 482).
The Secretary shall prescribe regulations setting forth—
rules which are consistent with the rules set forth in subsection (a) for the application of this section in the case of commissions, rentals, and other income, and
rules for the allocation of expenditures in computing combined taxable income under subsection (a)(2) in those cases where a DISC is seeking to establish or maintain a market for export property.
For purposes of this section, the term “export promotion expenses” means those expenses incurred to advance the distribution or sale of export property for use, consumption, or distribution outside of the United States, but does not include income taxes. Such expenses shall also include freight expenses to the extent of 50 percent of the cost of shipping export property aboard airplanes owned and operated by United States persons or ships documented under the laws of the United States in those cases where law or regulations does not require that such property be shipped aboard such airplanes or ships.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.994-1 Inter-company pricing rules for DISC's
- Treas. Reg. §Treas. Reg. §1.994-1(a) §1.994-1(a)
- Treas. Reg. §Treas. Reg. §1.994-1(b) If, for example, during 1982, a DISC commission from a related supplier with respect to a transaction completed in 1980 was redetermined to be $1,000 less than the commission actually charged by, and paid to, the DISC, the amount of any distribution previously made by the DISC from its 1980 previously taxed income to the related supplies as a shareholder may, to the extent of $1,000, be treated not as a distribution but as a repayment of the commission.
- Treas. Reg. §Treas. Reg. §1.994-1(c) For purposes of this subdivision (iv), whether the transfer price or commission actually paid is deemed a reasonable estimate may be determined on the basis for grouping transactions chosen by the taxpayer under paragraph (c)(5) and (7) of this section.
- Treas. Reg. §Treas. Reg. §1.994-1(d) Rules under section 994(a)(1) and (2) for transactions other than sales.
- Treas. Reg. §Treas. Reg. §1.994-1(e) Methods of applying paragraphs (c) and (d) of this section—(1) Limitation on DISC income (“no loss” rule)—(i) In general.
- Treas. Reg. §Treas. Reg. §1.994-1(f) Export promotion expenses—(1) Purpose of expense.
- Treas. Reg. §Treas. Reg. §1.994-1(g) Examples.
- Treas. Reg. §Treas. Reg. §1.994-1(i) §1.994-1(i)
- Treas. Reg. §Treas. Reg. §1.994-1(v) Sales of promotional material.
- Treas. Reg. §Treas. Reg. §1.994-2 Marginal costing rules
- Treas. Reg. §Treas. Reg. §1.994-2(a) §1.994-2(a)
- Treas. Reg. §Treas. Reg. §1.994-2(b) The total gross receipts (determined under § 1.
- Treas. Reg. §Treas. Reg. §1.994-2(c) Definitions—(1) Establishing or maintaining a foreign market.
- Treas. Reg. §Treas. Reg. §1.994-2(d) Application of limitation on DISC income (“no loss” rule).
- Treas. Reg. §Treas. Reg. §1.994-2(e) Examples.
- Treas. Reg. §Treas. Reg. §1.994-2(i) Direct production costs (as defined in § 1.
37 Citing Cases
's sales of CV's products to customers located outside the United States. The commission agreement provided that, in exchange for services provided under the agreement, CVI would receive a commission equal to the maximum amount allowable pursuant to section 994. Pursuant to a written agreement entitled "Agreement Designating Foreign Marketing Departments and Related 3(...continued) beginning Feb. 1, 1984, and ending Dec. 31, 1984. - 5 - Intercompany Accounts" (export promotion agreement) dated a
deduct certain period costs. In computing the base (combined taxable income) for the statutorily conferred tax benefit to promote exports, P did not account for period costs, which it had elected to deduct annually in prior years. R determined that sec. 994 and/or 925, I.R.C., and the regulations thereunder, required P to include prior years' period costs that are attributable to the gross receipts from foreign exports in computing the base for P's deferral or exemption from income. P manufactu
Commissions were normally computed under the 50-50 combined taxable income method (50-percent method) provided for in section 994 because that method yielded the largest commission.
ation" (DISC), see sec. 992(a)(1), during those years. International was GE's export sales agent,. and was entitled to receive commissions on GE's export sales. The commissions equaled the maximum commissions permitted to be received by a DISC under section 994. Boeing and McDonnell Douglas manufacture airframes. Basically, airframes are the full aircraft less engines and reversers. After manufacturing the airframes, Boeing and McDonnell Douglas install engines and reversers thereon and deliver