Domestic International Sales Corporation

Summary of Domestic International Sales Corporation

Commonly known by the acronym DISC, a U.S.-chartered corporation, qualified with the Internal Revenue Service, that derives virtually all of its income from export sales and export-related activities. A properly qualified DISC was permitted to defer indefinitely tax on a portion of its income. The DISC program was authorized by the Revenue Act of 1971 (P.L. 92-178) as a stimulus to export sales. In order to qualify for DISC status, the corporation must (1) be incorporated under the laws of a state or the District of Columbia; (2) derive 95 percent of its gross receipts from “qualified export receipts”; (3) have an adjusted basis of “qualified export assets equivalent to at least 95 percent of the sum of the adjusted basis of all assets at the close of the taxable year”; (4) issue only one class of stock, the par or stated value of which must be at least $2,500 on each day of the taxable year; and (5) have made a valid election, which must remain in effect. In addition, administrative regulations of the Internal Revenue Service require that a DISC must maintain continuously its own bank account and have separate books and records.

For purposes of the Act, qualified export receipts are defined as gross receipts derived from (1) the sale, exchange, or other transfer of “export property”; (2) lease or rental, outside the United States, of “export property”; (3) the performance of services incidental to the sale, lease, or other disposition of “export property”; (4) engineering or architectural services performed outside the United States; and (5) managerial services provided in conjunction with the production of qualified export receipts.

To qualify as export property, the exported merchandise must be the product of American industry or agriculture, not more than 50 percent of the fair market value of which is attributable to foreign components, and it must be held in the normal course of trade for sale, rental, or use outside the United States. Specifically excluded from the definition of export property are goods sold or leased between or among DISCs as well as sales or leases to a (now defunct) Western Hemisphere Trading Corporation (for more details visit the resource).

Qualified, export assets are defined as (1) “export property,”as defined above; (2) “business assets”used primarily in the sale or handling of export property, to include manufacturing facilities, farmlands, or other qualified export receipts—general means of production employed extensively for domestic consumption do not qualify; (3) trade receivables arising from transactions that produced qualified export receipts; (4) temporary investments of working capital; (5) producer’s loans; (6) securities of related foreign sales corporations; (7) certain obligations of the Export-Import Bank of the U.S. or the Foreign Credit Insurance Association, the Private Export Funding Corporation, or a domestic corporation formed for the purpose of financing sales of export property under an agreement with the Export-Import Bank; and (8) funds awaiting investment, and export-related interest.

Certain exclusions apply to DISCs on exports of copyrighted material, property that incurs depletion allowances, and “property in short supply,”as defined in Section 933(c) of the Internal Revenue Code.

A DISC does not pay income tax on its earnings, unless the earnings are distributed or deemed to be distributed; however, the stockholders of a DISC are treated, for tax purposes, as though they had received a dividend equal to 50 percent of the earnings of the Disc.

Most DISCs are formed as wholly owned subsidiaries of manufacturers with significant export sales.

In 1984, the law was amended to replace Disc with Foreign Sales Corporation (read this and related legal terms for further details). Taxes deferred under the DISC arrangement will be permanently forgiven.

(Main Author: William J. Miller)