ReDISCovering A Tax Classic: The Domestic International Sales Corporation

• Published date: 27 January 2022
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Income Tax, Transfer Pricing, Shareholders
• Law Firm: Freeman Law
• Author: Mr TL Fahring

Created by Congress in 1971 as a tax incentive for domestic exporters of U.S.-made goods, the domestic international sales corporation (DISC) remains a viable tool for small-to-medium sized exporters to reduce their federal income tax liability.¹

A DISC typically is just "a shell corporation with no employees, the only purpose of which is to act as an accounting vehicle for the earnings of its affiliated or parent corporation."² Special transfer pricing rules allow DISCs to "skim[] the export profits of the parent corporation by taking 'commissions' on the parent's export sales."³

This comes in handy because DISCs are not subject to federal income tax.⁴ Instead, the DISC's shareholders are treated as receiving a distribution equal to their pro rata shares of certain income earned by the DISC during the taxable year.⁵ The exact types and amounts of income on which these deemed distributions are based vary depending on the identity of the shareholders (individuals versus corporations) and the operations of the DISC.⁶ But, the gist is that federal income tax on the first $10 million of the DISC's qualified export receipts (more on those below) generally is deferred until either the DISC actually makes a distribution to its shareholders, or the shareholders sell their stock in the DISC.⁷

This deferral comes at a cost, however. The DISC's shareholders must pay interest each taxable year at the base period T-bill rate on the amount that their tax liabilities for the year would have been increased if they had included their pro rata shares of the DISC's deferred income as gross income in that year.⁸

What is a DISC?

A DISC is a corporation formed under the laws of any U.S. state or the District of Columbia that, during any taxable year, meets the following requirements:

• 95% or more of the corporation's gross receipts are qualified export receipts;
• the adjusted basis of the corporation's qualified export assets is at least 95% of the adjusted basis of all of the corporation's assets as of the end of the taxable year;
• the corporation does not have more than one class of stock and the par value or stated value of its outstanding stock is at least $2,500 on each day of the taxable year; and
• the corporation has made an election to be treated as a DISC for the taxable year and keeps its own books and records.⁹

Certain domestic corporations, however, are ineligible to be treated as a DISC. These include tax exempt organizations, personal holding companies, financial...