The Operation and Effect 

of the Domestic International 

Sales Corporation Legislation 

1979 Annual Report 

Department of the Treasury 

April1981 
THE SECRETARY OF THE TREASURY 

WASHINGTON 20220 

Dear Mr. Speaker: 2 7 APP 1981 

Section 506 of Public Law 92-178, the Revenue Act of 

1971, provides that "the Secretary of the Treasury shall, 

commencing for the calendar year 1972, submit an annual 

report to the Congress within 15-1/2 months following the 

close of each calendar year setting forth an analysis of 

the operation and effect of the provisions of" Title V of 

that Act, which authorizes the creation of domestic 

international sales corporations. 

Pursuant to that section, I hereby submit the eighth 

annual report entitled "The Operation and Effect of the 

Domestic International Sales Corporation Legislation." 

I am sending a similar letter to the President of the 

Senate. 

The Honorable 

Thomas P. O'Nelll 

Sincerely, 

~7- A-eM~ Donald T. Regan '7 

Speaker of the House of Representatives 

Washington, D.C. 20515 

Enclosure 
Chapter 1. 

Chapter 2 . 

Chapter 3 . 

Chapter 4 . 

Chapter 5. 

Appendix A 

Appendix B 

Appendix C 

TABLE OF CONTENTS 

Introduction and Summary 

History and Provisions of DISC Statute 

The Effect of DISC on the Level and 

Structure of U.S. Trade 

Effect of DISC on Tax Revenues 

General Statistical Information 

Definitions and Sampling Procedure 

Review of the Limitations of the 

Methodology Used in Previous 

Reports to Estimate the DISC 

Effect on Exports 

Information Used to Estimate DISC Effect 

Page 

1 

4 

8 

17 

26 

34 

37 

39 
TABLES IN THE REPORT 

Page 

Figure 1 12 

Table 3-1 Gross Receipts, Net Income and Tax Deferred 

Income by Major Product Class - DISC Year 1979 13 

Table 3-2 Estimated Reduction in Exports if DISC Were 

Eliminated - DISC Year 1979 15 

Table 4-1 Revenue Cost Estimates and Projections, 

Actual tax Rates and DISC Provisions 19 

Table 4-2 Gross Receipts, Net Income and Tax-deferred 

Income by Asset Size of Corporate Majority 

Shareholder - DISC Year 1979 21 

Table 4-3 Gross Receipts, Net Income and Tax-deferred 

Income Size of Gross Receipts of the DISC -

DISC Year 1979 22 

Table 4-4 Gross Receipts, Net Income and Tax-deferred 

Income by Size of Net Income - DISC Year 1979 23 

Table 4-5 DISC Elections 25 

Table 5-l Historical Statistics, DISC Years 1976-1979 27 

Table 5-2 Gross Receipts, Net Income and Tax-deferred 

Income by Accounting Period - DISC Year 1979 28 

Table 5-3 Gross Receipts, Net Income and Tax-deferred 

Income by Pricing Method - DISC Year 1979 29 

Table 5-4 Balance Sheet Statistics - DISC Year 1979 31 

Table 5-5 Income Statement Statistics 32 

Table A-1 Summary of Sampling Results 36 

Table C-1 Price Elasticities of Export Demand and 

Supply Assumed in Each Major Category 39 

Table C-2 Specific Products in Each Major Category 40 
-1-

Chapter 1 - Introduction and Summary 

This report is the eighth in an annual series on the operqtion and effect of the domestic international sales corporation 

(DISC) legislation. A DISC is a special corporation that allows 

the deferral of income tax on a portion of export profits. The 

report covers the seventh full year of DISC operations, referred 

to as DISC year 1979. It presents statistical estimates derived 

from a sample of tax returns, Form 1120-DISC, filed for 

accounting periods ending between July 1, 1978 and June 30, 

1979. !/ 

The scope of DISC activity measured both by export receipts 

and net income continued to expand in DISC year 1979. The number 

of active DISCs increased from 6, 665 to 7, 208, reversing the 

decline in the previous year. DISC manufactured exports as a 

share of total u.s. manufactured exports rose from 60.7 percent 

in DISC year 1978 to 65.7 percent in DISC year 1979. 2/ 

Chapter 2 discusses the 1971 DISC legislation and the 

modifications to the original legislation in the Tax Reduction 

Act of 1975 and the Tax Reform Act of 1976. 

!/ 

'!:_/ 

Because the majority of DISCs have tax years ending in 

December 1978 or January 1979, roughly 82.7 percent of the 

exports reported in DISC year 1979 occurred in calendar year 

1978. Consequently, activities in 1978 are major 

determinants of the results reported for DISC year 1979. 

Statistics on DISC exports of nonmanufactured products, 

specifically agricultural products, exceed actual u.s. 

exports from all sources by a substantial margin because of 

sales between unrelated DISC. That is to say, one DISC may 

sell to another DISC--as long as the property sold is 

ultimately for direct use, consumption, or sale outside the 

United States, its sale is a qualified export receipt. 

Therefore, comparisons between DISC exports and total u.s. 

exports of agricultural products do not lead to any meaningful comparisons. Inter-DISC sales may also add some error to 

the statistics on manufactured exports, but the error is not 

believed to be large. 
-2-

Chapter 3 discusses the impact of the DISC legislation on 

U.S. exports. Previous DISC reports have presented a specific, 

although qualified, estimate of the impact of the DISC legislation on U.S. exports by comparing the growth of DISC and non-DISC 

exports. A similar estimate will not be made in the current 

report because the 1 imitations of the earlier methodology have 

become more apparent. The shortcomings of the methodology were 

alluded to in last year's report and are explained in Appendix B 

of this report. 

Instead of a single estimate of the extent to which DISC 

increased exports in DISC year 1979 over what they would otherwise have been, Chapter 3 offers a range of between $4.5 billion 

and $7.0 billion. This range is based on a consideration of the 

conditions of demand and supply in various product categories. 

DISC tax savings increase the profitability of exports, and 

therefore stimulate an additional supply of exports. The extent 

to which export supply is stimulated depends on the responsiveness of supply to the change in the profitability of capital used 

for export production. 

U.S. exports are class if led into four basic categories with 

differing supply and demand behav lor. In most cases the supply 

of output to foreign markets is extremely responsive since it 

represents the diversion of output from domestic consumption, 

which can be instantaneous. If the return from diverting output 

is positive, the destination of the product will change until the 

return from selling in either market is identical. In the case 

of many goods, total output is also highly responsive to 

increased profitability because they are produced with standard 

technologies. Labor and capital can therefore be readily adapted 

to expanding product ion. The responsiveness of demand varies 

among product categories depending on the differentation of 

products in world trade. Some products, including agricultural 

goods, are highly standardized, and foreign demand is therefore 

highly elastic. In other cases there may be somewhat more 

differentation because of the necessity to tailor goods to 

particular markets. While it is reasonable to assume these 

systematic differences in supply and demand elasticities, it is 

difficult to be precise about the exact elasticity values in each 

category. It is, therefore, necessary in some cases to use a 

range of demand or supply elasticities, which results in the $4.5 

to $7.0 billion range indicated. 

The $4.5 to $7.0 bill ion range for the effect of DISC on 

exports does not take into account the second round effect 

through flexible exchange rates. The change in tax on export 

profits causes a shift in the u.s. supply of exports, which 

results in more exports. The increase in exports will lead to an 

appreciation of the dollar which will stimulate an increase in 

u.s. imports. In the long run, there will be somewhat more 

exports and also an increase in imports. 
-3-

Furthermore, the increase in exports draws capital into 

industries producing exports. This may simply be a shift from 

elsewhere in the corporate sector, e.g., from import competing 

industries; it may be new savings stimulated by the cut in taxes; 

or it may be capital attracted from the noncorporate sector or 

from abroad. The lower taxation of exporting firms reduces their 

overall cost of capital. 

As shown in Chapter 4, the revenue cost of DISC in DISC year 

1979 was $994 million, assuming no behavorial change due to DISC. 

This amounted to a 36 percent increase over DISC year 1978, somewhat less than had been projected in previous reports. There had 

been a 35 percent decline in revenue costs from DISC year 1976 to 

DISC year 1977 because of the incremental and other provisions of 

the Tax Reform Act of 1976. 3/ There was a further, but small, 

decline in DISC year 1978 as-all DISCs became subject to the incremental provision compared to somewhat more than 70 percent in 

the previous year. The large increase in DISC year 1979 in part 

reflects the 23 percent increase in DISC income. It is also due 

to the increase in the DISC deferral rate since the base years 

used to apply the incremental rules did not change between 1978 

and 1979. In making the no behavorial change revenue estimates, 

no account is taken of the fact that, in the absence of DISC, 

total exports and profit margins might be different and total 

corporate profits might therefore be different without DISC. 

Summary income and balance sheet statistics derived from DISC 

returns are presented in Chapter 5. The consolidated prof it 

margin earned on DISC exports of manufactured goods increased 

from 13.1 percent in DISC year 1978 to 14.1 percent in DISC year 

1979. 4/ Tax deferred income was 18.3 percent of the consol idated "Income from manufactured exports by DISCs. Net income 

reported by all DISCs was $6.4 billion. Transportation 

equipment, non-electrical machinery, and chemicals in that 

order -- accounted for the largest dollar amounts of DISC income. 

'}/ The Act , w h i c h 

restricted DISC 

export sales. 

is discussed more fully in 

benefits t o increased, rather 

Chapter 2, 

than total, 

!/ As noted in footnote 2, statistics for DISC exports of 

nonmanufactured products, specifically agricultural products, 

are overstated relative to actual exports because of interDISC sales. Thus, the ratio between DISC net income and 

gross receipts for agricultural products does not represent 

the true rate of return on DISC exports of these products. 
-4-

Chapter 2 - Bistor* and Provisions of DISC Statute 

Provisions of t e Original DISC Legislat1on 

Title V of the Revenue Act of 1971 provided for the creation 

of Domestic International Sales Corporations (DISCs). Its 

objective was to stimulate an increase in exports by lowering the 

effective rate of taxation of export income. The legislation 

provided a tax deferral for part of the export income channeled 

through a DISC. A DISC is exempt from federal income tax, but 

its shareholders are taxable on dividends distributed or deemed 

distributed by a DISC. Until 1976, the shareholders of a DISC 

were generally deemed to receive an annual dividend equal to one 

half of the DISC's taxable income, even if the DISC distributed 

less. This deemed distribution was fully taxable to the shareholders. Federal income tax could be deferred on the remaining 

half of the DISC's taxable income, until the income was actually 

distributed to the DISC shareholders, a shareholder disposed of 

the DISC stock, the DISC was liquidated, the corporation ceased 

to qualify as a DISC, or the DISC election was terminated or 

revoked by the shareholder(s). 

To qualify for tax exempt ion, a DISC must have been incorporated under the laws of any state or the District of Columbia, 

have only one class of stock, have issued outstanding capital 

stock with a par or stated value of at least $2,500, have elected 

to be treated as a DISC, and have satisfied the "gross receipts" 

and "gross assets• tests. 

The gross receipts test required that at least 95 percent of 

the corporation's gross receipts consist of "qual if led export 

receipts." In general, qualified export receipts were to be 

derived from the sale or lease for use outside the United States 

of "export property," or from the furnishing of services related 

and subsidiary to the sale or lease of export property. Also 

included were divide.nds on stock of a •related foreign export 

corporation" and interest on any obligation which was a 

"qualified export asset." "Export property" was defined as 

property manufactured, produced, grown or extracted in the United 

States. Exports subsidized by the u.s. Government or exports 

intended for use in the United States did not qualify as export 

property. A DISC could not engage in producing, growing, or 

manufacturing export property. 

The gross assets test required that at least 95 percent of 

the corporation's assets be qualified export assets. In general, 

qualified export assets were inventories of export property, 

necessary operational equipment and supplies, trade receivables 
-5-

from export sales (including commissions receivable), producer's 

loans, working capital, investments in related foreign export 

corporations, obligations issued, guaranteed, or insured by the 

Export-Import Bank or the Foreign Credit Insurance Association, 

and obligations of domestic corporations organized solely to 

finance export sales under guaranty agreements with the 

Export-Import Bank. 

The law also provided that even if a DISC failed to meet 

either the gross receipts or gross assets test, it could continue 

to qualify as a DISC by making a pro-rata distribution to its 

shareholders equal to the portion of the income attributable to 

the ineligible receipts or equal to the fair market value of the 

unqualified assets, depending on the nature of the disqualification. However, if a DISC were disqualified, or otherwise 

terminated its status as a DISC, the deferred tax became payable 

over a period of time equal to the number of years the DISC had 

been in existence, up to a maximum of 10 years. 

A DISC usually acquires export property from its parent 

corporation or an affiliated corporation ("related supplier") and 

then sells the property abroad; however, it can act simply as a 

commission agent. In many cases, a DISC is a "paper" corporation 

without any employees or real operations. The method used for 

allocating income between a DISC and its related suppliers therefore is an important part of the DISC statute. The allocation is 

achieved through special intercompany pricing rules which permit 

the DISC to realize taxable income in an amount which does not 

exceed the greater of: 

(a) 4 percent of the qualified export receipts 

attributable to the sale of export property plus 10 

percent of related "export promotion expenses", 

defined as ordinary and necessary expenses incurred 

to obtain qualified export receipts (referred to as 

the 4 percent method); 

(b) 50 percent of the combined taxable income 

of the DISC and its related supplier attributable 

to qualified export receipts plus 10 percent of 

related "export promotion expenses• (referred to as 

the so-so method); or 

(c) taxable income based upon the price 

actually charged the DISC by its related supplier 

if that price is justifiable on an arm's-length 

basis (referred to as the arm's-length method). 
-6-

Neither the 4 percent method nor the 50-50 method can be 

applied in such a way as to cause a loss to the related supplier 

while the DISC is earning a net profit. These special rules 

allow exporters to allocate more income to a DISC, and thus to 

defer a larger portion of their total tax burden, than they would 

be able to under the normal arm's-length rule. 

Statutory Amendments 

The Tax Reduction Act of 1975 denied DISC benefits to profits 

arising from exports of products in short domestic supply, as 

determined by the Commerce Department under the Export Administration Act of 1969 or by Executive Order of the President. The 

Act also removed DISC benefits from exports of natural resource 

products, such as oil, gas, and minerals, subject to a depleti on 

allowance. The Tax Reform Act of 1976, however, restored DISC 

benefits to these natural resource products for sales made 

pursuant to fixed contracts entered into before March 19, 1975, 

and consummated prior to March 19, 1980. It also excluded 

renewable resources, such as timber, from the natural resource 

products ineligible for DISC benefits. 

The incremental provision in the Tax Reform Act of 1976 

reduced DISC benefits for elig i ble export products by about 40 

percent for taxable years beginning after December 31, 1975. 1/ 

Under these provisions, applicable to accounting perioas 

beginning after December 31, 1975, DISC benefits (deferral of tax 

on one half of profits) are limited to income attributable to 

export gross receipts in excess of 67 percent of average export 

gross receipts in a 4-year base period • 

. !/ The amount of the reduction i s estimated by comparing the 

ratios, for periods before and after the 1 976 Act was 

effective, of DISCs' tax-deferred income to net income . 

Statistics in the 1977 and 1 978 Reports indicate that th i s 

ratio was .49 in the last full year before the Act came into 

effect, and .29 in the f i rst full year to which the Act 

applied (the last part of DISC year 1977 and the first part 

of DISC year 1978). The ratio of tax-deferred income to ne t 

income increased to 32.4 percent in DISC year 1979 because 

the base period remained unchanged. The ratio will increase 

further in 1980 and 1981, as the number of years between the 

end of the base period and the current taxable year rises 

from two to four. 
-7-

For taxable years beginning in 1976 through 1979, the base 

period years are 1972 through 1975. Starting with taxable years 

beginning in 1980, the base period will be advanced each year. 

For example, the base period will be 1973 through 1976 for taxable years beginning in 1980, and 1974 through 1977 for taxable 

years beginning in 1981. 2/ DISCs with incomes of $100,000 or 

less are exempted from the incremental rule. This exempt ion is 

phased out over the $100,000 to $150,000 income range. 

In applying the incremental rule, a DISC's export gross 

receipts are treated as equal to zero for those base period years 

in which the DISC did not exist. In order to prevent a control1 ing shareholder from gaining an advantage by shifting exports 

from one DISC to another, the sales of all DISCs that are part of 

a controlled group are combined in calculating base-period 

exports. Appropriate allowance is made for base-period sales of 

products no longer fully eligible for DISC benefits, such as 

natural resource products. 

The 1976 Act made additional amendments to the DISC 

legislation. The most important of these was to reduce the DISC 

deferral o~ sales of military goods to one half the amount which 

would otherwise be allowed. The 1976 Act also lengthened the 

period for recapture of the deferred tax, in the event of disqualification or termination of DISC status, to twice the number 

of years of the DISC's existence, up to a maximum period of 10 

years. 

~/ For an analysis of the effect of the incremental provlSlOn on 

the incentive to expand exports, see the 1976 Report, pages 

15-16 and 53-58. These pages demonstrate that, for the same 

increase in tax revenue, an across-the-board reduction in the 

DISC defe rral rate might have had a slightly more favorable 

impact on the incentive to expand exports than the more 

complicated 1976 provision does. 
-8-

Chapter 3 - The Effect of DISC on the Level and Structure 

of U.S. Trade 

In a departure from previous reports, this report offers a 

range of estimates of the impact of-DISC on exports based on 

assumed responses to increased supplies made possible by-DISC. 

Previous reports compared the growth in DISC and non-DISC exports 

and presented a specific estimate of the impact of DISC on 

exports. This DISC/non-DISC comparison is not used in this 

year's report because of limitations explained in Appendix B. 

Any attempt to estimate the precise impact of DISC on exports 

is complicated by the many factors which contributed to the $100 

billion growth in exports between 1971 and 1978. These include: 

.!/ 

~I 

1. The substantial domestic and worldwide inflation during 

the period. For example, the $100 billion increase in the 

value of U.S. exports from 1971 to 1978 represents an 

increase in the real (deflated) volume of exports of 62 

percent combined with a 104 percent increase in prices. 

2. The rapid expansion of overall world trade. While U.S. 

exports increased substantially, the u.s. share of free world 

exports declined from 19.7 percent in 1971 to 17.0 percent in 

1978. 1/ In part this was due to the rapid growth of productive capacity in almost all major countries. The ratio of 

exports to GNP also increased in many countries: from 4.1 

percent in 1971 to 6.6 percent in 1978 in the u.s., from 18.0 

percent to 22.3 percent in Germany, and from 16.1 percent to 

23.2 percent in the United Kingdom. ~/ 

All aggregate trade data are taken from the quarterly publication by the u.s. Department of Commerce, International 

Economic Indicators. 

The conspicuous exception is Japan in which exports as a 

percentage of GNP were basically unchanged from 1971 to 1978. 

This indicates the importance of the expansion in overall 

productive capacity in explaining Japanese export performance. The difference between the falling U.S. share of 

world trade and the simultaneous increase in u.s. exports as 

a percentage of domestic GNP is an example of the difficulty 

in evaluating u.s. export performance. 
-9-

3. The devaluation of the dollar relative to major 

foreign currencies. The value of the dollar fell by 14.5 

percent on a trade weighted basis from December 1971 to 

December 1978, making u.s. exports more attractive to foreign 

purchasers. The devaluation of the dollar since 1971 did not 

simply compensate for higher inflation in the U.S. compared 

to our trading partners over the period. In fact, between 

March 1973 and December 1978, the real effective value of the 

dollar, i.e., adjusted for inflation in each country, 

declined somewhat more than the nominal value. ll 

DISC increases the profitability of exporting and therefore 

stimulates an increase in export supply by U.S. producers. Labor 

and capital are drawn into the export sector. The extent to 

which a reduction in costs or an increase in price induces the 

expanded production of exports is indicated by the price 

elasticity of supply. The stimulating effect of DISC on exports 

therefore depends on supply and demand responses, combined with 

the shift in export supply brought about by DISC. 

The impact of DISC on exports is estimated by first 

classifying the specific products 1 isted in Table 3-1 into four 

categories with differing supply and demand behavior. The 

responsiveness of export supply is generally assumed to be very 

high. One reason is that output can easily be diverted from 

domestic consumption, which for most goods is much larger than 

export demand. If the return from diverting output is positive, 

the destination of sales will change until the return from 

selling in either market is identical. Furthermore, many goods 

are produced with standard, widely diffused technologies so that 

labor and capital can easily be shifted from other uses in order 

to expand output. Demand is also highly responsive where 

standardized commodities are sold in many markets, as in the case 

of farm products. The responsiveness of demand is somewhat lower 

in cases in which products are more differentiated, or have to be 

adapted to particular markets. 

See World Financial Markets, published monthly by Morgan 

Guaranty Trust. March l973 is the base for their real 

exchange rate calculations. 
-10-

The four categories into which products are classified are: 

1. Nonmanufactured products (mainly agricultural commodi ties) • These are products whose demand is very 

highly responsive to price changes because identical 

products are supplied and demanded by many countries. 

For example, grains are sold in standard grades in many 

markets. The elasticity of supply is not as high as in 

manufacturing, however, because of the constraints 

imposed by the available agricultural land or mineral 

resources. Furthermore, a significant share of u.s. 

output is already exported so that a large percentage 

increase in exports requires a significant increase in 

domestic production. 

2. Basic manufacturing industries not requiring 

advanced technology. These products include textiles, 

rubber, fabricated metal products, and transportation 

equipment other than aircraft. Since these products use 

relatively standard technologies, capital and labor can 

easily be adapted to expanded production. Supply is 

therefore very elastic. Furthermore, the elasticity of 

demand is also high because products tend to be 

relatively standardized in most world markets. 

3. High technology manufactured products. Examples 

include chemicals, aircraft, electrical machinery and 

equipment, and office machinery. It is assumed that 

demand is somewhat less elastic than category 2. The 

high technological level reduces the number of countries 

that may be alternative sources of supply. Products are 

also more likely to be differentiated, which would also 

reduce the elasticity of demand. 

4. Resource-related manufacturing products. These include paper, lumber, and nonferrous metals. Production 

of these products is constrained by the availability of 

some natural resource in the U.S. Products tend to be 

standardized. This category is therefore close in 

character to nonmanufactured products in having very 

elastic demand, but lower supply elasticities than other 

manufactured products. 

The particular products in each category are listed in 

Appendix c. Appendix c also gives the elasticities of demand and 

supply assumed in each category. 
-11-

Figure 1 illustrates the analysis of the change in exports 

that would occur if DISC were eliminated. The example depicted is 

for an export such as an agricultural good with a very high 

demand elasticity. DD and SS are the current demand and supply 

schedules respectively. The current level of exports is OX and 

the price is XA. The elimination of DISC decreases export 

supply, i.e . , shifts the supply of export schedule upwards to 

S'S' because it reduces the after-tax profit from producing any 

level of exports. If a price of XA were required, with DISC, to 

induce producers to produce OX of exports, then without DISC, a 

price of XB would be needed. But since that price cannot be 

obtained with the demand represented by DD, OX of exports will 

not be supplied. 

The magnitude of BA, the vertical shift in the supply 

schedule, depends on the DISC tax saving per dollar of capital 

devoted to producing exports. Exporters would be willing to 

continue to supply OX if they could earn the same after-tax 

profit per unit of such capital. The DISC tax saving per unit of 

capital is approximated by the reduction in tax on the pre-tax 

return per unit of capital used. This reduction depends on the 

percentage of profits that can be deferred and the marginal 

corporate tax rate {48 percent for DISC year 1979). 

As a result of the shift in supply resulting from the 

elimination of DISC, exports fall to OY. More generally, the 

magnitude of the changes in the quantity of exports depends on 

the slopes of the demand and supply schedules in each category. 

The analysis of the reduction in the value of exports if DISC 

were eliminated is summarized in Table 3-2. The overall 

reduction in the value of exports is in the range of $4.5 to $7.0 

billion. The relatively modest reduction of exports of nonmanufactured products reflects the small DISC-induced shift in 

supply. Exports of both basic and high technology manufactured 

products decline substantially. Although demand in high technology products is assumed to be somewhat less price sensitive 

than basic manufactured products, the decline in exports is 

substantial because the DISC induced shift in supply is large. 
-1 2-

Figure 1 

(f) 

t 

0 

a. 

X 

w 

-0 

Q) 

s' u 

"i:: 

a. 

s 

0 y X Quantity of Exports 
Table 3-1 

Gross Receipts, Net Income and Tax Deferred Income by Major Product Class 1/ - DISC year 1979 

(Dollar Amounts in Millions) -

: Deferred- Tax as 

Major Product Class : Number of : Gross : Net Income : Tax-deferred : a Percent of 

Returns : Receipts : : Income :Gross ReceiEts 3/ 

Total 7,208 99 ,b04 6 ,402. 1 2, 071.3 1.0 

Nonmanufactured products 934 26,038 478.9 170.6 0.3 

Agricultural products 299 24 , 616 341.6 119.4 0.2 

Grains lUO 22 , 5lb 278.9 97.3 0. 2 

Other agricultural products 192 2,luu 62 . 7 22.3 0.5 

Mineral products 114 333 10.7 3.7 0. 5 

Other 521 l,U89 126 . 6 47.5 2.1 

Manufactured products 2/ 6 , 274 73 , 566 5,923.1 1,9u0.7 1.2 

Ordnance and accessories 46 247 28 . 7 6.3 1.2 

Food and kindred products 270 2,592 1133.9 65.1 1.2 

Meat products 73 633 34.0 12.2 0.9 

Canned fruits, vegetables, seafood 64 514 48.9 20 .2 1.9 

Grain mill products 42 647 46.8 15.0 1.1 

Tobacco manufactures 10 715 71.0 26.0 1.7 

Textile mill products 243 9n 57.4 18.4 0.9 

Apparel, etc. 137 245 11.0 4.5 0. 9 

Lumber, etc., except furniture 190 1,947 71.5 22 . 5 0.6 

Saw and planing mill products, logging 34 91;8 22.2 6. 0 0.3 

Millwork, veneer, etc. 54 198 10 . 2 3.4 0.8 

Furniture and fixtur e s 39 2fi 3. 3 1.5 2.6 

Paper and allied products 162 1,525 102 . 3 25.2 0.8 

Printing, publishing , etc. 84 285 29.2 9.9 1.7 

Chemicals and allied products 507 9,491 910.2 288.4 1.5 

Inorganic, organic chemicals 78 4,339 476 . 1 152.0 1.7 

Plastics materials, etc., including fibers 81 2,ul9 1131.5 60 . 7 1.4 

Drugs 44 5u6 87.2 25 . 5 2.4 

Agricultural 74 1,262 51.6 13.1 0.5 

Rubber and miscellaneous plastic pLoducts 141 640 41.9 13 . 8 1.0 

Leather and leather products 11() 1,358 13.4 5.1 0.2 

I_ 
Table 3-1 Continued 

: Deferred Tax as 

Major Product Class Number of : Gross : Net Income : Tax-deferred : a Percent of 

: Returns : Receipts : __ :_ Income :Gross Receipts 3/ 

Stone, clay, glass and concrete products 

Primary metal industries 

Iron and steel industries 

Fabricated metal products 

Structural metal products 

Cutlery, etc. 

Heating and plumbing 

Machinery, except electrical 

Engines and turbines 

Farm machinery and equipment 

Construction, mining, etc. 

Metal working 

Special industry 

Office, etc. 

Electrical Machinery and Equipment 

Transmission and distribution equipment 

Household appliances 

Communications equipment 

Electronic components, etc . Transportation equipment 

Motor vehicles and equipment 

Aircraft and parts 

Prof. and scientific instruments, etc. 

Research instruments 

Physical measuring instruments 

Surgical, medical, dental, etc. 

Photographic equipment 

All other manufactures 

Off ice of the Secreta-ry-or-the Treasury 

Office of Tax Analysis 

71 

175 

16 

6US 

93 

90 

59 

1,225 

34 

62 

183 

88 

363 

72 

1,006 

27 

35 

104 

407 

441 

221 

164 

371 

72 

131 

117 

25 

441 

665 

1,36b 

118 

2,774 

363 

164 

99 

15,688 

3, 062 

921 

5,116 

380 

1,890 

1,989 

8,885 

1,023 

898 

821 

3,482 

18,716 

11,1U2 

7,396 

3,851 

760 

725 

536 

1, 718 

1,555 

62.7 

76.4 

9.2 

223.9 

33.3 

14.5 

5.3 

1,327.1 

260 . 3 

40.5 

392.8 

34.3 

166.0 

233.6 

801.4 

125.8 

64.8 

81.1 

309 . 6 

1,345.4 

671.0 

657.4 

460.9 

73.1 

73 .2 

52 . 7 

253.4 

118.1 

21.7 

22 . 6 

2.8 

78.9 

11.9 

5.9 

2.0 

424.3 

77.6 

14.5 

124.3 

10.7 

56.2 

83 . 2 

278.9 

3!:! .4 

21.4 

27 .6 

109.9 

366.9 

207.31 

174.5 

157.0 

26.0 

26.6 

19.9 

81.6 

43.9 

1.6 

0.8 

1.1 

1.4 

1.6 

1.7 

1.0 

1.3 

1.2 

0 . 8 

1.2 

1.4 

1.4 

2.0 

1.5 

1.8 

1.1 

1.6 

1.5 

1.0 

0.9 

1.1 

2.0 

1.6 

1.8 

1.8 

2.3 

1.4 

!I Classification is based on the product or product class accounting for the largest portion of gross receipts. 

2/ Statistics on DISC sales of agricultural products exceed U.S. exports from all sources by a substantial margin 

- because of inter-DISC sales. Therefore, the ratio of net income to gross receipts understates the profit margin on 

exports of these products. 

1f Tax def~rred income X 0.48/Gross receipts. 
-15-

Table 3-2 

Es timated Reduction in Exports 

if DISC Were Eliminated - DISC Year 1979 

DISC SavLng Per : Percent Reduction : 

Product Category Dollar of Sales : in Value of Exports: 

(i n cents) (range) 

1. Norunanufactured 

Produc ts . 3 .9-1.5 

2. Basic 

Manufactures 1 . 0 7.7- 10 . 0 

3. High Technology 

Manufactures 1.5 4.9 - 9 . 0 

4. Resource Related 

Manufactures .9 4.3- 4. 7 

TOTAL 1. 0 4.5- 7.0 

OffLce of the Secretary of the Treasury 

Office of Tax Analysis 

Dec rease in 

Dollar value of 

Exports (billions) : 

• 2 - • 4 

2. 2 - 2. 9 

1.8 - 3.3 

• 3 - . 4 

4 . 5 - 7.0 
-16-

As noted earlier, the $4.5 to $7.0 billion increase in 

exports because of DISC is the direct effect before any induced 

change in the exchange rate. The initial increase in the dollar 

value of exports when DISC was enacted resulted in an appreciation of the dollar, increasing imports. !/ 

In addition to its impact on the level and composition of 

U.S. exports, DISC has other related effects which should be 

noted. One is the consequence of the increase in the value of 

the dollar following the DISC-induced expansion of exports. The 

higher value o f the dollar decreases the real cost of imports to 

all consumers of imported goods and services. In other words, 

they benefit because they obtain the same amount of imports at a 

lower price in dollars. ~/ 

The principal effect of DISC is that the expansion in export 

opportunities draws capital into the export sector. This capital 

may come from several sources. It may be attracted from elsewhere in the corporate sector producing import competing-goods, 

for example, or it may be attracted from the noncorporate sector. 

The new capital may also derive from new saving stimulated by the 

lower taxes on exports, or from foreign capital also attracted by 

the higher after tax returns. 

!/ 

~I 

There is some possibility that DISC exports displace non-DISC 

exports, but this effect is not 1 ikely to be significant. 

The circumstances in which exporters cannot use a DISC are 

very specific, as noted in Chapter 2. A DISC would not be 

used if the firm is making an overall loss. Mineral products 

benefiting from a percentage depletion allowance are 

excluded, as are those not intended for use outside the U.S. 

The latter would include goods exported for assembly and then 

reimported. DISC and non-DISC exports are therefore unlikely 

to be very close substitutes. 

The reduction in the price of imports may be more or less 

than the initial reduction in export prices. The appreciation of the dollar would be larger than the drop in export 

prices if, for example, the demand for products receiving the 

largest DISC incentive was more price sensitive than exports 

in general. 
-17-

Chapter 4 - Effect of DISC on Tax Revenues 

The revenue cost of DISC in DISC year 1979 was $994.2 

mill ion. The revenue cost is estimated by applying the then 

applicable corporate tax rate of 48 percent to the portion of 

DISC income on which tax is deferred. 1/ The tax-deferred income 

of a DISC is equal to its taxable income less its deemed 

d istr ibut ions. Under the original DISC legislation, the 

principal deemed distribution was 50 percent of adjusted taxable 

income. 2/ Thus, the ratio of deemed d istr ibut ions to DISC 

taxable income was 51 percent in DISC year 1976. 

For accounting periods beginning after December 31, 197 5, 

DISCs are subject to the incremental provision introduced by the 

Tax Reform Act of 1976. For these periods, DISC shareholders are 

deemed to receive, in place of 50 percent of DISC adjusted 

taxable income, all adjusted taxable income attributable to base 

period exports (defined as 67 percent of the average of the 

export gross receipts of the DISC during calendar years 1972 

through 1975), plus 50 percent of the excess of total adjusted 

taxable income over the amount · attributable to base period 

exports. 3/ As a result of the incremental provision, as well as 

other kinas of deemed d istr ibut ions provided by the Tax Reform 

Act of 1976, the ratio of deemed distributions to DISC taxable 

income was nearly 70 percent for DISC year 1977 and 71 percent 

for DISC year 1978. 4/ The deemed distribution rate decreased to 

67.6 percent in DISC year 1979 because the base period remained 

unchanged from 1978 • 

.!/ 

~I 

ll 

!/ 

The 48 percent tax rate is appropriate for DISC year 1979 

because the lower 46 percent rate only applies to taxable 

years beginning after December 31, 1978. 

Other deemed distributions were interest derived from 

producer's loans made by a DISC, certain kinds of capital 

gains recognized by a DISC, and the amount of foreign 

investment attributable to producer's loans for the taxable 

year. 

This base period applies to taxable years beginning in 1976 

through 1979. Starting with taxable years beginning in 1980, 

the base period is advanced each year. 

Additional deemed distributions which apply to accounting 

periods beginning after December 31, 1975, are SO percent of 

taxable income attributable to sales of military property, 

income attributable to international boycott activity, and 

the amount of illegal brib~s. 
-18-

The foregoing revenue estimates assume that the labor and 

capital producing DISC exports would have the same level of 

income in the absence of DISC, with the . only change being that 

the full corporate rate would apply to profits. This might be 

true, for example, if exports and pre-tax profit margins did not 

change or if the capital flowing into exports would have earned 

the same income elsewhere, but fully taxable at the regular 

corporate rate. In reality, economic responses may make the true 

revenue cost different from the $994.2 million estimate. In the 

absence of DISC, before-tax margins may increase to give 

exporters the same after tax return. In fact, this was assumed 

in the elasticity estimates in Chapter 3. In that case, the 

revenue estimate would be understated. On the other hand, there 

may be responses which reduce the revenue cost of DISC. By 

reducing the tax on the corporate sector, DISC will increase 

saving and attract capital from the noncorporate sector. The 

increased capital stock may also lead to higher levels of output, 

employment 1 and tax revenue. In the absence of DISC 1 exporters 

might have found other ways within existing law to •shelter" 

export profits. These and other behavor ial changes may have an 

impact on the revenue cost of DISC 1 but the magnitude of the 

offset cannot be estimated without more precise information on 

the adjustments taking place. 

The $994 million estimated revenue cost for DISC year 1979 is 

based on the assumption that DISC income would be taxable to the 

parent at the then effective rate of 48 percent in the year in 

which earned. The estimate understates the revenue cost of DISC 

in those cases where the existence of a DISC enables taxation of 

the deemed d istr ibut ion to be postponed until the next year. 

Such cases occur where the end of the DISC's fiscal year is one 

or two months later than the end of the parent corporation • s 

fiscal year. 

Table 4-1 presents the estimated revenue costs of DISC for 

calendar and fiscal years 1972 through 1978, as well as projected 

revenue costs for 1978 through 1986. 5/ Adjusting DISC income in 

DISC year 1979 to a calendar year basTs requires apportioning the 

income reported on all DISC returns filed for tax years which 

overlap calendar year 1978. This results in an estimate of DISC 

The $994 mill ion estimate refers to DISC year 1979, and is 

therefore to be distinguished from the calendar and fiscal 

year estimates in Table 4-1. 
Year 

(1) 

1972 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

1981 

1982 

1983 

1984 

1985 

1986 

.. 

. 

: Cost Under 

-19-

Table 4-1 

Revenue Cost Estimates and Projections, 

Actual Tax Rates and DISC Provisions 1/ 

(Millions of Dollars) -

Un er 

Present 

:Original Act Other 

(4) 

Law 3/ 

(2) (S} 

$ 3SO 

730 

1,120 

1,160 

1,160 $ 390 

1,200 4SO 

1,430 440 

1,690 420 

2,050 510 

2,2SO 590 

2,430 650 

2,610 740 

2,820 870 

3,040 1,020 

3,280 1,190 

$ 10 

40 

so 

so 

60 

70 

80 

100 

100 

120 

130 

130 

$ 3SO 

730 

1,120 

1,150 

730 

700 

940 

1,210 

1,470 

1,580 

1,680 

1,770 

1,830 

1,890 

1,960 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

Fiscal Year 

Receipts 

Foregone 

(Present Law) 

(6) !I 

$ 100 

460 

850 

1,130 

1,020 

720 

820 

1,060 

1,340 

1,600 

1,630 

1,730 

1,810 

1,870 

1,930 

The 1972 through 1978 figures are estimated from DISC returns. All 

other figures are projections. All figures are based on the assumption that in the absence of DISC, the earnings would be subject to 

tax at the corporate tax rate, which is 48 percent for 1972-78 and 46 

percent for 1979 and subsequent years. 

y 

y 

!I 

Net reduction in revenue costs as a result of changes provided for in 

the Tax Reduction Act of 1975 and the Tax Reform Act of 1976 (see 

Chapter 2 for details). 

Column (2) minus the sum of columns (3) and (4). 

Calculated on the basis of normal relationships between calendar year 

corporate t ax liabilities and fiscal year receipts. Fiscal years 

through 1976 end on June 30 of the corresponding calendar year, 

thereafte r on September 30. The transition quarter in 1976 is not 

shown separately. The receipts estimate for that quarter is $110 

million. The jump in rece ipts in fiscal 1981 followed by the small 

increase in FY 1982 reflects the speed up in estimated payments by 

large corporations as a result of the Omnibus Reconciliation Act of 

1980. 
-20-

revenue cost for calendar year 1978 of $940 million. As shown in 

column 3, the incremental provision reduced the revenue cost of 

the original DISC program by 31 percent in calendar year 1978. 

Tax savings provided by the other amendments to the original DISC 

program (i.e., reduced benefits for military exports and the 

exclusion of certain natural resource products from DISC 

benefits) reduced the revenue cost of the original legislation by 

an additional 3.5 percent in calendar year 1978. 

Distribution of DISC Benefits 

For corporate owners for which asset size is available, 62.7 

percent of the tax-deferred income of the DISCs in DISC year 1979 

accrued to the 6. 7 percent of the DISCs with parent companies 

having assets of at least $500 million (see Table 4-2). The 138 

DISCs with gross receipts of $100 million or more accounted for 

55.2 percent of all tax-deferred DISC income (see Table 4-3). 

The 93 DISCs with net incomes of $10 million or more accounted 

for 53.4 percent of all tax-deferred income (see Table 4-4). Ten 

DISC parents accounted for 24.5 percent of all tax-deferred 

income and 26.7 percent of all net income. 6/ 

Data on the distribution of tax-deferred income to DISCs 

owned directly or indirectly by foreign corporations are 

available only for DISC year 1975. They show that $85 million of 

DISC dividends -- 4 percent of the total -- were distributed to 

U.S. corporations with foreign owners; $2 million of DISC 

dividends 0.1 percent of the total were distributed 

directly to foreign corporations. 

~I The fact that the distribution of tax-deferred income was 

less concentrated than the distribution of DISC net income 

reflects the exemption of small DISCs from the incremental 

provision of the 1976 Tax Reform Act. 
Table 4-2 

Gross Receipts, Net Income and Tax-deferred Income by Asset Size of Corporate Majority Shareholder - DISC Year 1979 

(Dollar Amounts in Millions) 

Returns 

Asset Size of Corporate 

Majority Shareholder Number Percent 

of Total 

All Returns 

No Majority Shareholder or 

Assets not Available 

Returns with Majority 

Corporate Shareholder 

Total 

$1 under $10~,000 

$100,000 under $1,000,000 

$1 , 000 , 000 under $5,000,uOO 

$5,0uO , OOO under $1U , OUO,OUO 

$10 , 000,000 under $50,000,000 

$50 , 0oo,ooo under $100 , 0vo , ooo 

$lOO , OuO,OOO under $250,000 00~ 

$250,000,000 under $500,000,000 $~UO,UOO,OOO under $l, OOu , OOO,OOO 

$1,000,000,000 or more 

7, 208 

2, 230 

4, 978 

4,978 

64 

635 

1,495 

606 

l,lOG 

269 

291 

1135 

122 

211 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

* Less than 0.5 percent 

100.0 

30.9 

69.1 

100 . 0 

1.3 

12.8 

30.() 

12.2 

22.1 

5. 4 

5.8 

3.7 

2.5 

4.2 

Gross-Rec-eipts : Net Income : Tax-deferred Income 

Amount : Percent : Amount : Percent : Amount : Percent 

of Total : : of Total : : of Total 

99,604 100.0 6,402 .1 100 . 0 2, v71.3 100.0 

8,921 9.0 360 . 5 5. 6 140 . 7 6.8 

90,623 91.0 6,041.5 94 .4 1,930.6 93.2 

Returns with Majorit~ Cor~rate Shareholder 

90,623 100.0 6,()41.5 100.0 1,930.6 100.0 

53 0.1 2.7 * 1.1 0.1 

636 ().7 38 . 0 0. 6 17.0 0.9 

2,364 2.6 169 . 6 2. 8 70.3 3.6 

2, 286 2.5 118.2 2.() 48.7 2. 5 

14,877 16.4 544.5 9.0 197.0 10 . 2 

3,577 3.9 245.4 4.1 84 . 2 4.4 

5,207 5.7 429.4 7. 1 136.5 7.1 

8,764 9.7 5()3 . 0 8.3 164.8 8. 5 

9 ,421 10 .4 668 . 6 11.1 204 .9 10.6 

43,439 47.9 3,321.8 55 .0 1,006.1 52 .1 
Table 4-3 

Gross Receipts, Net Income and Tax-deferred Income by Size of Gross Receipts of the DISC - DISC year 1979 

(Dollar Amounts in Millions) 

Returns 

Sizes of Gross f<ec·eipts Number Percent 

of Total 

Total 

Zero Receipts 

$1 under $50,000 

$50,000 under $250,000 

$250 , 000 under ~1,000,000 

$l , OOO,Ouu unde.r $10,000,000 ~10,000,000 under $100,000,000 

$luo,ouo,ooo under $250,000,000 

$25U,OOO,OOU or more 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

• Less than 0.5 percent 

7,208 

544 

376 

866 

1,700 

2,740 

844 

90 

48 

100 . 0 

7.5 

5.2 

12.0 

23.6 

38.0 

11.7 

1.2 

U.7 

Gross Rece~ : Net Income : Tax-deferred Income 

Amount : Percent : Amount : Percent : Amount : Percent 

of Total : : of Total : : of Total 

All Returns 

99,604 100.0 6,402.1 100.0 2,071.3 100.0 

-- -- 25.9 0. 4 7.5 0. 4 

9 • 1.7 • 1.1 0. 1 

126 0. 1 13 . 0 0. 2 6. 9 0.3 

983 1.0 98.0 1.5 48 . 7 2 . 4 

9,400 9.4 726.2 11.3 274 . 6 13.3 

24,619 24.7 1,805.7 28. 2 590 . 9 28 . 5 

14,459 14 . 5 1,016.1 15. 9 322 . 1 15.6 

50,007 50.2 2, 715. 4 42 . 4 819 . 5 39.6 
Table 4-4 

Gross Receipts, Net Income and Tax-deferred Income by Size of Net Income - DISC year 1979 

(Dollar Amounts in Millions) 

Size of Net Income 

Returns : Gross Receipts : Net I ncome : Tax-deferred Income 

Number : Percent :Amount : Percent : Amount : Percent : Amount : Percent of 

of Total : : of Total : : of Total : : Net Income 

All returns 7,208 100 . 0 !19,604 100.0 6,402.1 lOU . O 2,u71 . 3 32.3 

Less: Deficit returns 748 10.4 565 0. 6 -26.9 -0.4 

Returns with zero net income 102 1.4 964 1.0 

Returns with net income 6,358 88.2 96,1)74 98.5 6,428. 9 100.4 2,071.3 32.3 

$1 under $1UO,OOO 3,241 45.0 3,162 3.2 120.2 1.9 57.3 47.7 

$100,000 under $200, 000 972 13. 5 2, 456 2.5 139. 3 2. 2 59.4 42.6 

$200,000 under $1,UOO,OOO 1,383 19.2 12,313 12.4 641.1 10 . 0 224.2 35 . 0 

$1,000,000 under $5,000,000 576 8. 0 19 , 194 19.3 1,254.9 19 . 6 407.2 32 . 4 

$5,000,000 under $10,000,000 96 1.3 8, 366 8.4 682.9 10.7 217 . 8 31.9 

$10,000,000 under $25,000,000 54 0.7 13,H8 13.8 a26 . 8 12 . 9 265.3 32.1 

$2S,Ouo,uoo under S50,ooo,ooo 20 0. 3 8,551 8.6 672.2 10 . 5 206. 6 30.7 

$50,000,uuu or more 16 0. 2 30 , 316 30.4 2,091.6 32 . 7 633.5 30.3 

Office of the Secretar y of the Treasury 

Office of Tax Analysis 
-24-

DISC Elections 

A total of 13,796 elections was made through February 1981 

(see Table 4-5) • This represents an increase of 1, 604, or 13 

percent, over February 1980. The continued increase in DISC 

elections supports the assumption that the use of DISC will 

increase over time. However, the data on DISC elections are not 

adjusted for DISCs that are inactive or that have been liquidated 

or have withdrawn their elections. 7/ 

7/ For example, for accounting periods ending between July 1, 

1978 and June 30, 19-79, 7,208 DISC returns were filed even 

though 10,144 DISC elections had been made as of February 28, 

1978. These two figures are chosen for comparison since a 

DISC election must be made, at the latest, within 90 days 

after the beginning of the DISC's taxable year, and the 

largest number of returns are for periods beginning in 

December 1977 and January 1978. The difference between these 

two figures reflects primarily the number of inactive DISCs, 

including newly created DISCs which have not yet begun 

operations. The number of DISC returns filed during DISC 

year 1979 increased by 543, or 8.1 percent, which is slightly 

faster than the growth in elections. This apparent decline 

in the percentage of inactive DISCs is consistent with the 

growth in profit margins and the decline in the percent of 

DISC returns with a deficit in DISC year 1979. 
-25-

Table 4-5 

DISC Elections 

End of Per1od Cumulative Total 

1972 - March 

June 

September 

December 

1973 - March 

June 

September 

December 

1974 - March 

June 

September 

December 

1975 - March 

June 

September 

December 

1976 - March 

June 

Septembe r 

December 

1977 - February 

June 

September 

December 

1978 - February 

June 

September 

December 

1979 - February 

June 

September 

December 

1980 - February 

June 

September 

December 

1981 - February 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

1,136 

2,412 

3,049 

3,439 

3,842 

4,164 

4,466 

4,825 

5,184 

5,570 

6,569 

6,738 

7,293 

7,653 

7,956 

8,258 

8,522 

8,805 

9,070 

9,331 

9,447 

9,718 

9,827 

10,024 

10,144 

10,341 

10,552 

10,780 

10,978 

11,285 

11,667 

11,924 

12,192 

12,645 

13,061 

13,489 

13,796 
-26-

Chapter 5 - General Statistical Information 

This Report covers the sixth full year of DISC operations. 

The tabulations are based on a sample of 2,039 tax returns, Form 

1120-DISC, filed by active DISCs for taxable periods ending 

between July 1, 1978, and June 30, 1979. This period is defined 

as DISC year 1979, although most of the activity it covers 

occurred in calendar year 1978. 1/ Table 5-1 presents the total 

number of DISC returns filed for DISC years 1975-78, as well as 

statistics on DISC receipts, net income, and assets for each of 

these years. 

DISC Income 

In DISC year 1979, net income attributable to DISC manufactured exports amounted to $5.9 billion. This figure is 120 

percent greater than the amount reported in the second DISC year, 

1974, and is 23 percent greater than net income reported in DISC 

year 1978. Because the 23 percent increase in net income 

slightly exceeded the 22 percent increase in DISC gross sales of 

manufactures, DISCs' average profit margin for all manufactured 

product classes rose from 8. 0 to 8.1 percent of sales between 

DISC years 1978 and 1979. Table 5-2 presents statistics on DISC 

receipts, net income, and tax-deferred income by accounting 

period in DISC year 1979. The weighted average of tax-deferred 

income as a percentage of net income was 32.4 percent. 

Table 5-3 presents data on the pricing methods used by DISCs. 

It shows that about 34.7 percent of DISC sales were reported as 

being subject to the 50-50 pricing method, 32.8 percent to the 4 

percent method, and 4.7 percent to the arm's-length pricing 

method. The remaining 27.8 percent of DISC sales were subject to 

some combination of these three methods or were shown on returns 

in which the pricing method could not be determined. This 

information can be used to estimate the combined profit margins 

of DISCs and their related suppliers. The average value of this 

combined margin for all manufactured exports sold through DISCs 

was 14.1 percent of gross sales in DISC year 1979. ~/ 

!/ 

~I 

DISC year 1979 is equivalent to statistical year 1978 as used 

by the Internal Revenue Service. See Appendix A for 

definitions and a description of the sampling procedure. 

For an explanation of the derivation of the combined profit 

margins, see pages 35-36 of the 1976 Report. 
-27-

Table 5-l 

Historical Statistics, DISC Years 1976-1979 

(Dollar Amounts in Millions) 

1976 1977 1978 

Nl.lllber of Returns, Total 6,431 6,911 6,665 

Full Year 5,844 6,421 6,316 

Part Year 833 490 349 

Gross !Eceipts, Total $73,22() $82,681 $85,887 

Normanufactured Products 20,469 y 23,997 y 25,521 

Manufactured Products 52,751 58,684 60,366 

Export Receipts, Total 73,220 82,681 85,887 

Canada n.a. 11,382 n.a. 

Latin American Republics n.a. 8,334 n.a. 

Europe n.a. 26,261 n.a. 

Japan n.a. 7,287 n.a. 

u.s. Destinations n.a. 4,691 n.a . All Other and Unallocated n.a. 24,726 n.a. 

Net Income 4,764 5,062 5,211 

Normanufactured Products 442 421 411 

Manufactured Products 4,322 4,651 4,800 

Tax-deferred Income 2,352 1,572 1,519 

Normanufactured Products 219 145 139 

Manufactured Products 2,133 1,427 1,380 

Total Assets, End of Year 11,832 14,678 15,955 

Trade Receivables 7,491 8,840 10,162 

Other Assets 4,341 5,838 5,793 

Accllllulated Income, Errl of Year 6,946 8,527 9,560 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

1980 

7,208 

6,768 

440 

99,603 

y 26,038 !I 

73,566 

99,604 

14,360 

11,691 

30,395 

8,927 

4,701 

29,530 

6,402 

480 

5,923 

2,071 

171 

1,901 

19,725 

12,416 

7,309 

11,383 

y Statistics on DISC sales of nonmanufactured products, specifically agricultural products, exceed U.S. exports from all sources by a substantial 

margin because of inter-DISC sales. Therefore , gross receipts of 

nonmanufactured products overstate exports of these products. 

n.a. -- not available 
Table 5-2 

Gross Receipts, Net Income and Tax-deferred Income by Accounting Period - DISC Year 1979 

(Dollar Amounts in Millions) 

Tax-aete-rrea 

Accounting Period Ending : Number of : Gross Receipts : Net Income : Tax- deferred : Income as a Per- : Returns : : : I.ncome : cent of Net Income 

All Returns 7, 2U8 99,604 6,402.1 2 , ()71.3 32.4 

Full Year Returns, All Periods 6,768 98,420 6,333.5 2,402.9 32.3 

July 19/9 457 2, 346 178 . 4 61.0 34.2 

August 19/9 271 946 72 . 9 24.9 34.2 

September 19"/Y 499 3,011 143.0 50.2 35.1 

October 1979 420 4, 262 321 . 8 104 . 8 32.6 

November 19i9 312 2,204 156.3 49.6 31.7 

December 1979 1,527 28,072 1,998.5 636.9 31.9 

January 1980 1,153 25,131 2,259.5 694 .8 30.6 

February 1980 273 5,180 336 .9 114. 0 33 . 8 

March 1980 484 6,154 187 . 5 63.7 34 .0 

April 19ts(J 365 3,009 211 . 0 7i.1 36.5 

May 1980 331 9,228 186.6 67.7 36 .3 

June 1980 676 9, 056 280 . U 98 .4 35. 1 

Part Year Returns, All Periods 44G 1,184 68.6 28.4 41.4 

Office o~the Secretary of the Treasury Office of Tax Analysis 
Table 5-3 

Gross Receipts, Net Income and Tax Deferred Income by Pricing Method - DISC Year 1979 

(Dollar Amounts in Millions) 

Pricing Method : Number of : 

Returns : 

All returns 7 , 208 

Returns reporting pricing method 5,812 

so-so method 2,874 

4 percent method 1,561 

Arm's-length method 991 

50-50 and 4 percent 375 

All other combinations 11 

Pricing method not determinable 1,396 

All retu.rns 934 

Returns reporting pricing method 568 

50-50 method 193 

4 percent method 163 

Arm's-length method 182 

All combinations 30 

Pricing method not determinable 366 

All returns 6,274 

Returns reporting pricing method 5244 

so-so method 2,681 

4 percent method 1,398 

Arm's-length method 809 

All combinations 356 

Pricin~ method not determinable 

Office of the Secretary of the Treasury 

1,030 

Office of Tax Analysis 

Net Income 

Gross : : Percent of 

Recekfts : Amount : Gross Receif2tS 

&£roducts 

99,604 6,402.1 6 . 4 

93,036 6 , 162.4 6.6 

34,546 3,849.1 11.1 

32,717 787.1 2.4 

4,734 319.6 6.8 

19,246 1 , 512.7 7.9 

1,843 53 . 9 2.9 

6,518 239.6 3 . 7 

Nonmanufactured 12roducts 

26,038 478 . 9 1.8 

22,849 440.1 1.9 

1,270 101.4 0 . 8 

18,502 259.9 1.4 

1,069 32. 8 3.1 

2,008 46.1 2.3 

3,188 41.9 1.3 

Manufactured Eroducts 

73,566 5,923.1 8.1 

70,237 5,722.4 8.1 

33,276 3,387.7 10.2 

14,215 527.2 3. 7 

3,665 286.9 7.8 

19 , 080 1,520.6 8.0 

3,329 200.8 6 . 0 

Tax-deferred 

Income 

2,071 . 3 

1,981.6 

1,145.3 

263.1 

111.5 

445.1 

16.4 

89.7 

170.6 

155.4 

36.7 

89.0 

12.4 

17. 4 

15.2 

1,900 . 7 

1,826.2 

1,108.7 

174 . 2 

99.1 

444.2 

74.4 
-30-

Balance Sheet Statistics 

Table 5-4 presents year-end balance sheet statistics. Total 

assets of DISCs amounted to $19.7 billion, 2.3 percent higher 

than the previous year's figure. Of these assets, 63 percent 

consisted of trade receivables (accounts and notes receivable). 

The second largest asset item was producer's loans, which were 20 

percent higher than in DISC year 1978. The category •other 

assets• increased by 42 percent between DISC year 1978 and 1979, 

after falling 23 percent the previous year. The next fastest 

growing category was Export-Import Bank obligations which grew 30 

percent. 

On the liabilities and capital side in the lower part of 

Table 5-4, the largest item was accumulated DISC income, 

amounting to $16.3 billion, 83 percent of the value of 

liabilities and stockholders' equity. The amount of accumulated 

DISC income was approximately equal to the difference between 

total reported DISC earnings of $30.9 billion through DISC year 

1979, and total reported actual DISC distributions of $13.4 

billion. 3/ Total actual DISC distributions through DISC year 

1979 were-$5.8 billion less than the amount deemed to have been 

distributed--and taxed--to shareholders. Retention of tax-paid 

earnings by DISCs presumably · reflects the financial incentives 

involved, notably the favorable tax treatment of interest earned 

on qualified export receivables and other investments. 

Income Statement Statistics 4/ 

Table 5-5 presents combined income statement statistics for 

all DISCs. While almost all of the qualified receipts of $34.4 

billion consisted of receipts from the sale of export property, 

about $1 billion constituted receipts from other sources. The 

largest item in this latter category was interest income, 

amounting to almost $700 million. 

!/ 

The difference between accumulated DISC income and total 

earnings less actual distributions is due to statistical and 

reporting errors. 

Note that, for income statement purposes, receipts include 

only the commissions in the case of goods sold on a 

commission basis. 
-31-

Table 5-4 

Balance Sheet Statistics - DISC year 1979 

(Millions of Dollars) 

Total assets 

Qualified assets, total 

Working capital 

Export-Import Bank obligations 

Trade receivables 

Export property 

Producer's loans 

Other 

Nonqualified assets 

Total liabilities and capital 

Liabilities, total 

Accounts payable 

Other current liabilities 

Mortages, notes, bonds payable in 

one year or more 

Other liabilities 

Capital accounts, total 

Capital stock and paid-in surplus 

Previously taxed income 

Tax-deferred income 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

All Products 

19,725 

10,624 

460 

1,200 

12,416 

901 

3,031 

1,616 

101 

19,725 

3,201 

1,857 

853 

177 

314 

16,524 

186 

4,954 

11,383 
-32-

Table 5-5 

Income Statement Statistics 

Total receipts 1/ 

Qualified export receipts, total 

Qualified receipts from property sales 

Other qualified receipts 

Leasing of export property 

Services related to qualified exports 

Engineering and architectural services 

Qualified dividends 

Interest on producer's loans 

Other interest 

Other qualified receipts 

Nonqualified receipts, total / 

Total deductions 

Cost of sales and operations 

Export promotion expenses 

Other expenses 

Total receipts less total deductions 

Net income 

Tax deferred and taxable income 

Total deemed distributions 

Attributable to base period export 

gross receipts 

All other deemed distributions 

Actual distributions 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

Number 

of Returns 

6,863 

6,853 

6,497 

3,418 

72 

229 

118 

41 

1,353 

2,189 

n.a. 

977 

6,221 

3,567 

3,568 

5, 577 

7,208 

7,106 

6,330 

6, 315 

1,309 

n.a. 

3,644 

Amount 

(Millions) 

34,445 

34,325 

33,300 

1,025 

52 

118 

135 

17 

211 

470 

23 

132 

28,005 

26,325 

1,016 

714 

6,389 

6,402 

6,427 

4,360 

1,895 

2,465 

3,174 

!/ For income statement purposes rece ipts include only the commission 

earned on commission sales. 

/ Net of adjustments to income. 

n.a. -- Not available. 
-33-

As would be expected, the largest deduct ion was the $26.3 

billion for cost of goods sold and cost of operations. The only 

other significant deduction was for export promotion expenses, 

amounting to just over $1 billion or one percent of the value of 

total DISC exports. 

Audit Results 

Substantial adjustments in DISC income were proposed in 

calendar year 1980 as a result of audit examinations. In total, 

DISC income was reduced by $312.7 mill ion and the income of 

parents was increased by the same amount. Tax liabilities 

increased by about $70 million. Most of the proposed adjustments 

were for the years from 1974 to 1977. More than 70 percent of 

the reduct ion of DISC income was due to intercompany pricing 

adjustments. Apparently these were largely the result of the 

failure of parents and their DISCs to have explicit written 

agreements on their exact pricing rules. The only other 

significant reason for proposed adjustments to DISC income was 

the disallowance of DISC status because the corporation did not 

meet the 95 percent export assets test in section 993 of the 

Internal Revenue Code. 
-34-

Appendix A -- Definitions and Sampling Procedure 

Definitions 

Unless otherwise indicated, the following definitions apply 

throughout this Report. 

1. DISC gross receipts. Gross receipts of a DISC include 

the full value of goods and services sold on a commission basis. 

This item is reported on Schedule N, Part I, Section A, Column 2 

of Form 1120-DISC. 1/ 

2. DISC net income. Net income of a DISC is gross receipts 

less costs and less deductions. It is reported on line 10 of 

page 1, Form 1120-DISC. Net income may be positive or negative. 

Of 7,208 DISC returns filed for DISC year 1979, only 748 showed 

net losses (i.e., negative net income}. 

3. DISC taxable income. Taxable income of a DISC is net 

income less net operat1ng loss deduction and dividends-received 

deduction. It is reported on line 12 of page 1, Form 1120-DISC. 

4. Tax-deferred income. The tax-deferred income of a DISC 

is the part of its taxable income which may be retained tax 

deferred by the DISC. It equals its taxable income less deemed 

distributions. For taxable years beg inning before January 1, 

1976, deemed distributions were the sum of (1) interest on 

producer 1 s loans, (2} certain capital gains, (3} one half of the 

excess of taxable income over the sum of ( 1) and ( 2) , and ( 4) 

foreign investment attributable to producer's loans for the 

taxable year. The Tax Reform Act of 1976 added several new types 

of deemed distributions and modified (3) above to conform. For 

taxable years beginning after December 31, 1975, deemed distributions were the sum of (1) adjusted taxable income attributable to 

base period export gross receipts; (2) interest on producer 1 s 

loans; (3) certain capital gains; (4} one half of taxable income 

attributable to mi 1 ita ry sales; (5) one half of the excess of 

taxable income over the sum of (1), (2}, (3), and (4); (6) income 

attributable to international boycott activity; {7) the amount of 

illegal bribes; and (8) foreign investment attributable to producer's loans for the taxable year. Total deemed distributions 

are reported on Schedule J, Part 1, line 17 of Form 1120-DISC. 

.!:/ All references to Form 1120-DISC are to the 1978 form, which 

appears in Appendix D. 
-35-

5. DISC year 1979. This is defined to cover accounting 

periods ended July 1, 1978, through June 30, 1979. DISC year 

1979 corresponds to SOI year 1978 in the Internal Revenue Service 

publications on the Statistics of Income. 

Sampling Procedure 

The statistical estimates presented in this Report are based 

on a stratified random sample of DISC returns. All DISCs with 

net income of $51 mill ion or more or with parent corporations 

having assets of $250 million or more were included in the sample 

(sampling rate of 100 percent). DISCs with less than $200,000 of 

net income and with parent corporations having assets of less 

than $50 miliTOn received prior to January 1980 were sampled at a 

10 percent rate and those received after December 1979 were 

sampled at a 20 percent rate. The remaining DISCs were sampled 

at a 40 percent rate. DISCs owned by individuals or partnerships 

were sampled only according to the amount of their net income. A 

full description of the sampling procedure, together with 

additional information from DISC returns for the SOI year 1978, 

will appear in the forthcoming publication, Statistics of Income, 

Supplemental Report, Domestic International Sales Corporations. 
All returns 

Returns sampled 

at 100% 

Returns sampled 

at less than 

100% 

Addendum 

Unweighted amounts 

for returns sampled 

at less than lOu% 

-36-

Table A-1 

Summary of Sampling Results 

Gross 

Number of Receipts 

Returns ($ Millions) 

7,208 99,604 

934 83,663 

6,274 15,941 

1,105 4,345 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

Net 

Income 

($ Millions) 

6,402.1 

5,591.9 

810.2 

252 .9 
-37-

APPENDIX B 

Review of the Limi t ations of the Methodology Used in 

Previous Reports to Estimate the DISC Effect on Exports 

The methodology used in previous reports was described in 

detail in the 1975 DISC report. The estimated DISC effect was 

based on a comparison of the growth in non-DISC and DISC exports. 

The comparison required a complex sequence of statistical calculations. First, the growth rate of DISC exports over the most 

recent two years was computed from DISCs in operation for all of 

the current year which also reported exports for all of the previous year. Total current year DISC exports and the estimated 

growth rate in DISC exports were used to compute an "estimate" of 

total DISC exports in the previous year. Cur rent year DISC 

exports were subtracted from current year aggregate exports to 

obtain non-DISC exports in the current year. Similarly, the 

"estimated" level of DISC exports in the previous year was 

subtracted from aggregate exports in the previous year to obtain 

non-DISC exports in the previous year . The growth in non-DISC 

exports was then calculated from these two successive levels of 

non-DISC exports. 

Over the years, the following difficulties with the 

methodology became apparent: 

1. The uncertain validity of non-DISC exports as a control 

group. Because of DISC's benefits, exporters would only fail to 

use a DISC under very special c ircwnstances. One is where the 

firm bas overall losses. Similarly, a firm which has overall 

profits may choose to put profitable exports through a DISC but 

leave any unprofitable exports outside. The export product may 

also fail the DISC requirement that it be "for direct use, consumption or disposition outside the United States." Electronic 

components which are exported for assembly and then reimported 

would be an example. It is very unclear whether goods exported 

under these very special circumstances should be expected to grow 

at the same rate as goods using DISC would have in the absence of 

DISC. 
-38-

2. The failure to give recognition to the role of new DISCs. 

The incremental DISC effects were based on the growth of exports 

by DISCs which were in operation for all of the current year and 

also reported exports for all of the previous year. Some DI~ 

were therefore ignored in the first year of their existence, and 

all new exporters starting DISCs could be ignored for up to the 

first two years of their existence. The methodology also ignored 

DISCs which left the export business. The statistical problem is 

the familiar one of estimating rates of growth using a series of 

1 inked samples. The estimate may drift substantially from the 

true growth rate because of entry and exit. 

3. The use of trade data originating from completely 

different data systems to compare the growth in DISC and non-DISC 

exports. DISC exports come from tax returns and are based on 

accounting entries. Aggregate exports are compiled by the 

Commerce Department from customs reports and are based on 

physical shipments. A serious effort was made to correct for 

timing differences. However, the hazards of using trade data 

from different sources are well known. For example, there are 

major discrepancies in the exports reported by one country and 

the imports reported by the receiving country 

4. The sensitivity of the estimates to errors in the trade 

data. The methodology tended to accentuate the effect of data 

errors. Consider, for example, an error overstating the growth 

in DISC exports. Because non-DISC exports are derived by subtracting DISC exports from total exports, this error would lead 

to an understatement in the growth of non-DISC exports. The 

estimated difference in the growth of DISC and non-DISC exports 

would therefore have two errors in the same direction, because of 

the overstatement in DISC and the understatement in non-DISC. 

This problem was recognized and adjustments were made in certain 

cases, but substantial errors may still remain. 

5. The erratic pattern of the estimates based on the 

methodology. The final overall DISC effect in recent years was 

the net result of large positive and negative effects in various 

individual products. The pattern did not seem to be the result 

of product classification errors. They may have been due to 

random fluctuations, but this suggests that the overall estimate 

was still highly unreliable. 
-39-

APPENDIX C: Information Used to Estimate DISC Effect 

Table C-1 

Elasticiti es of Export Demand and Supply 

Assumed in Each Major Category 

Product Category Supply Elasticity 

1. Nonmanufactured 

Products 1.5-2.5 

2. Basic Manufactures 20 

3. High Technology 

Manufactures 20 

4. Resource Related 

Manufactures 4 

Office of the Secretary of the Treasury 

Office of Tax Analysis 

Demand Elasticity 

(absolute value) 

Infinite 

6-8 

3-5 

8-10 
-40-

Table C-2 

Specific Products in Each Major Category 

1. All Nonmanufactured Products 

2. Basic Manufactured Products 

Textile mill products 

Apparel 

Furniture and fixtures 

Printing and publishing 

Rubber and miscellaneous plastic products 

Leather and leather products 

Stone, clay, and glass products 

Iron and steel industries 

Fabricated metal products 

Transportation equipment except aircraft 

Nonelectrical machinery other than office 

Machinery, engines and turbines, and special industry 

machinery 

Miscellaneous manufactures 

3. High Technology Manufactures 

Chemicals and allied products 

Electrical machinery and equipment 

Aircraft and parts 

Professional and scientific instruments 

Ordnance 

Office machinery 

Special industry machinery 

4. Resource Related Manufactures 

Food and kindred products 

Tobacco manufactures 

Paper and allied products 

Lumber 

Primary nonferrous metals 

Petroleum and related products 
~1120-DISC DtooriiMill Ill lllo T ••-IY 

lot.ui- S...ke 

Domestic International Sales 

Corporation Return ~®78 !PLEASE TYPE Oil PlliNT) 

For calendar year 1978 or other taxable year beginning . 1978 ending 19 

A Dote of DISC eltetlon Name C Employer lcl.,.tlliutlon numiHr 

Number end 5tred 0 Dote locorporotocl 

a Buolneu ~ number 

(See pace 8 of lnstruc• C.ty or town, Slate. and ZIP code £ fa)~·~~~~~~=·~~~~r..:~:,otJmn t.onsJ 

I I I s 

F Did any corporation, Individual, partnership, trust or estllta at the end of your taxable year own. directly or Indirectly, 50% or Yes No 

---- more of your voting stockl . . . . . . tr "Yes," enter below the owner's name, address, Identifying number, percentage of voting stocl< owned and, If o corporation, · .W* * ;l 

total assets. (See General Instruction Q) :- ~-:..;:. . Pen:ent• Forelan 

ldenlllvtnc ••• of T..UI OIUU Nome Addreu votlnc owner ruuniMr lloel< (C4rporetJona ont~ 

owned 

~~ 

0 Indicate by placing an "X" In the appropriate box(es) the lnt()(-company pricing rule or rules which were applied to 25% or more of total 

receipts (line 4, page 1). 

0 50-50 combined taxable Income method, D 4% gross receipts method, 0 Section 482 method ("arm's length prlcina' ') 

All Computations Must Reflect lnter·Company Pricing Rules 

Under Section 994 If Used (See Schedule P (Form 1120-DISC)) 

Gross Income 

1 Qualified export receipts from the sale of export property (line l(c) column E, Schedule B) • • 

2 Other qualified export receipts: (line 20) column E, Schedule B) • , • , , 

3 Nonqualified gross receipts: (line 3(g) column E, Schedule 8) • • , • • , • • • . .. . 1-------- 4 Tot-at of lines 1, 2, and 3 . • • • • • • • • • • • • • • • • • • • • • • • 

5 Subtract: Cost of goods sold (Uno 7, Schedule A) and/or operations (attach schedule) • • 

6 Total Income 

Deductions 

7 Export promotion expenses: (line 1(0}, Schedule E) • • • • 

8 Other expenses not deducted above: (line 2(h), Schedule E) • • • • • • 

9 Total deductions (odd Unes 7 and 8) • • • 

Computation of Taxable Income 

10 Taxable Income before net operating loss deduction and divldends·received deduction (5ubtract line 9 from line 6) • 

11 Subtrlc:t: (a) Net oileratlna loss deduction (see Instructions--attach schedule) • . . (b) Divldends·rec•lved deduction (line 2, Schedule I) • . . . . . . . I 

12 Taxable Income (subtract line 11 from line 10) • . . 

1.3 Refund of U.S. tax on special fuel. non highway cas. and lubricating oil (attach Form 4136) 

411 ~ ..:;:~~·~;.r:;:• ~ =•t1'j~"'~"=~t)l/li: .:';d" ,.!~j~~J. =:•;J ~~~=,;"' ... •:•~';"t.:!;. ~~~•1114 boll ol rt1,'/ U.wlttl(t or. I bdoof, 111$ trvt, CDJI'Cd. .. 

411 

~J X ~ ~ana1ure Oi' otfteer ~ ... .§ 

VI Paid p,..pe,..r's ~ I Preparar's 10elal aec:urtty no. I Cheek If Mlf· ., slanoture I ! ..,plo~ .... 0 "' Preparer's i Information Flrm't IWI1e (Of }'0<11'1,~ 1 E.l. No . .... I tfself-.m~), 

address and IP code -1 O.te ~ . 
,_, 1120-DISC ( 1!1711 "-P 2 

M"tlf!mfW!W Cost of Goods Sold (See instructions for Schedule A) 

Reflect ACTUAL purchases from • related supplier at the transfer price determined under the inter-company pricing rules of section 994, if used. See Schedule P (Form 1120-DISC). 

I Inventory et the beclnnln& of the yar 

a Purcheus •• •••• 

I lallriU lnd ..... • • • 

4 Ottler COlts (ett.cfl ICMdull) • • • • 

I Totet • • • • • • • • • 

I .._ Inventory at tile end of tile ye« 

r Colt of IOOds ~ h- end on lne 5, PIP 1 • 

a Ce) Check wluetion !Mthod(a) uNCI fot total c:Joslq Inventory: 

Oeo.t 

0 Lower of COlt or Wllt'tllt 

0 Other (lttKh eptenltion) 

(It) Ch«k If this Is tt11 ll'lt yNr LIFO ~method -adopted end uted • • • • , , , • , • , , , • • • • • 0 

If dlec:ked, ettlc:tl fonn 970. 

(c) If ttte LIFO 1~ method - cned fw tflls uuble yeer, enter perc:entap (or •mounts) of c:loalnr lnven-1 

toty c:om.,ut.d under Ll FO • • • , , • • • • • • • • • • • • • • • • • • • , , , ..__ -==-:-::-----::::-:-:-

(41) Wn t11tn _, .....,.. c11n11 II .......,. .-..... C111C, or t llllltiolll W... .,...., Sid cfoMit llventoftl • • • • 0 Yu 0 No 

If "Yes," ltt.Ktl !lfllenetlon. 

•tl@mfli:M Gross Income (See Instructions for Schedule B) 

D. Other reu.lpta (ecld c:olum,. C end D) 

• • • • r-----------------1·-----------------l------------------ l·-----------------

fOAip .... """"' I ...... fanip llllilf' ' 1-------1--------------1-------

(111) To penoM In the U.S. (other then en unreilted DISC) • • • • 

(lv) To en unrellttd DISC • 

(It) To related purcheMrS: 

(I) Direct forelan Slles • • • 

(il) To persons In the U.S.. • • • • r-----------------1--------------------l-----------------l------

(c:) T~ltr ._,. II colulllll E • U. J. pap 1 • • 

a Ottler qualified export receipts: 

(1) Leasing or rentlnc of export property • • • 

(b) Services rellted end aubsldllry to 1 qualified a · 

port safe ot ..... • • • • • • • 

(c) Enrineerinr 1nd erchitecturel MfVIces. • 

(d) u 'port manapment lltviCH , • , , 

(e) Qualified dividends (line 10, Schedule C) • 

(f) Interest on produce( a loene • • • , • 

(I) Other Interest (lttiCh IChedule) • • , • 

(h) Clpltat a•ln lilt illcotM (Attadl Sdltdule 0 (F- 1120)) • 

(I) Ordinary p in ot (toss) from Part II, form 4797 

(1ttach FOI'I'II 4797, - lnstructlons) • • • 

CD Totii-Enter -~~ • columa E 011 line Z. pqe 1 . 

I Nonquelifled (I"'OS receipts: 

(1) Ultimate use In U.S. • • • • • • • • 

(b) Exports subsldilled by the U.S. GoYemment <-

Instructions) • • • • • • • • • • • , 

(c) Clrtlln direct ot Indirect Sllel ot teeus for use 

by the U.S. Gowmment • • • • • • • • 1--------1-------1-------1-------

(4) Slla ID otlltf Ot$CI II tilt lllllt coatrolled ,roup • , 

(e) Nonqu1lifltd dforidends (tiM 11, Sd!edule C) • ~%:1~ ~~ · ~ ·~~ 

(f) Other <-~schedule) • • 1------1------1------1------

(1) Toiii-UJir 111101111t II colu11111 E 011 lilt 3, ,_,, l • 

amount In c:olumA E 
I Domestic corporwtions subject to the 85% chductlon 

2 C4N1aln pteferred ltDdl of public utilitlft • 

a Forelan corporlltlons subject to the 85% deduction • 

4 Dividends from wtloiiJ-owiiiCI forelan subsldlatlea subject to the 100% deduction (Mdlon 24!S(b)) • 

a Other dividends from forel&n corpomlona 

4 Includable Income from controlled forelln corporlltiont under subpart F (ettac:h Forms 3646) • 

7 TalCIIble dividends from a DISC or form., DISC not Included In One 1 (Mdlon 246(d)} 

• Other dividends • 

• Total (edd lines 1 ltlroush 8) • 

10 SubtnH:t Quellfi«< dlvldeud• Enter the qualified dlvldenda here and on line 2(e), c:olumn 0, Schedule 8 • 

l Export promotion apenMS: 

(a) Mertlet studlee • 

(I») Advertlslns 

(c) Depreciation (eiDch Form ~ 

(d) Seleries end ....-• 

(e) R.ms • 

(f) Seles commluions • 

(I) Warehoualnc • 

(b) frelaht (exduclinll lnauranc:e--eee IMtnlc:tiona) 

(I) Compensation of olllclra • 

8) Repelrs <-lnatructiona) . 

(II) Amortlz.etlon (llttach schedule) 

(1) Pension, profit .. herlna, etc. plans <- Instructions) (enter number of plena ~ --·--·> 

(m) Employee benefit ptll8rems 

(n) Other (list):-·-------

(o) Total (add linea 1 (I) through 1(n))-£nter here and on line 7, paae 1 • 

J Other expenses not deducted above: 

(II) Bad debts (Sdledule F If reserve method Ia used) • 

(b) Taxes • 

(c) Interest 

(d) Contributions (not over 5% of line 12, pep 1 edjusted per lnstructioM-ettech IChedule) 

(e) frel&ht • 

(t) freiaht lnsu,_ • 

(&) Other (attach Ktledule) 

LY- ,_ .. , ... _. 

___ ..... _ 

- --·-··--------·-----1-----

7 • ._ ... ._ .... ............. _ 

1973 

1974 

lt75 

11715 

1977 

1978 

--------·-----1----- ----- --------·-··1------1 

C,r hedule I • nds-received Deduction ( 

1 (a) 85% of line l, Schedule C 

(b) 60.208% of line 2, Schedule C 

(c) 85% of hne 3, Schedule C 

(d) 100% of line 4, Schedule C • 

·------·-· ------- -·------- nstructeons for Schedu 

2 Tob~ Instructions for limitation. Entw here and on Rne ll(b), page 1 • 

·~ 
Form I 12~01SC 119781 POJJe 4 

•'G;tt:mt:WM Deemed and Actual Distributions to Shareholders for the Taxable Year (See instructions for Schedule J) 

PART I.-Deemed Distributions Under Section 995(b\(1) 

1 Gross Interest dero~ed during the year from producer's loans (sectoon 995(b)( I )(A)) 

2 Gam recosmzed on the sate or eJCChange of property ($«lion 995(b)(1 )(B)) (see •nslructlons-attach schedule) • -· 

3 Gain recogmzed on the sate or exchange of propPrty (sect•on 995(b)(I)(C)) (see •nstructions-attach schedule) • 

4 50% of taxable Income attnbutable to m•lotary property (section 995(b)(I)(O)) (sec 1nstruct•ons-attach schedule) 

5 Total of lines 1. 2. 3, and 4 

6 Taxable Income (line 12, page 1) 

7 Adjusted taxable mcome (subtract hne 5 from line 6) (enter here and on line 1. Part II) . -------- 8 Tauble income attnbutable to base penod export grou receopts (scctoon 995(b)( I )(E)) (from I me 22, Part II) 

9 Subtract line 8 from hne 7 (enter z.ero •f less than zero) 

10 50% of hne 9 (section 995(b)(l)(F)(1)) . -----.. ·-·---- 11 International ~cort mcome (section 99S(b)(1)(F)(u)) (see lnstruct1ons) ------··------- 12 Amount of Illegal bribes and other payments (sect•on 995(b)( l)(F)(ul)) (see Instructions) • 

13 Total of lines 5, 8, 10, 11. •nd 12 - 14 Earnings ond profits for )'ear (see Instructions-attach schedule) ·----··-- 15 Enter the smaller of hno 13 or hne 14 (but not less than zero) --·-·--···--- 16 Foreign Investment attnbutable to producer's loans (sect1on 995(b)(l )(G)) (see mstruct1ons-attach schedule) 

17 Total deemed dostnbut1ons under sectoon 995(b)(l) (add hnes 15 and 16) 

PART 11.-computaUon ot Tuabltt lncomtt Attnbutable to Base Pertod Export Gross Receopts --- 1 Adrusted taxable Income (from hne 7. Part I) 

2 Enter the Ia Iller of (a) 365 d1111ded by the number of da~s 1n your taxable year or (b) 1 (one) • . a Annual•led ad,usted tuabie mcome (lone 1 t1mes hne 2) . 4 Annualized adrusted taxaWe income of all other DISCs 1n your controlled group (see lnstruct1ons for exceptions) 

5 Line 3 plus hnlt 4 (1f $100.000 or less see lnstruct1ons) 

6 Taxable years begmn1ng In 1972, 1973. 1974. o~nd 1975 (use a c 0•« ltod ••••n fKI'•Ob •• 0 50 prrctnt of '1U1f1f...., u 

; ·; , 

seearate line tor each full or eart ~ar, startms v.•th th~ earliest) '""'rA>d .. ~t40f\l t'U·I(JI (A (8o, ICI, IGI 1-'Wf tHI HM port r«••pU In tolvrM C at 

A. S.JUHI•ftJ .. )e;lr (.-.olllit. cbrt )'tUJ e Ud oJ ;tM ,....,,.. . ., ,...l testlac:IJOU I« urli•A t.«JIIIA~ tnbuUble a. •'lnarr ,.pu(J 

@ J 

,~ _ .(a) ····-····· ... ···-·· ·····- ··-· ......... .................... _ ... _ .. _ ................ ..... . .............. _______ ..................... _ -··- -··----·-·-- ';; ' i _ _ .(b) ···---·----······--··-· -----·-····-··----··--.. -··· ... .............. -- ·-··--·····-·-· ·-····-··-········-···-· - (c~ ······--··· ····-·-···· -· ·· · f~ * ;}I _(d) ·-···-- --··--·· - ·-·· ···--- -···----- -~ ·-·-·----- ··--·--··-----··---· .~,~,A ........... -.. --.. ·---·-·-··· - ................. ._ ...... _ ..... _ ........... _._.,.. __ ................ _ ............... _. ___ ___ ··-----· .... ··---··-··--- (e) 

(f) Totals (add hnes (a) through (e)) • . • • . • . • ~~ "~ 

.. ~ • ~ (g) Clase penod export grosS' rece1pts (subtract Column 60. line (I) from Column 6C, I me (f)) . 

7 Enter the smaller of (a) 1,461 d1v1ded by the number of days 1n your base penod or (b) 1 (one) • 

8 Line 6(g) t1mes line 7 . . 9 Adrustment factor .1675 

10 Adrusted base penod export gross receipts (hne 8 t1mes hne 9) 

11 Add ttlons to adJUSted base penod export aross recetpts: 

(a) Adjusted base period export aross rec.e1pts of all other DISCs In your controlled group 

(b) Other additiOns (attach schedule-see mstructions) :I 

(c) Total addouons (line ll(a) plus lioe ll(b)) • . 12 Line 10 plus l1ne 11 (c) • . . 13 (1) Quahhed export rece,pts as described ln sechons 993(a)(I)(A), (8), (C), (G), and (H). (Add 

the amounts from Schedule 8, Columns B and 0, ltnes 1(c), 2(1), 2(b), 2(c), end 2(d)) • 

(b) 50 percent of quahf1ed export receipts on line 13(a) ottnbutable to military property :I 

(c) Export gross receipts (subtract hne 13(b) from line 13(a)). . 14 Annualized export gross receipts (hne 2 times line 13(c)) • 

15 Annualized export gross rece1pts of all other DISCs In your controlled group • 

16 Line 14 plus hne 15. 

17 Enter the smaller of (a) line 12 divided by hne 16 or (b) l (one). . . 18 Line 5 times hne 17 . . . 19 Small DISC phaseout 

(1) Enter the greater of (e) $150,000 less lme 5 (but not more than $50,000) ex (b) zero 

(b) Una 19(a) times 2 (two) . I 

20 Subtract line l9(b) from line 18 (enter zero If less than zero) • . . . . . . 21 Une 1 divided by lone 5 • . 22 Tauble Income ettrlbuttble lo base ptriod export rross rtcelpts (line 20 thr.es Ilea 21) (enter here end on nne 8, Plrt I) • 
..... li~ISC 11911) 

I Annual Installment of dlstributlon attributable to revocation of election In a prior ygr 

2 Annual Installment of distribution attrlbutllble to a failure to qualify as a DISC In a prior year • 

3 Total deemed distributions under section 995 2 add line 1 and line 2 • • • . . • 

PMT IV.-Actual Distributions 

I Distributions to meet qualification requirements under section 992(c) (attach computation) • 

2 Other actual distributjons • • • • • • • 

S Total of line 1 and liM 2 • • • • • • • 

4 Amount on line 3 tr11ted es distributed out of: 

(e) Prevoously taxed Income • • • • • • 

(b) Accumulated DISC Income (including DISC Income of the current year) 

(c) Other earnlnp and profits • • • • • • • • • • • • • 

Schedule K Shareholder's Statement of DISC Distribution 

..... s 

(Attach a separate Copy A, Schedule K (form 1120-DISC) for each shareholder receiving a deemed or actual distribution. Give Copy B to the shareholder. See instructions on the back of Copy C.) 

H Did you Claim a deduction lor expenses connected with: 

(1) Entertainment facility (boat. resort. l'llndl, etc.)? • • • • 

(2) Uving accommodations (except employees on buslness)l 

(3) Employees' families at conventions or meetlnp? • • • 

If "Yes," were any of the~ conventions or meelings outside the United States or Its possessions? • 

(4) Employee or family vac:atoons not reported on Form W-27 . • • • • • • • • • • • • • 

Enter total amount claimed on Form 112<>-0ISC tor entertainment. entertainment facilities. gifts, tnlvel, and conventions 

of the ~ tor whic.h substanbatJon Is required under ~!Jon 274(d) of the Internal Revenue Code. (See Instruction 

S.) ~ . . . . • • . . . . • . • . . . . • • • • • • • • . . ..... -····--·---

1 Refer to page 8 of the lnstructoons and state the princopal: 

Business actovoty ~ ----·--··-··-·---··-·-·-· ·---·-··--......... _, __ .. ____ _ Product or servoce ~ .......... -----··-·······--···-·--··-·---·--·-···-······-··· ··· ·-·····--~-·- -·---- K Were you a U.S. shareholder of any controlled foreign corporation? • • • • • • • • • • • • • • 

(See ~ions 951 and 957.) II "Yes," attach Form 3646 (and Form 2952 where appropriate) for each corporation. 

&. Did you file all required Forms 1087, 1096, and 10997 • • • • • • • • • • • • • • • • • • • 

II (1) Did 95% or more of your gross receipts for the taxable year consist of qualified export receipts (as defined In section 

993(a))l • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 1 __ 1 __ 

(2) Did the adjusted basis of your qualified export assats (as defined In section 993(b)) at the close of the taxable year 

equal or exceed 95% of the sum of the adjusted basis of all your assets at the close of the taxable year? • , • • 

(3) If the answer to (1) or (2) is "No," did you make a pro rata distribution of rope~ as defined In section 992{c)7 • • 

N (1) Did you have more than one class of stock at any time during the taxable year? • • • • • • • • • • • • , 

(2) Was the par or stated value of your stock at least $2.500 on each day (for 1 new corporation, on the last day for maklna 

en election and for each succeedi ng day) of the taxable year? • 

0 Al1l you a member of 11 controlled group that Includes other DISCsl • • • • • • • • • • • • • • • • • • 

If ''Yes," 

(1) Report In Part II, Section 8 of Schedule N the names, addresses, end employer Identification numbers of the DISCs. 

(2) State the name and employer ldentlficatlon number of the DISC in your controlled group completing Columns 3 and 4 

of Part I, SectJons A and B of Schedule N. See specoflc lnstructoon B, Schedule N (Form 1120·DISC). 

Name -······-··-·-·· .. ··--.. ··-·-............................................ - •• - ............................. - ........... - ...... _____ ............... - .......... _ .••... _ 

Employer Identification number ~ ........... ·-·-··-·-··--···-·-·-·-·-·-··· .. -· .. ·-··························· .. •••••·••··• .. ····-··----·-.. ·-··· 

P Old you have your own bank account! • • • • • • • • • • • • • • , • , • • • • • • • • • • 

Q Did you maintain separate books and records? • • • • • • • • • • • • • • • • • • • • • • • • • 

R Old you, at any lime durin& the tauble year, have an Interest In or signature or other authority over a bank, securities, or 

other financial aecount In a foreign countty7 • • • • • • • • • • • • • • • • • • • • • • • • • 

If ' 'Yes," see Instruction R. 

I Were you the grantor of, or transferor to, 1 fwelgn trust during any taxable year, which foreign trust -• In belnc durina 

the current taxable year, whether or not you have any beneficial Interest In such trust? • • • • • • • • , • • • 
fonn ll ~ISC !1971) •1!1@!!it:IIW Balance Sheets 

I 

1 Qualified assets: 

(a) Working capital (cash and necessa!Y temporary Invest ments) • 

(b) Funds aw1uhng Investment (cash In U.S. banks in eKcess of working capital 

needs to acquire other qualified export assets) • • 

(c) Export-Import Bank obligations • • 

(d) Trade receivables (aceounlS and notes receovable) 

(i) Subtract allowance for bad debts • • • • 

(a) Export property (net) (Including onventory end qualified property held for lease) • 

(f ) Producer's loans • • • • • • • • • • • 

{g) Investment in related fore•gn e~port corporations • 

(h) Depreciable assets • • • • • • 

Ull Boafnnfns of the taxAble year 

p ... 6 

IBJ End of 11\e tuat>M yo.,. 

(I) Subtract accumulated depreciation • 

{I) Other (attach schedule) • • • • • ---·-·--------·---- 2 Nonqualified assets (net) (list): ·-- "----------·-·-··--·--·· 

3 Tota I assets • . • • • • • 

• AccounlS payable • • • • • 

5 Other current habUttles (attach schedule) 

, f 6 Mortaeaes. notes, bonds payable on 1 year or more • 

i.5' 7 Other liabilities (attach schedule) 

8 Capital stock • • • • 

9 Paid·in or capital surplus • • 

10 Other earnings and profits • • -------·-------------- 11 Previously taxed Income (sec. 996(f)(2)) 

12 Accumulated DISC Income • • • • • 

13 Less cost of treasury stock • • . • • 

14 Total liabilities and stockholders' equity . 

. . -----·----·- - ------·--

l:t;rt;m!iWf.l!!ll Reconciliation of Income per Books With Income per Return 

1 Net 1-m• per books • • • • • • • • ·-----·--· 6 Income recorded on books this year not included in 

2 Excess of ~pilailoues O'lei capital aalns • • • -------- tills rttum (ltemlu) _____ _ 

3 Taxable income not recorded on books this yur ----------------·--··-· --··----- (llemlze) --·-···----·---------·---

4 Expenses rtcOtded on bool<s this ynr not dtdudtd 

7 DtducUons In this return not dlll&td aae!nst book 

Income this ynr (itemize)-····------· 

In this relurn (ltemrte). ---------------------····----··1------ --··---·--·····----·· 8 Tolal of lines 6 and 7 • • • • 5 Total of lines 1 through 4 • • • • 9 Income Cline 10. pese l) (line 5 less line 8) 

IOi'!liJZml'\'W.r.!!f',J Analysis ot Other Earnings and Pr"ofits (Une 10 above) 

1 Balance at the beeinnilll ol the year • • • • 5 Distributions to qualify under sec. 992.(c) • 

2 lncrems (ltvnlze) _________ _ 6 Other decreases (itvnite) _________ _ 

----·------------------1------- -----·-----------1------- 3 Total of lines 1 and 2. • • • • • • ·------- 7 Total of lines 4, 5, and 6 • • 

4 Dtrocit In urnings and profits • • • • • • 8 Balance at end of Yflr (line 3 less line 7) 

10-m@mt!WM!$1 Analysis of Previously Taxed Income (Une 11 above) 

1 Balan« at the bt&innlnc ol the ynr • • 

2 Deemed distributions under settlon 995(b) • 

3 Other lncruns (ltemite) 

·--------· 5 Deficit in nmln&s end profils • • • 

------ 6 Olslribu11ons to qualify under sec. 992(c) 

7 Other dactmes (ltemlze)_" ________ l 

-·---· 8 Total of lines 5, 6, and 7 

4 Total of lln11 1. 2. and 3 9 Balance at enll of yur (line 4 less line 8) 

10'1l1#mr:w~r.el Analysis of Accumulated DISC Income (Une 12 above) 

·------ ----

1 Balance at the bealnninc oflha year • • • • ----·------

2 Increases (itemize) ______________ _ 

-------·-·---- --1------1 

6 Distributions to quehly under sec. 992(c) • • • ···------

7 Olstrlbullons upon dlsquallllcatlon (sec. 995(b)(2)) • ·----··---

8 O!hrr decreues (ltemlre) - ·-- -------

3 Totill ofllnu 1 alld 2 . ----------·-··--- 4 Deficit In uminas and profils • • • • • • 9 Total of lines 4 throuah 8 • • • • • 

5 Rtdempllons under secllon 996(d) • • . • • 10 Balanae al end of year (line 3 less line 9) • • • 

&11!;rnmr:w~M Export Gross Receipts of the DISC and Related U.S. Persons (Atlach separate Schedule N (form 1120-DISC)) 

•1\!@mtjM Computation of Inter-company Transfer Price or Commission (Atlach separate Schedule P (form 112G-DISC)) 
~®78 ~@/~~ 

Internal Revenue Service 

Instructions for Form 1120-DISC 

Domestic International 

Sales Corporation Return 

(References are to the tnternal Revenue Code) 

0 • 4 $ u $ 

Sec:. 992. Requirements of a DlSC 

(a). General rule,.......A DISC Is a cor· poratlon that Is Incorporated under 

the laws of any State or the District of 

Columbia and satisfies the following 

conditions for the taxable ye~: 

(1) 95% or mon~ of Its gross re- ceipts (as defined In sect!on 993(f)) 

consists of qualified export receipts (as 

defined In section 993(a)); 

(2) the adjusted basis of Its qualified export assets (as defined In aec:-

tlon 993(b)) at the end of the taxable 

year equals or exee.fs 95% of the sum 

of the adjusted basis of a lilts assets at 

the eod of the taxable year, 

(3) It does not have more than 

one class of stock and the par or stated 

value of Its outstanding stock Is at least 

$2.500 on each day (for a new corpora- tion. on the last day for making an 

election and for each succeeding day) 

of the taxable year; 

(4) It has made an eJection to be 

treated u 1 DISC and the e6ec:tlon is W. 

effect for the taxabMI year, 

(5) it has Its own bank 8CCOUflt on each day of the taxabMI yeM (~ 

exceptions see section 1.992-l(i) of 

the regulations) and r~~aintains separate 

books alld records; and 

(6) It Is not an ineligible corpora· 

lion. 

(b). Election.-An election by an ex· 

lsting corporation to be treated as a 

DISC for a taxable year must be made 

at any time during the 90-day period 

tmmedlately preceding the becinnlng of 

the taxable year and by a new corporation within 90 days after the beginning 

of the first taxable year. 

In general, the election will be valid 

only If ell persons who are shareholders 

In the corporation on the first day of the 

first taxable year for which the election 

Is effective consent to the election. (See 

Form 4876, Election to be Treated as a DISC.) 

An election may be terminated by 

a revocation of the election for any 

taxable year after the first taxable year 

for which the election Is effective If 

made at any time during the first 90 

days of the taxable year (or for the 

taxable year following the taxable year 

In which made, If made after the close 

of such 90 days). 

The election will be terminated by 

the continued failure of the corporation 

to be a DISC for each of any 5 consecutive taxable years for which an election 

Is effective. 

(e). Distributions to meet quaUfi. 

cation requlrements.-A corporation 

•• • • u 0 

that f« a taxable ~ear does not satisfy 

the 1rot1 niCelpts or qual.fled export 

assets oonditlona will be deemed to 

satisfy the conditions for the taxable 

year If it makes a pro rata distribtrtion of 

property after the close of the taxable 

year to Its shareholders (desl&nated at 

the time of the distributton as a distribution to meet quallftcaUon requirements) with respect to theW stoci< in an 

amount which Is equal to (1) the por· 

tion of Its taxable tnC:Ome attributable 

to its gross recetpts that are not quafi. 

fled export recelt* If it t.ils the cross 

rec"pts conditiofl, (2) the fair market 

value of those assets that are not quall· 

f.ed export assets on the last day of the 

taxable year If the qualified export 

assets condition II not mat. eod (3) the sum of (1) and (2) If nelttler condffion 

IS met. 

See sectlott 992(c)(2) for reaaonable 

cause lor failure to make distributions 

to meet qualification ...,!Mments and 

sectloft 992(c)(3) for ~~buttons 

made within 8~ ~aft« the close 

of the tlt.xable ~· 

For ~ of deficiency distributions to meet queltfk:ation requirements, see MC'tion 1. 992-3 of the NgU· 

lations. A DISC that makes a deficiency di$-

tributlon after the 15th day of the ninth 

month following the close of its taxable 

year must pay an "Interest" charge for 

the amount to qualify as a deficiency 

distribution. The "Interest"' charge is 

4 Vz% per each taxable year of the 

DISC beginning after the taxable year to 

which the defi<:lency distribution relates until the date of the distribution 

times the amount of the deficiency 

distribution. 

The DISC must pay this ••tnterest•• 

charge within 30 days of the distribution to the Internal Revenue Service 

Center where it filed Its form 1120-

DISC. When submitting payment. the 

DISC should give its name, address, 

employer Identification number, the 

taxable year to which the distribution 

relates. and state that the amount submitted is the '"interest•• charge imposed 

by regulation section 1.992-3(c)(4). 

(d). lnellcfble corporations.-The 

following corporations are not eligibfe 

for DISC treatment: 

(1) a corporation exempt from tax under section 501, 

(2) a personal holding company 

as defined in section 542, 

(3) a financial institution to which 

section 581 or 593 applies, 

(4) an Insurance company subject 

to the tax Imposed by subchapter L, 

(5) a regulabld tnwstment com· 

pany as defined In section 851(a), or 

(6) an electing small business 

corporation as defined In sec:1km 

137l(b). 

(e). RestrlctioM on DISC. aod DISC 

corpor8te atoc:khohlera.-For any tax· able year In which a corporation Is a 

DISC or In which at any time It owns. 

directly or lndlrectty, stock In a DISC 

or former 01 SC, such corporation Is not 

aUowed to take the 'Hatem Hemisphere 

Trade Corporation deduction (section 

922), and Is not entitled to the benefits 

of section 936. 

Sec. 993. Definitions 

(a). Qualified export ncetpta..-

Except as provided by re~latlons und« 

section 993(1)(2), qualified export re· 

celpts of a corporation are: 

(1) gross receipts from the sale, exchance, or otM!' disposition of ex· 

port property; 

(2) gross receipts from the lease or rental of export property tNt Is 

used by the lessee of the property out· 

side the U.S.; 

(3) gross receipts for services 

that are related and subsidiary t~ 

quallfled sale. exchange, lease, " , or other disposition of uport property 

by the cot'pOratJon; 

(4) gain from the sale, exchance. 

or otMr disposition of quaftled export 

aSMts (otner tnan export ~); 

(5) dividends (or amounts lndudlble In gross Income under a.:tlon 951) 

witR ...,.a to atodt of • ,..._. b · elgn export corporation; 

(6) lntetest on any oeHption 

that ls a qwtlified uport aa.C; 

<n crosa ~ toreneiM«illl or arc:hitectwal aemces for construe:· 

tion projects toc.1lad (or ptOp0!4Id for 

location) outside the U.S.; and 

(8) aross rec"pts for the l*form- ance of managerial sertices In further· 

ance of the production of other qualified 

export receipts of a DISC. 

(b). Quaftfled export asaets....-Qualified export assets of a corporation are: 

(1) export property; 

(2) assets used primarily In connection with the sale, lease. rental, ator· 

age, handling, transportation. packag. 

lng. assembly, or servicing of export 

property. or the performance of engineering or architectural services as described in section 993(a)(l)(G) or man· 

agerial services In the furtherance of 

the production of qualified export re- ceipts as described In section 993(a) 

(1) (A), (B), (C), and (G); 

(3} accounts receivable and evi· 

dences of Indebtedness that arise by 

reason of transactions described In section 993(a)(1)(A). (B), (C), (D), (G), 

or (H); 

(4) money, bank deposits, and 

other similar temporary Investments 

that are reasonably necessary to meet 

the working capital requirements of 

the corporation; 

(5) obligations arising In connection with a producer•s loan; 

~-263-109-1 
(6) stock or securities of a ,.. 

fated forelen export corpontion; 

(7) cerbin obllptions issued, 

IUaranteed, or lntured, In whole or In 

part, by the Export-Import Bank of the 

U.S. or the Forelan Credit Insurance 

Association In thoM cues where the 

obllptlons are acquired from the benk 

or association or from the seller or purchaser of the &oocls or services from 

which the obllptions arose; 

• (8) certain obllptlons issued by 

a domestic corporation orpnized solely 

for the purpose of financing sales of ex· port property pursuant to an agreement 

with the Export-Import Bank of the 

U.S. under which the corporation makes 

export loans auaranteed by the benk: 

and 

(9) amounts (other than reason· 

able worklna capltlll) on deposit In the 

U.S. that are utilized durin& the period 

pi'OY!ded by reaulatlons to acquire other 

qualified export assets. 

(c). Export property.-Uport prop· 

erty Is property (except property excluded under section 993(c)(2) and 

property In short supply): 

(1) manufactured, produced, 

crown. or extracted In the u.s. by a 

person other than a DISC; 

(2) held primarily for sale, lease, 

or rental In the ordinary course of trade or business, by, or to, a DISC, for direct 

use, consumption, or disposition out· 

side the U.S.; 

(3) whose fair market value is not 

more than 50% attributable to articles 

imported into the U.S.; and 

(4) not sold or leased (i) by a 

DISC, or with a DISC as commission 

apnt, to another DISC that Is a mem· ber of the same controlled group (as 

defined in section 993(a)(3)) as the 

DISC or (ii) by any person to a Western 

Hemisphere trade corporation (as defined In section 921) that is a related 

person (a member of the same con· trolled group as defined In section 993(a)(3) or a relationship that would 

result in a disallowance of losses under 

section 267 or section 707(b}) Immediately before or after a transaction with 

respect to the seller, lessor, or com· 

mission aaent. 

(d). Producer's loans.-An obliga· 

tion subject to the rules provided in sec- tion 993(d)(2) and (3) will be treated 

as arisina out of a producer's loan if: 

(1) the loan, when added to the 

unpaid balance of all other producer's 

loans made by the DISC, does not ex· 

ceed the accumulated DISC income at 

the beainninc of the month in which 

the loan was made: 

(2) the obliption is evidenced by 

a note (or other evidenco of Indebted· 

ness) with a stated maturity date not 

more than 5 years from the date of the 

loan; 

(3) the loan Is made to a person 

enrapd In the U.S. In the manufactur· 

in£ production, arowfnr. or extraction 

of ex.port property; and 

2 

(4) It i.s deslanated es a producer's loan at the time of the loan. 

(e). Related fwei&n eapwt corpora· tlon.--A DISC may acquire and receive 

income In the form of dividends and 

Interest from the followin1 Investments 

that are re:osted to exports from the U.S. 

Forelcn International saJes COf'l)Oration (FISC).--A forelcn corporation 

Is a related foreiiJ' export corporation 

If: (1) stock possessln1 more than 

50% of the total combined votin( 

power of all classes of stock entitled to 

vote Is owned directly by the DISC; 

(2) 95% or more of the foreign 

corporation's cross receipts for its tax· 

able year endln1 with or within the tax· 

able year of the DISC consists of 

qualified export receipts described In 

section 993(a)(1)(A) throurh (D) and 

interest on any obllptlon described In 

section 993(b)(3) and (4); and 

(3) the adjusted baais of the qual· 

ified export assets held by the foreian 

corllQratlon at the close of the taxable 

year equals or exceeds 95% of the sum of the adjusted basis of all assets 

held by It at the close of the taxable 

year. 

Real property holdlnc compaltJ.-

A forei1n corllQratlon Is a related for· 

elan export corporation If: 

(1) stock pouesslnr more than 

50% of the total combined voting pow· 

er of all clastes of stock entitled \o vote 

is owned directly by the DISC, and 

(2) its exclusive function Is to 

hold title to real property for the ex· 

elusive use (under a lease or otherwise) 

of the DISC because of a requirement 

of applicable foreign law that the DISC 

cannot hold title. 

Associated forelcn corporatlon.-

A foreiiJ' corllQration Is a related for· 

elgn export COrllQratlon if: 

(1) less than 10% of the total 

combined voting power of all classes of 

the foreign corporation's stock entitled 

to vote is owned (Within the meaning 

of section 1563(d) and (e)) by the DISC 

or by a controlled croup of corporations 

(within the meaninr of section 1563) 

of which the DISC Is a member, and 

(2) the ownership of stock and 

securities In the foreian corporation by 

the DISC Is determined to be reasonably in furtherance of a transaction or 

transactions aivlng rise to qualified ex· 

port receipts of the DISC. 

(f). Gross recelpU.-The term gross 

receipts means the total receipts from 

the sale, lease, or rental of property held 

primarily for sale, lease, or rental In 

the ordinary course of a trade or busi· 

ness and aross income from all other 

sources. In the case of commissions on the 

sale, lease, or rental of property, the 

amount taken Into account will be the 

gross receipts on the sale, lease, or 

rental of the property on which the com· 

missions arose. 

(1). United States.-U.S. Includes 

the Commonwealth of Puerto Rico and 

the possessions of the U.S. 

Sec. 994. Inter-Company 

Pricinc Rules 

In the case of a sale of export prop. 

erty to a DISC by a penon described 

in section 482, the taxable Income of 

the DISC and the other penon may be 

based upon a transfer price which would 

allow the DISC to derive tllxable income 

attributable to the sale (reprdless of 

the sales price actually charpd) In an 

amount which does not exceed the 

greatest of: 

(1) 4% of the qualified export re· 

ceipts on the sale of the property by the 

DISC plus 10% of the export promo- tion expenses of the DISC attributable 

to the receipts, 

(2) 50% of the combined tax· 

able Income of the DISC and the per· 

son which Is attributable to the qualified 

export receipts on the property derived 

as the result of a sale by the DISC plus 

10% of the export promotion expenses 

of the DISC attributable to the receipts, 

or 

(3) taxable income based upon 

the sale price actually charaed (subject 

to the rules provided in section 432). 

Note: Generally, inter-company pric· 

ing rules (1) and (2) above will not per· 

mit the related person to price at a loss. See Schedule P (Form 112GDISC). 

Export promotion expenses are those 

expenses incurred to advance the dis· 

tributlon or sale of export property for 

uae, consumption, or distribution out· 

side the U.S. but do not Include in· 

come tax. They Include freight ex· 

penses to the extent of 50% of the cost 

of shipping export property aboard air· 

planes owned and operated by U.S. per· sons or ships documented under the 

laws of the U.S. In thoso cases where 

law or rerulations do not require that 

the property be shipped aboard such 

airplanes or ships. 

General Instructions 

A. Corporations required to file Form 

1120-DISC.-Form 112G-DISC must 

be filed by a domestic COrllQratlon that 

has elected to be treated as a DISC and 

has satisfied the requirements under 

section 992 for treatment as a DISC for 

the taxable year. 

A "former DISC" (as defined In sec· tion 992(a)(3)), in addition to filing any 

other return required, must file Form 

112G-DISC, and clearly mark that it Is 

filing as a former DISC. The former 

DISC need not complete those items 

pertaining to the computation of tax· 

able income, but must complete Sched· 

ules J, K, L, and M (Form 112G-DISC). 

8. Where to file.- " .. .,..,.. .... _ ·~ .. ..... llolboftllt. NY OOSOI 
H• Yon (Ill olkl 

::,:~~~· -KompOiotn,lthodo hid-. MA 05501 

lsl•nd. Ytr-1 

~~~·;.:,~~~I:; AIIMbo, c;A 31101 

flllchlttrl, 011~ Cl•ci•Mtl, OH 45,:19 

t!"::~~. K=~dc•. AouL•. nc 7JJ01 

o•-. r .... Alttka, AtirOIII, Colora~. 

IPI>t, lltn-...... LIAI. Nobtut.a. Hftoda, NO<th 

g:t:'t!: 3t:t:"'w.S::.~ ••. Wyotnl ... 

Otdt!!, UT $420 1 

llllnofs, ..,...,ltiiMCuri, Konsos City, MO um WlltDMh' 

Cllllonlla, Kowall r.-. CA 93~ 

1114l•ftl, lltri!Kky, "-th f.atollna, llftntUf"t. 

\'•f1lola, W•t Ylr,lola NtmPIIls, TN 37501 

Otl.,..,., Dls!tlct of 

Cllumbll, lllal)'lao~ . 

f CftM)'fWtf'il 

,.llacltfol!la, ,A I~SS 

The aeparat• lnc:Otne tax mums of a '"""" of Corporations loeet•d In oweral Service c.n. tOf' rGclons may be ltled with tl>e s.,..;ce Cen- ter for t11e atea In wttlch tho pnr>e>pol offic e of the mana&tnl COrpcttatlon thot ~«CIS aH the 

books and records Is located. 

C. When to file.-Form 1120-DISC 

must be filed on or before the 15th 

day of the 9th month following the close 

of the taxable year. No t>xtenslon of time to file will be 

granted. 

D. Period to be coverecf by the 1978 

retum.-The 1978 return Is to be tiled 

for calendar year 1978 and fiscal years 

beginning in 1978 and ending in 1979. 

If the return Is for a fiscal year, fill In 

the taxable year space on the form. 

Final return.-lf the corporation 

ceases to exist, write "FINAL RETURN" 

at the top of the form. 

E. Chance In accounting period.- To change an accounting period, see section 1.442-1 of the regulations and 

Form 1128, Application for Change In 

Accounting Period. 

F. Accountlnc method5.-A DISC 

may, generally, choose any method of 

accounting permissible under section 

446(c) and the regulations thereunder. However, if a DISC is a member of a controlled group (as defined In section 

993(a)(3)), the DISC may not choose a method of accounting that. when ap· 

plied to tranS3ctions between the DISC and other members of the controlled 

group, will result In a material distortion 

of the income of the DISC or any other 

member of the controlled group. A rna· terlal distortion would occur, for exam· pie, If a DISC chooses to use the cash 

method of accounting where the DISC 

acts as a commission agent in a sub· 

stantlal volume of sales of property by 

a related corporation that uses the ac· 

crual method of accounting and cus· 

tomarlly pays commissions to the DISC 

more than 2 months after the sales. 

Unless the law specifically permits, 

you may not chan,e the method of 

Hccountmg used to report income in 

prior years (for income as a whole or for any material Item) without first 

obtaining consent on Form 3115, Application for Change in Accounting 

Method. 

c59-263-109-l 

Rounding off to whole-dollar 

amounti.-Money Items may be shown 

as whole·dollar amounts by dropping 

any amount less than 50 cents and in· 

creasing any amount from 50 cents 

through 99 cents to the next higher 

dollar. 

G. Stock owner5hlp In foreign cor· pontions.-lf you owned 5% or more 

in value of the outstanding stock of a foreign perwnal holding company, at· 

tach the statement required by section 

551(c). If you control a foreicn corporation 

or were a 10% or more shareholder of a controlled foreign corporation, you 

may be required to file Forms 2952 

and 3646. 

H. Financial atatements.-The bal· 

ance sheets must agree with your books 

and records. Any differences must be 

reconciled. 

1. Attaehmenu.--H more space is 

needed on forms or schedules, attach 

s1parate shetsts. Attach schedules In af. 

phabelical order and forms In num«leal 

order to the back of Form 1120-DISC. 

Be sure to put the taxpayer's name and 

employer identification number on the.se 

separate sheets. 

J. Amended return.--Correet any error in a previously ftled return by 

filing an amended Form 11 20-DISC. 

K. Sicnature.-The return must be 

signed and dated by the president, vice 

president. treasurer, assi!>tant treas· 

urer, chief accounting officer. or by any 

other corporate officer (such as tax of· 

fleer) authorized to sign. 

A receiver, trustee, or assignee must 

sign any return that he is required to file 

on behalf of a corporation. 

If your corporate officer filled In Form 

1120-DISC, the space under the signa· 

ture of officer should remain blank. If 

someone prepares Form 1120-DISC 

and does not charge the corporation, 

that person should not sign the return. Certain others who prepare Form 1120-

DISC should not sign. For example, a 

regular full time employee of the cor· poration such as clerk, secretary, etc., does not have to sign. (This list is not 

all inclusive.) Generally, anyone Who is paid to pre· 

pare Form 1120-DISC must sign the re· turn and hll in the other blanks in the Paid Preparer's Information area of the 

return. When more than one person prepares 

Form 1120-DISC. the preparer with 

primary responsibility for the overall 

accuracy of the return must sign as the 

preparer. 

If the preparer is self·employed (i.e., 

is not emp!oyed by any person or busi· ness entity to prepare ttle return), he or 

she should cheek the ''SE'' box. 

if you have questions about whether 

a preparer is required to sign Form 

1120-DISC, please contact an IRS 

offke. 

The person required to sign the re· 

turn MUST: -Sign it, by hand, in the space pro· 

vided for the preparer's signature 

(signature stamps or labels are not acceptable); 

-Give a copy of Form 1120-DISC 

to the taxpayer in addition to the 

copy filed with IRS. 

Publication 1054 is a guide listing some of the preparer's responsibilities 

and penalties for which he or she may 

be liable. The publication also contains 

the regulation citations which govern 

their worlt. Tax return preparers should 

be faiTMiiar with their responsibilities. 

This publication Is available at IRS 

offices. 

l. Tobll a&Mtl.-lf there are no as· 

sets at the end of the taxable year, 

enter the total astets at the becinning 

of the taxable year. 

M. Penalty for failure to file return5 

and provide lnformation.--A penalty is 

imposed by section 6686 (In addition 

to the penalty imposed by section 7203) on any person required to supply in· 

formation or f1le a return who fails 

to supply information or file a rEturn 

at the time prescribed or who files a return that does not show the informa· 

lion required. 

Unless it is shown that the failure is 

due to reasonable cause, the penalty is 

(1) $100 for each fallute to supply in· 

formation (the total amount imposed for 

all failures during any calendar year will 

not exceed $25,000) or (2) $1,000 for 

each failure to file a return. 

N. Taxation of a DISC.-A DISC 

is not subject to any tax Imposed by 

sections 1 through 1564 except for the 

tax imposed by sections 1491 through 

1494 on certain transfers to avoid tax. 

A DISC is not subJect to the corpo· 

rate income tax, the minimum tax on 

tax preferences, or the accumulated 

earnings tax. A DISC Is subject to the provisions 

of sections 1441 through 1461 relating 

to withholding of tax on nonresident 

aliens and foreign corporations. 

0. Investment credit and work lncen· 

five (WIN) eredit.-The Investment 

credit and the work incentive (WIN) 

credit do not apply to a DISC and they 

do not pass through to any shareholder 

in a DISC. 

P. Nonresident alien Individuals and 

foreicn corporatlon5, trusts, and H · 

tates.-Treat all gains on the disposi· 

tion of stock in a DISC or former DISC 

and all distributions out of accumulated 

DISC income, including deemed dlstri· 

butions. as effectively connected w1th 

the conduct of a trade or business con· ducted through a permanent establish· ment within the U.S. 

Q. !tock owner5hlp.-For rules of 

stock attribution, see section 267(c). If 

the owner of the voting stock of the 

DISC was an alien Individual or a foreign 

entity (corporation, partnership, trust, or estate), so indicate by placing an X 

in the "Yes" box in the " Foreign Own· 

er" column and enter the name of the 

owner's country In parentheses in the 

address column. "Owner's country" for 

individuals is their country of residence; 

for other foreign entities, It is the coun· try in which organized or otherwise ere. 

ated, or in which administered. 

3 
R. ForeJcn financial accounts and 

foreiJ'n trusta.-lf at any time during 

the taxable year, you had an interest in or signature or other authority over a bank account, securities account, or 

other financial account in a foreign 

country, check the Yes box for question 

R. However, you snould check the No 

box If the combined assets in the ac· 

count(s) were $1,000 or less during the 

entire year, or were with a U.S. military 

bankmg facility operated by a U.S. fi. 

nanciallnstltutlon. 

If you own more than 50 percent of 

the stock In any corporation that owns 

one or more foreign bank accounts, you 

must check the Yes box for question R. 

Get Forms 90-22.1 to see af you arc 

considered to have an interest in, or signature or other authonty 0\'cr a bank, security, or other financial ac· 

count In a foreign country. 

If you checked Yes for question R, file Form 90-22.1. You can get thts 

form from many IRS offices. File the 

completed form by June 30, 1979, with 

the Department of the Treasury, P.O. 

Box 28309, Central Station, Washing· 

ton, DC 20005. Oo not file it with the 

IRS, it is not a tax return. 

If you were a grantor of. or transferor to a forelifl trust, which was in !>sing 

during the tax year, check the Yes box 

for question S. 

S. Travel and entertainment (SKtion 

274(d).-(See Form 1120-DISC ques· 

tion I, page 5.) The amount required to 

be entered is the total amount expended 

during the year for entertainment, en- tertainment facilities. gifts, travel, and 

conventions for which substantiation 

would be required under section 

274(d). 

Expenditures paid or incurred in 

years prior to taxable years beginning 

in 1978 but not deducted '" those years are not required to be included in the 

total (I.e., expenditures reflected in be· 

ginning Inventories, capitallred expend· 

itures subject to depreciation, etc.}. 

However, expenditures paid or incurred 

in tax years beginning in 1978 that are included In the cost of inventory, mer· chandise purchased for resale, or capl· 

talized In asset accounts, etc., should 

be reported In the total as if they were fully deducted on ths return even 

though all or a portion of such expendl· tures a111 Included In ending inventory, asset accounts, etc. 

Oo not Include amounts treated as compensation and reported on Forms W-2. 

See regulations section 1.274-5 for 

definitions and rules Joverning the 

types of eKpenscs for wh•ch substantia· tlon is required and therefore report· able in question I. 

See Form 1120-FY (1978-79) tor 

rules regarding the deduction of travel 

and entertainment expenses for fiscal 

year DISCs. 

4 4 • 

Specific Instructions 

(Numbered to correspond with lhe line 

numbers on page 1 of the return.) 

S. Cost of pods aold.-Enter the 

amount shown on line 7, Schedule A. 

4 

Cost of operations (where Inventories 

are not an lncom•deterrnininc faetor).-H the amount entered on line 5 

includes an amount applicable to cost 

of operations, attach a schedule show· ing (1) salanes and wages end (Z) other 

costs In detail. 

Computation of Taxable Income 

ll(a). Net operatlnc lou deduc· 

tion.-The " net operating loss deduchon" Is the sum of the n&t operating 

loss c1rryovcl'$ and carrybacks to the 

taxable year. (Section 172(a).) 

A net operating loss may be carried 

back to each of the 3 years preceding 

the year of each loss and carried over 

to each of the 7 years following the year 

of such loss; or, an election may be 

made whereby a net operating loss 

may be carried over to each of the 7 

years following the year of such loss. After applying the net operating loss to 

the initial year, the portion of the loss that may be carried to each of the re. mainlng taxable years Is the excess, if 

any, of the loss over the sum of the 

taxable income for each of the prior tax· 

able years to which the loss may be 

carried. (Seet1on 172(b).) 

The term "net operating loss" means the excess of allowable deductions over gross income, computed with the fol· 

lowing modifications under section 

172(d): 

(1) No net operating loss deduction 

is allowed. 

(2) The dividends-received deduc· 

tion In line 1 of Schedule I Is 

computed without regard to the 

85% limitation prcwided In set· 

tlon 246(b). See section 

1.172-2 of the regulations. 

A deficit In earnings and profits Is 

chargeable in the following order: 

(1) first, to other eamlngs and 

profits, to the extent thereof; 

(2) ~nd. to accumulated DISC in· 

come, to the extent thereof; and 

(3) finally, to previously taxed In· 

come, 

exc.ept tl\at a deftclt In earnings and 

profits will not be applied against accu- mulated DISC Income which haa been 

determined Is to be dMmed distributed 

to the shareholders (pursuant to sec· tion 995(b)(2)(A)) as a result of a 

revocation of election or other 

disqualification. 

In determining the taxable Income 

that must be subtracted from a net op· orating lou to determine the portion of 

the loss that will atJII be available to 

carry to a subsequent year, the net 

operating lou deduction Is determined 

without reprd to the net operating Joss 

for the loss year or any taxable year 

thereafter, and, under certain circum· 

stances. without regard to any portion 

of a net operatlnc loss attributable to a foreign expropriation loss. 

12. Tnable lncome.-lf either the 

gross receipts method or combined tax- able income method Is chosen for computing the taxable Income of the DISC 

attributable to a transaction or group of 

transactions consisting of products or product lines, attach a Schedule P (Form 

1120-DISC) showing. In detail, the 

computation of the DISC's taxable Income attributable to each such trans· 

action or group of trans!lctJons. 

Schedule A.--Cost of goods sold 

If lnter·company pricing rules are 

used, reflect In Schedule A actual pur· 

chases from a rel3ted supplier at U1e 

transfer price determined under the inter-company pricing rules of section 994 . See Schedule P (Form 1120-

DISC). 

Where the DISC acts as a commls· slon agent on a sale for any person, do 

not enter any amount In Schedule A for 

such sale. See Schedule P (Form 1120-

DISC). 

The method of valuing inventorlas may not be changed without permls· 

sion. Application for permission to 

change must be made on Form 3115. 

Check method(s) used for valuing clos· ing Inventories on hne 8(a). 

If this Is the first year the " last-In 

First·out" (LIFO) inventory method provided in section 472 was adopted and 

used, attach Form 970 or a statement 

with the Information required by Form 

970 to Form 1120-DISC and check the 

LIFO boK In line 8(b). Enter the amount or percent (estimates may be used) of 

total closing Inventories covered under 

section 472 In line 8(c). 

$¥¥0¥¥ 

Schedule B.--Gross Income 

(Numbered to correspund Wtth the lme numbers In Schedule B.) 

Enter crosa Income in lines 1 

throue;h 3 catecorlnd as eltt!er (1) 

qualified export receipts from the ule 

of export property, (2) other qualified 

export receipts, or (3) nonquallfied 

gross receipts. If an Income Item con· 

alata of two or more c:ategoriM, report 

each on the applicable line. For u· ample, If Interest Income conalata of 

quallfled Interest fr"om 1 fo,..icn lnt.r- national sales c:orporation and nonquallf.ed lnter"t from 1 domestJe obUpUon, 

enter the qualified Interest on an atUiched schedule for line 2(C) and the 

nonqualified Interest on an attached 

schedule for line l(f), 

Special rule when the DISC acta as 1 

commlssJon apnt.-For commlu iona 

on the sale, !Mse, or rental of property, or the fumlahlnc of MNica, liat In tol· 

umn B the grou receipts on the sale, lease, or rental of property, or the fvrnlahlnc of ..me:.. on whkh the com- mlulona arose and In column C the 

eommlaalona earned. Receipta from non~onunlaaion ulu, lealea, rentals, 

or the fumiahlnc of aervieel and all 

other receipts should be reporUd on 

the appropriate lines In column D. Column E is the aum of commisiMns ,. ported In Column C and receipts from 

~lot-1 
non-commission ules, leases, or rentals 

end all other NCelpb reported In col· 

UIM D. 

See lnatructlona for Hnes 2(11) and 

2(1) for ~ r~prdlnc Ute reportlnc 

of pins from ..,. of qualified aport 

....ts. 

If you use the Installment meUlod of 

reportlnc. attach a schedule showin& 

for the current and 3 preceding years: 

(a) gross sales, (b) cost of goods sold, 

(c) tross profit, (d) percentare of crou profit to tross sales, (e) amount col· 

leeted, and (f) gross profit on the 

amount collected. 

1. Qualified export receipts from the 

sale of export property.-These are re· 

ceipts from the sale of property, such 

as Inventory, produced in the U.S. for 

direct use, consumption, or disposition 

outside the U.S. 

For a sale to meet the export require· ment, It must meet (1) a destination 

test and (2) a requirement that the sate 

not be for ultimate use In the U.S. The destination test will be con· sidered satisfied If the property Is de· livered (regardless of the F.O.B. point or the place at which title passes or risk 

of loss shifts from the seller or lessor): 

(a) Within the U.S. to a carrier or 

freight forwarder for ultlmate delivery 

outside the U.S. to a purchaser or lessee (or to a subsequent purchaser or 

sublessee); 

(b) Within the U.S. to a purchaser or 

lessee, If the property Is ultimately delivered outside the U.S. (Including de· livery to a carrier or frelcht forwarder 

for delivery outside the U.S.) by the 

purchaser or Jessee (or a subsequent 

purchaser or sublessee) within one year 

after the sale or lease; 

(e) Within or outside the U.S . to a 

purchaser or lessee that, at the time of 

the sate or lease, Is a DISC and Is not a member of the same controlled group 

(as defined In section 993(a)(3)} as the 

seller or lessor; 

(d) From the U.S. to the purchaser or lessee (or a subsequent purchaser or 

sublessee) at a point outside the U.S. 

by means of the seller's or lessor' s own 

ship, aircraft, or other delivery vehicle; 

(e) Outside the U.S. to a purchaser or lessee from a warehouse, a storage 

facility, or assembly site located out. 

side the U.S., If the property was pre· viously shipped by the seller or lessor 

from the U.S.; or 

(t) Outside the U.S. to a purchaser or lessee tf the property was previously 

shipped by the setter or lessor from the 

U.S and If the property Is located out. 

side the U.S. pursuant to m prior lease 

by the seller or lessor, and either (a) the 

prior tease termlnatold at the expiration 

of Its term (or by the action of the prior 

lessee acting alone), (b) the sale oe· 

curred or the term of the subsequent 

tease began after the time at which the 

term of the prior lease woutd have ex· 

pired, or (3) the lessee under the sub· 

sequent lease Is not a related person 

(a member of the same controlled group 

as defined in section 993(a)(3) or a relationship that would result in a dis· 

~59-263-lC)g-.1 

allowance of losses under section 267 or section 707(b)) Immediately before or after the lease with rapect to the 

lessor and the prior Ieese -s terml· 

nated by the action of Ute lessor (act· lng alone or together with the lessee). 

The second part of the export ,.. qulrement for sates Is that the sale must 

not be for ultimate use In the U.S. This 

test is applied at the time of the sale. If the property Is to be used predom· 

inantly outside the U.S., the sale Is not 

for ultimate use in the U.S. Property sold to an unrelated person 

is considered sold for ultimate use in 

the U.S. If It Is sold pursuant to an acreement or understanding that it will 

be used in the U.S. or If a reasonable 

person would have believed that It will 

be ttsed In the U.S. 

For eumple, it property is sold to a foreign wholesaler and It is known In 

trade circlet that the wholesaler, to a 

substantial extent, supplies the U.S. retail market, the sate would not be a 

qualified export sate. 

Special rules apply In the ease of 

certain exported components lncorpo· 

rated Into products Imported Into the 

u.s. 

In ...,.,.., related pun:hasers ere 

purc:hasfnc corporations that are mem· bets of the same controlled trOUP 

(as defined in section 993(a)(3)) as the 

DlSC. Unrelated purchasers are all 

other purchasers. 

l{a).-Enter the DISC's qualified ex· port receipts (other than those entered 

on line 1 (b)) from sales of export property to foreign unrelated purchasers for 

delivery outside the U.S. 

l(b).-Enter the DISC's qualified ex· 

port" receipts from sates of export prop· 

erty for delivery outside the U.S. to (I) 

a related foreign entity for resale (dl· 

redly or Indirectly) to a foreign unre· lated purchaser, or (ii) an unrelated 

purchaser where a related foreign en· 

tity acts as commission a,ent. A related 

foreign entity Is a foreign corporation 

tllat ts a member of tJ1e same controlled 

group (as defined in section 993(a)(3)) 

as the DISC. 

2(a). Le.ulnc of export property.-

Enter the 1ross amount r _x,eived from 

the leasins (Including subleasing) of 

export property to unrelated persons for 

use outside \he U.S. Whether the leased property satls· lles the usage test is to be determined 

on .1 year·by·year basis. The roce•pts from a tease of export 

property may qualify In some years and 

not in other years dapending upon t he 

plac9 where the lessee uses the property in the years involved. 

Deduct expenses such as repairs, In· 

terest, taxes, and depreciation on the 

proper lines for such deductions. 

2(b). Services related and subslcflary 

to e qualified export sale or lease.-A 

service is related to a sale or lease if It 

is of a kind customarily and usually fur· 

nished with that type of transaction In a trade or business in which the transae· 

tion arose and if the acreoment to fur· 

nlsh the services Is connected with the 

sate or 18H8. A llfVice Is subsidiary if 

it Is of less Importance and value as 

compared to the sale or tea ... 

2(c). EnclnMrinc end .-dtltactunl 

semces.-Rec:elpts from en&ineerlnJ 

or architectural services on forel&n con· structlon projects Which are either Jo. 

cated abroad or proposed for location 

abroad are qualified receipts. They In· 

elude feasibility studies, design and en· 

gineerlng, and general supervision of 

construction but do not Include services 

connected with exploration for minerals. 

2(d). Export manapment ..mea.. 

-Include receipts for export mana1e· 

ment services provided to unrelated 

DISCs. 

2(f). Interest on producer's loans.-

A producer's loan must be evidenced 

by a note or other evidence of Indebted· 

ness, be designated as a producer' s 

loan, have a stated maturity not to ex· ceed 5 years, and be attributable to the 

borrower's assets used In exporting 

and research and development. 

2(1). Other lnterest.-Ent&r Interest on any qualified export asset other tllan 

interest on producer's loans. 

Include, for example, lnte1est on 

accounts receivable arising out of sates 

in which the DISC ected as a principal or agent and Interest on certain obtl· 

ptlons Issued, ,uaranteed, or Insured 

by the Export.Jmport Bank or the For· ergn Credit Insurance As!ociation. 

2(h). Capital pin net ineome.-

Every sale or exchange of a capital asset 

must be reported In detail on a sepa· 

rate Schedule D (Form 1120) even though no gain or loss is Indicated. 

In addition to completing Schedule 

0 (Form 1120), attach a separate 

schedule computln1 the gain from the 

sale of qualified export assets. 

2(i). Ordinary pin or (loss).-Enter the total ordinary gain or loss from 

line 11, Part II, Form 4 797. 

In addition to completing Form 4797, 

attach a separate schedule computing 

the gain from the sale of qualified ex· 

port assets. 

3(b). Exports subsidized by the 

U.S. Government.-Enter receipts from 

the sale of products subsidized under a program of the U.S. Government, or any instrumentality thereof, that have 

been designated as excluded receipts. 

3(c). Certain direct or indirect sales 

or teases for use by the U.S. Govemment.-Enter receipts from di· 

rect or indirect sales or leases of property or services for use by the U.S. Government, or any Instrumentality 

thereof, where the use of U.S. products or services Is required by statuto or 

regulations. 

3(d). Sales to another DISC In Ute same eontroNed lfOUP.-Enter receipts 

from a DISC that Is a member of the 

same controlled croup of corporations. 

5 
See leCtion 993(a)(3) for the definition 

of c:ontrolled poup. 

3(f). OtMr.-lnclude in an at· 

lathed schedufa any ROnquallfied cross 

receipts not ,.rtact on lines 3(a) 

thf'OUih 3(a). Do not ofbet an item 

of Income apiMt 1 similar item of 

expanse. 

Schedule C.-Dividends 

(Numbered to correspond with the 

1/ne numbers I~ Schedule C.) 

1. Enter dMdands received from do· 

mettle corporations IUbject to income 

tax and the 85% deduction under sec· 

tion 243(a)(l). 

Include on this line taxable distribu· 

tions received from 1 DISC or former 

DISC that are desipted as beinc eHei· 

ble for the 85 ~ divitfends-received 

deduction. 

For dividends received from a regu· 

fated investment company, see section 

854 for the amount subject to the 85% 

deduction. 

So-called dividends or eaminp received from mutual aavincs banks, etc., 

are really interest and should not be 

treated as dividends. 

2. Er.ter dividends received on the 

preferred stock of a public utility that 

is subject to income tax and is allowed 

the deduction provided in section 247 

for dividends paid. 

3. Enter dividends received from 

foreign c:orporatlons that qualify for the 

85% deduction provided in section 

245(a). 

4. Enter dividends received from 

wholly-owned foreign subsidiaries that 

are eligible for the 100% deduction 

provided in section 245(b). 

5. Enter foreign dividends (includ. 

lng minimum distributions under sub· 

part F) that are not reportable on lines 

3 and 4. Exclude distributions of 

amounts constructively taxed in the 

current year or in prior years under 

subpart F. 

6. Include income constructively re· 

ceived from controlled foreign corpora· 

tions under subpart F. This amount 

should equal the total of amount.s re· 

ported in Schedule A, line 5 of Form(s) 

3646. 

7. Enter taxable distributions from a 

DISC or former DISC that are deslg· 

nated as not being eligible for the 85% 

dividends-received deduction. (See sec· 

tlons 246(d), 995(b), and 996(a)(3).) 

8. Include dividends (other than cap· 

ltal gain dividends) received from reg· 

ulated investment companies that are 

not subject to the 85% deduction; divi· 

dends from tax-exempt organizations; 

dividends (other than capital gain divi· 

dends) received from a real estate in· 

vestment trust which, for the taxable 

year of the trust in which the dividends 

are paid, qualifies under sections 856 

through 858; dividends not eligible for 

6 

a dividends-received deduction because 

of the lloldinc period of the stoek or an 

obliptlon to meb CIM'o ~· pey. menta with r8I98Ct to liMi stock; * 

any other taxable dividend 1nc:oma not 

property reported abcwe. 

10. Enter dividends (and Income 

construdlvety ~lwd from controlled 

foreien corporations under subpert F) 

from a qualified foraitn frrwstment of 

1 DISC tn 1 ret.ted foreltn export c:or· 

poratlon which constitute qualified 

dividends. Generally, the lnwstment 

will be in stock or securitln of a foreien 

selling subsidiary of the DISC which 

qualifies as 1 foreicn international sales 

corporation (FISC). 

0 u 4 4 4 ¥ 

Schedule E.--OaductioM 

(Numbered to correspond with t,. line 

numbers In Schedule £.) 

Enter upon , OIMtion ...,. ..... "' 

line 1. Export pronaotioft ...,.,.... .,. 

a DtSC'a ordinlfJ and MC8SUIJ ••· pe..... peid Of lncwrad .. Clbtain 

qualified export racatpta (but do Mt 

include Income tun). Any upense (or 

any 1*1 of aa upansa) not Incurred to 

obtain qualified apett recalpta should 

be ..tared In line 2. 

1(c). D.praci.tlon..--Attach Fotm 

4562 If you claim a deduction for de· 

preciatlon. Enter on thls tine the depreciation not claimed In Schedule A and 

elsewhere on the return. 

1(h). Freipt.-Enter one-half of the 

freight expenses (not including insur· 

ance) for shipping export property 

aboard U.S. flag vessels and U.S. owned 

and operated aircraft (unless required 

by law). 

1(1). Compensation of officers.-

Attach 1 schedule 5howing the name, 

social security number, amount of com· 

pensation, and expense account allow- ance for your 6 highest paid officers. 

To determine the highest paid offi. 

cers, acid all allowances. Including ex· 

pense account allowances, to each of· 

fleer's compensation. Expense account 

allowance means (1) amounts, other 

than compensation, received as ad· 

vances or reimbursements and (2) 

amounts paid by or for the corporation 

for expenses lncurrod by or on behalf 

of an officer. The expense account al· 

lowance does not have to be shown for 

any officer for whom the combined 

compensation and expense account al· 

lowance is less than $30,000. 

For this purpose, an officer is a per· 

son, such as regular officer, chairman 

of the board, etc., who Is elected or appointed to offiCfJ or who Is designated 

as an officer In the corporation's charter 

or bylaws. 

1(D. Repairs.-Enter the cost of in· 

cidental repairs, such as labor and 

supplies, that do not add to the value 

or appreciably prolong the life of the 

property. Include on this line the total 

amount of repairs figured under ttle 

Class lifo Asset Depreciation Range 

(CLAOR) System. 

l(lc). Amonia:af1a .-If • deduction 

for amortization Is claimed. attach a 

tcMdule lhowtnc: (1) a deacriptlon of 

tM expenditures belftc emoetiad: (2) 

date acquired,~. or expended; 

(3) amount being 1m0ttlzed; (4) 

amortization deducted in prior years; 

(5) amortization period (number of 

months); (6) amortiDtlon for this y•r; 

and (7) the total amount of amortiza. 

tlon leu the amount claimed in Schad· 

ule A and elsewhere on tM return. 

1(1). Pension, proftt.charMc. etc. 

.,tans.-The number of ,.ns to be en· tared refers to aU plans for which all as· 

sets have not been distributed. Also in· 

elude any plans in which assets were 

distributed In the current year. The 

number of plans must be Indicated 

whether or not a deduction Is claimed. 

Complete Form 5500 for each plan 

and file each as a separate return. 

Complete Form 5500-C In lieu of Form 

5500 If there were fewer than 100 par. 

tlcipants at the beginninc of the plan 

year. See instructions for above forms 

for computation af the amount of allOW· 

able deduction. File these forms on or 

before the last day of the 7th month followinc the close of the plan yea¥. 

Caution: ERISA imposes penalties 

for failure to furnish complete lnforma· 

tion and failure to file statemer~ts, re· 

turns and reports. 

l(m). Employee beMftt procrams.-

Enter the amount of your contributions 

to employee benefit programs (e.g. in· 

surance, health and welfare programs) 

that are not an incidental part of a pen· 

sion, profit-sharin,. etc., plan included 

on line 1(1). Also onclude contributions 

to a qualified group legal services plan. 

Section 120 imposes certain rules on 

an employer which will permit em· 

ployees (including spouses and de· 

penclents) to exclude from income em· p_loyer contributions to a qualified group 

legal services plan. 

2(a). Bad debts.-Bad debts may be 

treated In either of two ways--{i) as 

a deduction for debts that become 

worthless In whole or In part, or (li) as 

a deduction for a reasonable addition to 

a reserve for bad debts. (Section 166.) 

Application to change the method of 

computing bad debts must be made on 

Form 3115. 

2(b). Taxes.-Enter taxes paid or 

accrued during the taxable year. 

See section 164(d) for apportion· 

ment of tax on real property bEtween 

seller and purchaser. 

2(e). lnterest.-Oo not include in· 

terest on indebtedness Incurred or con· 

tinued to purchase or carry obligations 

on which the Interest Is wholly exempt 

from Income tax. (Section 265.) 

See section 267 for the limitation on 

deductions for unpaid expenses and in· 

terest in transactions between related 

taxpayers. 

See section 46l(g) for limitation on 

deduction for prepaid interest by a cash 

basis taxpayer. 
2(d). Contributiona.-Entflf' con· trlbutlons or gifts actually paid within 

the taxable year to or for the use of 

charitable and gowmmental orpnfza. 

tions described In section 170(c) and 

any unused contributions carried over 

from prior years. 

11M total amount claimed may not 

eneed 5% of taxable Income (line 12 

of pap 1) compuad without reprd to 

(1) any deduction for contributions, ~2) 

the dlvklends·rec:eivld deduclion on hne 

ll(b) of ...,.1, (3) deductions allowed 

under sections 249 and 250, (4) any 

net ope,.tinc toss c:ai'TJINidt to the tal· 

able year under section 172, and (5) 

anr.eapfUI Joss ea~ to ttM tal· 

ab ,.., under Mdlon 1212(a)(1). 

Charitable contributions In excess of 

the 5% limitation may not be deducted 

for the taxable year but may be carried 

over to the next 5 taxable years. A contribution carryover is not allowed to the extent that It increases a 

net operating loss carryover. See sec· tlon 170(d)(2)(B). 

Corporations on the accrual basis 

may elect to deduct contributions paid 

on or before the 15th day of the 3d 

month following the close of the tax· able year If the contributions are au· 

thorlzed by the board of directors 

during the taxable year. A declaration, 

sianed by an officer, statlna that the 

resolution authorlzlnc the contributions 

was adopted by the board of directors 

durin& the taxable year, and a copy of 

the resolution, must both be attached 

to the return. 

Attach a schedule showing the name 

of each orpnizatlon and the amount 

paid. If a contribution Is made in property other than money, describe the 

kind of property contributed and the 

method used In determining its fair 

market value. If a contribution carry· over Is included, show the amount and 

how It was determined. 

Special rule frK contributions of eet· 

tain property..--lf a charitable contribu· 

tion of property Is made, the contribu· tlon must be reduced by the sum of 

(1) the ordinary income and 

(2) for certain contributions. 

62 Y2 % (60.870% for gifts 

made after December 31 , 1978) 

of the lona·term capital gain, 

that would have resulted if the property were sold at its fair market value. The 

reduction for 621h% (60.870% for 

gifts made after December 31, 1978) of 

the lona·term capital gain applies to (1) 

contributions of tangible personal property for use by an exempt organioration 

for a purpose or function unrelated to 

the basis for its exemption, and (2) con· 

trlbutions of any property to or for the 

us.e of certain private foundations. (Sec· 

tlon 170(e).) However, a charitable contribution of inventory and property de· scribed In section 1221(1) and (2), to 

an exempt organization described in 

section 50l(c)(3) for use in the care of 

the ill, needy, or children may be de· 

ducted to the extent of basis plus one· half of appreciation of such property, 

but in no event may the deduction ex· 

c59-M3-1~1 

ceed twice the basis for such property. 

(Section 170(e).) 

&arpin sale to a charitable orpni· 

zation.-lf a charitable contribution de· 

duct ion for property sold to a charitable 

organization is claimed, the adjusted 

basis for determining gain from the sale 

is an amount which is in the same ratio 

to the adjusted basis as the amount 

realized Is to the fair market value of 

the property. 

2(e). Freipt.-Enter the freight ex· 

pense not deducted on line 1 (h) as an 

export promotion expense. 

2(1). OtMr.-No deduction Is al· 

lowable for any amount allocable 

to a class of exempt Income. Items dl· 

rectly attributable to wholly exempt In· 

come must be allocated to such Income. 

and Items directly attributable to any 

class of taxable Income must be allo· 

cated to such taxable income. 

If an item Is Indirectly attributable 

both to taxable Income and exempt In· 

come, a reasonable proportion of the 

item. determined In the light of all the 

facts and circumstances In each case, 

must be allocated to each. 

Attach a statement showinc (1) the 

amount of each class of exempt income 

and {2) the amount of expense Items al· located to each class. Show the amount 

allocated by apportionment separately. 

Schedule I.-Dividends-received 

deduction 

1. In general, no dividends-received 

deduction will be allowed on any share 

of stock (a) that is disposed of before 

the corporation has held it 15 days or 

less or (b) to the extent the corporation 

is under an obligation to make corre· 

spondlng payments with respect to sub· 

stantialty identical stock or securities. 

No deduction is allowed under section 243 for a dividend from a DISC or 

fonner DISC (as defined in section 

992(a)) to the extent it is paid out of 

accumulated DISC Income or previously 

taxed income or is a deemed distribu· tion pursuant to section 995{b)(1). 

2. Umlution on divldends·rec:•ived 

deductlon.-Llne 2 may not exceed 

85% of line 10, page 1. 

For this purpose, line 10 is to be 

computed Y-ithout regard to any capital 

loss carryback to the taxable year under 

section 1212(a)(1). In a year In which a net operating 

loss occurs, ~ectlons 172(d) and 246(b) 

provide that this 85% limitation does 

not apply even if the loss Is created by 

the divldend5·received deduction. 

3. Fiscal year DISCs that have received dividends on certain preferred 

stock of public utilities must use Form 

1120-FY (1978-79) to compute their 

dlvidends·received deduction. 

• 4 u • 

Schedule J.-Deemed and Actual 

Distributions to Shareholders for 

the Tauble Yur 

Part I.-Deemed distributions under 

sec:tJon 995(b)(1) (Numbered to cor· 

respond with the line numbers in Part I 

of Schedule J.) 

2. Attach a computation showing the 

gain recognized by the DISC during the 

taxable year on the sale or exchange of 

property, other than property which in 

the hands of the DISC is a qualified ex- port asset. previously transferred to it 

in a transaction in which gain was not 

recognized in whole or In part, but only 

to the extent that the transferor's pin 

on the previous transfer was not 

recognized. 

3. Attach a computation showing the 

gain (other than the aaln entered on line 

2) recognized by the DISC during the 

taxable year on the sale or exchanee 

of property (other than property which 

In the hands of the DISC is stock In 

trade or other property described in sec· !ion 1221(1)) previously transferred to 

It in a transaction In which pin was not 

recognized In whole or In part, but only 

to the extent that the transferor's p in on the previous transfer was not recoa· 

nized and would have been treated as ordinary income If the property had 

been sold or exchanged rather than 

transferred to the DISC. 

4. For purposes of computine the 

portion of taxable income attributable 

to military property usa the gross In· 

come for the year attributable to mill· tary property and the deductions which 

are properly apportioned or allocated 

to such income. See section 38 of the 

International Security Assistance and 

Arms Export Control A-:t of 1976 (22 

USC 2778) and regulations thereunder 

(22 CFR 121.01) for definition of 

"military property ... 

11. Under section 995(b)(1)(F)(ii), 

a DISC Is deemed to distribute the en· 

tire amount of lt.s income attributable 

to participation in or cooperation wath an international boycott. See Form 

5713 for computation of this deemed 

distribution and reporting requirements 

of any DISC with operations In or re· 

lated to a "boycotting" country. 

12. Under section 995(b)(l)(F)(iii), 

a DISC Is deemed to distribute the 

amount of any Illegal bribe, kickback or 

other payment paid by or on behalf of 

the DISC, directly or Indirectly, to an 

official, employee or aeent of any gov· 

ernment. 

14. Attach a computation showing 

the earnings and profits for the taxable 

year. 

For purposes of computinc the 

earnings and profits for taxable years 

beginning after June 30, 1972, the al· lowance for depreciation (and amortl· 

zation, If any) Is the amount which 

would be allowable for such year If the 

straight line method of depreciation had 

been used for each taxable year btlin· 

ning after June 30, 1972. See section 

312(k)(2) for exception. I 

16. Attach a computation showinl 

the amount of (1) forelan investment 

attributable to producer's loans (as d• 

fined In section 995(d)) of the DISC 

for the taxable year; (2) all accumu· 

7 
lated earnings and profits including 

earnings and profits for the taxable 

year less the amount on line 15, Part 

I; and (3) accumulated DISC Income. 

Enter the smaner of these 3 amounts 

(but not less than zero) on Une 16. 

Foreign Investment attributable to 

producer's loans will be the smallest of 

these 3: 

(1) the net increase in foreign as· 

sets by members of the con· trolled group (as defined in 5et· 

tlon 993(a)(3)) that Includes the 

DISC, 

(2) the actual foreign Investment by 

domestic members of the group, 

or 

(3) the amount of the DISC's out· 

standing producer's loans to 

members of the controfled 

group. 

For the definitions of "net increase 

in foreign assets" and "actual foreign 

investment," see sections 995(d)(2) 

and 995(d)(3). 

Part ll.~putation of Tax.able Income Attributable to Base Period Export Grou Receipts 

(Numbered to correspond with the 

line numbers in Part II ol Schedule J.) 

4. Include the annualized taxable in· come but no taxable losses incurred by 

any DISC which is a member of your 

controlled group (as defined m section 

993(a)(3)) for the latest ta)t8ble year 

ending with or within your taxable year. 

5. If this amount Is $100,000 or 

less, omit lines 6 througt, 21 and en1er 

zero on line 22 and on line 8, Part I. 

6. Column C.-Generally, if export 

property does not qualify in the current 

year under 993(c)(2) as giving rise to 

export gross receipts, then the gross 

receipts from such property should be 

excluded in computina the export gross 

receipts for the base period. 

However, if, by virtue of section 

603(b)(2) of the Tax Reduction Act of 

1975, export property qualifies in the 

current year as giving rise to export 

gross receipts, then the DISC must In· crease Its export gross receipts for the 

base period. See section 1101(g)(5) of 

of the Tax Reform Act of 1976 for com· 

putatiorl to be used. Note: Enter gross receipts, not just 

commissions, In the cue ol transac· 

lions made on a commission basis. 

llb. Additions must be made to 

base period export gross receipts In cer· 

tain cases where there has been a sep· 

aration In ownership of the stock In the 

DISC from ownership In the underlying 

trade or business which produced the 

export gross receipts during the base 

period, and In cases where any 5% or 

more shareholder owned 5% or more of the stock of another DISC in any base 

period year. (See sections 995(e)(9) 

and 995(e)(l0).) 

15. Include on this line the annualized export gross receipts of all DISCs 

which are members of yoor controlled 

group (as defined in s-ection 993(a)(3)) 

for their tatest tax:able year mdiQ~ with or within your taxable year. 

Part m-Deemec~ ...,...... ander 

section 995(b)(Z) 

A st.arehokhr of a oorpoA~tion tttat 

reYOked its election to be tnrated as a DISC or h~ to queflfJ es a OtSC for 

a taxable year wift be deemed to have 

received a distribution bucable as • dlv· idend equal to his pro rata shaN of the 

O.SC Income of ttte corporation eccumulated durin& the lmmedlatefy preted· 

ing consecutive taxable years for which 

the corporation was a DISC. The dlstri· 

butlons will be deemed to be received in 

equal Installments on the last day of 

each of the 10 taxable years of the 

corporation fotlowina the year of the 

termination or dlsqualiflca1ion (but In no case over more than twice the num· 

bar of immediately preceding consewtlve taxable yean during wllich the cor- poration was a DISC). 

0 4 •• u •••••• 

Schedule K.--Shareholder's 

Statement of DISC Distribution 

Attach a separate Copy A. Schedule K 

(Form 1120-DISC) to form 1120-

DISC for each shareholder who had an 

actual or deemed distribution durlnc 

the DISC's taxable year. .. 4 

Schedule H.-Export Gross 

Receipts of the DISC and 

Related U.S. Persons 

Complete and attach Sctledule N 

(Form 1120-DISC) to Form 1120-

DISC. 

Schedule P.--eo.nputation 

of lnt•·compa11J Transfer 

Price 01' Co.,missiea 

Attach a separate Sche<We P (forM 

ll~SC) tor eac:.h tt•~ or 

(rOU9 ol transectic>M to wNd1 the inter· 

~ny pricinc n.IAes ol sectioft 9!M 

(a)(l) 8nd (2) are~ 

Codes for Principal Business Activity 

These industry titles and definitions are based. In general, on the Enterprise Standard Industrial Classification system 

developed by the Office of Management and Budget. Execu- tive Office of the President, to classify enterprises by type 

of activity In which they are engaged. The system follows 

closely the Standard Industrial Classification used to classify 

establishments. However, certain activities such as manufacturing, do not apply to a DISC. Using the list below, enter on page 1, under B, the code 

number for the specific industry group from which ttle largest percentage of "total receipts" is derived. "Total re- ceipts" means all Income (line 4, page 1). On page 5, ques· tion J, state the principal business activity and principal 

product or service that accoont for the largest percentage 

of total receipts. For example, if the principal business at· 

tivlty Is "Wholesale trade: Machinery, equipment. and wpplles." the principal product or service may be Engines<~nd 

turbines." 

TRAHSf'ORTATIOH, COMMUM<:ATIOH, 

ELECTRIC. GAS, AND SANITARY 

SERIIIC£S Code 

T ransportatloft: 

4400 Water tr.nsportatron 

4 700 ()(hef' trensportatlon services DJctri<:, ps, end Nnlbry MNfcet.: 

4910 Electric services 

4920 Gas production lllld distributloll 

4930 Comllln .. on utility MtVi<:es 

wttOLUAU TRADE 

Otnt*: 

5008 M.tdllnery, equipment. end supplies 

5010 Motor vehida end eutomodve eqwpo 

rnent 5G20 Furnltutw end home fvmlshlnp 

5030 lumber and constiUC:tlon materials 

5040 Sporting, rec:rtetlonal, photocraphle, and 

hobtly &OQds, toys. and suppll• 5050 w.tals end miMrals, exc.t~t petroleum 

and scrap 

5060 ~eoods 5070 H.,........ plumtlinc and hllldnl eqlli9-

ment 

!5098 ()(her durable roods 

8 

Code 

Nondurable: 

5110 Pal)er and pal)er products 

5129 Orvp, ~~ proprlet•rlas. and drvaglsts' sundnes 

5130 ,._pperet, piece aoods. and notions 

5140 Groc:efill and re~ed products 

5150 Farm-product raw materials 

5160 Chemicals and •Hied Pt"oductl 

S 170 Petroleum and petroleum prodvets 

5180 Alcobolic be¥eraen 

5190 ~ ... scellaneous nondurlble soods 

R£TAIL TIW)£ 

Wldll'cl m.t.ta"d..~ pnlen ..,, and mciblte home : 

5220 Building materials de111ers 

5251 Hantw.ra lt«es 

5265 Garden supplies and mobile home ....... 5300 Gentof"'l tMn:l\andiM stcJru 

5410 '"'-'Y .tores 5490 ()(hal' food stores 

Autllmotlve dMierl end Mrvioe lbltiona: 

5515 Motor vehide deelerl 

5598 55-41 GasoloM OU..r automotiva MfVIce ·~ dealers 

Code 

5600 Appe...t and -.ory .... 5700 furniture and ,_ fwnilhll., ~ 

5800 Eatlna and drinldne .._.. 

Mltc:el'- rwb)l lto!W: 

5912 Orur stores and ~atary atores 

!i92l liquor atotes 

5995 Other ml-llaneous retail ltoras 

PtNAMCE. INSORANa. AND REAL ESTAT£. 

c..dlt ___.... oiNt than bent.: 

6199 Other c!9dlt ..-nates 

SERVICES 

Business~ 

7389 Export manaaement Mnricn 

Auto ,...., and wrvlces; ,.,.,..__ repak 

: 

7500 Luao or rental ol motor vehlctes 

Amusement and rec:rNtlon .-vlc:ft: 

7812 Motion picture pnxluctlon, distribution, 

and services 

Ottler saMcn: 

8911 An:tlltectural and etlll-"'• ..mc:es 8930 Accoontinc, eudltlnc, lftd booldcM1)in( 

8980 Miscellaneous services 
SCHEDULE N Export Gross Recel~ta of the DISC 

{Form 1120-DISC) and Related U. • Persons 

o.-..... ,_ .... See ...,.,... IMtructloM. ~®78 

--- .... AttKtl tt11a Khedule to Form 1120-DISC. 

Neme u a11own on Fotm 1120-0ISC &,en.,.. ........ " .... ., ...... ... _ ............ ~ 

-- ..._of 

-- upott -· recelpta 

~ ldentiflcallon numlw I 

l i 

•• 

Section A.-£xport Gioia Rec:etpta In the Current Y .. r by Country (See spec1fic Instruction B) 

I Country ol ultlmolo <IMt!Mtlon 2 t.rpon ,..,,, [ar.:.Jrm ~~.-· recolpta of (UM OM llno lor oach couml)') lllo DISC 

J " ' '""" 

4 All _, rwlotod 

DISCo u ............. 

United States ~lncludln& Puerto Rico and U.S. pouuslona) ~~..-64 

Tot.. Is ..... Sect1on B.-Export Gross Receipts in Precedin& Ye01rs (See spec1f1c mstructlon B for 

adJustments due to changes to the def1n1tion of qualified export gross receipts) 

1 Toublo year of the DISC b11011 .,..., rwcolpco of 

W!~~~~=~1~"~·~~"f.:'<t!":~~.:;: ~·.~ .,:~,:-o'!'~ :~: 2 bpon 1rott .. ltlt<l u ............. 

Jonuory I, I t72) ~C: fi."~' (ol B~ntna of yoar (II) End olyur l Ralotod 4 All other relttod 

mo dey. yur) (lnoftth, d4ty. yoorl DISCI U.L penon• 
Schedule H (Form u:O-OISC) 1971 

M:atjlll 

Section A.-Releted U.S. Persons, Except DISC., in Your Controlled Group (Aitldllddltlollll ~ o1 IIIII ......_ 1 -.,) 

Name 
<lf0\78 U ~ ~@!~~ Internal Revenue Service 

Instructions for 

Schedule N (Form 1120-DISC) 

Export Gross Receipts of the 

DISC and Related U.S. Persons 

(References are to the Internal Revenue Code) 

General Instructions 

1. Purpoee of ScfleduJe N (Fonn 

U20-01SC).-Thls schedule must be 

coml)let.d end ett.ehed to Form 1120-

DISC to report: 

(e) export arou receipts of the DISC 

by product code; 

(b) export aross receipts of the DISC 

end rwleted U.S. persons In the 

eurrwnt y .. r by country; 

(e) export aross receipts of the DISC 

end rwleted U.S. persons In pre· 

eedlna years; end 

(d) the name, eddress, end Identify• 

Ina number of related u.S. persons. 

If the lines on this schedule ere not 

sufftelent, ett.eh edditlonal copies of 

Schedule N. 

2. Export Groa RKelpta.-Thue are 

receipts from: 

(e) the sale for direct use, eonsump. 

tlon, or disposition outside the 

U.S. of property (such 11 lnven· 

tory) produced in the U.S.; 

(b) the lease or rwntel of such prop. 

erty to unrelated persons for use outside the U.S.; 

(c) services related and subsidiary to e sale described In (1), or a lease 

or rwntel described In (b); 

(d) enalneerinl or architectural serv· 

Ices for construction projects out· 

side the U.S.; end 

(e) export management services. 

In the case of commission sales, 

"•xport srou receipts" Include the total 

receipts on which the commission wes 

eemed. (See section 995(e)(4).) 

II*: FOt puf11051S of Sdltdule H only, no rtductlon Is to be made lOt receipts attrlbvtablt to 

military property. Thtrtlort, 1 DISC's "export 

II'OSS rtCtlpb" ,., purposa or Sdltdult " should 

be taken from line 13(a), Part II, Schedule J (Form 

1120-{)ISC 1978) lOt the current taxable ~ur. 

from line ll(a), Part II, Schedule J (FOtlll 1120-

0ISC 1977) for twblt ,.,rs bellnnlnc In 1977; 

lr0111 lint 13(1), Ptrt II, Schedule J (Form 1120-

0ISC 1976) lOt taxable ,.ars beclnnlnc In 1976; 

and from column C. lines 6(a) tllrouch 6(t), Part 

II, Sdledule J (FOtlll 1120-{)ISC 1978) lor tutble 

,.ars belinninclft 1972 lhnouch 1975. 

3. U.S.-U.S. Includes the Common· -•lth of Puerto Rico and possessions of the U.S. (See section 993(g).) 

4. Qeocrephlc Sou" c of ElqiOrt Gross 

RKelpts.-The 11108"' lc source of eJC· 

port 11ross receipts tr~. m the sele of 

property Is the country of ultimate des· 

tinetlon of the property, or the country In 

which the property Is consumed or fur· 

ther processed to the best of the DISC's 

knowledll•· However, all ~elpts from 

sales by a DISC to a second DISC heve 

the U.S. as their 11101rephle sour-c. for 

purposes of Schedule N, reaardless of 

the disposition of the property by the 

second DISC. For non·DISC releted U.S. 

persons, ell receipts from sales to or 

throu11h a related or unrelated DISC, end 

from sales of property ultimately des· 

tined lor the U.S., are to be excluded 

from "export 11ros1 receipts" and there· 

fore not reported on Schedule N. 

The geographic source of export 11ross 

receipts from the lease or rwntal of prop· 

erty is the country in which the property 

Is located. 

The geographic source of aross ,... 

ceipts from the provision of services II 

the country in which the purchaser Is 

located. 

5. Related Persona.-The followinl 

are "related persons": 

(a) an Individual, partnership, trust. 

or estete which controls the DISC; 

(b) a corporetion which controls, or is controlled by the DISC; and 

(c} a corporetion which Is controlled 

by the same person or persons 

who control the DISC. 

In the above, "control" means direct 

or Indirect ownership of more than 50% 

of the total combined voting power of ell 

classes of stock entitled to vote. (See 

section 993(a)(3).) 

6. u.s. Person.-A "U.S. person" Is: 

(a) a citizen or resident of the U.S.; 

(b) a domestic corporetlon or partner· 

ship; or 

(c) any estate or trust (other then e 

foreign estate or trust. within the meaning of section 7701(e)(31)). 

Specific Instructions 

A. Export Gross Receipts of the DISC 

by Product Code.-f>roduct code num· 

bers and percentages of export 11ross re- ceipts are reported In the Information 

block In the upper righthand corner of 

Pill• l, Schedule N. Uslna the product 

code system on page 2 of thue lnstruc· 

tlons, enter the code number for the major product or service (es menured 

by export gross receipts) sold or pro· vlded by the DISC in the first column of 

the first line of the informetlon block. Enter the percentage of total export a ross rece~pts accounted for by this product or service In the second column of the first 

line. Enter the same Information on the 

second line for the next laraest product or service (as measured by export 1rot1 

receipts) sold or provided by the DISC. 

Example: A DISC hes export lrosl re- ceipts of $10 million. The sale of qri· 

eulturel chemicals accounts for $4.5 mil· 

lion (45%) of that amount, the larant 

product or service sold or provided by·ttte 

DISC. The number "287" (the product 

code for aarlcultural chemicals) should 

be entered In the first column, end 45% 

In the second column of the first line. 

The sele of Industrial chemicals a~ounta 

for $2 million (20% of $10 million), ttle 

second largest product CK service sold 01 

provided by the DISC. The number "281" 

{the product code for lndustrlel ehem· 

leafs) should be entered In the first col· 

umn and 20% In the second column of 

the second line. 

8 . Pert I.-If two or more DISCs ere 

related persons, only the DISC with the 

laraest export gross receipts should com· 

plate columns 3 and 4 In Sections A end 

B. All DISCs should complete columns 1 

and 2 In both Sections. 

Period for which lnformetlon Is to be 

Furnished for Related U.S. Persons.-

Furnlsh the Information required In col· 

umns 3 and 4 for the related DISCs' end 

other related U.S. persons' ennual ec· counting periods endlnl with or within 

the DISC's texable year. 

Section A-Export Gross Receipts In 

the Current Year by Country.-The re- ceipts from any trensaction should be 

reported only In one column. If a DISC 

acts as a commission aaent for a rwlated 

person, the total emount of the tranuc:· 

tion should be attributed to the DISC. 

(1) Column 2-Export gross receipts 

of the DISC.-Complete column 2 to re- port the geographic source of the DISC's 

export gross receipts from all souces (including the U.S.) for the taxable year. 

(2) Column 3-Export gross receipts 

of related DISC's.-Complete column 3 to 

report the geographic source of all releted 

DISCs' export gross receipts from all 

sources (Including the U.S.). 

(3) Column 4-Export gross receipts 

of all other related U.S. persons.-Com· 

plete column 4 to report the geographic 

source of ell other related U.S. persona' 

export gross receipts from all sources ex· 

eept the U.S. 

Section 8-Export Gross Receipts In 

Preceding Years.-Complete Part I, Sec· 

tlon 8 to report the export gross receipts 

of the DISC, ell related DISCs end ell 

other related U.S. persons for each tax· able year of the DISC beglnnlna on or 

after January l, 1972. 

If any of the prior year DISC export 

gross receipts were adjusted to exclude 

gross receipts from property which does 

not currently qualify as export property 

under section 993(e)(2), attach 1 sched· 

ule showing the amount of the edjust· ment for each year for each DISC In the 

related group. Include the edjustments 

fur each year In the export gross receipts 

of the "all other related U.S. persons" 

(column 4) as If the export had not orial· 

nally been made through the DISC. 

C. Part 11.-Report the name, ad· 

dress, and identifying number of related 

U.S. persons In your controlled aroup on Schedule N, page 2. 
Product Code Sptem 

{TlleM--.... to be UMd only witt!~ .. (Form 1120-DIIC))• 

Using the list below, enter on page 1 of Schedule N the product code qumber and percent of export gross receipts as explained in Instruction A of the Specific Instructions. 

This product code system is divided Into two categories-(!) nonmanufactured product groups and services 

and C2) manufactured product groups. 

Pap2 

Code 

243 Mlll-1'11. -r. plywood. end prefobrl- coted llructural wood IN'OCI<IctL 244 W-n conloinors. 249 Milcolloneous Wood productL 

FlltftltuN enll flstu.-: 

251 Hou"hold tum lturo. 252 Olllco fumltu,.., 

n: ~~o~~ ~~l:'.,J~ ='~::·~c. end store fixturoL 25t Ml.collonoous l"m lturo a nd flxturos. 

l'aper end allied ...-ctucta: 

2li I Pulp miiiL 262 l'apor mills. except buildl"' peper mil ... 2Q l'opotboord milt.. 

264 ~::r~~=~:~:!r:.~rd producu. 

~U :~~~·;:!:,':~~"':u1t':.'n~bcnl..:!'rd miiiL 

........... ~ .......... preduda: 

271 N-poporo: publllhlna. publlthlftl end llrlntlna. 

Z12 ... rlodlcola: publllhlna. publlthlftl and 

m =._na. 

y; ~'""-:.u-...=="' .... 276 MMifold businou fotma. 

m i~rd.::~~ ...... end boollblndl ... and related -"'- 279 Service lndUstrleo for the prlntlftl trade.. 

~ ........... .,..... 212 

281 1'1-lndwtttol lca ......,..,. lncHpnlo and Md orpnlo 

~ 

~ 

rw~,., 

a)'lrtlletlc rubber, a)'lrtiMitlo •nd othor m.,.. mede fibers, ucepiiiUL 213 Otup. 214 Soap, cleterpnto, 1nd clun1111 .,..,.,... 

''- porf\i,_ c:osmeCics. end othw toilet prepo..tlons. 215 l'elnto, voml....., loc:que~ en•mols. end allied productL 2M Gum and wood chemicals. 217 Aaricultural c._,lc:oiL 21!1 Wl..,.U.n-.. dlemlcol prodllctL 

........._.,..,.,.. ..... ~ ......... = 291 l'ottOieum toflnlna. 

:::.~--"~=~ ... ,__ ..... coal. 

......,....,miiiiiRU,......._..,... 

301 Tlres -..,d Inner tub-. S02 Rubber ,_.r. 303 lloc:lolmod rubber. 306 f'obrlceted rubbor producta, not ......._. clullfled. JC77 Mlscellen-.. plutlcs t>.-ctL 

LMIMr ........... ., .,..._ 

311 lather tannin• •nd flnllhlrw. Jl2 lnduotrlel lu~ boltlftl end" pacld,... 313 -end ohM cut atodl Mel tlndlftiL 3114 Footwear, excopt rubbor. 315 l.Athor ~~- end mlttonL 316 ......... 317 Hoii<lbop end other penonal INtMr 

319 =· IJW)Ods. not tiHWtlere c1Halfltd. 

...... ., .......... _.... ....... 321 Flat i!UL 

322 Gloss •nd tlfeuwatL -..cl or blowR. 

W Gl•• produc:U, mode or purdlaMcl ~~- 324 Comont. hydraulic. 325 Structural cloy prod"ctL 326 l'ottary end roleted proclucts, 127 Coftc ...... lln"Um. and plaster proctuca. 321 Cut otona end st- poaducta. sa AbrnlvoL ...,...__ end .... _..._. 

fiOflfMtlolllo mineral llf'OCIUcta. 

,....,......,..,...... 331 Blest fumocea, stMI_., end rolllftlend tlnlolllftl mlle. 

Code 

332 I"'" and stMI folmdNs. 

333 t:,1~ amaltln~ and refinln1 of non'-

334 ~~:a~-:::-ltln~ •net rwflnln~ of -

33!1 Rollin&. drowlna. •nd atrucllftl of - ferrous metalL 336 Nonferrous foundrl-. 339 Miscellaneous prlmery metal ~. 

Febrlceted metal ~ _,.. .,-. 

:~~MNM~ end ~~ 

3 41 Mocol cons. 342 Cutlory, hond tools, e nd a ener111 hordwero. 

343 ~~~-;:,~,.. eg!:,':.!.." (except olectrlq end 

344 Fobncoled otructur~~l metal productL 34 5 Scrww medllne PNductL ond bolto. nuta, 

346 -Metal otarlvota mplnp. and .. ~ 

347 Cootlna. -.rev~ end aUied MfVI-. 3411 Mi-lleneous fabrocoted wino DrOCtuctL 349 Ml.collon-.. lebrlcotecl met.( llf'OCIUcta. 

... cblfMIY--....,... 

351 Enlln .. end turtoiML 

352 f'orm modllnery •net ""'-'-

153 ~mlnl.::t -=~ .... 154 MotoiWOI\lftl rnediiMtJ end -..lllft*IL 355 Special Industry machlfMIY, _,.. ......., wort.l.ftl machlowy. 356 General Industrial machiMr7 and ...... ment. 357 Office, computlna. end -mini - chin-. 351 S.rvlco Industry mochlnes. 

3!18 ::::ll•neoua modllowy, acept ..... 
Department of the Treasury 

Washington, D.C. 20220 

Official Business 

Penalty for Private Use, $300 

Margaret sue Parker . office of Tax Ana1ys~s 

Room 1120 - MT 

SPECIAL FOURTH 

CLASS MAIL