FSC provisions: licensing computer software.In technical advice memorandum 9344002, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. concluded that a company that licensed computer software for reproduction outside the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. did not qualify for foreign sales corporation Foreign Sales Corporation (FSC)
A special type of corporation created by the Tax Reform Act of 1984 that is designed to provide a tax incentive for exporting U.S.-produced goods. (FSC FSC
See: Foreign Sales Corporation ) benefits because it failed to meet several key tests. The IRS also ruled on the foreign management requirement of the FSC provisions.
FSCs are foreign corporations formed either in U.S. possessions or in certain countries with which the United States has exchange-of-information agreements. U.S. companies use FSCs to exempt from U.S. tax a portion of income earned by exporting property. To qualify for the exemption, a FSC and the export property must satisfy the requirements of tax code sections 921 through 927. (For more information on FSCs, see "Tax Incentives for Small Exporters," JofA, Oct.93, page 39.)
Management requirement. One requirement is that a FSC must be managed outside the United States. This mandates, among other things, that a FSC
1. Maintain throughout the taxable year Taxable year
The 12-month period an individual uses to report income for income tax purposes. For most individuals, their tax year is the calendar year. a principal bank account outside the United States.
2. Disburse dis·burse
tr.v. dis·bursed, dis·burs·ing, dis·burs·es
To pay out, as from a fund; expend. See Synonyms at spend.
[Obsolete French desbourser, from Old French desborser by its tax return's filing date any dividends, legal and accounting fees and officer or board member salaries for the taxable year from bank accounts outside the United States.
In the case before the IRS, a FSC opened a bank account in a U.S. possession but did not deposit funds in the account for over two years. During this time, the FSC's parent made any necessary payments on behalf of the FSC and was reimbursed when funds were deposited in the account.
* Issue no. 1. Was the principal bank account requirement satisfied? The IRS concluded the tax code and regulations did not require funds to be deposited in the account, only that the account be opened and maintained on the bank's books and records.
* Issue no. 2. Did the FSC satisfy the disbursement DISBURSEMENT. Literally, to take money out of a purse. Figuratively, to pay out money; to expend money; and sometimes it signifies to advance money.
2. requirement? While recognizing the disbursement requirement technically was not satisfied, the IRS effectively waived this requirement by invoking a good-faith exception in the regulations.
Export property requirements. In addition to the requirements related to the FSC itself, the export property must satisfy certain requirements to qualify for FSC benefits. The tax code specifically excludes certain property, such as copyrights, from qualifying as export property. Thus, royalty income from copyright sales or licensing generally is not eligible for FSC benefits. However, the tax code and regulations provide an exception for copyrights of "films, tapes, records or similar reproductions for commercial or home use."
* Issue no. 3. Did licensing a master copy of computer software for reproduction and sale outside the United States qualify for FSC benefits under this exception? Citing the legislative history of a related provision, the IRS concluded the exception was intended to apply only to the entertainment industry. Therefore, licensing a master copy of computer software did not qualify.
Observation: Although the IRS concluded FSC benefits were not available for licensing a master copy of computer software, it may be possible to claim FSC benefits on the export of the software itself--provided it is not accompanied by a right to reproduce.
Marianne Burge, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , international tax partner, Kenneth Kral, CPA, international tax partner, and Jack Serota, Esq., international tax manager, at Price Waterhouse, New York City New York City: see New York, city.
New York City
City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. .