Interest-Charge Domestic International Sales Corporations, 1996.
There were 773 active Interest-Charge Domestic International Sales Corporation (IC-DISC) returns filed for Tax Year 1996, a 21-percent decrease from the 980 returns filed for Tax Year 1991 (the last year for which similar statistics were compiled) . However, IC-DISC export gross receipts increased 30 percent (in current dollars) over the same time period, from $3.5 billion to $4.6 billion (Figure A). Tax-deferred IC-DISC income reported to shareholders increased slightly from $0.53 billion to $0.54 billion, while actual distributions to shareholders increased 124 percent, from $0.1 billion to $0.3 billion.
[Figure A ILLUSTRATION OMITTED]
The IC-DISC entity was created by the Deficit Reduction Act of 1984. Parent shareholders, mostly corporations, form an IC-DISC by filing Form 4876-A, Election to be Treated as an Interest-Charge DISC . This election is considered to be in effect as long as the IC-DISC meets the following requirements: (1) at least 95 percent of the IC-DISC's total receipts are "qualified export receipts"; and (2) at least 95 percent of the adjusted basis of the IC-DISC's total assets are "qualified assets." An IC-DISC is also generally required to have only one class of stock, conform its tax year to that of the principal shareholder, and maintain separate books and records. Figure B presents the majority ownership of active IC-DISC's by entity type of shareholder for Tax Year 1996.
[Figure B ILLUSTRATION OMITTED]
Certain types and amounts of IC-DISC income are subject to tax-deferral; the IC-DISC entity itself is not taxed. Instead, IC-DISC shareholders are taxed when the income is either actually distributed or "deemed" distributed. The IC-DISC is required to: (1) calculate the tax-deferred portion of its "taxable income" each year; (2) accumulate the tax-deferred income for the current tax year and prior tax years in a separate account; and (3) report the total accumulated amount of tax-deferred income to its shareholders each year. The IC-DISC shareholders must then pay an interest charge on any additional tax that would have resulted from the inclusion of the IC-DISC's income on their tax returns. This interest charge is determined using a compounded annual rate of interest equivalent to the average investment yield of U.S. Treasury bills with 52-week maturities .
IC-DISC taxable income that does not qualify for tax deferral is "deemed" distributed to shareholders as a dividend in the tax year in which it is earned, regardless of whether the income is actually distributed to shareholders or retained by the IC-DISC. Types of income that are not eligible for tax deferral include: taxable income derived from excess qualified export receipts; certain gains from the sale or exchange of assets; one-half of IC-DISC taxable income attributable to the sale or exchange of military property; "international boycott income"; illegal bribes and kickbacks; and foreign investment attributable to "producer's loans." Excess qualified export receipts are gross receipts in excess of $10 million, a limitation that was intended to restrict IC-DISC activity to smaller businesses.
IC-DISC Income and Distributions
For Tax Year 1996, IC-DISC's reported $320.8 million of taxable income, a 44-percent increase from 1991. The portion of IC-DISC taxable income attributable to "excess qualified export receipts" was $146.4 million, a 280-percent increase over the $38.6 million reported for 1991. A total of $165.7 million was "deemed" distributed for Tax Year 1996, $111.7 million more than for Tax Year 1991.
After the subtraction of "deemed" and actual distributions (if any) to IC-DISC shareholders, the income remaining is considered to be tax-deferred and is reported to shareholders on Schedule K, Shareholder's Statement of IC-DISC Distributions. Accumulated tax-deferred IC-DISC income reported to shareholders increased from $530 million for Tax Year 1991 to $537 million for Tax Year 1996 (Figure A).
Distribution of IC-DISC's by Product or Service Group
Figure C presents distributions of active IC-DISC's by principal product or service group for Tax Years 1987, 1991, and 1996. For Tax Year 1996, about 90 percent of all active IC-DISC returns reported the export of manufactured products as their principal product or service, a proportion which was comparable to the figures for Tax Years 1987 and 1991. The two most frequently reported export product groups were electrical machinery, equipment, and supplies; and non-electrical machinery, which together comprised 32 percent of all active IC-DISC returns for Tax Year 1996. Other predominant product groups included fabricated metal products, other than ordnance and accessories; miscellaneous manufactured products; and transportation equipment. Although only 6 percent of all active IC-DISC's for Tax Year 1996 reported chemicals and allied products as their principal export product, these IC-DISC's were responsible for 24 percent of total export gross receipts, 31 percent of taxable income, and 57 percent of taxable income attributable to excess qualified export receipts. Further, just over half (51 percent) of total "deemed" distributions and 43 percent of actual distributions were accounted for by IC-DISC's in the chemicals and allied products industry.
Figure C Interest-Charge Domestic International Sales Corporation Returns, by Major Product or Service Group, Tax Years 1987, 1991, and 1996
Number of returns Major product or service group 1987 1991 1996 All products and services 1,185 980 773 Manufactured products 1,085 892 695 Ordnance and accessories 3 -- (**) Food and kindred products 51 38 28 Textile mill products 33 36 14 Apparel and other finished goods 12 14 10 Lumber and wood products, except furniture 21 36 30 Furniture and fixtures 13 10 7 Paper and allied products 18 25 19 Printing, publishing, and allied products 17 14 6 Chemicals and allied products 46 69 48 Petroleum refining and related products 5 7 3 Rubber and miscellaneous plastics products 17 14 13 Leather and leather products 9 7 7 Stone, clay, glass, and concrete products 8 5 6 Primary metal products 55 31 20 Fabricated metal products, other than ordnance, machinery, and transportation equipment 78 83 65 Machinery, other than electrical 169 129 123 Electrical machinery, equipment, and supplies 209 169 125 Transportation equipment 73 68 63 Professional, scientific, and controlling instruments 138 72 44 Miscellaneous manufactured products 110 65 (**)65 Nonmanufactured products and services 100 72 71 Product or service not allocable -- 16 7
(**) Data combined to prevent disclosure of information for specific taxpayers.
NOTES: Detail may not add to totals because of rounding. Data for Tax Years 1987 and 1991 are presented in the Statistics of Income Bulletin, Summer 1995, Volume 15, Number 1.
About 59 percent of active IC-DISC's reporting export of nonmanufactured products and services were concentrated in the agricultural industries, particularly grains and soybeans and other crops. For Tax Year 1996, two new product or service groups reported by IC-DISC's were motion picture distribution and engineering and architectural services. IC-DISC assets, receipts (including total export gross receipts of IC-DISC's and related U.S. persons), deductions, income, and distributions, classified by product or service group, are presented in Table 1.
[TABULAR DATA 1 NOT REPRODUCIBLE IN ASCII]
Data by Size of Total Assets
Figure D presents selected Tax Year 1996 IC-DISC statistics, classified by size of total IC-DISC assets. Of the total 773 active IC-DISC returns for Tax Year 1996, there were 737 IC-DISC's with reported total assets under $5 million. Further analysis shows that 70 percent of active IC-DISC returns reported total assets under $1 million, about 25 percent reported total assets between $1 million and $5 million, and the remaining 5 percent reported total assets over $5 million. However, the majority of activity can be attributed to those IC-DISC's with total assets in the $1-million-under-$5-million range. IC-DISC's in this asset class were responsible for 52 percent of taxable income, 65 percent of taxable income attributable to excess qualified export receipts, 64 percent of total deemed distributions, 56 percent of total actual distributions, and 49 percent of total export gross receipts.
[Figure D ILLUSTRATION OMITTED]
Explanation of Selected Terms
Actual Distributions to Shareholders.--Distributions from the IC-DISC's "earnings and profits" actually paid to shareholders of the IC-DISC.
Adjusted IC-DISC Income Subject to Deferral Computation.--This represented the IC-DISC's taxable income after subtracting certain amounts not eligible for tax deferral (e.g., amounts deemed distributed). For Tax Year 1996, adjusted IC-DISC income subject to the tax deferral computation equaled IC-DISC taxable income minus the sum of: (1) gross interest from "producer's loans"; (2) certain gains from the sale or exchange of assets; (3) one-half of IC-DISC taxable income attributable to military property; and (4) IC-DISC taxable income attributable to "export gross receipts" in excess of $10 million.
Amounts Deemed Distributed.--This was the portion of the IC-DISC's "earnings and profits" that was not eligible for tax deferral and, hence, was characterized as a fully taxable dividend to the IC-DISC shareholder(s). For Tax Year 1996, amounts deemed distributed equaled the sum of: (1) gross interest from "producer's loans"; (2) certain gains from the sale or exchange of assets; (3) one-half of IC-DISC taxable income attributable to military property; (4) IC-DISC taxable income attributable to "export gross receipts" in excess of $10 million; (5) international boycott income; (6) illegal bribes and kickbacks; and (7) the amount of foreign investment attributable to producer's loans. In addition, for all shareholders that are C corporations, one-seventeenth of the adjusted IC-DISC income subject to deferral was to be reported as a deemed distribution .
Current-Year Tax-Deferred Income.--This amount represented the IC-DISC's taxable income after all current year taxable income amounts deemed distributed under Internal Revenue Code section 995(b)(1) were subtracted.
Export Gross Receipts.--Export gross receipts of the IC-DISC represented "qualified export receipts" from: (1) the sale, lease, or rental of export property; (2) services related and subsidiary to any qualified sale, lease, or rental of export property; (3) engineering or architectural services for construction projects located outside the United States; and (4) export management services provided to other unrelated IC-DISC's to aid in promoting qualified export receipts. For IC-DISC's that acted as commission agents, export gross receipts included the total receipts on which the commission was earned, as well as the commission. Export gross receipts do not include passive income (dividends, interest, or capital or ordinary gains on sale of business property) received by IC-DISC's.
Export Promotion Expenses.--These were expenses (excluding income taxes) incurred by an IC-DISC to advance the sale, lease, or other distribution of export property for use, consumption, or distribution outside the United States.
Export Property.--The IC-DISC's export property was inventory and property held for sale or lease which: (1) had been made, manufactured, produced, grown, or extracted in the United States by a "person" other than an IC-DISC; (2) was held primarily for sale or lease in the ordinary course of business for direct use, consumption, or disposition outside the United States; and (3) had, at the time of sale or lease by the IC-DISC, not more than 50 percent of its fair market value attributable to imported articles.
IC-DISC Taxable Income.--This was the IC-DISC's net income minus statutory special deductions (i.e., the "net operating loss deduction" and the dividends-received deduction). IC-DISC taxable income is computed to determine: (1) the IC-DISC's "earnings and profits" considered "deemed distributed" to IC-DISC shareholders for the current tax year; and (2) the interest charge on tax that would have been imposed on IC-DISC income had it not been subject to deferral.
Producer's Loans.--This qualified asset generally consisted of loans made from the IC-DISC's accumulated tax-deferred income to its parent company or any other U.S. person engaged in manufacturing, producing, growing, or extracting export property. A producer's loan must have been designated as such, have been evidenced by a note, have had a stated maturity not to exceed 5 years, and have been attributed to assets used in export production. If a producer's loan was renewed, it had to be requalified at the time of renewal. A producer's loan did not have to be traced to a specific investment by the domestic borrower, but was subject to certain limitations to assure that it did not exceed the investment in assets that could have been attributable to production for export.
Qualified Assets.--Qualified export assets included: (1) export property; (2) assets used in performing engineering or architectural services; (3) accounts receivable attributable to export transactions; (4) working capital; (5) producer's loan obligations; (6) certain stocks or securities held by the IC-DISC; (7) certain obligations issued or insured by the U.S. Export-Import Bank or the Foreign Credit Insurance Association; and (8) certain other deposits.
Qualified Export Receipts.--See Export Gross Receipts.
Related U.S. Persons.--IC-DISC-related U.S. persons were: (1) individuals who were citizens or residents of the United States and controlled the IC-DISC; (2) domestic partnerships, estates, or trusts that controlled the IC-DISC; (3) domestic corporations that controlled the IC-DISC; and (4) domestic corporations that were controlled by the same person(s) that controlled the IC-DISC. Control meant direct or indirect ownership of more than 50 percent of the voting power of the stock entitled to vote in an IC-DISC or other domestic corporation. Under the stock attribution rules of Internal Revenue Code section 267(c), stock held by related family members is considered to be held as if the family is one shareholder.
Tax-Deferred IC-DISC Income Reported to Shareholders.--This amount was reported on Form 1120-IC-DISC, Schedule K, Shareholders' Statement of IC-DISC Distributions. An interest charge on the tax that would otherwise have been paid currently on this income amount was computed by IC-DISC shareholders on Form 8404, Computation of Interest Charge on DISC-Related Deferred Tax Liability.
Total Qualified Export Receipts and Nonqualified Receipts.--This sum was used as the starting point for the computation of the IC-DISC's net and taxable incomes. For IC-DISC's that acted as commission agents, total qualified export receipts and nonqualified receipts exclude the total receipts upon which the commission was earned, and therefore represent only the commission amounts. Total qualified export receipts and nonqualified receipts include passive income (dividends, interest, capital or ordinary gains) amounts received by IC-DISC's. IC-DISC passive income amounts may be characterized as either qualified export receipts or nonqualified gross receipts.
Data Sources and Limitations
The statistics in this data release were compiled from Form 1120 IC-DISC returns with accounting periods ending between July 1996 and June 1997 and filed during Calendar Years 1996, 1997, or 1998. The data presented exclude "inactive" IC-DISC returns. An IC-DISC is considered to be inactive if no receipts, deductions, income, or distributions were reported on the return.
The Tax Year 1996 IC-DISC study was designed to include the entire population of IC-DISC returns; however, certain returns were unavailable for the statistics. The complete 1996 IC-DISC study file included 726 returns, adjusted to reflect an estimated population of approximately 836 active and inactive returns. Because the data were based on all available returns, sampling error was not a limitation. With regard to nonsampling error, some of the data were inconsistently reported by taxpayers. Where possible, such inconsistencies were resolved to reflect provisions of the Internal Revenue Code and taxpayer intentions.
The products and services classification system used in the 1996 IC-DISC study was generally based on Internal Revenue Service instructions provided to the taxpayer for completion of Schedule N, Export Gross Receipts of the IC-DISC and Related U.S. Persons. Products and services reported by a tax-payer on each specific return were reviewed for consistency with product information provided in supporting schedules and other taxpayer attachments and with the principal business activity described on the return. For example, a return was reviewed if the taxpayer indicated engineering services on Schedule N despite the absence of any "engineering and architectural services income" on Schedule B, Gross Income. In addition, products and services reported by taxpayers on specific returns were reviewed for consistency with the major products and services group classification. Certain business activities, such as manufacturing, are not applicable to an IC-DISC. Therefore, an IC-DISC return reporting the manufacture of farm machinery equipment as the principal business activity would have been reviewed to ascertain if a more appropriate principal business activity was the wholesaling of farm machinery and equipment.
For purposes of this data release, data classified by product or service were compiled using the IC-DISC's largest grossing export product (in terms of gross receipts), without regard to any entry for the IC-DISC's second largest product or service reported on Schedule N. To this extent, the industry statistics contained in this data release may be slightly overstated for certain industries and slightly understated for others.
Notes and References
 For additional information about IC-DISC's for Tax Year 1991, see Holik, Daniel S., "Interest-Charge Domestic International Sales Corporations, 1991," Statistics of Income Bulletin, Summer 1995, Volume 15, Number 1, pp. 46-57.
 Owners of an IC-DISC are referred to as "shareholders," since not all IC-DISC's are owned by other corporations. Individuals, partnerships, trusts, or estates could also own IC-DISC's.
 The interest charge is computed by IC-DISC shareholders on Form 8404, Computation of Interest Charge on DISC-Related Deferred Tax Liability. For example, for Tax Year 1996, the interest-charge to an IC-DISC shareholder filing a full calendar year return was calculated using an interest charge of approximately 5.65 percent. (See Revenue Ruling 96-55, Internal Revenue Bulletin, Number 1996-49, pp. 4-6, Dec. 2, 1996.)
 See Internal Revenue Code section 995(b) for additional information regarding deemed distributions.
This data release was written by Cynthia Belmonte, an economist with the Special Studies Returns Analysis Section, under the direction of Chris Carson, Chief.
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|Publication:||Statistics of Income. SOI Bulletin|
|Article Type:||Statistical Data Included|
|Date:||Sep 22, 2000|
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