Instructions For Form 1120-Fsc - 2007 (Page 2 of 13) in pdf

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1-800-TAX-FORM (1-800-829-3676). You

Made by checking the box on line 2 of

foreign country or any U.S. possession other

can also get most forms and publications at

Form 8873,

than Puerto Rico.

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your local IRS office.

Made on a transaction-by-transaction

Qualifying U.S. possessions include

basis,

Guam, American Samoa, the

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Effective for the tax year for which it is

Commonwealth of the Northern Mariana

General Instructions

made and for all subsequent tax years, and

Islands, and the U.S. Virgin Islands.

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Revocable only with the consent of the

A qualifying foreign country is a foreign

IRS.

country that meets the exchange of

Purpose of Form

Taxpayers use Form 8873 to determine

information rules of section 927(e)(3)(A) or

Use Form 1120-FSC to report the income,

their extraterritorial income exclusion.

(B). All U.S. possessions other than Puerto

gains, losses, deductions, credits, and to

Rico are also certified to have met these

Election To Be Treated as a

figure the income tax liability of a FSC.

rules.

Domestic Corporation

The following countries are qualifying

FSC Repeal and

A FSC that was in existence on September

foreign countries that have met the

30, 2000, and at all times thereafter, may

exchange of information rules of section

Extraterritorial Income

elect to be treated as a domestic corporation

927(e)(3)(A) or 927(e)(3)(B): Australia,

Exclusion

if substantially all of its gross receipts are

Austria, Barbados, Belgium, Bermuda,

foreign trading gross receipts. A FSC that

Canada, Costa Rica, Cyprus, Denmark,

In general, the FSC Repeal and

elects to be treated as a domestic

Dominica, the Dominican Republic, Egypt,

Extraterritorial Income Exclusion

corporation ceases to be a FSC for any tax

Finland, France, Germany, Grenada,

Act of 2000:

year for which the election applies (and for

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Guyana, Honduras, Iceland, Ireland,

Repealed the FSC rules,

any subsequent tax year).

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Jamaica, Korea, Malta, the Marshall Islands,

Provided taxpayers with an exclusion,

Mexico, Morocco, the Netherlands, New

The election is made by checking the

which is figured on Form 8873,

Zealand, Norway, Pakistan, Peru, the

box on line 3 of Form 8873. An electing

Extraterritorial Income Exclusion, and

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Philippines, St. Lucia, Sweden, and Trinidad

corporation files Form 1120, U.S.

Provided transition rules for existing

and Tobago.

Corporation Income Tax Return. Once

FSCs. These rules are included in Rules for

2. It had no more than 25 shareholders

made, the election applies to the tax year for

Existing FSCs below.

at any time during the tax year.

which it is made and remains in effect for all

Note. The American Jobs Creation Act of

3. It had no preferred stock outstanding

subsequent years unless the election is

2004 repealed the extraterritorial income

at any time during the tax year.

revoked or terminated. If the election is

exclusion provisions generally for

4. During the tax year, the FSC must

revoked or terminated, the corporation

transactions after 2004, subject to a

maintain:

would be a foreign corporation that files

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transition rule. See the Instructions for Form

An office in one of the qualifying

Form 1120-F, U.S. Income Tax Return of a

8873 for more information.

foreign countries or U.S. possessions listed

Foreign Corporation. Furthermore, the

above,

foreign corporation would not be eligible to

The Tax Increase Prevention and

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A set of permanent books of account

reelect to be treated as a domestic

Reconciliation Act of 2005 repealed the FSC

(including invoices) at that office, and

corporation for 5 tax years beginning with

binding contract exception. See Binding

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The books and records required under

the first tax year for which the original

contract exception below for details.

section 6001 at a U.S. location to sufficiently

election is not in effect as a result of the

establish the amount of gross income,

revocation or termination.

Rules for Existing FSCs

deductions, credits, or other matters

Effect of election. For purposes of section

In general, a FSC that was in existence on

required to be shown on its tax return.

367, a foreign corporation that has elected

September 30, 2000, and at all times

5. It must have at least one director, at

to be a domestic corporation is generally

thereafter, may continue to use the FSC

all times during the tax year, who is not a

treated as transferring, as of the first day of

rules for any transaction in the ordinary

resident of the United States.

the first tax year to which the election

course of business, that is (a) before

6. It must not be a member, at any time

applies, all of its assets to a domestic

January 1, 2002, or (b) after December 31,

during the tax year, of a controlled group of

corporation in an exchange under section

2001, if such transaction is pursuant to a

which a DISC is a member.

354.

binding contract that meets the

7. It must have elected to be a FSC or

requirements described in Binding contract

FSC Election

small FSC, and the election must have been

exception below.

in effect for the tax year.

No corporation may elect to be a FSC or a

Binding contract exception. The binding

small FSC (defined below) after

Small FSC. Section 922(b) defines a small

contract exception has been repealed for tax

September 30, 2000.

FSC as a corporation that:

years beginning after May 17, 2006. For tax

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Elected small FSC status and has kept

Termination of Inactive FSCs

years beginning before May 18, 2006, the

the election in effect for the tax year and

following rules apply: The transaction must

If a FSC has no foreign trade income (see

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Is not a member, at any time during the

be pursuant to a binding contract between

definition under Tax Treatment of a FSC on

tax year, of a controlled group that includes

the FSC (or a person related to the FSC)

page 2) for any 5 consecutive tax years

a FSC (unless that other FSC is also a

and a person other than a related person if

beginning after December 31, 2001, the

small FSC).

that binding contract was in effect on

FSC will no longer be treated as a FSC for

September 30, 2000, and has remained in

A small FSC is exempt from the foreign

any tax year beginning after that 5-year

effect. A binding contract includes a

management and foreign economic process

period.

purchase, renewal, or replacement option

requirements outlined on page 3.

Additional Information

that is enforceable against a lessor or seller

$5 million limit. Generally, any foreign

(provided the option is part of a contract that

For additional information regarding the

trading gross receipts of a small FSC for the

is binding and in effect on September 30,

rules discussed above, see Rev. Proc.

tax year that exceed $5 million are not to be

2000, and has remained in effect).

2001-37, 2001-1 C.B. 1327.

considered in determining its exempt foreign

trade income. The $5 million limit is reduced

The mere entering into of a single

Pre-Repeal FSC Rules

if the small FSC has a short tax year. It may

transaction, such as a lease, would not, in

also be reduced if the small FSC is a

and of itself, prevent the transaction from

member of a controlled group that contains

being in the ordinary course of business.

Definition of a Foreign

other small FSCs. See Regulations section

Sales Corporation (FSC)

Election To Apply Exclusion Rules

1.921-2(b) for more information.

Under section 922(a), a FSC is defined as a

Taxpayers may elect to apply the

Tax Treatment of a FSC

corporation that has met all of the following

extraterritorial income exclusion rules

rules:

instead of the FSC rules for transactions

A FSC is not taxed on its exempt foreign

occurring during the transition period. The

1. It must be a corporation created or

trade income. Section 923 defines foreign

election is:

organized under the laws of a qualifying

trade income as the gross income of a FSC

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Instructions For Form 1120-Fsc - 2007 Page 2

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