Instructions For Form 1120-Fsc - 2006 (Page 2 of 13) in pdf

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Information on how to access toll-free and

purchase, renewal, or replacement option

Pre-Repeal FSC Rules

email technical support.

that is enforceable against a lessor or seller

(provided the option is part of a contract that

This CD is released twice during the

Definition of a Foreign

is binding and in effect on September 30,

year.

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2000, and has remained in effect).

Sales Corporation (FSC)

The first release ships in the beginning of

The mere entering into of a single

January 2007.

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

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transaction, such as a lease, would not, in

The final release will ship the beginning of

corporation that has met all of the following

and of itself, prevent the transaction from

March 2007.

rules:

being in the ordinary course of business.

1. It must be a corporation created or

Purchase the CD from the National

Technical Information Service at

Election To Apply Exclusion Rules

organized under the laws of a qualifying

foreign country or any U.S. possession other

gov/cdorders for $25 (no handling fee) or

Taxpayers may elect to apply the

call 1-877-CDFORMS (1-877-233-6767)

than Puerto Rico.

extraterritorial income exclusion rules

toll-free to buy the CD for $25 (plus a $5

Qualifying U.S. possessions include

instead of the FSC rules for transactions

handling fee). Price is subject to change.

Guam, American Samoa, the

occurring during the transition period. The

Commonwealth of the Northern Mariana

By phone and in person. You can order

election is:

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Islands, and the U.S. Virgin Islands.

forms and publications by calling

Made by checking the box on line 2 of

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

Form 8873,

A qualifying foreign country is a foreign

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can also get most forms and publications at

Made on a transaction-by-transaction

country that meets the exchange of

your local IRS office.

basis,

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

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Effective for the tax year for which it is

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

made and for all subsequent tax years, and

Rico are also certified to have met these

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General Instructions

Revocable only with the consent of the

rules.

IRS.

The following countries are qualifying

Taxpayers use Form 8873 to determine

foreign countries that have met the

Purpose of Form

their extraterritorial income exclusion.

exchange of information rules of section

Use Form 1120-FSC to report the income,

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

Election To Be Treated as a

gains, losses, deductions, credits, and to

Austria, Barbados, Belgium, Bermuda,

figure the income tax liability of a FSC.

Domestic Corporation

Canada, Costa Rica, Cyprus, Denmark,

Dominica, the Dominican Republic, Egypt,

A FSC that was in existence on September

FSC Repeal and

Finland, France, Germany, Grenada,

30, 2000, and at all times thereafter, may

Guyana, Honduras, Iceland, Ireland,

elect to be treated as a domestic corporation

Extraterritorial Income

Jamaica, Korea, Malta, the Marshall Islands,

if substantially all of its gross receipts are

Mexico, Morocco, the Netherlands, New

Exclusion

foreign trading gross receipts.

Zealand, Norway, Pakistan, Peru, the

The election is made by checking the

In general, the FSC Repeal and

Philippines, St. Lucia, Sweden, and Trinidad

box on line 3 of Form 8873. An electing

Extraterritorial Income Exclusion

and Tobago.

corporation files Form 1120, U.S.

Act of 2000:

2. It had no more than 25 shareholders

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Corporation Income Tax Return, or Form

Repealed the FSC rules,

at any time during the tax year.

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1120-A, U.S. Corporation Short-Form

Provided taxpayers with an exclusion,

3. It had no preferred stock outstanding

Income Tax Return. Once made, the

which is figured on Form 8873,

at any time during the tax year.

election applies to the tax year for which it is

Extraterritorial Income Exclusion, and

4. During the tax year, the FSC must

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made and remains in effect for all

Provided transition rules for existing

maintain:

subsequent years unless the election is

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FSCs. These rules are included in Rules for

An office in one of the qualifying

revoked or terminated. If the election is

Existing FSCs below.

foreign countries or U.S. possessions listed

revoked or terminated, the corporation

Note. The American Jobs Creation Act of

above,

would be a foreign corporation that files

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2004 repealed the extraterritorial income

A set of permanent books of account

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

exclusion provisions generally for

(including invoices) at that office, and

Foreign Corporation. Furthermore, the

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transactions after 2004, subject to a

The books and records required under

foreign corporation would not be eligible to

transition rule. See the instructions for Form

section 6001 at a U.S. location to sufficiently

reelect to be treated as a domestic

8873 for more information.

establish the amount of gross income,

corporation for 5 tax years beginning with

deductions, credits, or other matters

The Tax Increase Prevention and

the first tax year for which the original

required to be shown on its tax return.

Reconciliation Act of 2005 repealed the FSC

election is not in effect as a result of the

5. It must have at least one director, at

binding contract exception. See Binding

revocation or termination.

all times during the tax year, who is not a

contract exception below for details.

Effect of election. A FSC that elects to be

resident of the United States.

treated as a domestic corporation ceases to

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

Rules for Existing FSCs

be a FSC for any tax year for which the

during the tax year, of a controlled group of

In general, a FSC that was in existence on

election applies (and for any subsequent tax

which a DISC is a member.

September 30, 2000, and at all times

year).

7. It must have elected to be a FSC or

thereafter, may continue to use the FSC

small FSC, and the election must have been

FSC Election

rules for any transaction in the ordinary

in effect for the tax year.

course of business, that is (a) before

No corporation may elect to be a FSC or a

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

small FSC (defined below) after

Small FSC. Section 922(b) defines a small

2001, if such transaction is pursuant to a

September 30, 2000.

FSC as a corporation that:

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binding contract that meets the

Elected small FSC status and has kept

Termination of Inactive FSCs

requirements described in Binding contract

the election in effect for the tax year and

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exception below.

If a FSC has no foreign trade income (see

Is not a member, at any time during the

definition under Tax Treatment of a FSC on

Binding contract exception. The binding

tax year, of a controlled group that includes

contract exception has been repealed for tax

page 3) for any 5 consecutive tax years

a FSC (unless that other FSC is also a

beginning after December 31, 2001, the

years beginning after May 17, 2006. For tax

small FSC).

FSC will no longer be treated as a FSC for

years beginning before May 18, 2006, the

A small FSC is exempt from the foreign

following rules apply: The transaction must

any tax year beginning after that 5-year

management and foreign economic process

period.

be pursuant to a binding contract between

requirements outlined on page 3.

the FSC (or a person related to the FSC)

Additional Information

and a person other than a related person if

$5 million limit. Generally, any foreign

that binding contract was in effect on

For additional information regarding the

trading gross receipts of a small FSC for the

September 30, 2000, and has remained in

rules discussed above, see Rev. Proc.

tax year that exceed $5 million are not to be

effect. A binding contract includes a

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

considered in determining its exempt foreign

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Instructions For Form 1120-Fsc - 2006 Page 2

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