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The election is made by checking the

Egypt, Finland, France, Germany,

General Instructions

box on line 3 of Form 8873. An electing

Grenada, Guyana, Honduras, Iceland,

corporation files Form 1120, U.S.

Ireland, Jamaica, Korea, Malta, the

Corporation Income Tax Return, or Form

Marshall Islands, Mexico, Morocco, the

Purpose of Form

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

Netherlands, New Zealand, Norway,

Use Form 1120-FSC to report the

Income Tax Return. Once made, the

Pakistan, Peru, the Philippines, St. Lucia,

income, gains, losses, deductions,

election applies to the tax year for which it

Sweden, and Trinidad and Tobago.

credits, and to figure the income tax

is made and remains in effect for all

2. It had no more than 25

liability of a FSC.

subsequent years unless the election is

shareholders at any time during the tax

revoked or terminated. If the election is

year.

FSC Repeal and

revoked or terminated, the corporation

3. It had no preferred stock

would be a foreign corporation that files

Extraterritorial Income

outstanding at any time during the tax

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

year.

Exclusion

a Foreign Corporation. Furthermore, the

4. During the tax year, the FSC must

foreign corporation would not be eligible

maintain:

In general, the FSC Repeal and

•

to reelect to be treated as a domestic

An office in one of the qualifying

Extraterritorial Income Exclusion Act of

corporation for 5 tax years beginning with

foreign countries or U.S. possessions

2000:

•

the first tax year for which the original

listed above,

Repealed the FSC rules,

•

election is not in effect as a result of the

A set of permanent books of

Provides taxpayers with an exclusion,

revocation or termination.

account (including invoices) at that office,

which is figured on Form 8873,

and

Effect of election. A FSC that elects to

Extraterritorial Income Exclusion, and

•

The books and records required

be treated as a domestic corporation

Provides transition rules for existing

under section 6001 at a U.S. location to

ceases to be a FSC for any tax year for

FSCs (see Transition Rules below).

sufficiently establish the amount of gross

which the election applies (and for any

Transition Rules

income, deductions, credits, or other

subsequent tax year).

In general, a FSC that was in existence

matters required to be shown on its tax

FSC Election

on September 30, 2000, and at all times

return.

thereafter, may continue to use the FSC

No corporation may elect to be a FSC or

5. It must have at least one director,

rules for qualifying transactions in the

a small FSC (defined below) after

at all times during the tax year, who is not

ordinary course of business that are

September 30, 2000.

a resident of the United States.

pursuant to a binding contract between

6. It must not be a member, at any

Termination of Inactive FSCs

the FSC (or a person related to the FSC)

time during the tax year, of a controlled

If a FSC has no foreign trade income (see

and a person other than a related person

group of which a DISC is a member.

definition under Tax Treatment of a FSC

if that binding contract was in effect on

7. It must have elected to be a FSC or

below) for any 5 consecutive tax years

September 30, 2000, and has remained

small FSC, and the election must have

beginning after December 31, 2001, the

in effect. A binding contract includes a

been in effect for the tax year.

FSC will no longer be treated as a FSC

purchase, renewal, or replacement option

for any tax year beginning after that

that is enforceable against a lessor or

Small FSC. Section 922(b) defines a

5-year period.

seller (provided the option is part of a

small FSC as a corporation that:

•

contract that is binding and in effect on

Elected small FSC status and has kept

Additional Information

September 30, 2000, and has remained

the election in effect for the tax year and

•

For additional information regarding the

in effect).

Is not a member, at any time during the

rules discussed above, see Rev. Proc.

tax year, of a controlled group that

The mere entering into of a single

2001-37, 2001-23 I.R.B. 1327.

includes a FSC (unless that other FSC is

transaction, such as a lease, would not, in

also a small FSC).

and of itself, prevent the transaction from

FSC Rules

being in the ordinary course of business.

A small FSC is exempt from the

foreign management and foreign

Election To Apply Exclusion Rules

Definition of a Foreign

economic process requirements. See the

Sales Corporation (FSC)

Taxpayers may elect to apply the

instructions for Foreign Management

extraterritorial income exclusion rules

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

Rules and the Foreign Economic

instead of the FSC rules for transactions

a corporation that has met all of the

Process Rules on page 3.

occurring during the transition period. The

following rules.

$5 million limit. Generally, any

election is:

1. It must be a corporation created or

•

foreign trading gross receipts of a small

Made by checking the box on line 2 of

organized under the laws of a qualifying

FSC for the tax year that exceed $5

Form 8873,

foreign country or any U.S. possession

•

million are not to be considered in

Made on a transaction-by-transaction

other than Puerto Rico.

determining its exempt foreign trade

basis,

•

Qualifying U.S. possessions include

income. The $5 million limit is reduced if

Effective for the tax year for which it is

Guam, American Samoa, the

the small FSC has a short tax year. It may

made and for all subsequent tax years,

Commonwealth of the Northern Mariana

also be reduced if the small FSC is a

and

•

Islands, and the U.S. Virgin Islands.

member of a controlled group that

Revocable only with the consent of the

contains other small FSCs. See

IRS.

A qualifying foreign country is a foreign

Regulations section 1.921-2(b) for more

country that meets the exchange of

Taxpayers use Form 8873 to

information.

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

determine their extraterritorial income

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

exclusion.

Tax Treatment of a FSC

Puerto Rico are also certified to have met

Election To Be Treated as a

A FSC is not taxed on its exempt foreign

these rules.

trade income. Section 923 defines foreign

Domestic Corporation

The following countries are qualifying

trade income as the gross income of a

A FSC that was in existence on

foreign countries that have met the

FSC attributable to foreign trading gross

September 30, 2000, and at all times

exchange of information rules of section

receipts (defined on page 3).

thereafter, may elect to be treated as a

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

domestic corporation if substantially all of

Austria, Barbados, Belgium, Bermuda,

The percentage of foreign trade

its gross receipts are foreign trading gross

Canada, Costa Rica, Cyprus, Denmark,

income exempt from tax is figured

receipts.

Dominica, the Dominican Republic,

differently for income determined under

-2-

Instructions For Form 1120-Fsc - U.s. Income Tax Return Of A Foreign Sales Corporation - 2003 Page 2

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