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Membership dues. The FSC may

Equal apportionment plan. If no

or retiree (but only for the 2-year period

deduct amounts paid or incurred for

apportionment plan is adopted, members of

beginning on the date of the employee’s or

membership dues in civic or public service

a controlled group must divide the amount in

retiree’s death). See Temporary Regulations

organizations, professional organizations

each taxable income bracket equally among

section 1.448-1T(e) for details.

(such as bar and medical associations),

themselves. For example, Controlled Group

Note. If the FSC meets these tests, check

business leagues, trade associations,

AB consists of Corporation A and

the box on line 3, Schedule J, Form

chambers of commerce, boards of trade,

Corporation B. They do not elect an

1120-FSC.

and real estate boards. However, no

apportionment plan. Therefore, each

deduction is allowed if a principal purpose of

corporation is entitled to:

•

Line 4

the organization is to entertain, or provide

$25,000 (one-half of $50,000) on line

entertainment facilities for, members or their

2a(1),

Alternative minimum tax (AMT). Unless

•

guests. In addition, FSCs may not deduct

$12,500 (one-half of $25,000) on line

the FSC is treated as a small corporation

membership dues in any club organized for

2a(2), and

exempt from the AMT, it may owe the AMT

•

business, pleasure, recreation, or other

$4,962,500 (one-half of $9,925,000) on

if it has any of the adjustments and tax

social purpose. This includes country clubs,

line 2a(3).

preference items listed on Form 4626,

golf and athletic clubs, airline and hotel

Line 2b. Members of a controlled group are

Alternative Minimum Tax – Corporations.

clubs, and clubs operated to provide meals

treated as one group to figure the

The FSC must file Form 4626 if its taxable

under conditions favorable to business

applicability of the additional 5% tax and the

income (or loss) combined with these

discussion.

additional 3% tax. If an additional tax

adjustments and tax preference items is

Entertainment facilities. The FSC

applies, each member will pay that tax

more than the smaller of $40,000 or the

cannot deduct an expense paid or incurred

based on the part of the amount used in

FSC’s allowable exemption amount (from

for a facility (such as a yacht or hunting

each taxable income bracket to reduce that

Form 4626). For this purpose, taxable

lodge) used for an activity usually

member’s tax. See section 1561(a). If an

income does not include the NOL deduction.

considered entertainment, amusement, or

additional tax applies, attach a schedule

See Form 4626 for details.

recreation.

showing the taxable income of the entire

Exception for small corporations. A

group and how the FSC figured its share of

Amounts treated as compensation.

FSC is treated as a small corporation

the additional tax.

Generally the FSC may be able to deduct

exempt from the AMT for its tax year

otherwise nondeductible meals, travel, and

Line 2b(1). Enter the FSC’s share of the

beginning in 2004 if:

entertainment expenses if the amounts are

additional 5% tax on line 2b(1).

1. It was treated as a small corporation

treated as compensation to the recipient and

Line 2b(2). Enter the FSC’s share of the

exempt from the AMT for all prior tax years

reported on Form W-2 for an employee or

additional 3% tax on line 2b(2).

beginning after 1997 and

on Form 1099-MISC or Form 1042-S for an

2. Its average annual gross receipts for

Line 3

independent contractor. However, if the

the 3-tax-year period (or portion thereof

recipient is an officer, director, or beneficial

Most FSCs should figure their tax using the

during which the FSC was in existence)

owner (directly or indirectly) of more than

Tax Rate Schedule below. Exceptions apply

ending before its tax year beginning in 2004

10% of any class of stock, the deduction for

to members of a controlled group (see

did not exceed $7.5 million.

otherwise nondeductible meals, travel, and

worksheet on page 13) and qualified

entertainment expenses incurred after

personal service corporations (see

Line 6

October 22, 2004, is limited to the amount

instructions below).

treated as compensation. See section

Foreign tax credit. Generally, a FSC may

Members of a controlled group must

274(e)(2).

not claim a foreign tax credit. It may,

attach to Form 1120-FSC a statement

however, claim a foreign tax credit for any

showing the computation of the tax entered

Schedule J

foreign taxes imposed on foreign source

on line 3.

taxable nonforeign trade income (Schedule

Tax Computation

Tax Rate Schedule

F, Part II) that is treated as effectively

connected with a U.S. trade or business.

Lines 1 and 2

If taxable income (Schedule B, line 20) is:

See Temporary Regulations section

1.921-3T(d)(2) for more details.

Of the

Members of a controlled group. A

But not

amount

member of a controlled group, as defined in

Line 8

Over —

over —

Tax is:

over —

section 927(d)(4), must check the box on

Personal holding company tax. See

line 1 and complete lines 2a and 2b of

$50,000

15%

Personal Holding Companies and Foreign

Schedule J, Form 1120-FSC.

50,000

75,000

$ 7,500 + 25%

50,000

Personal Holding Companies on page 5.

Line 2a. Members of a controlled group are

75,000

100,000

13,750 + 34%

75,000

entitled to one $50,000, one $25,000, and

100,000

335,000

22,250 + 39%

100,000

Line 9

one $9,925,000 taxable income bracket

335,000 10,000,000

113,900 + 34%

335,000

amount (in that order) on line 2a.

10,000,000 15,000,000 3,400,000 + 35% 10,000,000

Total tax

15,000,000 18,333,333 5,150,000 + 38% 15,000,000

When a controlled group adopts or later

Interest on tax deferred under the

18,333,333

- - - - -

35%

amends an apportionment plan, each

installment method for certain nondealer

member must attach to its tax return a copy

installment obligations. If an obligation

of its consent to this plan. The copy (or an

Qualified personal service corporations.

arising from the disposition of property to

attached statement) must show the part of

A qualified personal service corporation is

which section 453A applies is outstanding at

the amount in each taxable income bracket

taxed at a flat rate of 35% on its taxable

the close of the year, the FSC must include

apportioned to that member. See

income. A FSC is a qualified personal

the interest due under section 453A(c) in the

Regulations section 1.1561-3(b) for other

service corporation if it meets both of the

amount on line 9, Schedule J. On the dotted

requirements and for the time and manner

following tests:

line to the left of line 9, Schedule J, write

•

of making the consent.

Substantially all of the FSC’s activities

“Section 453A(c) interest” and the amount.

involve the performance of services in the

Unequal apportionment plan.

Attach a schedule showing the computation.

fields of engineering, architecture, or

Members of a controlled group may elect an

Schedule L

management consulting and

unequal apportionment plan and divide the

•

At least 95% of the corporation’s stock, by

taxable income brackets as they want.

Balance Sheets per Books

value, is owned, directly or indirectly, by (1)

There is no need for consistency among

employees performing the services, (2)

The balance sheet should agree with the

taxable income brackets. Any member may

retired employees who had performed the

FSC’s books and records. Include

be entitled to all, some, or none of the

services listed above, (3) any estate of the

certificates of deposit as cash on line 1,

taxable income bracket. However, the total

employee or retiree described above, or (4)

Schedule L.

amount for all members cannot be more

any person who acquired the stock of the

than the total amount in each taxable

FSC as a result of the death of an employee

income bracket.

-12-

Instructions For Form 1120-Fsc - U.s. Income Tax Return Of A Foreign Sales Corporation - 2004 Page 12

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