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the FSC can deduct for the tax year is

FSCs that account for inventoriable items

Line 6. If the FSC owned at least a 10%

figured on line 8.

in the same manner as materials and

interest, directly or indirectly, in any foreign

supplies that are not incidental may

partnership, attach a statement listing the

All FSCs not using the cash method of

currently deduct expenditures for direct

following information for each foreign

accounting should see Section 263A

labor and all indirect costs that would

partnership. For this purpose, a foreign

uniform capitalization rules in the

otherwise be included in inventory costs.

partnership includes an entity treated as a

instructions for Schedule G on page 10. See

foreign partnership under Regulations

those instructions before completing

The average cost (rolling average)

section 301.7701-2 or 301.7701-3.

Schedule A.

method of valuing inventories generally

1. Name and EIN (if any) of the foreign

does not conform to the requirements of the

If the FSC uses intercompany pricing

partnership;

regulations. See Rev. Rul. 71-234, 1971-1

rules (for purchases from a related supplier),

2. Identify which, if any, of the following

C.B. 148.

use the transfer price figured in Part II of

forms the foreign partnership filed for its tax

Schedule P (Form 1120-FSC).

FSCs that use erroneous valuation

year ending with or within the FSC’s tax

methods must change to a method

Line 1. Inventory at beginning of year. If

year: Form 1042, 1065 or 1065-B, or 8804;

permitted for Federal income tax purposes.

the FSC is changing its method of

3. Name of the tax matters partner (if

To make this change, use Form 3115.

accounting for the current tax year, it must

any); and

refigure last year’s closing inventory using

On line 9a, check the method(s) used for

4. Beginning and ending dates of the

its new method of accounting and enter the

valuing inventories. Under lower of cost or

foreign partnership’s tax year.

result on line 1. If there is a difference

market, the term “market” (for normal goods)

between last year’s closing inventory and

means the current bid price prevailing on the

Line 7. If the FSC has a net operating loss

the refigured amount, attach an explanation

(NOL) for its 2004 tax year, it can elect to

inventory valuation date for the particular

and take it into account when figuring the

waive the entire carryback period for the

merchandise in the volume usually

FSC’s section 481(a) adjustment (explained

NOL and instead carry the NOL forward to

purchased by the taxpayer. If section 263A

on page 5).

applies to the taxpayer, the basic elements

future tax years. To do so, check the box on

of cost must reflect the current bid price of

line 7 and file the tax return by its due date,

Line 4. Additional section 263A costs. An

including extensions (do not attach the

all direct costs and all indirect costs properly

entry is required on this line only for FSCs

statement described in Temporary

allocable to goods on hand at the inventory

that have elected a simplified method of

Regulations section 301.9100-12T). Once

date.

accounting.

made, the election is irrevocable. See Pub.

Inventory may be valued below cost

For FSCs that have elected the simplified

542, Corporations, and Form 1139,

when the merchandise is unsalable at

production method, additional section 263A

Corporation Application for Tentative

normal prices or unusable in the normal way

costs are generally those costs, other than

Refund, for more details.

because the goods are subnormal due to

interest, that were not capitalized under the

Line 8. Enter the amount of the NOL

damage, imperfections, shopwear, etc.,

FSC’s method of accounting immediately

carryover to the tax year from prior years,

within the meaning of Regulations section

prior to the effective date of section 263A

even if some of the loss is used to offset

1.471-2(c). The goods may be valued at the

but are now required to be capitalized under

income on this return. The amount to enter

current bona fide selling price, minus direct

section 263A. For details, see Regulations

is the total of all NOLs generated in prior

cost of disposition (but not less than scrap

section 1.263A-2(b).

years but not used to offset income (either

value) if such a price can be established.

For FSCs that have elected the simplified

as a carryback or carryover) to a tax year

If this is the first year the Last-in,

resale method, additional section 263A

prior to 2004. Do not reduce the amount by

First-out (LIFO) inventory method was either

costs are generally those costs incurred with

any NOL deduction reported on line 19a,

adopted or extended to inventory goods not

respect to the following categories.

Part II of Schedule B.

•

Off-site storage or warehousing.

previously valued under the LIFO method

•

Lines 9c and 10b(2). See Definition of a

Purchasing; handling, such as

provided in section 472, attach Form 970,

Foreign Sales Corporation (FSC) on page 2

Application To Use LIFO Inventory Method,

processing, assembling, repackaging, and

for definitions of qualifying foreign country

or a statement with the information required

transporting.

•

and U.S. possession.

by Form 970. Also check the LIFO box on

General and administrative costs (mixed

Line 10. All FSCs (except small FSCs)

service costs).

line 9c. On line 9d, enter the amount or the

must answer these questions. For more

percent of total closing inventories covered

For details, see Regulations section

information, see Foreign Management Rules

under section 472. Estimates are

1.263A-3(d).

acceptable.

on page 3.

Enter on line 4 the balance of section

Line 11. All FSCs (except small FSCs)

If the FSC changed or extended its

263A costs paid or incurred during the tax

must answer these questions. On line 11b,

inventory method to LIFO and had to write

year not includible on lines 2, 3, and 5.

indicate how the FSC met the foreign direct

up the opening inventory to cost in the year

Line 5. Other costs. Enter on line 5 any

costs requirement of section 924(d) for all

of election, report the effect of the write-up

costs paid or incurred during the tax year

transactions that generated foreign trading

as other income (as appropriate on

not entered on lines 2 through 4.

gross receipts reported on lines 1 through 5

Schedule F, line 16), proportionately over a

Line 7. Inventory at end of year. See

of Schedule B. Also, complete line 11a

3-year period that begins with the year of

Regulations sections 1.263A-1 through

and/or line 11d to make an election to use

the LIFO election (section 472(d)).

1.263A-3 for details on figuring the amount

either of the annual grouping election(s)

For more information on inventory

of additional section 263A costs to be

indicated. See Foreign Economic Process

valuation methods, see Pub. 538,

included in ending inventory. If the FSC

Rules on page 3 for details.

Accounting Periods and Methods.

accounts for inventoriable items in the same

Schedule B

manner as materials and supplies that are

Additional Information

not incidental, enter on line 7 the portion of

Taxable Income or (Loss)

its merchandise purchased for resale that is

Line 2. Show any tax-exempt interest

included on line 6 and was not sold during

received or accrued. Include any

Use Schedule B to compute taxable income

the year.

exempt-interest dividends received as a

from all sources.

Lines 9a through 9f. Inventory valuation

shareholder in a mutual fund or other

Part I

methods. Inventories can be valued at:

regulated investment company. Also include

•

Cost;

this amount on Schedule M-1, line 7a.

Use Part I to compute net income

•

Cost or market value (whichever is lower);

attributable to nonexempt foreign trade

Line 4. See section 542 for the definition of

income. Income and expenses on lines 1

personal holding company and section 552

•

Any other method approved by the IRS

through 15 are reported in column (a) if the

for the definition of foreign personal holding

that conforms to the requirements of the

administrative pricing rules were used in the

company. Also, see Personal Holding

applicable regulations cited below.

transaction that produced the income.

Companies and Foreign Personal Holding

However, if the FSC is using the cash

Companies on page 5 for information and

Report in column (b) all foreign trade

method of accounting, it is required to use

other details if the FSC meets the definition

income from all transactions in which the

cost.

of either.

administrative pricing rules were not used.

-8-

Instructions For Form 1120-Fsc - U.s. Income Tax Return Of A Foreign Sales Corporation - 2004 Page 8

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