Comments on application of estimated tax rules to foreign sales corporations December 21, 1990.

Comments on Application of Estimated Tax Rules to Foreign Sales Corporations

This letter follows up on our recent meeting with respect to the corporate meeting with respect to the corporate estimated tax payments of foreign sales corporations (FSCs).

As we have previously discussed, taxpayers have experienced great difficulty in making adequate estimated tax payments with respect to FSCs and their related suppliers. TEI recommended that te IRS adopt a rule whereby ne estimated tax penalties, failure-to-pay penalties, or interest charges would be imposed if no such penalties and interest would be due on an aggregate basis with respect to FSC commissions when estimated tax payments of both the FSC and the related supplier are taken into account. In addition, TEI recommended adoption of a safe harbor that would treat the FSC as having made adequate tax payments for purposes of section 6655 of the Code if the quarterly installments equal or exceed the tax on 1.83 percent of the foreign trading gross receipts of the related supplier and the FSC for that quarter. You asked the Institute to provide examples of situations in which the IRS had exercised its discretion to grant relief with respect to the estimated tax or similar provisions. This letter responsible to that request.

Prefatorily, we note that a FSC and its related supplier in reality operate as a single economic unit. The FSC provisions were enacted to replace the domestic international sales corporations (DISC) -- not for tax reasons -- but to address concerns raised by our trading partners with respect to the General Agreement on Tariffs and Trade (GATT). Unnecessary interest and penalty charges attributable to the operation of the estimated tax rules diminish the value of the FSC as an export incentive and frustrate the purpose of the provisions. Thus, we submit that there is no policy reason to deny a safe harbor from the estimated tax penalty with respect to FSCs and their related suppliers.

Annualized Income Exception

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) increased estimated tax payments for corporations from 80 to 90 percent of the current year's tax liability. Because the increased estimated tax payments demanded greater precision in preparing the estimates, the estimated tax penalty was restructured and the annualized income exceptions expanded. See Staff of the Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and...