Group's state tax organization offers FSC opportunities.

• Author: Reynolds, Bruce W.
• Position: Foreign sales corporation

Example: A manufacturing company operates as a contract manufacturer (cost-plus) and has a presence in only one state. A warehousing company holds title to inventory from completion by the manufacturer until ordered by a distribution company. The distribution company makes actual sales, then orders from the warehousing company. Profits are all in this third company.

The taxpayer wants to claim foreign sales corporation (FSC) benefits on all three sales for products exported by the distribution company. It can do this, but must deal with the following issues.

[] Are the sales separate transactions, or parts of the same one? The answer to this question will determine if each sale must be separately qualified and priced.

[] If separate sales, can FSC benefits be claimed at all levels, since this is a single controlled group? Yes, if the gross receipts pricing method is not used on any sale.

[] How can sales No. 1 and 2 qualify? The destination test of Temp. Regs. Sec. 1.927(a)-1T(d)(3) must be met. Then, as separate sales, each must separately qualify under the economic process tests:

1. Contracts are needed between the seller and the FSC.

2. Participation in sales process requirements must be met. With only one customer, a solicitation letter may suffice.

3. Foreign direct cost elements must be carefully considered. Two out of five direct cost categories must have a specified proportion of foreign expenses, although they do not always work as they do with normal FSC sales:

   1. Advertising and sales promotion. FSC advertising may not qualify when there is only one potential customer. The regulations define advertising in terms of reaching "multiple" customers. A concept known as "cooperative advertising" may help get around this.

   2. Transportation. FSCs cannot transport products delivered domestically. This foreign direct cost test is therefore unavailable.

   3. Credit risk. Sales No. 1 and 2 probably do not experience bad debts. Some of the other methods of meeting this test...