Elections pursuant to FSC Repeal and Extraterritorial Income Exclusion Act of 2000.

• Author: O'Connell, Frank J., Jr.
• Position: Foreign sales corporations

The IRS issued Rev. Proc. 2001-37 on May 18, 2001, providing guidance on the procedures for certain elections available under the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (Act). Specifically, Rev. Proc. 2001-37 provides guidance on the election (1) to exclude gross income from foreign trading gross receipts (FTGRs) under Sec. 942(a)(3), (2) to apply the extraterritorial income (ETI) exclusion provisions, in lieu of the foreign sales corporation (FSC) provisions under Section 5(c)(2) of the Act and (3) by a foreign corporation for treatment as a domestic corporation under Sec. 943(e)(1).

The President signed the Act into law on Nov. 15, 2000, repealing the FSC provisions under Secs. 921-927 and replacing them with the ETI exclusion under Secs. 941-943. Under the Act, the ETI exclusion applies to transactions that occur after Sept. 30, 2000. Section 5(c)(1) provides a transition rule applicable to FSCs in existence on Sept. 30, 2000, by which the FSC provisions continue to apply to transactions that occur before 2002.

Election to Exclude Gross Income from FTGRs

Under the Act, a taxpayer can elect to exclude gross receipts from FTGRs under Sec. 942(a)(3). The taxpayer makes the election by simply checking the box on line 1 in Part I of Form 8873, Extraterritorial Income Exclusion, the form prescribed by the IRS to report extraterritorial income and to calculate the ETI exclusion. If a taxpayer wishes to treat gross receipts from certain transactions as FTGRs and exclude gross receipts from other transactions, it must attach a schedule to Form 8873, identifying all gross receipts that are excluded.

The ability to exclude certain gross receipts from FTGRs is significant if there are loss transactions. Under the FSC provisions, an election to exclude transactions from FTGRs was unnecessary. Generally, the contract between the FSC and a domestic related-party supplier could be drafted such that the supplier could choose not to use the FSC for any transaction. As a result, the domestic related-party supplier could essentially choose the transactions that it wished to include in the calculation of the FSC's commission.

Under the provisions of the ETI exclusion, all qualifying transactions are FTGRs, in the absence of an affirmative election to exclude certain transactions. The failure to properly elect not to include certain transactions in FTGRs could adversely affect the calculation of the allowable exclusion.

The election is...