Selected Terms and Concepts
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Commissions and accounts receivable.— In general, the sum of commissions receivable and accounts receivable shown on the Form 1120-FSC end-of-year balance sheet represented pending payments to the FSC by the FSCs related supplier’s for the FSCs exports of the related supplier’s products and or services.
Deficit.—This was the sum of net income amounts less than zero.
Export property.—The FSCs export property was inventory and property held for sale or lease which: (1) had been manufactured, produced, grown, or extracted in the United States by a "person" other than a FSC; (2) was held primarily for sale, lease, or rental in the ordinary course of business for direct use, consumption, or disposition outside the United States; and (3) had, at the time of sale, lease, or rental by the FSC, not more than 50 percent of its fair market value attributable to imported articles.
Foreign direct costs:
Administrative.—These were foreign direct costs related to foreign trade income from transactions in which administrative inter-company pricing rules were applied. Foreign direct costs were attributable to activities performed outside of the United States and were related to the sale or other disposition of export property. As specified by Internal Revenue Code section 924(e), foreign direct costs included advertising and sales promotion, certain processing and arranging costs, certain transportation costs, certain determination and transmittal costs, and costs related to the assumption of credit risk.
Non-administrative.—These were foreign direct costs related to foreign trade income from transactions in which the non-administrative inter-company pricing rule (Internal Revenue Code section 482 method) was applied. See administrative foreign direct costs entry, above, for additional information about foreign direct costs.
Foreign trade deductions:
Administrative.—Included were deductions related to foreign trade income (exempt and nonexempt) from transactions in which the administrative pricing rules were used. These deductions included, but were not limited to, administrative foreign direct costs (see above).
Non-administrative.—Included were deductions related to foreign trade income (exempt and nonexempt) from transactions in which the non-administrative pricing rules were used. These deductions included, but were not limited to, non-administrative foreign direct costs.
Foreign trade gross receipts.—Foreign trade gross receipts represented: (1) the sale, exchange, or other disposition of export property (see above); (2) the lease or rental of export property for use by the lessee outside the United States; (3) services which were related and subsidiary to activities described in (1) or (2); (4) engineering or architectural services for construction projects located (or proposed for location) outside the United States; and (5) the performance of managerial services for an unrelated FSC or Domestic International Sales Corporation (DISC). These receipts were earned by, or allocated to, the FSC as a result of application of inter-company pricing rules (see below). Excluded were passive income (see non-foreign trade income, below). In general, foreign trade gross receipts of a “buy-sell” FSC consisted of receipts derived from qualified export transactions prior to the subtraction of a cost of goods sold. In general, the foreign trade gross receipts of the related supplier were deemed the foreign trade gross receipts of a “commission” FSC.
Inter-company pricing rules.—These rules were used to allocate receipts (and derive income) between the FSC and its related suppliers.
Administrative.—Administrative pricing rules included: (1) the 1.83 percent of gross receipts method; (2) the 23 percent of combined taxable income method; and (3) the marginal costing method. If one of these three administrative pricing rules was not applied, then the non-administrative Internal Revenue Code section 482 method had to be used.
Non-administrative.—The Internal Revenue Code section 482 method had to be used.
Net exempt income:
Administrative.—Included were exempt foreign trade income from transactions for which the administrative pricing rules were applied, net of deductions related to that exempt foreign trade income.
Non-administrative.—Included were exempt foreign trade income from transactions for which the non-administrative pricing rule (Internal Revenue Code section 482 method) applied, net of deductions related to that exempt foreign trade income.
Net income.—This was the sum of net income amounts greater than or equal to zero.
Net income (less deficit).—This was net income prior to exclusions or adjustments after net exempt income (see above) was subtracted. Net income (less deficit) was the sum of taxable income from foreign trade income and taxable income from non-foreign trade income (see below).
Net income prior to exclusions or adjustments.—Total nonexempt income net of all appropriate deductions except the “net operating loss” and dividends-received deductions, including:
Administrative net income.—net income attributed to nonexempt foreign trade income from transactions for which the administrative pricing rules applied;
Non-administrative net income.— net income attributed to nonexempt foreign trade income from transactions for which the non-administrative pricing rule applied, reduced by any nontaxable income (i.e., income that was not “effectively connected” with a U.S. trade or business);
Non-foreign trade net income.—net income attributed to non-foreign trade income.
Non-foreign trade deductions.—These were deductions related to non-foreign trade income, described below.
Regular income tax.—This was the tax generated by application of statutory tax rates from the regular tax rate schedules to taxable income (see below).
Taxable income.—Total net income, reduced by the “net operating loss” and dividends received deductions as well as FSC income exempt from U.S. income tax.
Total assets.—Total assets were the sum of individual asset components reported in the end-of-year balance sheet on Form 1120-FSC and reflected fair market value.
Total costs of sales and operations.—Total costs of sales and operations commonly consisted of the manufacturing costs incurred by the FSC or its related suppliers, as mentioned below. Included were costs of goods purchased for resale, direct labor, and certain overhead expenses. Generally, FSCs acted either as principals or as commission agents for export transactions. FSCs acting as principals for transactions were referred to as “buy-sell” FSCs, while those acting as commission agents for transactions were referred to as “commission” FSCs. Only buy-sell FSCs reported total costs of sales and operations. For commission FSCs, the total costs of sales and operations was reported by the commission FSCs related supplier and generally factored into the commission calculation.
Total current and long-term liabilities.—This was the sum of accounts payable; mortgages, notes and bonds payable in less than one year; transfer prices payable; other current liabilities; loans from shareholders; mortgages, notes and bonds payable in one year or more; and other liabilities from the Form 1120-FSC end-of-year balance sheet.
Total distributions.—Distributions of cash, stock or other property from Form 1120-FSC “earnings and profits”
paid to shareholders of the Form 1120-FSC.
Total foreign trading gross receipts of FSCs and related suppliers.—Gross receipts of FSCs and related suppliers is used as a computational base for the calculation of foreign trading gross receipts (see above). These receipts were comprised of all gross receipts (prior to any deductions) earned by the FSC and related suppliers from: (1) the resale of export property or services supplied by related suppliers; or (2) a FSC acting in its capacity as a commission agent for related suppliers in the disposition of export property or services. Because certain FSCs (especially those acting as commission agents), may not have title to property being exported, gross receipts attributed to FSCs and their related suppliers is a more complete measure of export activities.
Full costing.—Foreign trading gross receipts of FSCs and related suppliers computed using the “full costing” method on Form 1120-FSC Schedule P.
Marginal costing.—Foreign trading gross receipts of FSCs and related suppliers computed using the “marginal costing” method on Form 1120-FSC Schedule P.
Foreign trade income.—This was income from qualified transactions attributable to the sale or lease of “export property” outside the United States or to the performance of various types of “export service” outside the United States.
Administrative.—Included were foreign trade gross receipts (or the commission portion of gross receipts) earned by FSCs from transactions for which the administrative pricing rules were applied.
Non-administrative.—Included were foreign trade gross receipts (or the commission portion of gross receipts) earned by FSCs from transactions for which the non-administrative pricing rule applied.
Non-foreign trade income.—This was income earned by FSCs that was generally not related to qualified exports of U.S. manufactured products or services, such as interest, dividends, or royalties, and income earned by “small FSCs” in excess of the $5 million exemption from tax of small FSC foreign trade income.
Total tax liability.—This was the sum of regular income tax (see above), alternative minimum tax, environmental tax and personal holding company tax minus the foreign tax credit.
Data Sources and Limitations
The Tax Year 2000 statistics were based on a sample of Form 1120-FSC returns with accounting periods ending between July 2000 and June 2001 and filed during Calendar Years 2000, 2001, or 2002. The data presented excluded "inactive" FSC returns; a FSC was considered to be inactive if no current receipts, net income or deficit, deductions, or distributions were reported on the return. Thus, a FSC that had no current income or deductions reported was treated as an active corporation if it made a distribution to its shareholders during the tax year. FSCs were no longer included in the Statistics of Income data for all corporations because they were not engaged in trade or business in the United States.
The Tax Year 2000 sample totaled 2,248 returns, weighted to reflect an estimated population of approximately 5,075 active and inactive FSC returns. Certain returns were unavailable for the statistics. Because the data were based on a sample, they were subject to sampling error. However, coefficients of variation (CV’s) for these data were not computed. With regard to non-sampling error, some of the data were inconsistently reported. Where possible, inconsistencies in the data were resolved to conform to provisions of the Internal Revenue Code.
The product and services classification system used in the Tax Year 2000 FSC study was generally based upon Internal Revenue Service instructions provided to the taxpayer for completion of Schedule P, Transfer Price or Commission. Products and services reported by a taxpayer on each specific return were reviewed for consistency with product information provided in supporting schedules and other taxpayer attachments and with the principal business activities described on the return. For example, the return was reviewed if a taxpayer reported engineering services on Schedule P without reporting any "engineering services income" on Schedule B, Taxable Income or (Loss). In addition, products and services reported by taxpayers on specific returns were reviewed for consistency with the major product and services group classification. Since a FSC was intended to serve solely as an export mechanism for U.S. taxpayers, certain business activities, such as manufacturing, were not applicable to a FSC.
Consequently, FSC returns reporting manufacturing as the principal business activity were reviewed and reconciled with product and other information. As an example, a FSC return reporting the manufacture of farm machinery and equipment as the principal business activity would have been reviewed to ascertain if a more appropriate principal business activity was the wholesaling of farm machinery and equipment. Each return used for the statistics had product and industry codes reported or assigned during statistical processing. These codes were used as classifiers of the returns. The product and industry codes represented the principal business activity (i.e., the activity which accounted for the largest portion of gross receipts of FSCs and related suppliers) of the FSC filing the return. However, a given FSC return may have exported goods and services for a consolidated corporate parent which conducted different business activities. To the extent that some consolidated (and non-consolidated) parent corporations were engaged in many types of business activities, the data in the Tax Year 2000 FSC study were not entirely related to the product or industrial activity under which they were shown.