US Internal Revenue Service: I1120fsc - 2003

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Page 1 of 16 Instructions for Form 1120-FSC 15:44 - 30-DEC-2003
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2003 Department of the Treasury

Internal Revenue Service
Instructions for Form

1120-FSC
U.S. Income Tax Return of a Foreign Sales Corporation
Section references are to the Internal Revenue Code unless otherwise noted.
Contents Page Photographs of • A description of the hardship the FSC

Photographs of Missing Children .... 1 is facing (if applicable).
Unresolved Tax Issues . . . . . . . . .... 1 Missing Children The FSC may contact a Taxpayer
How To Get Forms and The Internal Revenue Service is a proud Advocate by calling 1-877-777-4778 (toll
Publications . . . . . . . . . . . . . . .... 1 partner with the National Center for free). Persons who have access to TTY/
General Instructions . . . . . . . . . .... 2 Missing and Exploited Children. TDD equipment may call 1-800-829-4059
Purpose of Form . . . . . . . . . . . .... 2 Photographs of missing children selected and ask for Taxpayer Advocate
FSC Repeal and by the Center may appear in instructions assistance. If the FSC prefers, it may call,
on pages that would otherwise be blank. write, or fax the Taxpayer Advocate office
Extraterritorial Income
You can help bring these children home in its area. See Pub. 1546, The Taxpayer
Exclusion . . . . . . . . . . . . . . . . .. 2 by looking at the photographs and calling
FSC Rules . . . . . . . . . . . . . . . . . . 2-4 Advocate Service of the IRS, for a list of
1-800-THE-LOST (1-800-843-5678) if you addresses and fax numbers.
Who Must File . . . . . . . . . . . . . . .. 4 recognize a child.
When To File . . . . . . . . . . . . . . . .. 4
Where To File . . . . . . . . . . . . . . . .. 4 How To Get Forms
Unresolved Tax Issues
Who Must Sign . . . . . . . . . . . . . . .. 4
If the FSC has attempted to deal with an
and Publications
Paid Preparer Authorization . . . . . .. 4
IRS problem unsuccessfully, it should Personal computer. You can access the
Other Forms, Schedules, and
contact the Taxpayer Advocate. The IRS website 24 hours a day, 7 days a
Statements That May Be week, at www.irs.gov to:
Taxpayer Advocate independently
Required . . . . . . . . . . . . . . . . . . 4-5 represents the FSC’s interests and • Order IRS products online.
Assembling the Return . . . . . . . . .. 5 concerns within the IRS by protecting its • Download forms, instructions, and
Accounting Methods . . . . . . . . . . .. 6 rights and resolving problems that have publications.
Accounting Periods . . . . . . . . . . . .. 6 not been fixed through normal channels. • See answers to frequently asked tax
Rounding Off To Whole questions.
Dollars . . . . . . . . . . . . . . . . . . .. 6 While Taxpayer Advocates cannot • Search publications online by topic or
Recordkeeping . . . . . . . . . . . . . . .. 6 change the tax law or make a technical keyword.
Payment of Tax Due . . . . . . . . . . . 6-7 tax decision, they can clear up problems • Send us comments or request help by
that resulted from previous contacts and email.
Estimated Tax Payments . . . . . . . .. 7
Interest and Penalties . . . . . . . . . .. 7
ensure that the FSC’s case is given a • Sign up to receive local and national
complete and impartial review. tax news by email.
Specific Instructions . . . . . . . . . . .. 7
Tax and Payments . . . . . . . . . . . .. 8 The FSC’s assigned personal You can also reach us using file
Schedule A – Cost of Goods advocate will listen to its point of view and transfer protocol at ftp.irs.gov.
Sold Related To Foreign will work with the FSC to address its CD-ROM. Order Pub. 1796, Federal Tax
Trading Gross Receipts . . . . . . . 8-9 concerns. The FSC can expect the Products on CD-ROM, and get:
Additional Information . . . . . . . . . 9-10 advocate to provide:
Schedule B – Taxable Income • A “fresh look” at a new or on-going • Current year forms, instructions, and
problem. publications.
or (Loss) . . . . . . . . . . . . . . . . . . 10
• Timely acknowledgment. • Prior year forms, instructions, and
Schedule E – Exemption
• The name and phone number of the publications.
Percentages Used in individual assigned to its case. • Frequently requested tax forms that
Figuring Exempt Foreign • Updates on progress. may be filled in electronically, printed out
Trade Income . . . . . . . . . . . . . . 10 • Timeframes for action. for submission, and saved for
Schedule F – Net Income From • Speedy resolution. recordkeeping.
Nonexempt Foreign Trade • Courteous service. • The Internal Revenue Bulletin.
Income and Taxable Buy the CD-ROM on the Internet at
Nonforeign Trade Income . . . . 10-12 When contacting the Taxpayer
Advocate, the FSC should be prepared to www.irs.gov/cdorders from the National
Schedule G – Deductions Technical Information Service (NTIS) for
Allocated or Apportioned to provide the following information:
Foreign Trade Income Other
• The FSC’s name, address, and $22 (no handling fee) or call
employer identification number (EIN). 1-877-CDFORMS (1-877-233-6767) toll
Than Foreign Trade Income • The name and telephone number of an free to buy the CD-ROM for $22 (plus a
Reported on Schedule F . . . . 12-13 authorized contact person and the hours $5 handling fee).
Schedule J – Tax Computation . 13-14 he or she can be reached. By phone and in person. You can order
Schedule L – Balance Sheets • The type of tax return and year(s) forms and publications 24 hours a day, 7
per Books . . . . . . . . . . . . . . . . . 14 involved. days a week, by calling
Schedule M-1 . . . . . . . . . . . . . . . . 14 • A detailed description of the problem. 1-800-TAX-FORM (1-800-829-3676). You
Principal Business Activity • Previous attempts to solve the problem can also get most forms and publications
Codes . . . . . . . . . . . . . . . . . . . . 16 and the office that was contacted. at your local IRS office.
Cat. No. 11532V

The election is made by checking the Egypt, Finland, France, Germany,

General Instructions box on line 3 of Form 8873. An electing
corporation files Form 1120, U.S.
Grenada, Guyana, Honduras, Iceland,
Ireland, Jamaica, Korea, Malta, the
Corporation Income Tax Return, or Form Marshall Islands, Mexico, Morocco, the
Purpose of Form 1120-A, U.S. Corporation Short-Form Netherlands, New Zealand, Norway,
Use Form 1120-FSC to report the Income Tax Return. Once made, the Pakistan, Peru, the Philippines, St. Lucia,
income, gains, losses, deductions, election applies to the tax year for which it Sweden, and Trinidad and Tobago.
credits, and to figure the income tax is made and remains in effect for all 2. It had no more than 25
liability of a FSC. subsequent years unless the election is shareholders at any time during the tax
revoked or terminated. If the election is year.
FSC Repeal and revoked or terminated, the corporation 3. It had no preferred stock
would be a foreign corporation that files
Extraterritorial Income Form 1120-F, U.S. Income Tax Return of
outstanding at any time during the tax
year.
Exclusion a Foreign Corporation. Furthermore, the 4. During the tax year, the FSC must
In general, the FSC Repeal and foreign corporation would not be eligible maintain:
Extraterritorial Income Exclusion Act of to reelect to be treated as a domestic • An office in one of the qualifying
2000: corporation for 5 tax years beginning with foreign countries or U.S. possessions
• Repealed the FSC rules, the first tax year for which the original listed above,
• Provides taxpayers with an exclusion, election is not in effect as a result of the • A set of permanent books of
which is figured on Form 8873, revocation or termination. account (including invoices) at that office,
Extraterritorial Income Exclusion, and Effect of election. A FSC that elects to and
• Provides transition rules for existing be treated as a domestic corporation • The books and records required
FSCs (see Transition Rules below). ceases to be a FSC for any tax year for under section 6001 at a U.S. location to
which the election applies (and for any sufficiently establish the amount of gross
Transition Rules subsequent tax year). income, deductions, credits, or other
In general, a FSC that was in existence matters required to be shown on its tax
on September 30, 2000, and at all times FSC Election return.
thereafter, may continue to use the FSC No corporation may elect to be a FSC or 5. It must have at least one director,
rules for qualifying transactions in the a small FSC (defined below) after at all times during the tax year, who is not
ordinary course of business that are September 30, 2000. a resident of the United States.
pursuant to a binding contract between 6. It must not be a member, at any
the FSC (or a person related to the FSC) Termination of Inactive FSCs time during the tax year, of a controlled
and a person other than a related person If a FSC has no foreign trade income (see group of which a DISC is a member.
if that binding contract was in effect on definition under Tax Treatment of a FSC 7. It must have elected to be a FSC or
September 30, 2000, and has remained below) for any 5 consecutive tax years small FSC, and the election must have
in effect. A binding contract includes a beginning after December 31, 2001, the been in effect for the tax year.
purchase, renewal, or replacement option FSC will no longer be treated as a FSC
that is enforceable against a lessor or for any tax year beginning after that Small FSC. Section 922(b) defines a
seller (provided the option is part of a 5-year period. small FSC as a corporation that:
contract that is binding and in effect on
Additional Information • Elected small FSC status and has kept
September 30, 2000, and has remained the election in effect for the tax year and
in effect). For additional information regarding the • Is not a member, at any time during the
rules discussed above, see Rev. Proc. tax year, of a controlled group that
The mere entering into of a single
2001-37, 2001-23 I.R.B. 1327. includes a FSC (unless that other FSC is
transaction, such as a lease, would not, in
and of itself, prevent the transaction from also a small FSC).
being in the ordinary course of business. FSC Rules A small FSC is exempt from the
Election To Apply Exclusion Rules Definition of a Foreign foreign management and foreign
economic process requirements. See the
Taxpayers may elect to apply the Sales Corporation (FSC) instructions for Foreign Management
extraterritorial income exclusion rules Under section 922(a), a FSC is defined as Rules and the Foreign Economic
instead of the FSC rules for transactions a corporation that has met all of the Process Rules on page 3.
occurring during the transition period. The following rules.
election is: $5 million limit. Generally, any
1. It must be a corporation created or
• Made by checking the box on line 2 of organized under the laws of a qualifying
foreign trading gross receipts of a small
Form 8873, FSC for the tax year that exceed $5
foreign country or any U.S. possession
• Made on a transaction-by-transaction other than Puerto Rico.
million are not to be considered in
basis, determining its exempt foreign trade
• Effective for the tax year for which it is Qualifying U.S. possessions include income. The $5 million limit is reduced if
made and for all subsequent tax years, Guam, American Samoa, the the small FSC has a short tax year. It may
and Commonwealth of the Northern Mariana also be reduced if the small FSC is a
• Revocable only with the consent of the Islands, and the U.S. Virgin Islands. member of a controlled group that
IRS. A qualifying foreign country is a foreign contains other small FSCs. See
Taxpayers use Form 8873 to country that meets the exchange of Regulations section 1.921-2(b) for more
determine their extraterritorial income information rules of section 927(e)(3)(A) information.
exclusion. or (B). All U.S. possessions other than
Puerto Rico are also certified to have met Tax Treatment of a FSC
Election To Be Treated as a these rules. A FSC is not taxed on its exempt foreign
Domestic Corporation The following countries are qualifying trade income. Section 923 defines foreign
A FSC that was in existence on foreign countries that have met the trade income as the gross income of a
September 30, 2000, and at all times exchange of information rules of section FSC attributable to foreign trading gross
thereafter, may elect to be treated as a 927(e)(3)(A) or 927(e)(3)(B): Australia, receipts (defined on page 3).
domestic corporation if substantially all of Austria, Barbados, Belgium, Bermuda, The percentage of foreign trade
its gross receipts are foreign trading gross Canada, Costa Rica, Cyprus, Denmark, income exempt from tax is figured
receipts. Dominica, the Dominican Republic, differently for income determined under
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the administrative pricing rules (for (if it is held at all), who must be present, incurred by the FSC attributable to the
details, see the instructions for Schedule quorum requirements, use of proxies, etc. transaction.
P (Form 1120-FSC)) and income Principal bank accounts. See Instead of satisfying the 50% foreign
determined without regard to the Regulations section 1.924(c)-1(c) for direct cost test, the FSC may incur foreign
administrative pricing rules. These information regarding principal bank direct costs attributable to activities
percentages are computed on Schedule accounts. described in each of two of the section
E, page 4, Form 1120-FSC, and carried 924(e) categories. The costs must equal
over to lines 9a and 9b of Schedule B, Foreign Economic Process Rules or exceed 85% of the total direct costs
page 3, Form 1120-FSC, to figure taxable A FSC (other than a small FSC) has incurred by the FSC attributable to the
income or (loss). foreign trading gross receipts from any activity described in each of the two
See section 923(a)(4) for a special rule transaction only if certain economic categories. If no direct costs are incurred
for foreign trade income allocable to a processes for the transaction take place by the FSC in a particular category, that
cooperative. See section 923(a)(5) for a outside the United States. Section 924(d) category is not taken into account for
special rule for military property. and Regulations section 1.924(d)-1 set purposes of determining whether the FSC
Tax treaty benefits. A FSC may not forth the rules for determining whether a has met either the 50% or 85% foreign
claim any benefits under any income tax sufficient amount of the economic direct cost test.
treaty between the United States and any processes of a transaction takes place Direct costs are costs that:
foreign country. outside the United States. • Are incident to and necessary for the
Generally, a transaction will qualify if performance of any activity described in
Foreign Trading Gross Receipts section 924(e);
the FSC satisfies two requirements:
A FSC is treated as having foreign trading
• Participation outside the United States • Include the cost of materials consumed
gross receipts (defined in section 924) in the performance of the activity and the
in the sales portion of the transaction and
only if it has met certain foreign
management and foreign economic
• Satisfaction of either the 50% or the cost of labor that can be identified or
85% foreign direct cost test. associated directly with the performance
process requirements. of the activity (but only to the extent of
Foreign trading gross receipts do not The activities comprising these wages, salaries, fees for professional
include: economic processes may be performed services, and other amounts paid for
• Certain excluded receipts (defined in by the FSC or by any other person acting personal services actually rendered, such
section 924(f)). under contract with the FSC. as bonuses or compensation paid for
• Receipts attributable to property Participation outside the United States services on the basis of a percentage of
excluded from export property under in the sales portion of the transaction. profits); and
section 927(a)(2). Generally, the requirement of section • Include the allowable depreciation
• Investment income (defined in section 924(d)(1)(A) is met for the gross receipts deduction for equipment or facilities (or
927(c)). of a FSC derived from any transaction if the rental cost for its use) that can be
• Carrying charges (defined in section the FSC has participated outside the specifically identified or associated with
927(d)(1)). United States in the following sales the activity, as well as the contract price
Note: Computer software licensed for activities relating to the transaction: (1) of an activity performed on behalf of the
reproduction abroad is not excluded from solicitation (other than advertising), (2) FSC by a contractor.
export property under section 927(a)(2). negotiation, and (3) making a contract. Total direct costs means all of the
Therefore, receipts attributable to the 1. Solicitation (other than advertising) direct costs of any transaction attributable
sale, lease, or rental of computer software is any communication (including, but not to activities described in any paragraph of
and services related and subsidiary to limited to, telephone, telegraph, mail, or in section 924(e). For purposes of the 50%
such transactions qualify as foreign person) by the FSC, to a specific, test of section 924(d)(1)(B), total direct
trading gross receipts. targeted customer or potential customer. costs are based on the direct costs of all
2. Negotiation is any communication activities described in all paragraphs of
by the FSC to a customer or potential section 924(e). For purposes of the 85%
Foreign Management Rules customer aimed at an agreement on one test of section 924(d)(2), however, the
A FSC (other than a small FSC) is treated or more of the terms of a transaction, total direct costs are determined
as having foreign trading gross receipts including, but not limited to, price, credit separately for each paragraph of section
for the tax year only if the management of terms, quantity, or time or manner of 924(e).
the FSC during the year takes place delivery.
outside the United States. These Foreign direct costs means the
3. Making a contract refers to
management activities include: portion of the total direct costs of any
performance by the FSC of any of the
• Meetings of the board of directors and elements necessary to complete a sale,
transaction attributable to activities
meetings of the shareholders. performed outside the United States. For
such as making or accepting an offer.
• Disbursing cash, dividends, legal and purposes of the 50% test, foreign direct
accounting fees, salaries of officers, and Grouping transactions. Generally, costs are based on the direct costs of all
salaries or fees of directors from the the sales activities described above are to activities described in all paragraphs of
principal bank account (see below). be applied on a transaction-by-transaction section 924(e). For purposes of the 85%
• Maintaining the principal bank account basis. However, a FSC may make an test, however, foreign direct costs are
at all times during the tax year. annual election to apply any of the sales determined separately for each paragraph
activities on the basis of a group. To of section 924(e).
Meetings of directors and meetings of
the shareholders. All meetings of the make the election, check the applicable For more details, see Regulations
board of directors of the FSC and all box on line 11a, Additional Information, section 1.924(d)-1(d).
meetings of the shareholders of the FSC on page 2 of Form 1120-FSC. See Check the applicable box(es) on line
that take place during the tax year must Regulations section 1.924(d)-1(c)(5) for 11b, Additional Information, on page 2
take place outside the United States. details. of the form, to indicate how the FSC met
In addition, all such meetings must Satisfaction of either the 50% or 85% the foreign direct costs requirement.
comply with the local laws of the foreign foreign direct cost test. To qualify as Grouping transactions. Generally,
country or U.S. possession in which the foreign trading gross receipts, the foreign the foreign direct cost tests under
FSC was created or organized. The local direct costs incurred by the FSC Regulations section 1.924(d)-1(d) are
laws determine whether a meeting must attributable to the transaction must equal applied on a transaction-by-transaction
be held, when and where it must be held or exceed 50% of the total direct costs basis. However, the FSC may make an
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annual election (on line 11d, Additional • Airborne Express (Airborne): Overnight return. The FSC is also authorizing the
Information, on page 2 of the form) to Air Express Service, Next Afternoon paid preparer to:
apply the foreign direct cost tests on a Service, and Second Day Service. • Give the IRS any information that is
customer, contract, or product or product • DHL Worldwide Express (DHL): DHL missing from the return,
line grouping basis. Any grouping used “Same Day” Service and DHL USA • Call the IRS for information about the
must be supported by adequate Overnight. processing of the return or the status of
documentation of performance of • Federal Express (FedEx): FedEx any related refund or payment(s), and
activities and costs of activities relating to Priority Overnight, FedEx Standard • Respond to certain IRS notices that the
the grouping used. See Regulations Overnight, FedEx 2Day, FedEx FSC has shared with the preparer about
section 1.924(d)-1(e) for details. International Priority, and FedEx math errors, offsets, and return
International First. preparation. The notices will not be sent
Exception for foreign military property.
The economic process rules do not apply
• United Parcel Service (UPS): UPS Next to the preparer.
Day Air, UPS Next Day Air Saver, UPS The FSC is not authorizing the paid
to any activities performed in connection
2nd Day Air, UPS 2nd Day Air A.M., UPS preparer to receive any refund check,
with foreign military sales except those
Worldwide Express Plus, and UPS bind the FSC to anything (including any
activities described in section 924(e). See
Worldwide Express. additional tax liability), or otherwise
Regulations section 1.924(d)-1(f) for
details. The private delivery service can tell represent the FSC before the IRS. If the
you how to get written proof of the mailing FSC wants to expand the paid preparer’s
Section 925(c) Rule date. authorization, see Pub. 947, Practice
To use the administrative pricing rules to Extension of time to file. File Form Before the IRS and Power of Attorney.
determine the FSC’s (or small FSC’s) 7004, Application for Automatic Extension The authorization cannot be revoked.
profit on a transaction or group of of Time To File Corporation Income Tax However, the authorization will
transactions, the FSC must perform (or Return, to request a 6-month extension of automatically end no later than the due
contract with another person to perform) time to file. date (excluding extensions) for filing the
all of the economic process activities FSC’s 2004 tax return.
relating to the transaction or group of Where To File
transactions. All of the direct and indirect File Form 1120-FSC with the Internal Other Forms, Schedules,
expenses relating to the performance of Revenue Service Center, Philadelphia,
those activities must be reflected on the PA 19255. and Statements That
books of the FSC and on Form
1120-FSC. May Be Required
Who Must Sign
Under Temporary Regulations section The return must be signed and dated by: The FSC may have to file some of the
1.925(a)-1T(b)(2)(ii), an election may be • The president, vice president, following forms. See the form for more
made to include on the FSC’s books all treasurer, assistant treasurer, chief information.
expenses, other than cost of goods sold, accounting officer or • Form W-2, Wage and Tax Statement,
that are necessary to figure combined • Any other corporate officer (such as tax and Form W-3, Transmittal of Wage and
taxable income for the transaction or officer) authorized to sign. Tax Statements. Use these forms to
group of transactions. The expenses must Receivers, trustees, or assignees must report wages, tips, and other
be identified on Schedule G on the also sign and date any return filed on compensation, and withheld income,
applicable line. behalf of a corporation. social security, and Medicare taxes for
employees.
Who Must File If an employee of the corporation • Form 940 or Form 940-EZ, Employer’s
completes Form 1120-FSC, the paid Annual Federal Unemployment (FUTA)
File Form 1120-FSC if the corporation preparer’s space should remain blank. Tax Return. The FSC may be liable for
elected to be treated as a FSC or small Anyone who prepares Form 1120-FSC FUTA tax and may have to file Form 940
FSC, and the election is still in effect. but does not charge the corporation or Form 940-EZ if it either:
Note: A FSC that elects to be treated as should not complete that section.
1. Paid wages of $1,500 or more in
a domestic corporation under section Generally, anyone who is paid to prepare
any calendar quarter in 2002 or 2003 or
943(e)(1) does not file Form 1120-FSC. the return must sign it and fill in the “Paid
2. Had one or more employees who
Instead, it files Form 1120 (or Form Preparer’s Use Only” area.
worked for the FSC for at least some part
1120-A). The paid preparer must complete the of a day in any 20 or more different weeks
required preparer information and — in 2002 or 20 or more different weeks in
When To File • Sign the return in the space provided 2003.
for the preparer’s signature. • Form 941, Employer’s Quarterly
Generally, a corporation must file Form • Give a copy of the return to the Federal Tax Return. Employers must file
1120-FSC by the 15th day of the 3rd taxpayer. this form to report income tax withheld,
month after the end of its tax year. A FSC
and employer and employee social
that has dissolved must generally file by Paid Preparer security and Medicare taxes. Also, see
the 15th day of the 3rd month after the
Authorization Trust fund recovery penalty on page 7.
date it dissolved.
• Form 945, Annual Return of Withheld
If the due date falls on a Saturday, If the FSC wants to allow the IRS to Federal Income Tax. File Form 945 to
Sunday, or legal holiday, the FSC may file discuss its 2003 tax return with the paid report income tax withheld from
on the next business day. preparer who signed it, check the “Yes” nonpayroll distributions or payments.
box in the signature area of the return. Also, see Trust fund recovery penalty
Private delivery services. FSCs can This authorization applies only to the on page 7.
use certain private delivery services
designated by the IRS to meet the “timely
individual whose signature appears in the • Form 1042, Annual Withholding Tax
“Paid Preparer’s Use Only” section of the Return for U.S. Source Income of Foreign
mailing as timely filing/paying” rule for tax FSC’s return. It does not apply to the firm, Persons,
returns and payments. The most recent
list of designated private delivery services
if any, shown in that section. • Form 1042-S, Foreign Person’s U.S.
If the “Yes” box is checked, the FSC is Source Income Subject to Withholding,
was published by the IRS in September
authorizing the IRS to call the paid and
2002.
preparer to answer any questions that • Form 1042-T, Annual Summary and
The list includes only the following: may arise during the processing of its Transmittal of Forms 1042-S. Use these
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forms to report and send withheld tax on • Form 5713, International Boycott 3. Any transaction for which the FSC
payments or distributions made to Report. FSCs that had operations in, or has contractual protection against
nonresident alien individuals, foreign related to, certain “boycotting” countries disallowance of the tax benefits.
partnerships, or foreign corporations to file Form 5713. 4. Any transaction resulting in a loss
the extent these payments constitute • Form 8264, Application for Registration of at least $10 million in any single year or
gross income from sources within the of a Tax Shelter. Tax shelter organizers $20 million in any combination of years.
United States (see sections 861 through use this form to receive a tax shelter 5. Any transaction resulting in a
865). registration number from the IRS. book-tax difference of more than $10
Also, see Pub. 515, Withholding of • Form 8271, Investor Reporting of Tax million on a gross basis. For exceptions,
Tax on Nonresident Aliens and Foreign Shelter Registration Number. FSCs, see Rev. Proc. 2003-24, 2003-11 I.R.B.
Entities, and sections 1441 and 1442. which have acquired an interest in a tax 599, and Rev. Proc. 2003-25, 2003-11
• Form 1096, Annual Summary and shelter that is required to be registered, I.R.B. 601.
Transmittal of U.S. Information Returns. use this form to report the tax shelter’s 6. Any transaction resulting in a tax
• Forms 1099. Use these information registration number. Attach Form 8271 to credit of more than $250,000, if the FSC
returns to report the following: any tax return (including an application for held the asset generating the credit for 45
tentative refund (Form 1139) and an days or less.
1. 1099-A, Acquisition or
amended return) on which a deduction, • Schedule P (Form 1120-FSC),
Abandonment of Secured Property. Transfer Price or Commission. Complete
2. 1099-B, Proceeds From Broker and credit, loss, or other tax benefit
attributable to a tax shelter is taken or any and attach Schedule P, as appropriate,
Barter Exchange Transactions. using the administrative pricing rules of
3. 1099-C, Cancellation of Debt. income attributable to a tax shelter is
reported. section 925.
4. 1099-DIV, Dividends and
Distributions. • Form 8275, Disclosure Statement, and Personal Holding Companies and
5. 1099-INT, Interest Income. Form 8275-R, Regulation Disclosure Foreign Personal Holding
6. 1099-MISC, Miscellaneous Income. Statement. Disclose items or positions Companies
Use this form to report payments: to taken on a tax return that are not
otherwise adequately disclosed on a tax Personal holding company. A FSC that
providers of health and medical services,
return or that are contrary to Treasury is a personal holding company (as
of rent or royalties, of nonemployee
regulations (to avoid parts of the defined in section 542) but not a foreign
compensation, etc.
accuracy-related penalty or certain personal holding company, must file
Note: Every corporation must file Form preparer penalties). Schedule PH (Form 1120), U.S.
1099-MISC if it makes payments of rents, • Form 8300, Report of Cash Payments Personal Holding Company (PHC) Tax,
commissions, or other fixed or Over $10,000 Received in a Trade or with Form 1120-FSC. On line 8, Schedule
determinable income (see section 6041) Business. Use this form to report the J, Form 1120-FSC, the FSC reports the
totaling $600 or more to any one U.S. receipt of more than $10,000 in cash or personal holding company tax. See
person in the course of its trade or foreign currency in one transaction or a section 542 and Schedule PH (Form
business during the calendar year. series of related transactions. 1120) for details.
7. 1099-OID, Original Issue Discount. • Form 8810, Corporate Passive Activity Foreign personal holding company.
Also use these returns to report Loss and Credit Limitations. Closely held Regulations section 1.551-4 requires
amounts received as a nominee for FSCs (and FSCs that are personal certain shareholders of a FSC that is a
another person. service corporations) must use this form foreign personal holding company (as
• Form 5471, Information Return of U.S. to compute the passive activity loss and defined in section 552) to attach a
Persons With Respect to Certain Foreign credit allowed under section 469. statement to their personal returns
Corporations. This form may have to be • Form 8842, Election To Use Different containing the information required by
filed by certain U.S. officers, directors, or Annualization Periods for Corporate section 551(c).
shareholders of a FSC to report changes Estimated Tax. FSCs use Form 8842 for Form 5471. Section 6035 and the
in ownership (see sections 6046 and the each year they want to elect one of the related regulations require certain U.S.
related regulations). annualization periods in section officers, directors, and shareholders of a
If a Form 1120-FSC is filed, Form 6655(e)(2) for figuring estimated tax foreign personal holding company to file
5471 is not required to be filed to satisfy payments under the annualized income Schedule N (Form 5471), Return of
the requirements of section 6038 (see installment method. Officers, Directors, and 10% or More
Temporary Regulations section • Form 8866, Interest Computation Shareholders of a Foreign Personal
1.921-1T(b)(3)). However, certain U.S. Under the Look-Back Method for Property Holding Company, and the appropriate
shareholders may be required to file Form Depreciated Under the Income Forecast schedules of Form 5471. See the
5471 and the applicable schedules to Method. Figure the interest due or to be Instructions for Form 5471 for additional
report subpart F income. refunded under the look-back method of information.
Certain U.S. officers, directors, and section 167(g)(2) for property placed in
shareholders of a FSC that is a foreign service after September 13, 1995, that is Assembling the Return
personal holding company may have to depreciated under the income forecast To ensure that the FSC’s tax return is
file Form 5471 and appropriate method. correctly processed, attach all schedules
schedules. See Foreign personal • Form 8886, Reportable Transaction and other forms after page 6, Form
holding company on this page for Disclosure Statement. Use this form to 1120-FSC, and in the following order.
details. disclose information for each reportable
1. Form 4136.
See the instructions for Form 5471 for transaction in which the FSC participated.
2. Form 4626.
more information. Form 8886 must be filed for each tax year
3. Form 851.
• Form 5472, Information Return of a that the Federal Income tax liability of the
4. Additional schedules in alphabetical
25% Foreign-Owned U.S. Corporation or FSC is affected by its participation in the
order.
a Foreign Corporation Engaged in a U.S. transaction. The following are reportable
5. Additional forms in numerical order.
Trade or Business. Generally, a FSC that transactions.
is engaged in a trade or business in the 1. Any transaction that is the same as Complete every applicable entry space
United States that had a reportable or substantially similar to tax avoidance on Form 1120-FSC. Do not write “See
transaction with a foreign or domestic transactions identified by the IRS. attached” instead of completing the entry
related party during the tax year must file 2. Any transaction offered under spaces. If more space is needed on the
Form 5472. conditions of confidentiality. forms or schedules, attach separate
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sheets using the same size and format as • The amount of the liability can be accounting period, the FSC must maintain
the printed forms. If there are supporting figured with reasonable accuracy, and its books and records and report its
statements and attachments, arrange • Economic performance takes place income and expenses for the period from
them in the same order as the schedules with respect to the expense. January 1 through December 31 of each
or forms they support and attach them There are exceptions to the economic year.
last. Show the totals on the printed forms. performance rule for certain items, Fiscal year. A fiscal year is 12
Also, be sure to enter the FSC’s name including recurring expenses. See section consecutive months ending on the last
and EIN on each supporting statement or 461(h) and the related regulations for the day of any month except December. A
attachment. rules for determining when economic 52-53 week year is a fiscal year that
performance takes place. varies from 52 to 53 weeks.
Accounting Methods Nonaccrual experience method.
An accounting method is a set of rules Accrual method corporations are not Rounding Off To
used to determine when and how income required to accrue certain amounts to be Whole Dollars
and expenses are reported. Figure received from the performance of certain
taxable income using the method of The FSC may round off cents to whole
services that, on the basis of their
accounting regularly used in keeping the dollars on its return and schedules. If the
experience, will not be collected, if the
FSC’s books and records. In all cases, FSC does round to whole dollars, it must
corporation’s average annual gross
the method used must clearly show round all amounts. To round, drop
receipts for the 3 prior years does not
taxable income. amounts under 50 cents and increase
exceed $5 million.
amounts from 50 to 99 cents to the next
Generally, permissible methods This provision does not apply to any dollar (for example, $1.39 becomes $1
include: amount if interest is required to be paid and $2.50 becomes $3).
• Cash, on the amount or if there is any penalty
• Accrual, or for failure to timely pay the amount. For
If two or more amounts must be added
• Any other method authorized by the more information, see section 448(d)(5)
to figure the amount to enter on a line,
include cents when adding the amounts
Internal Revenue Code. and Temporary Regulations section and round off only the total.
A member of a controlled group cannot 1.448-2T. For reporting requirements, see
the instructions for Schedule B on page
use an accounting method that would
10.
Recordkeeping
distort any group member’s income, Keep the FSC’s records for as long as
including its own. For example, a FSC Change in accounting method. To
they may be needed for the
acts as a commission agent for property change its method of accounting used to
administration of any provision of the
sales by a related corporation that uses report taxable income (for income as a
Internal Revenue Code. Usually, records
the accrual method and pays the FSC its whole or for any material item), the FSC
that support an item of income, deduction,
commission more than 2 months after the must file Form 3115, Application for
or credit on the return must be kept for 3
sale. In this case, the FSC should not use Change in Accounting Method. For more
years from the date the return is due or
the cash method because that method information, see Form 3115 and Pub.
filed, whichever is later. Keep records that
would materially distort its income. 538, Accounting Periods and Methods.
verify the FSC’s basis in property for as
Accrual method. Generally, a FSC Section 481(a) adjustment. The FSC long as they are needed to figure the
(other than a qualified personal service may have to make an adjustment under basis of the original or replacement
corporation) must use the accrual method section 481(a) to prevent amounts of property.
of accounting if its average annual gross income or expense from being duplicated The FSC should keep copies of all
receipts exceed $5 million. See section or omitted. The section 481(a) adjustment filed returns. They help in preparing future
448(c). period is generally 1 year for a net and amended returns.
negative adjustment and 4 years for a net
If inventories are required, the accrual
positive adjustment. However, a FSC may
method generally must be used for sales
elect to use a 1-year adjustment period if
Payment of Tax Due
and purchases of merchandise. However, The FSC must pay the tax due in full no
the net section 481(a) adjustment for the
qualifying taxpayers and eligible later than the 15th day of the 3rd month
change is less than $25,000. The FSC
businesses of qualifying small business after the end of the tax year. The method
must complete the appropriate lines of
taxpayers are excepted from using the for payment of the tax due depends upon
Form 3115 to make the election.
accrual method for eligible trades or whether the FSC has an office or place of
businesses and may account for business in the United States.
inventoriable items as materials and Accounting Periods
A FSC must figure its taxable income on 1. FSCs that do not maintain an
supplies that are not incidental. For
the basis of a tax year. A tax year is the office or place of business in the United
details, see Schedule A, Cost of Goods
annual accounting period a FSC uses to States must pay the tax due directly to the
Sold Related to Foreign Trading Gross
keep its records and report its income and IRS (i.e., do not use the depository
Receipts, on page 8.
expenses. Generally, FSCs can use a method of tax payment described on
Under the accrual method, an amount page 7). The tax may be paid by check or
calendar year or a fiscal year. Personal
is includible in income when: money order, payable to the “United
service corporations, however, must
• All the events have occurred that fix the generally use a calendar year. States Treasury.” To help ensure proper
right to receive the income, which is the crediting, write the FSC’s employer
Note: The tax year of a FSC must be the identification number (EIN), “Form
earliest of the date: (a) the required same as the tax year of the principal
performance takes place, (b) payment is 1120-FSC,” and the tax period to which
shareholder which, at the beginning of the the payment applies on the check or
due, or (c) payment is received, and FSC tax year, has the highest percentage
• The amount can be determined with of voting power. If two or more
money order. Enclose the payment when
reasonable accuracy. Form 1120-FSC is filed with the Internal
shareholders have the highest Revenue Service Center, Philadelphia,
See Regulations section 1.451-1(a) for percentage of voting power, the FSC PA 19255.
details. must have a tax year that conforms to the 2. FSCs that do maintain an office or
Generally, an accrual basis taxpayer tax year of any such shareholder. See place of business in the United States
can deduct accrued expenses in the tax section 441(h). must pay the tax due using a qualified
year when: depositary. The two methods of
• All events that determine the liability Calendar year. If the FSC is required to depositing corporate taxes are discussed
have occurred, use the calendar year as its annual on page 7.
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Electronic Deposit Requirement Estimated Tax Payments the unpaid tax for each month or part of a
month the tax is not paid, up to a
Generally, the following rules apply to the
The FSC must make electronic maximum of 25% of the unpaid tax. The
FSC’s payments of estimated tax.
deposits of all depository taxes (such as penalty will not be imposed if the FSC can
employment tax, excise tax, and • The FSC must make installment show that the failure to pay on time was
corporate income tax) using the payments of estimated tax if it expects its due to reasonable cause.
Electronic Federal Tax Payment System total tax for the year (less applicable Trust fund recovery penalty. This
(EFTPS) in 2004 if: credits) to be $500 or more. penalty may apply if certain income,
• The total deposits of such taxes in • The installments are due by the 15th social security, and Medicare taxes that
2002 were more than $200,000 or day of the 4th, 6th, 9th, and 12th months must be collected or withheld are not
• The FSC was required to use EFTPS in of the tax year. If any date falls on a collected or withheld, or these taxes are
2003. Saturday, Sunday, or legal holiday, the not paid. These taxes are generally
installment is due on the next regular reported on Forms 941 or 945 (see Other
If the FSC is required to use EFTPS business day. Forms, Schedules, and Statements
and fails to do so, it may be subject to a • Use Form 1120-W, Estimated Tax for That May Be Required on page 4). The
10% penalty. If the FSC is not required to Corporations, as a worksheet to compute trust fund recovery penalty may be
use EFTPS, it may participate voluntarily. estimated tax. imposed on all persons who are
To enroll in or get more information about • If the FSC maintains an office or place determined by the IRS to have been
EFTPS, call 1-800-555-4477 or of business in the United States and it responsible for collecting, accounting for,
1-800-945-8400. To enroll online, visit does not use EFTPS, use the deposit and paying over these taxes, and who
www.eftps.gov. coupons (Forms 8109) to make deposits acted willfully in not doing so. The penalty
of estimated tax. is equal to the unpaid trust fund tax. See
Depositing on time. For EFTPS • If the FSC does not maintain an office Pub. 15 (Circular E), Employer’s Tax
deposits to be made timely, the FSC must or place of business in the United States,
initiate the transaction at least 1 business Guide, for details, including the definition
it must pay the estimated tax due directly of responsible persons.
day before the date the deposit is due. to the IRS.
Other penalties. Other penalties can be
Deposits With Form 8109 For more information on estimated tax imposed for negligence, substantial
payments, including penalties that apply if understatement of tax, and fraud. See
If the FSC does not use EFTPS, deposit the FSC fails to make required payments,
FSC income tax payments (and estimated sections 6662 and 6663.
see Line 3, Estimated tax penalty, on
tax payments) with Form 8109, Federal page 8. A FSC may also be subject to a
Tax Deposit Coupon. If you do not have a penalty (under section 6686) of:
Overpaid estimated tax. If the FSC
preprinted Form 8109, use Form 8109-B
overpaid estimated tax, it may be able to
• $100 for each failure to supply
to make deposits. You can get this form information, up to $25,000 during the
by calling 1-800-829-4933. Be sure to get a quick refund by filing Form 4466,
calendar year.
Corporation Application for Quick Refund
have your EIN ready when you call.
of Overpayment of Estimated Tax. The
• $1,000 for not filing a return.
Do not send deposits directly to an IRS overpayment must be at least 10% of the These penalties will not apply if the
office; otherwise, the FSC may have to FSC’s expected income tax liability and at FSC can show that the failure to furnish
pay a penalty. Mail or deliver the least $500. File Form 4466 after the end the required information was due to
completed Form 8109 with the payment of the FSC’s tax year, and no later than reasonable cause.
to an authorized depositary (i.e., a the 15th day of the third month after the
commercial bank or other financial end of the tax year. Form 4466 must be
institution authorized to accept Federal
tax deposits). Make checks or money
filed before the FSC files its tax return. Specific Instructions
orders payable to the depositary. Interest and Penalties Period covered. File the 2003 return for
If the FSC prefers, it may mail the Interest. Interest is charged on taxes calendar year 2003 and fiscal years that
coupon and payment to: Financial Agent, paid late even if an extension of time to begin in 2003 and end in 2004. For a
Federal Tax Deposit Processing, P.O. file is granted. Interest is also charged on fiscal year return, fill in the tax year space
Box 970030, St. Louis, MO 63197. Make penalties imposed for failure to file, at the top of the form.
the check or money order payable to negligence, fraud, substantial valuation
“Financial Agent.” misstatements, gross valuation Note: The 2003 Form 1120-FSC may
misstatements, and substantial also be used if:
To help ensure proper crediting, write
understatements of tax from the due date • The FSC has a tax year of less than 12
the FSC’s EIN, the tax period to which the months that begins and ends in 2004 and
(including extensions) to the date of
deposit applies, and “Form 1120-FSC” on
payment. The interest charge is figured at • The 2004 Form 1120-FSC is not
the check or money order. Be sure to available at the time the FSC is required
a rate determined under section 6621.
darken the “1120” box on the coupon. to file its return.
Records of these deposits will be sent to Penalty for late filing of return. A FSC
that does not file its tax return by the due The FSC must show its 2004 tax year
the IRS. on the 2003 Form 1120-FSC and take
date, including extensions, may be
For more information on deposits, see penalized 5% of the unpaid tax for each into account any tax law changes that are
the instructions in the coupon booklet month or part of a month the return is effective for tax years beginning after
(Form 8109) and Pub. 583, Starting a late, up to a maximum of 25% of the December 31, 2003.
Business and Keeping Records. unpaid tax. The minimum penalty for a Name. Print or type the FSC’s true name
return that is over 60 days late is the (as set forth in the charter or other legal
smaller of the tax due or $100. The document creating it).
If the FSC maintains an office or penalty will not be imposed if the FSC can Address. Enter the U.S. address where
! place of business in the United
CAUTION States and it owes tax when it files
show that the failure to file on time was
due to reasonable cause. FSCs that file
the FSC maintains the records required
under section 6001. Include the suite,
Form 1120-FSC, do not include the late must attach a statement explaining room, or other unit number after the street
payment with the tax return. Instead, mail the reasonable cause. address. If the Post Office does not
or deliver the payment with Form 8109 to Penalty for late payment of tax. A FSC deliver mail to the street address and the
an authorized depositary, or use EFTPS, that does not pay the tax when due FSC has a P.O. box, show the box
if applicable. generally may be penalized 1/2 of 1% of number instead.
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Item A. Foreign country or U.S. stock entitled to vote or more than 50% of Schedule A
possession of incorporation. See the total value of all classes of stock of
Definition of a Foreign Sales each corporation in the group (except the Cost of Goods Sold Related To
Corporation (FSC) on page 2. parent) must be owned by one or more of Foreign Trading Gross Receipts
Item E. Total assets. Enter the FSC’s the other corporations in the group. Complete Schedule A only for the cost of
total assets (as determined by the 2. The common parent must own goods sold deduction related to foreign
accounting method regularly used in more than 50% of the total combined trading gross receipts reported on lines 1
keeping the FSC’s books and records) at voting power of all classes of stock through 5 of Schedule B.
the end of the tax year from page 6, entitled to vote or more than 50% of the
Complete column (a) to show the cost
Schedule L, column (d), line 15. If there total value of all classes of stock of at
of goods sold for inventory acquired in
are no assets at the end of the tax year, least one of the other corporations in the
transactions using the administrative
enter -0-. group.
pricing rules. Complete column (b) to
Item F. Final return, name change, show the cost of goods sold for inventory
address change, or amended return. Stock owned directly by other acquired in transactions that did not use
• If the corporation ceases to exist, file members of the group is not counted the administrative pricing rules. For
Form 1120-FSC and check the “Final when computing the voting power or details on the administrative pricing rules,
return” box. value. see the Instructions for Schedule P (Form
• If the FSC changed its name since it See sections 927(d)(4) and 1563(d)(1) 1120-FSC).
last filed a return, check the box for for the definition of “stock” for purposes of If the FSC acts as another person’s
“Name change.” Generally, a FSC also determining stock ownership above. commission agent on a sale, do not enter
must have amended its articles of any amount on Schedule A for the sale.
incorporation and filed the amendment
with the jurisdiction in which it was Tax and Payments Small FSCs will have to make two
incorporated. separate computations for cost of goods
Line 2h. Backup withholding. If the
• If the FSC has changed its address FSC had income tax withheld from any
sold if their foreign trading gross receipts
since it last filed a return, check the box exceed the limitation amount on line 6e of
payments it received due to backup Schedule B. In this case, a deduction for
for “Address Change.” withholding, include the amount withheld
Note: If a change of address occurs cost of goods sold will be figured
in the total for line 2h. Show the amount separately for the income on line 6h of
after the return is filed, use Form 8822, withheld in the blank space in the
Change of Address, to notify the IRS of Schedule B, and separately for the
right-hand column between lines 1 and income on line 7 of Schedule F.
the new address. 2h, and write “backup withholding.”
• If the FSC is amending its return, check Generally, inventories are required at
the box for “Amended return.” Note: Do not include backup withholding the beginning and end of each tax year if
amounts on line 2g (i.e., include on line the purchase or sale of merchandise is an
FSC Information 2g only amounts withheld under Chapter income-producing factor. See Regulations
3 of the Code). section 1.471-1.
Line 1. Principal shareholder.
Complete lines 1a through 1h for the However, if the FSC is a qualifying
shareholder (individual, corporation, Line 3. Estimated tax penalty. A FSC taxpayer or a qualifying small business
partnership, trust, or estate) that was the that does not make estimated tax taxpayer, it may adopt or change its
principal shareholder at the beginning of payments when due may be subject to an accounting method to account for
the FSC’s tax year. See the note on page underpayment penalty for the period of inventoriable items in the same manner
6 under Accounting Periods. underpayment. Generally, a FSC is as materials and supplies that are not
Foreign address. Enter the subject to the penalty if its tax liability is incidental (unless its business is a tax
information in the following order: city, $500 or more and it did not timely pay the shelter (as defined in section 448(d)(3))).
province or state, and country. Follow the smaller of: A qualifying taxpayer is a taxpayer
country’s practice for entering the postal • Its tax liability for 2003 or that, for each prior tax year ending after
code. Do not abbreviate the country • Its prior year’s tax. December 16, 1998, has average annual
name. gross receipts of $1 million or less for the
See section 6655 for details and 3-tax-year period ending with that prior
Line 2. Parent-subsidiary controlled
exceptions, including special rules for year. See Rev. Proc. 2001-10, 2001-2
group. If the FSC is a subsidiary in a
large corporations. I.R.B. 272, for details.
parent-subsidiary controlled group and
the principal shareholder is not the Use Form 2220, Underpayment of A qualifying small business
common parent of the group, complete Estimated Tax by Corporations, to see if taxpayer is a taxpayer (a) that, for each
lines 2a through 2g for the common the FSC owes the penalty and to figure prior tax year ending on or after
parent. Enter the consolidated total the amount of the penalty. Generally, the December 31, 2000, has average annual
assets on line 2d for a group that files a FSC does not have to file this form gross receipts of $10 million or less for
consolidated return; otherwise, enter only because the IRS can figure the amount of the 3-tax-year period ending with that
the common parent’s total assets. any penalty and bill the FSC for it. prior tax year and (b) whose principal
Note: Check the “Yes” box on line 2 if the However, even if the FSC does not owe business activity is not an ineligible
FSC is a subsidiary in a parent-subsidiary the penalty, complete and attach Form activity. See Rev. Proc. 2002-28, 2002-18
controlled group. This applies even if the 2220 if: I.R.B. 815, for details.
FSC is a subsidiary member of one group • The annualized income or adjusted Under this accounting method,
and the parent corporation of another. seasonal installment method is used or inventory costs for merchandise
• The FSC is a large corporation purchased for resale are deductible in the
The term “parent-subsidiary controlled computing its first required installment year the merchandise is sold (but not
group” means one or more chains of based on the prior year’s tax. (See the before the year the FSC paid for the
corporations connected through stock Form 2220 instructions for the definition merchandise, if it is also using the cash
ownership (sections 927(d)(4) and of a large corporation.) method). For additional guidance on this
1563(a)(1)). Both of the following If Form 2220 is attached, check the method of accounting for inventoriable
requirements must be met. box on line 3, page 1, Form 1120-FSC, items, see Pub 538.
1. More than 50% of the total and enter the amount of any penalty on Enter amounts paid for merchandise
combined voting power of all classes of this line. during the tax year on line 2. The amount
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the FSC can deduct for the tax year is • Cost or market value (whichever is For more information on inventory
figured on line 8. lower); or valuation methods, see Pub. 538,
Note: All FSCs not using the cash • Any other method approved by the IRS Accounting Periods and Methods.
method of accounting should see Section that conforms to the requirements of the
263A uniform capitalization rules in the applicable regulations cited below. Additional Information
instructions for Schedule G on page 12. However, if the FSC is using the cash Line 2. Show any tax-exempt interest
See those instructions before completing method of accounting, it is required to use received or accrued. Include any
Schedule A. cost. exempt-interest dividends received as a
If the FSC uses intercompany pricing FSCs that account for inventoriable shareholder in a mutual fund or other
rules (for purchases from a related items in the same manner as materials regulated investment company.
supplier), use the transfer price figured in and supplies that are not incidental may
Part II of Schedule P (Form 1120-FSC). Line 4. See section 542 for the definition
currently deduct expenditures for direct of personal holding company and section
Line 1. Inventory at beginning of year. labor and all indirect costs that would 552 for the definition of foreign personal
If the FSC is changing its method of otherwise be included in inventory costs. holding company. Also, see Personal
accounting for the current tax year, it Holding Companies and Foreign
must refigure last year’s closing inventory The average cost (rolling average)
method of valuing inventories generally Personal Holding Companies on page 5
using its new method of accounting and for information and other details if the
enter the result on line 1. If there is a does not conform to the requirements of
the regulations. See Rev. Rul. 71-234, FSC meets the definition of either.
difference between last year’s closing
inventory and the refigured amount, 1971-1 C.B. 148. Line 6. If the FSC owned at least a 10%
attach an explanation and take it into FSCs that use erroneous valuation interest, directly or indirectly, in any
account when figuring the FSC’s section methods must change to a method foreign partnership, attach a statement
481(a) adjustment (explained on page 6). permitted for Federal income tax listing the following information for each
purposes. To make this change, use foreign partnership. For this purpose, a
Line 4. Additional section 263A costs.
Form 3115. foreign partnership includes an entity
An entry is required on this line only for
treated as a foreign partnership under
FSCs that have elected a simplified
On line 9a, check the method(s) used Regulations section 301.7701-2 or
method of accounting.
for valuing inventories. Under lower of 301.7701-3.
For FSCs that have elected the cost or market, the term “market” (for 1. Name and EIN (if any) of the
simplified production method, normal goods) means the current bid foreign partnership;
additional section 263A costs are price prevailing on the inventory valuation 2. Identify which, if any, of the
generally those costs, other than interest, date for the particular merchandise in the following forms the foreign partnership
that were not capitalized under the FSC’s volume usually purchased by the filed for its tax year ending with or within
method of accounting immediately prior to taxpayer. If section 263A applies to the the FSC’s tax year: Form 1042, 1065 or
the effective date of section 263A but are taxpayer, the basic elements of cost must 1065-B, or 8804;
now required to be capitalized under reflect the current bid price of all direct 3. Name of the tax matters partner (if
section 263A. For details, see costs and all indirect costs properly any); and
Regulations section 1.263A-2(b). allocable to goods on hand at the 4. Beginning and ending dates of the
For FSCs that have elected the inventory date. foreign partnership’s tax year.
simplified resale method, additional Inventory may be valued below cost
section 263A costs are generally those when the merchandise is unsalable at Line 7. If the FSC has a net operating
costs incurred with respect to the normal prices or unusable in the normal loss (NOL) for its 2003 tax year, it may
following categories. way because the goods are subnormal elect under section 172(b)(3) to waive the
• Off-site storage or warehousing. due to damage, imperfections, shopwear, entire carryback period for the NOL and
• Purchasing; handling, such as etc., within the meaning of Regulations instead carry the NOL forward to future
processing, assembling, repackaging, section 1.471-2(c). The goods may be tax years. To do so, check the box on line
and transporting. valued at the current bona fide selling 7 and file the tax return by its due date,
• General and administrative costs price, minus direct cost of disposition (but including extensions (do not attach the
(mixed service costs). not less than scrap value) if such a price statement described in Temporary
For details, see Regulations section can be established. Regulations section 301.9100-12T). Once
1.263A-3(d). made, the election is irrevocable. See
If this is the first year the Last-in, Pub. 542, Corporations, section 172, and
Enter on line 4 the balance of section First-out (LIFO) inventory method was Form 1139, Corporation Application for
263A costs paid or incurred during the tax either adopted or extended to inventory Tentative Refund, for more details.
year not includible on lines 2, 3, and 5. goods not previously valued under the
Line 5. Other costs. Enter on line 5 any LIFO method provided in section 472, Line 8. Enter the amount of the NOL
costs paid or incurred during the tax year attach Form 970, Application To Use carryover to the tax year from prior years,
not entered on lines 2 through 4. LIFO Inventory Method, or a statement even if some of the loss is used to offset
with the information required by Form income on this return. The amount to
Line 7. Inventory at end of year. See enter is the total of all NOLs generated in
Regulations sections 1.263A-1 through 970. Also check the LIFO box on line 9c.
On line 9d, enter the amount or the prior years but not used to offset income
1.263A-3 for details on figuring the (either as a carryback or carryover) to a
amount of additional section 263A costs percent of total closing inventories
covered under section 472. Estimates are tax year prior to 2003. Do not reduce the
to be included in ending inventory. If the amount by any NOL deduction reported
FSC accounts for inventoriable items in acceptable.
on line 19a, Part II of Schedule B.
the same manner as materials and If the FSC changed or extended its
supplies that are not incidental, enter on Lines 9c and 10b(2). See Definition of
inventory method to LIFO and had to
line 7 the portion of its merchandise a Foreign Sales Corporation (FSC) on
write up the opening inventory to cost in
purchased for resale that is included on page 2 for definitions of qualifying foreign
the year of election, report the effect of
line 6 and was not sold during the year. country and U.S. possession.
the write-up as other income (as
Lines 9a through 9f. Inventory appropriate on Schedule F, line 16), Line 10. All FSCs (except small FSCs)
valuation methods. Inventories can be proportionately over a 3-year period that must answer these questions. For more
valued at: begins with the year of the LIFO election information, see Foreign Management
• Cost; (section 472(d)). Rules on page 3.
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Line 11. All FSCs (except small FSCs) year by the number of days that would However, the FSC may elect to waive the
must answer these questions. On line have made up a full tax year and enter carryback period and instead carry the
11b, indicate how the FSC met the the resulting fraction on line 6d as a NOL forward to future tax years. To make
foreign direct costs requirement of section decimal less than 1.00000. the election, see the instructions for line 7
924(d) for all transactions that generated Example. For its 2003 calendar year on page 9.
foreign trading gross receipts reported on tax year, a small FSC has a short tax year See Form 1139 for details, including
lines 1 through 5 of Schedule B. Also, of 73 days. The FSC enters 0.200 (73/ other elections that may be available,
complete line 11a and/or line 11d to make 365) on line 6d. which must be made no later than 6
an election to use either of the annual months after the due date (excluding
Line 6f. If commission income is reported
grouping election(s) indicated. See the extensions) of the FSC’s tax return.
in the total for line 6a of Schedule B, total
instructions for Foreign Economic
receipts for purposes of line 6f are figured
Process Rules on page 3 for details.
as follows: Schedule E
Schedule B 1. Enter total of columns (a) and (b), Exemption Percentages Used in
Taxable Income or (Loss) line 6a, Schedule B . . . . . . . . . . . 1. Figuring Exempt Foreign Trade
Use Schedule B to compute taxable 2. Enter total commission income Income
reported on line 1 and line 2, For purposes of the Note at the top of
income from all sources. Schedule B . . . . . . . . . . . . . . . . 2.
Schedule E, a C corporation is a
Part I 3. Subtract line 2 from line 1 . . . . . . . 3. corporation other than an S corporation.
Use Part I to compute net income 4. With respect to the commission Shareholders, other than C corporations,
attributable to nonexempt foreign trade income reported on line 2 above, are individuals, partnerships, S
income. Income and expenses on lines 1 enter total gross receipts on the corporations, trusts, and estates.
through 15 are reported in column (a) if sale, lease, or rental of property on
which the commission income Use lines 2a through 2d to figure the
the administrative pricing rules were used
arose (section 927(b)(2)) . . . . . . . 4. exemption percentage for foreign trade
in the transaction that produced the
income determined by not using the
income. 5. Add lines 3 and 4. Enter here and
administrative pricing rules. See section
Report in column (b) all foreign trade on line 6f, Schedule B . . . . . . . . . 5.
923(a)(2).
income from all transactions in which the Line 6h. When making the line 6h
administrative pricing rules were not Use lines 3a through 3d to figure the
allocation, allocate only the commission exemption percentage for foreign trade
used. Attach a schedule that shows the income from the gross receipts on line 4
computation of the taxable and income that was determined by using the
above. If the small FSC’s foreign trading administrative pricing rules (see section
nontaxable income included on line 15, gross receipts for the tax year (line 6f,
column (b). Include only the taxable 923(a)(3)). If a qualified cooperative is a
Schedule B) exceed its allowable shareholder of the FSC, see section
amount on line 16. limitation (line 6e, Schedule B), the small 923(a)(4).
Nonaccrual experience method. FSC may select the gross receipts to
Corporations that qualify to use the which the limitation is allocated. In such a
nonaccrual experience method (described case, allocate the amount on line 6g
Schedule F
on page 6) should attach a schedule between columns (a) and (b) on line 6h Net Income From Nonexempt
showing total gross receipts, the amount based on whether the administrative Foreign Trade Income and
not accrued as a result of the application pricing rules were used for the gross
of section 448(d)(5), and the net amount
Taxable Nonforeign Trade
receipts selected. See Regulations
accrued. Enter the net amount on the section 1.921-2(b) Q&A-4.
Income
applicable line of Schedule B.
Part II Part I
Lines 1 through 5. Enter the foreign
trading gross receipts requested on lines Line 19a. Net operating loss deduction. Enter net income from nonexempt foreign
1 through 5. See section 924 and A FSC may use the net operating loss trade income and related expenses in
Foreign Trading Gross Receipts on (NOL) incurred in one tax year to reduce Part I.
page 3 of these instructions for receipts its taxable income in another tax year. Line 2. Enter FSC income that resulted
that are excluded and other details. Enter on line 19a the total NOL from the FSC’s cooperation with an
Report commission income on line 1 or carryovers from other tax years, but do international boycott. See section
line 2 based on the sale, lease, or rental not enter more than the FSC’s taxable 927(e)(2) and Form 5713 and related
of property on which that commission income (after the dividends-received schedules and instructions.
arose. deduction). Attach a schedule showing Line 3. Enter the amount, if any, of illegal
Line 5. If the 50% gross receipts test of the computation of the NOL deduction. payments, bribes, or kickbacks that the
section 924(a)(5) is not met, report the Also complete line 8 in Additional FSC paid, directly or indirectly, to
FSC’s gross receipts that would have Information on page 2 of the form. government officials, employees, or
otherwise qualified under that section on For details on the NOL deduction, see agents. See section 927(e)(2).
line 16, Schedule F, instead of line 5, Pub. 542, section 172, and Form 1139.
Schedule B. Line 5. See the instructions for Schedule
Line 19b. Dividends-received A before completing this line.
Lines 6b through 6h. See section deduction. A FSC may be entitled to a
924(b)(2)(B) for the rules regarding the deduction for dividends it receives from Part II
limitation on the amount of foreign trading other corporations. Complete the Enter the taxable portion of gross income
gross receipts that a small FSC may take worksheet on page 11 using the of the FSC that was not derived from
into account in determining its exempt instructions that begin on that page. foreign trading gross receipts. This type of
foreign trade income. Attach the completed worksheet to Form income includes:
Line 6d. Temporary Regulations section 1120-FSC. • Small FSCs only. Amounts specifically
1.921-1T(b)(5) indicates that, in the case Line 20. Taxable income or (loss). If excluded from foreign trade income
of a small FSC having a short tax year, line 20 is zero or less, the FSC may have because of the small FSC limitation (the
the dollar limitation reported on line 6b or a net operating loss (NOL) that can be amount by which line 6f of Schedule B
6c is to be prorated on a daily basis. A carried back or forward as a deduction to exceeds line 6e of Schedule B). (Enter
small FSC having a short tax year must other tax years. Generally, a FSC first the excess, if any, on line 7 of Schedule
divide the number of days in its short tax carries back an NOL 2 tax years. F.)
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• Investment type income. (Enter on lines • Are received from the amount of dividends that qualify for
8 through 12 of Schedule F.) less-than-20%-owned domestic the deduction.
• Income from property that is corporations subject to income tax and
Line 3, Columns (b) and (c)
subsidized, deemed in short supply, or • Qualify for the 70% deduction under
destined for use in the United States. section 243(a)(1). Dividends received on debt-financed
(Enter on lines 13 and 14 of Schedule F.) stock acquired after July 18, 1984, are not
• Amounts from transactions that did not Also include on line 1 dividends entitled to the full 70% or 80%
meet the foreign economic process (except those received on debt-financed dividends-received deduction. The 70%
requirements. (Enter on line 15 of stock acquired after July 18, 1984) from a or 80% deduction is reduced by a
Schedule F.) regulated investment company (RIC). The percentage that is related to the amount
• Other nonforeign trade income. (Enter amount of dividends eligible for the of debt incurred to acquire the stock. See
on line 16 of Schedule F.) dividends-received deduction under section 246A. Also, see section 245(a)
section 243 is limited by section 854(b). before making this computation for an
For more details, see sections 924(f) The FSC should receive a notice from the additional limitation that applies to
and 927(a)(2) and (3). RIC specifying the amount of dividends dividends received from foreign
Line 9. Complete the worksheet below to that qualify for the deduction. corporations. Attach a schedule to Form
figure the total dividends to report on line 1120-FSC showing how the amount on
9. Attach the completed worksheet to Report so-called dividends or earnings line 3, column (c), was figured.
Form 1120-FSC. received from mutual savings banks, etc.,
as interest. Do not treat them as Line 4, Column (a)
Line 18. Enter the deductions allocated dividends. Enter dividends received on the preferred
or apportioned to line 17 income. Attach stock of a less-than-20%-owned public
to Form 1120-FSC a schedule listing Line 2, Column (a) utility that is subject to income tax and is
each type of deduction. Show deductions Enter dividends (except those received on allowed the deduction provided in section
related to cost of goods sold separately. debt-financed stock acquired after July 247 for dividends paid.
See the instructions for Schedule A on 18, 1984) that are received from
page 8 before completing this line. 20%-or-more-owned domestic
Line 5, Column (a)
Passive activity limitations. Section corporations subject to income tax and Enter dividends received on preferred
469 generally limits the deduction of that are subject to the 80% deduction stock of a 20%-or-more-owned public
passive activity losses for closely held under section 243(c). utility that is subject to income tax and is
FSCs and FSCs that are personal service allowed the deduction provided in section
corporations. See section 469 and the Line 3, Column (a) 247 for dividends paid.
Instructions for Form 8810 for details. Enter dividends that are: Line 6, Column (a)
• Received on debt-financed stock Enter the U.S.-source portion of dividends
Instructions for Dividends acquired after July 18, 1984, from
and Dividends-Received that:
domestic and foreign corporations subject • Are received from
Deduction Worksheet to income tax that would otherwise be less-than-20%-owned foreign
For purposes of the 20% ownership test subject to the dividends-received corporations and
on lines 1 through 7, the percentage of deduction under section 243(a)(1), • Qualify for the 70% deduction under
stock owned by the FSC is based on 243(c), or 245(a). Generally, section 245(a). To qualify for the 70%
voting power and the value of the stock. debt-financed stock is stock that the FSC deduction, the FSC must own at least
Preferred stock described in section acquired by incurring a debt (e.g., it 10% of the stock of the foreign
1504(a)(4) is not taken into account. borrowed money to buy the stock). corporation by vote and value.
• Received from a RIC on debt-financed
Line 1, Column (a) stock. The amount of dividends eligible Line 7, Column (a)
Enter dividends (except those received on for the dividends-received deduction is Enter the U.S.-source portion of dividends
debt-financed stock acquired after July limited by section 854(b). The FSC should that are received from
18, 1984 — see section 246A) that: receive a notice from the RIC specifying 20%-or-more-owned foreign corporations
Dividends and Dividends-Received Deduction Worksheet (a) Dividends

(b) %
(c) Dividends-received
(See instructions that begin above) received deduction: (a) (b)
1 Dividends from less-than-20%-owned domestic corporations that are subject to

the 70% deduction (other than debt-financed stock) 70
2 Dividends from 20%-or-more-owned domestic corporations that are subject to
the 80% deduction (other than debt-financed stock) 80
3 Dividends on debt-financed stock of domestic and foreign corporations (section 246A) See Inst.
4 Dividends on certain preferred stock of less-than-20%-owned public utilities 42
5 Dividends on certain preferred stock of 20%-or-more-owned public utilities 48
6 Dividends from less-than-20%-owned foreign corporations that are subject to
the 70% deduction 70
7 Dividends from 20%-or-more-owned foreign corporations that are subject to the
80% deduction 80
8 Total dividends-received deduction. Add lines 1 through 7. See instructions for
limitation. Enter here and on line 19b, Schedule B 䊳
9 Other dividends from foreign corporations not included on lines 3, 6, or 7

10 Foreign dividend gross up (section 78)
11 Other dividends
12 Total dividends. Add lines 1 through 11. Enter here and on line 9, Schedule F 䊳
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and that qualify for the 80% deduction Two situations in which the Interest expense paid or incurred
under section 245(a). dividends-received deduction will not be during the production period of
allowed on any share of stock are: designated property must be capitalized
Line 8, Column (c) • If the FSC held the stock less than and is governed by special rules. For
46 days during the 90-day period more details, see Regulations sections
Limitation on dividends-received beginning 45 days before the stock 1.263A-8 through 1.263A-15.
deduction. Generally, line 8, column (c), became ex-dividend with respect to the
may not exceed the amount on line 10 of The costs required to be capitalized
dividend (see section 246(c)(1)(A)) or under section 263A are not deductible
the worksheet below. However, in a year • To the extent the FSC is under an until the property (to which the costs
in which an NOL occurs, this limitation obligation to make related payments for
does not apply even if the loss is created relate) is sold, used, or otherwise
substantially similar or related property. disposed of by the FSC.
by the dividends-received deduction. See 5. Any other taxable dividend income
sections 172(d) and 246(b). not properly reported above (including Exceptions. Section 263A does not
distributions under section 936(h)(4)). apply to:
1. Refigure line 18, Part II, Schedule • Personal property acquired for resale if
B (page 3 of Form 1120-FSC) If patronage dividends or per-unit the FSC’s average annual gross receipts
without any adjustment under retain allocations are included on line 11, for the 3 prior tax years were $10 million
section 1059 and without any identify the total of these amounts in a or less.
capital loss carryback to the tax
year under section 1212(a)(1) . . . 1.
schedule attached to Form 1120-FSC. • Inventoriable items accounted for in the
same manner as materials and supplies
2. Multiply line 1 by 80% . . . . . . . . 2. that are not incidental. See Schedule A
3. Add lines 2, 5, and 7, column (c),
Schedule G on page 8 for details.
and the part of the deduction on Deductions Allocated or For more details on the uniform
line 3, column (c), that is Apportioned to Foreign Trade capitalization rules, see Regulations
attributable to dividends from
20%-or-more-owned corporations 3. Income Other Than Foreign sections 1.263A-1 through 1.263A-3.
4. Enter the smaller of line 2 or 3. If
Trade Income Reported on Transactions between related
line 3 is greater than line 2, stop Schedule F taxpayers. Generally, an accrual basis
here; enter the amount from line 4 taxpayer may only deduct business
on line 8, column (c), and do not Limitations on Deductions expenses and interest owed to a related
complete lines 5-10 below . . . . . 4. party in the year the payment is included
Section 263A uniform capitalization in the income of the related party. See
5. Enter the total amount of dividends rules. The uniform capitalization rules of
from 20%-or-more-owned sections 163(e)(3), 163(j), and 267 for
section 263A require FSCs to capitalize, limitations on deductions for unpaid
corporations that are included on or include in inventory, certain costs
lines 2, 3, 5, and 7, column (a) . . 5. interest and expenses.
incurred in connection with:
6. Subtract line 5 from line 1 . . . . . . 6. • Personal property (tangible and certain Golden parachute payments. A portion
intangible property) acquired for resale. of the payments made by a FSC to key
7. Multiply line 6 by 70% . . . . . . . . 7.
8. Subtract line 3 above from line 8,
• The production of real property and personnel that exceeds their usual
tangible personal property by a FSC for compensation may not be deductible.
column (c) . . . . . . . . . . . . . . . 8. This occurs when the FSC has an
use in its trade or business or in an
9. Enter the smaller of line 7 or activity engaged in for profit. agreement (golden parachute) with these
line 8 . . . . . . . . . . . . . . . . . . . 9. key employees to pay them these excess
Tangible personal property amounts if control of the FSC changes.
10. Dividends-received deduction
produced by a FSC includes a film, sound See section 280G.
after limitation (sec. 246(b)). Add
lines 4 and 9. Enter the result here recording, videotape, book, or similar
Business startup expenses. Business
and on line 8, column (c) . . . . . . 10. property.
startup expenses must be capitalized
FSCs subject to the section 263A unless an election is made to amortize
Line 10, Column (a) uniform capitalization rules are required to them over a period of 60 months. See
capitalize: section 195 and Regulations section
If the FSC claims the foreign tax credit, 1.195-1.
enter the tax that is deemed paid under 1. Direct costs and
sections 902 and 960. See sections 78 2. An allocable part of most indirect Line 1. Enter only foreign direct costs on
and 906(b)(4). costs (including taxes) that (a) benefit the lines 1a through 1e. See section 924(e)
assets produced or acquired for resale or and Regulations sections 1.924(e)-1(a)
Line 11, Column (a) (b) are incurred by reason of the through (e) for definitions and rules on
performance of production or resale direct activity costs related to foreign
Include the following: activities. trade income.
1. Dividends (other than capital gain Line 4. Depreciation. Besides
distributions reported on Schedule D For inventory, some of the indirect depreciation, include on line 4 the part of
(Form 1120) and exempt-interest expenses that must be capitalized are: the cost that the FSC elected to expense
dividends) that are received from RICs • Administration expenses. under section 179 for certain property
and that are not subject to the 70% • Taxes. placed in service during tax year 2003 or
deduction. • Depreciation. carried over from 2002. See Form 4562,
2. Dividends from tax-exempt • Insurance. Depreciation and Amortization, and its
organizations. • Compensation paid to officers instructions.
3. Dividends (other than capital gain attributable to services.
Line 5. Salaries and wages. Enter the
distributions) received from a real estate • Rework labor. amount of salaries and wages paid for the
investment trust that, for the tax year of • Contributions to pension, stock bonus, tax year. Do not include salaries and
the trust in which the dividends are paid, and certain profit-sharing, annuity, or
wages deductible elsewhere on the
qualifies under sections 856 through 860. deferred compensation plans.
return, such as amounts included in cost
4. Dividends not eligible for a Regulations section 1.263A-1(e)(3) of goods sold, elective contributions to a
dividends-received deduction because of specifies other indirect costs that relate to section 401(k) cash or deferred
the holding period of the stock or an production or resale activities that must arrangement, or amounts contributed
obligation to make corresponding be capitalized and those that may be under a salary reduction SEP agreement
payments with respect to similar stock. currently deductible. or a SIMPLE IRA plan.
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Line 10. Compensation of officers. • A bona fide business discussion must an unequal apportionment plan and divide
Enter deductible officers’ compensation occur during, immediately before, or the taxable income brackets as they want.
on line 10. Do not include compensation immediately after the meal; and There is no need for consistency among
deductible elsewhere on the return, such • An employee of the FSC must be taxable income brackets. Any member
as amounts included in cost of goods present at the meal. may be entitled to all, some, or none of
sold, elective contributions to a section See section 274(n)(3) for a special rule the taxable income bracket. However, the
401(k) cash or deferred arrangement, or that applies to expenses for meals total amount for all members cannot be
amounts contributed under a salary consumed by individuals subject to the more than the total amount in each
reduction SEP agreement or a SIMPLE hours of service limits of the Department taxable income bracket.
IRA plan. of Transportation. Equal apportionment plan. If no
Line 11. Bad debts. Enter the total debts Membership dues. The FSC may apportionment plan is adopted, members
that became worthless in whole or in part deduct amounts paid or incurred for of a controlled group must divide the
during the tax year. A cash basis taxpayer membership dues in civic or public amount in each taxable income bracket
may not claim a bad debt deduction service organizations, professional equally among themselves. For example,
unless the amount was previously organizations (such as bar and medical Controlled Group AB consists of
included in income. associations), business leagues, trade Corporation A and Corporation B. They
associations, chambers of commerce, do not elect an apportionment plan.
Line 14. Other deductions. Attach a
boards of trade, and real estate boards. Therefore, each corporation is entitled to:
schedule, listing by type and amount, all
allowable deductions that are not However, no deduction is allowed if a • $25,000 (one-half of $50,000) on line
deductible elsewhere on Form 1120-FSC. principal purpose of the organization is to 2a(1),
Enter the total on line 14. entertain, or provide entertainment • $12,500 (one-half of $25,000) on line
facilities for, members or their guests. In 2a(2), and
Examples of other deductions include: addition, FSCs may not deduct • $4,962,500 (one-half of $9,925,000) on
• Amortization of business start-up membership dues in any club organized line 2a(3).
expenditures, organizational expenses, for business, pleasure, recreation, or
etc. (see Form 4562). other social purpose. This includes Line 2b. Members of a controlled group
• Insurance premiums. country clubs, golf and athletic clubs, are treated as one group to figure the
• Legal and professional fees. airline and hotel clubs, and clubs applicability of the additional 5% tax and
• Supplies used and consumed in the operated to provide meals under the additional 3% tax. If an additional tax
business. conditions favorable to business applies, each member will pay that tax
• Utilities. discussion. based on the part of the amount used in
each taxable income bracket to reduce
Also see Special rules below for limits Entertainment facilities. The FSC that member’s tax. See section 1561(a). If
on certain other deductions. cannot deduct an expense paid or an additional tax applies, attach a
incurred for a facility (such as a yacht or schedule showing the taxable income of
Do not deduct:
hunting lodge) used for an activity usually
• Fines or penalties paid to a government considered entertainment, amusement, or
the entire group and how the FSC figured
for violating any law. its share of the additional tax.
recreation.
• Any amount that is allocable to a class Line 2b(1). Enter the FSC’s share of
of exempt income. See section 265(b) for Note: The FSC may be able to deduct the additional 5% tax on line 2b(1).
exceptions. otherwise nondeductible meals, travel,
and entertainment expenses if the Line 2b(2). Enter the FSC’s share of
Special rules apply to the following amounts are treated as compensation the additional 3% tax on line 2b(2).
expenses: and reported on Form W-2 for an
employee or on Form 1099-MISC or Form
Line 3
Travel, meals, and entertainment.
1042-S for an independent contractor. Most FSCs should figure their tax using
Subject to limitations and restrictions
the Tax Rate Schedule below. Exceptions
discussed below, the FSC can deduct
apply to members of a controlled group
ordinary and necessary travel, meals, and Schedule J (see worksheet on page 14) and qualified
entertainment expenses paid or incurred
in its trade or business. Also, special rules Tax Computation personal service corporations (see
instructions below).
apply to deductions for gifts, skybox
rentals, luxury water travel, convention Lines 1 and 2 Members of a controlled group must
expenses, and entertainment tickets. See Members of a controlled group. A attach to Form 1120-FSC a statement
section 274 and Pub. 463, Travel, member of a controlled group, as defined showing the computation of the tax
Entertainment, Gift, and Car Expenses. in section 927(d)(4), must check the box entered on line 3.
Travel. The FSC cannot deduct travel on line 1 and complete lines 2a and 2b of
Schedule J, Form 1120-FSC. Tax Rate Schedule
expenses of any individual accompanying
a corporate officer or employee, including Line 2a. Members of a controlled group If taxable income (Schedule B, line 20) is:
a spouse or dependent of the officer or are entitled to one $50,000, one $25,000, Of the
employee, unless: and one $9,925,000 taxable income But not amount
• That individual is an employee of the bracket amount (in that order) on line 2a. Over — over — Tax is: over —
corporation and When a controlled group adopts or
• His or her travel is for a bona fide later amends an apportionment plan,
$0
50,000
$50,000
75,000
15%
$ 7,500 + 25%
$0
50,000
business purpose and would otherwise be each member must attach to its tax return 75,000 100,000 13,750 + 34% 75,000
deductible by that individual. a copy of its consent to this plan. The 100,000 335,000 22,250 + 39% 100,000
Meals and entertainment. Generally, copy (or an attached statement) must 335,000 10,000,000 113,900 + 34% 335,000
the FSC can deduct only 50% of the show the part of the amount in each 10,000,000 15,000,000 3,400,000 + 35% 10,000,000
amount otherwise allowable for meals taxable income bracket apportioned to 15,000,000 18,333,333 5,150,000 + 38% 15,000,000
and entertainment expenses paid or that member. See Regulations section 18,333,333 ----- 35% 0
incurred in its trade or business. In 1.1561-3(b) for other requirements and
addition (subject to exceptions under for the time and manner of making the Qualified personal service
section 274(k)(2)): consent. corporations. A qualified personal
• Meals must not be lavish or Unequal apportionment plan. service corporation is taxed at a flat rate
extravagant, Members of a controlled group may elect of 35% on its taxable income. A FSC is a
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Tax Computation Worksheet for Members of a Controlled Group 453A(c) interest” and the amount. Attach
(keep for your records) a schedule showing the computation.
Note: Each member of a controlled group (except a qualified personal service Schedule L
corporation) must compute the tax using this worksheet.
1. Enter taxable income (Schedule B, line 20) 1. Balance Sheets per Books
2. Enter line 1 or the FSC’s share of the $50,000 taxable income bracket, The balance sheet should agree with the
whichever is less 2. FSC’s books and records. Include
3. Subtract line 2 from line 1 3. certificates of deposit as cash on line 1,
4. Enter line 3 or the FSC’s share of the $25,000 taxable income bracket, Schedule L.
whichever is less 4.
Line 5. Tax-exempt securities. Include
5. Subtract line 4 from line 3 5. on this line:
6. Enter line 5 or the FSC’s share of the $9,925,000 taxable income bracket,
whichever is less 6.
• State and local government obligations,
the interest on which is excludible from
7. Subtract line 6 from line 5 7.
gross income under section 103(a) and
8. Multiply line 2 by 15% 8.
• Stock in a mutual fund or other
9. Multiply line 4 by 25% 9.
regulated investment company that
10. Multiply line 6 by 34% 10. distributed exempt-interest dividends
11. Multiply line 7 by 35% 11. during the tax year of the FSC.
12. If the taxable income of the controlled group exceeds $100,000, enter this
member’s share of the smaller of: 5% of the taxable income in excess of Line 27. Adjustments to shareholders’
$100,000, or $11,750 (see the instructions for Schedule J, line 2b) 12. equity. Some examples of adjustments
13. If the taxable income of the controlled group exceeds $15 million, enter this to report on this line include:
member’s share of the smaller of: 3% of the taxable income in excess of $15 • Foreign currency translation
million, or $100,000 (see the instructions for Schedule J, line 2b) 13. adjustments.
14. Total. Add lines 8 through 13. Enter here and on Schedule J, line 3 14. • The excess of additional pension
liability over unrecognized prior service
cost.
qualified personal service corporation if it exempt from the AMT for its tax year If the total adjustment to be entered on
meets both of the following tests: beginning in 2003 if: line 27 is a negative amount, enter the
• Substantially all of the FSC’s activities 1. It was treated as a small amount in parentheses.
involve the performance of services in the corporation exempt from the AMT for all
fields of engineering, architecture, or prior tax years beginning after 1997 and Schedule M-1
management consulting and 2. Its average annual gross receipts
• At least 95% of the corporation’s stock, for the 3-tax-year period (or portion Reconciliation of Income (Loss)
by value, is owned, directly or indirectly, thereof during which the FSC was in per Books With Income per
by (1) employees performing the services, existence) ending before its tax year
(2) retired employees who had performed Return
beginning in 2003 did not exceed $7.5
the services listed above, (3) any estate million. Line 5c. Travel and entertainment.
of the employee or retiree described Include on line 5c any of the following:
above, or (4) any person who acquired Line 6 • Meal and entertainment expenses not
the stock of the FSC as a result of the deductible under section 274(n).
death of an employee or retiree (but only Foreign tax credit. Generally, a FSC • Expenses for the use of an
for the 2-year period beginning on the may not claim a foreign tax credit. It may, entertainment facility.
date of the employee’s or retiree’s death). however, claim a foreign tax credit for any • The part of business gifts over $25.
See Temporary Regulations section foreign taxes imposed on foreign source • Expenses of an individual over $2,000,
1.448-1T(e) for details. taxable nonforeign trade income which are allocable to conventions on
Note: If the FSC meets these tests, (Schedule F, Part II) that is treated as cruise ships.
check the box on line 3, Schedule J, Form effectively connected with a U.S. trade or • Employee achievement awards over
1120-FSC. business. See Temporary Regulations $400.
section 1.921-3T(d)(2) for more details. • The cost of entertainment tickets over
Line 8 face value (also subject to 50% limit
Line 4 under section 274(n)).
Alternative minimum tax (AMT). Unless
Personal holding company tax. See • The cost of skyboxes over the face
Personal Holding Companies and value of nonluxury box seat tickets.
the FSC is treated as a small corporation
exempt from the AMT, it may owe the
Foreign Personal Holding Companies • The part of luxury water travel
on page 5. expenses not deductible under section
AMT if it has any of the adjustments and
tax preference items listed on Form 4626, Line 9 274(m).
Alternative Minimum Tax – Corporations. • Expenses for travel as a form of
The FSC must file Form 4626 if its Total tax education.
taxable income (or loss) combined with Interest on tax deferred under the
• Other nondeductible travel and
these adjustments and tax preference entertainment expenses.
installment method for certain
items is more than the smaller of $40,000 nondealer installment obligations. If an For more information, see Pub. 542.
or the FSC’s allowable exemption amount obligation arising from the disposition of Line 7a. Tax-exempt interest. Include
(from Form 4626). property to which section 453A applies is on line 7a any exempt-interest dividends
For this purpose, taxable income does outstanding at the close of the year, the received as a shareholder in a mutual
not include the NOL deduction. See Form FSC must include the interest due under fund or other regulated investment
4626 for details. section 453A(c) in the amount on line 9, company.
Exception for small corporations. A Schedule J. On the dotted line to the left
FSC is treated as a small corporation of line 9, Schedule J, write “Section
-14-
Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws of the United
States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to
figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the
form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their
contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are
confidential, as required by section 6103.
The time needed to complete and file this form and related schedule will vary depending on individual circumstances. The
estimated average times are:
Learning about the Preparing and sending the form

Form Recordkeeping law or the form to the IRS
1120-FSC 94 hr., 13 min. 19 hr., 45 min. 38 hr., 56 min.
Sch. P (1120-FSC) 9 hr., 48 min. 1 hr., 29 min. 1 hr., 43 min.
If you have comments concerning the accuracy of these time estimates or suggestions for making this form and related schedule
simpler, we would be happy to hear from you. You can write to the Tax Products Coordinating Committee, Western Area Distribution
Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this office. Instead, see Where To File on page 4.
-15-
Using the list of activities and codes below, Once the principal business activity is determined,
Forms 1120-FSC determine from which activity the FSC derives the entries must be made on Form 1120-FSC, page 2,
largest percentage of its “total receipts.” Total Additional Information, lines 1a, 1b, and 1c. For the
Principal Business Activity Codes receipts is defined as the sum of the foreign trading business activity code number, enter the six digit
This list of principal business activities and their gross receipts on Form 1120-FSC, page 3, Schedule code selected from the list below. On line 1b, enter a
associated codes is designed to classify an B, line 6a, and the total income on page 4, Schedule brief description of the FSC’s business activity.
enterprise by the type of activity in which it is F, lines 4 and 17. If the FSC’s largest percentage of Finally, enter a description of the principal product or
engaged to facilitate the administration of the its total receipts is derived from the wholesale service of the FSC on line 1c.
Internal Revenue Code. These principal business trading of durable goods, the FSC must use one of
activity codes are based on the North American the corresponding codes from the list below
Industry Classification System. (423100-423990).
Code Code Code Code

Wholesale Trade 424700 Petroleum & Petroleum 512200 Sound Recording Industries 532210 Consumer Electronics &
Products Broadcasting (except Internet) Appliances Rental
Merchant Wholesalers, Durable
Goods 424800 Beer, Wine, & Distilled 515100 Radio & Television 532220 Formal Wear & Costume
Alcoholic Beverages Broadcasting Rental
423100 Motor Vehicle & Motor
Vehicle Parts & Supplies 424910 Farm Supplies 515210 Cable & Other Subscription 532230 Video Tape & Disc Rental
423200 Furniture & Home 424920 Book, Periodical, & Programming 532290 Other Consumer Goods
Furnishings Newspapers Internet Publishing and Rental
423300 Lumber & Other Construction 424930 Flower, Nursery Stock, & Broadcasting 532310 General Rental Centers
Materials Florists’ Supplies 516110 Internet Publishing & 532400 Commercial & Industrial
423400 Professional & Commercial 424940 Tobacco & Tobacco Products Broadcasting Machinery & Equipment
Equipment & Supplies 424950 Paint, Varnish, & Supplies Telecommunications Rental & Leasing
423500 Metal & Mineral (except 424990 Other Miscellaneous 517000 Telecommunications
Petroleum) Nondurable Goods (including paging, cellular, Professional Services
423600 Electrical & Electronic Goods Wholesale Electronic Markets and satellite, cable & other Architectural, Engineering, and
423700 Hardware, & Plumbing & Agents and Brokers program distribution, Related Services
Heating Equipment & 425110 Business to Business resellers, & other 541310 Architectural Services
Supplies Electronic Markets telecommunications) 541320 Landscape Architecture
423800 Machinery, Equipment, & 425120 Wholesale Trade Agents & Internet Service Providers, Web Services
Supplies Brokers Search Portals, and Data Processing 541330 Engineering Services
423910 Sporting & Recreational Services
541340 Drafting Services
Goods & Supplies Information 518111 Internet Service Providers
541350 Building Inspection Services
423920 Toy & Hobby Goods & Publishing Industries (except 518112 Web Search Portals
541360 Geophysical Surveying &
Supplies Internet) 518210 Data Processing, Hosting, & Mapping Services
423930 Recyclable Materials 511110 Newspaper Publishers Related Services
541370 Surveying & Mapping (except
423940 Jewelry, Watch, Precious 511120 Periodical Publishers Other Information Services Geophysical) Services
Stone, & Precious Metals 511130 Book Publishers 519100 Other Information Services 541380 Testing Laboratories
423990 Other Miscellaneous Durable (including news syndicates &
511140 Directory & Mailing List Other Professional Services
Goods libraries)
Publishers 541600 Management Consulting
Merchant Wholesalers, Nondurable 511190 Other Publishers Services
Goods Rental and Leasing
511210 Software Publishers
424100 Paper & Paper Products Rental and Leasing Services
Motion Picture and Sound
424210 Drugs & Druggists’ Sundries Recording Industries 532100 Automotive Equipment Rental
424300 Apparel, Piece Goods, & & Leasing
512100 Motion Picture & Video
Notions Industries (except video
424400 Grocery & Related Products rental)
424500 Farm Product Raw Materials
424600 Chemical & Allied Products
-16-

US Internal Revenue Service: I1120fsc - 2003

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Userid: ________ Leading adjust: 29% ❏ Draft ❏ Ok to Print

PAGER/SGML Fileid: I1120FSC.cvt (30-Dec-2003) (Init. & date)

Page 1 of 16 Instructions for Form 1120-FSC 15:44 - 30-DEC-2003

2003 Department of the Treasury

Instructions for Form

Contents Page Photographs of • A description of the hardship the FSC

Cat. No. 11532V

The election is made by checking the Egypt, Finland, France, Germany,

Dividends and Dividends-Received Deduction Worksheet (a) Dividends

1 Dividends from less-than-20%-owned domestic corporations that are subject to

9 Other dividends from foreign corporations not included on lines 3, 6, or 7

Learning about the Preparing and sending the form

1120-FSC 94 hr., 13 min. 19 hr., 45 min. 38 hr., 56 min.

Sch. P (1120-FSC) 9 hr., 48 min. 1 hr., 29 min. 1 hr., 43 min.

Code Code Code Code

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