26 CFR § 1.992-1 - Requirements of a DISC.
(a) “DISC” defined. The term “DISC” refers to a domestic international sales corporation. The term “DISC” means a corporation which, for a taxable year—
(1) Is duly incorporated and existing under the laws of any State or the District of Columbia,
(2) Satisfies the gross receipts test described in paragraph (b) of this section,
(3) Satisfies the assets test described in paragraph (c) of this section,
(4) Satisfies the capitalization requirement described in paragraph (d) of this section,
(5) Satisfies the requirement that an election to be treated as a DISC be in effect for such year, as described in paragraph (e) of this section,
(6) [Reserved]
(7) Maintains separate books and records, and
(8) Is not an ineligible corporation described in paragraph (f) of this section.
(b) Gross receipts test. In order for a corporation described in paragraph (a)(1) of this section to be a DISC for a taxable year, 95 percent or more of its gross receipts (as defined in § 1.993-6) for such year must consist of qualified export receipts (as defined in § 1.993-1). Gross receipts for a taxable year are determined in accordance with the method of accounting adopted by the corporation pursuant to § 1.991-1(b)(2). However, for rules regarding gross receipts in the case of a commission sale by such corporation, see § 1.993-6.
(c) Assets test—(1) In general. In order for a corporation described in paragraph (a)(1) of this section to be a DISC for a taxable year, the adjusted basis (determined under section 1011) of its qualified export assets at the close of such year must equal or exceed 95 percent of the sum of the adjusted bases (determined under section 1011) of all assets of such corporation at the close of such year.
(2) Assets acquired to meet assets test. For purposes of determining whether the requirements of subparagraph (1) of this paragraph are satisfied by a corporation at the end of a taxable year, an asset which is a qualified export asset is treated as not being an asset of such corporation at such time if such asset is held for a total of 60 days or less and is acquired directly or indirectly through borrowing, unless the acquisition of such asset is established to the satisfaction of the Commissioner or his delegate to have been for bona fide purposes. Such acquisition is deemed to have been for bona fide purposes if, for example, it is made in the usual course of the corporation's trade or business.
(d) Capitalization requirement—(1) In general. To qualify as a DISC for a taxable year, a corporation must have, on each day of that taxable year, only one class of stock. The par value (or, in the case of stock without par value, the stated value) of the corporation's outstanding stock must be on each day of the taxable year at least $2,500. In the case of a corporation which elects to be treated as a DISC for its first taxable year, the requirements of this paragraph (d)(1) are satisfied if the corporation has no more than one class of stock at any time during the year and if the par value (or, in the case of stock without par value, the stated value) of the corporation's outstanding stock is at least $2,500 on the last day of the period within which the election must be made and on each succeeding day of the year. For purposes of this paragraph (d)(1), the stated value of shares is the aggregate amount of the consideration paid for such shares which is not allotted to paid in surplus, or other surplus. The law of the State of incorporation of the DISC determines what consideration may be used to capitalize the DISC. A corporation will not be a qualified DISC unless at least $2,500 of valid consideration was used for this purpose. If a corporation has a realized or unrealized loss during a taxable year which results in the impairment of all or part of the capital required under this paragraph (d)(1), that impairment does not result in disqualification under this paragraph (d)(1), provided that the corporation does not take any legal or formal action under State law to reduce capital for that year below the amount required under this paragraph (d)(1).
(2) Treatment of debt payable to shareholders—(i) In general. Purported debt of a DISC payable to any person, whether or not such person is a shareholder or a member of a controlled group (as defined in § 1.993-1(k)) of which such DISC is a member, is treated as debt for all purposes of the Code, provided that such purported debt—
(a) Would qualify as debt for purposes of the Code if the DISC were a corporation which did not qualify as a DISC,
(b) Qualifies under subdivision (ii) of this subparagraph, or
(c) Are trade accounts payable described in subdivision (iii) of this subparagraph.
(ii) Safe harbor rule. Purported debt of a DISC will in no event be treated as other than debt for purposes of subdivision (i) of this subparagraph if—
(a) It is a written obligation to pay a sum certain on or before a fixed maturity date,
(b) Interest is payable on such purported debt at an arm's length interest rate (as determined under § 1.482-2(a)(2)), expressed as a fixed dollar amount or a fixed percentage of principal,
(c) Such purported debt is not convertible into stock or into other purported debt unless such other purported debt qualifies under this subparagraph as debt of the DISC,
(d) Such purported debt does not confer voting rights upon its holder, except in the event of default thereon, and
(e) Interest and principal are paid in accordance with the terms of such purported debt or with any modification of such terms consistent with (a) through (d) of this subdivision.
(iii) Trade accounts payable. Trade accounts payable of a DISC which arise in the normal course of its trade or business (such as in consideration for inventory or supplies) constitute debt of the DISC (whether or not such accounts payable are debt described in subdivision (i) (a) or (b) of this subparagraph), provided that such accounts are payable within 15 months after they arise. If such accounts are payable more than 15 months after they arise, they are debt of such DISC only if they are debt described in subdivision (i) (a) or (b) of this subparagraph.
(iv) Relation of subparagraph to other corporations. The provisions of this subparagraph generally constitute a relaxation of the ordinary rules used in determining whether purported debt of a corporation is debt or equity. This relaxation is in recognition of the principle that a corporation may qualify as a DISC even though it has relatively little capital. This relaxation does not apply with respect to purported debt of other corporations in other contexts. The provisions of subdivisions (i), (ii), and (iii) of this subparagraph apply only for taxable years for which a corporation qualifies (or is treated) as a DISC.
(3) Classes of stock. [Reserved]
(e) Election in effect. In order for a corporation to be a DISC for a taxable year, an election to be treated as a DISC must be made by such corporation pursuant to § 1.992-2 and must be in effect for such taxable year. A corporation does not become or remain a DISC solely by making such an election. A corporation is a DISC for a taxable year only if such an election is in effect for that year and the corporation also satisfies the requirements of paragraphs (a) through (d) of this section. See § 1.992-2 for rules regarding the time and manner of making such an election.
(f) Ineligible corporations. The following corporations shall not be eligible to be treated as a DISC—
(1) A corporation exempt from tax by reason of section 501,
(2) A personal holding company (as defined in section 542),
(3) A financial institution to which section 581 or 593 applies,
(4) An insurance company subject to the tax imposed by subchapter L,
(5) A regulated investment company (as defined in section 851(a)),
(6) A China Trade Act corporation receiving the special deduction provided in section 941(a), or
(7) An electing small business corporation (as defined in section 1371(b)).
(g) Status as DISC after having filed return as a DISC. Under section 992(a)(2), notwithstanding the failure of a corporation to meet the requirements of paragraph (a) of this section for a taxable year, such corporation will be treated as a DISC for purposes of the Code for such taxable year (and, thus, will not be able to claim that it is not eligible to be a DISC) if—
(1) Such corporation files a return as a DISC for such taxable year,
(2) Such corporation does not notify the district director, more than 30 days before the expiration of the period of limitation (including extensions thereof) on assessment for underpayment of tax for such taxable year (as determined under section 6501 and the regulations thereunder), that it is not a DISC for such taxable year, and
(3) The Internal Revenue Service has not issued, within such period of limitation (including extensions thereof) on assessment for underpayment of tax for such taxable year, a notice of deficiency based on a determination that such corporation is not a DISC for such taxable year.
(h) Definition of “former DISC”. Under section 992(a)(3), the term “former DISC” refers to a corporation which is not a DISC for a taxable year but which was (or was treated as) a DISC for a prior taxable year. However, a corporation is not a former DISC for a taxable year unless such corporation has, at the beginning of such taxable year, undistributed previously taxed income (as defined in § 1.996-3(c) or accumulated DISC income (as defined in § 1.996-3(b)). A corporation which is a former DISC for a taxable year is a former DISC for all purposes of the Code.