--- kind: "range" citation: "26 C.F.R. §§ 1.993-2–1.993-6" title: "26" from: "1.993-2" to: "1.993-6" count: 5 url: "https://uscodex.org/cfr/26/1.993-2..1.993-6" --- # §1.993-2. Definition of qualified export assets. - (a) **In general.** For a corporation to qualify as a DISC, at the close of its taxable year it must have qualified export assets with adjusted bases equal to at least 95 percent of the sum of the adjusted bases of all its assets. An asset which is a qualified export asset under more than one paragraph of this section shall be taken into account only once in determining the sum of the adjusted bases of all qualified export assets. Under [section 993(b)](/cfr/26/993.md?p=b), the qualified export assets held by a corporation are— - (1) Export property as defined in [§ 1.993-3](/cfr/26/1.993-3.md) (see [paragraph (b)](#b) of this section), - (2) Business assets described in [paragraph (c)](#c) of this section, - (3) Trade receivables described in [paragraph (d)](#d) of this section, - (4) Temporary investments to the extent described in [paragraph (e)](#e) of this section, - (5) Producer's loans as defined in [§ 1.993-4](/cfr/26/1.993-4.md) (see [paragraph (f)](#f) of this section), - (6) Stock or securities (described in [paragraph (g)](#g) of this section) of related foreign export corporations as defined in [§ 1.993-5](/cfr/26/1.993-5.md), - (7) Export-Import Bank and other obligations described in [paragraph (h)](#h) of this section, - (8) Financing obligations described in paragraph (i) of this section, and - (9) **Funds awaiting investment described in paragraph (j) of this section.** - (b) **Export property.** In general, export property is certain property held for sale or lease which meets the requirements of [§ 1.993-3](/cfr/26/1.993-3.md). - (c) **Business assets.** For purposes of this section, business assets are assets used by a DISC (other than as a lessor) primarily in connection with— - (1) The sale, lease, storage, handling, transportation, packaging, assembly, or servicing of export property, or - (2) The performance of engineering or architectural services (described in [§ 1.993-1(h)](/cfr/26/1.993-1.md?p=h)) or managerial services (described in [§ 1.993-1(i)](/cfr/26/1.993-1.md?p=i)) in furtherance of the production of qualified export receipts. - (d) **Trade receivables—** - (1) **In general.** For purposes of this section, trade receivables are accounts receivable and evidences of indebtedness which arise by reason of transactions of such corporation or of another corporation which is a DISC and which is a member of a controlled group which includes such corporation described in subparagraph (A), (B), (C), (D), (G), or (H), of [section 993(a)(1)](/cfr/26/993.md?p=a-1) and which are due the DISC (or, if it acts as an agent, due its principal) and held by the DISC. - (2) **Trade receivables representing commissions.** If a DISC acts as commission agent for a principal in a transaction described in § [1.993-1 (b)](/cfr/26/1.993-1.md?p=b), [(c)](/cfr/26/1.993-1.md?p=c), [(d)](/cfr/26/1.993-1.md?p=d), [(e)](/cfr/26/1.993-1.md?p=e), [(h)](/cfr/26/1.993-1.md?p=h), or [(i)](/cfr/26/1.993-1.md?p=i) which results in qualified export receipts for the DISC, and if an account receivable or evidence of indebtedness held by the DISC and representing the commission payable to the DISC as a result of the transaction arises (and, in the case of an evidence of indebtedness, designated on its face as representing such commission), such account receivable or evidence of indebtedness shall be treated as a trade receiveable. If, however, the principal is a related supplier (as defined in [§ 1.994-1(a)(3)](/cfr/26/1.994-1.md?p=a-3)) with respect to the DISC, such account receivable or evidence of indebtedness will not be treated as a trade receivable unless it is payable and paid in a time and manner which satisfy the requirements of § [1.994-1(e)(3)](/cfr/26/1.994-1.md?p=e-3) or [(5)](/cfr/26/1.994-1.md?p=e-5) (relating to initial payment of transfer price or commission and procedure for adjustments to transfer price or commission, respectively), as the case may be. However, see [subparagraph (3)](#d-3) of this paragraph for rules regarding certain accounts receivable representing commissions payable to a DISC by its related supplier. - (3) **Indebtedness arising under § 1.994-1(e).** An indebtedness arising under [§ 1.994-1(e)(3)(iii)](/cfr/26/1.994-1.md?p=e-3-iii) (relating to initial payment of transfer price or commission) in favor of a DISC is not a qualified export asset. An indebtedness arising under [§ 1.994-1(e)(5)(i)](/cfr/26/1.994-1.md?p=e-5-i) (relating to procedure for adjustments to transfer price or commission) in favor of a DISC is a trade receivable if it is paid in the time and manner described in § [1.994-1(e)(5)(i)](/cfr/26/1.994-1.md?p=e-5-i) and [(ii)](/cfr/26/1.994-1.md?p=e-5-ii) and if it otherwise satisfies the requirements of [subparagraph (2)](#d-2) of this paragraph. If such an indebtedness is not paid in the time and manner described in § [1.994-1(e)(5)(i)](/cfr/26/1.994-1.md?p=e-5-i) and [(ii)](/cfr/26/1.994-1.md?p=e-5-ii), it is not a qualified export asset. - (e) **Temporary investments—** - (1) **In general.** For purposes of this section, temporary investments are money, bank deposits (not including time deposits of more than 1 year), and other similar temporary investments to the extent maintained by a DISC as reasonably necessary to meet its requirements for working capital. For purposes of this paragraph, a temporary investment is an obligation, including an evidence of indebtedness as defined in [paragraph (d)(1)](#d-1) of this section, which is a demand obligation or has a period remaining to maturity of not more than 1 year at the date it is acquired by the DISC. A temporary investment does not include trade receivables. - (2) **Determination of amount of working capital maintained.** For purposes of this paragraph— - (i) **The working capital of a DISC is the excess of its current assets over current liabilities.** - (ii) Current assets are cash and other assets (other than trade receivables) which may reasonably be expected to be converted into cash or sold or consumed during the current normal operating cycle of the DISC's trade or business. - (iii) Current liabilities are obligations (or portions of obligations) due within the current normal operating cycle of the trade or business of the DISC whose satisfaction when due is reasonably expected to require the use of current assets. - (iv) Generally accepted financial accounting treatments will be accepted, and - (v) Current assets (other than temporary investments) are taken into account before temporary investments, and trade receivables are never taken into account, in determining whether such temporary investments are maintained by the DISC as reasonably necessary to meet his current liabilities and its requirements for working capital. - (3) **Determination of amount of working capital reasonably required.** For purposes of this paragraph, a determination of the amount of money, bank deposits, and other similar temporary investments reasonably necessary to meet the requirements of the DISC for working capital will depend upon the nature and volume of the activities of the DISC existing at the end of the DISC's taxable year for which such determination is made, such as, for example— - (i) In the case of a DISC which purchases and sells inventory, the amount of working capital reasonably required is limited to an amount reasonably necessary to meet the ordinary operating expenses during the current normal operating cycle of the trade or business of the DISC, an amount reasonably needed to meet specific and definite plans for expansion and any amounts necessary for reasonably anticipated extraordinary business expenses. - (ii) In the case of a DISC which actively conducts a trade or business (including the employment of a sales force) and receives commissions in respect of goods to which such DISC does not have title, the amount of working capital required will depend upon the nature and volume of the activities of the DISC which produce such income as they exist on the applicable determination date. In determining the amount of working capital which is reasonably required for the production of such income, the anticipated future needs of the business will be taken into account to the extent that such needs relate to the year of the DISC following the applicable determination date. Anticipated future needs relating to a later period will not be taken into account unless it is clearly established that such needs are reasonably related to the production of such income as of the applicable determination date. - (iii) In the case of a DISC which does not actively conduct a trade or business, and which receives commissions solely by reason of section [994(a)(1)](/cfr/26/994.md?p=a-1), [(a)(2)](/cfr/26/994.md?p=a-2), or [(b)](/cfr/26/994.md?p=a-b) with respect to goods to which such DISC does not have title, no working capital would be required beyond a de minimis amount unless it appears from the facts and circumstances that additional working capital will be required. - (iv) In the case of a DISC deriving income from the leasing of property, the amount of working capital required will be determined on the basis of the facts and circumstances in such case. - (4) **Relationship of working capital to other qualified export assets.** If a temporary investment is a qualified export asset under any provision of this section (other than this paragraph), this paragraph shall not affect its status as a qualified export asset. However, any such temporary investment is taken into account before other temporary investments in determining whether such other temporary investments are maintained by a DISC as reasonably necessary to meet its requirements for working capital. Current assets (other than temporary investments) are taken into account before temporary investments, and trade receivables are never taken into account, in determining whether such temporary investments are maintained by the DISC as reasonably necessary requirements for working capital. An obligation issued or incurred by a member of a controlled group (as defined in [§ 1.993-1(k)](/cfr/26/1.993-1.md?p=k)) of which the DISC is a member is not a qualified export asset under this paragraph. For rules regarding working capital as of the end of each month of a taxable year for purposes of the 70-percent reasonableness standard with respect to certain deficiency distributions, see [paragraph (j)(3)](#j-3) of this section. - (f) **Producer's loans.** For purposes of this section, a producer's loan is an evidence of indebtedness arising in connection with producer's loans which are made by a DISC and which meet the requirements of [§ 1.993-4](/cfr/26/1.993-4.md). If a producer's loan is a qualified export asset, interest accrued with respect to the producer's loan will also be treated as a qualified export asset provided that payment is made in the form of money, property (valued at its fair market value on its date of transfer and including accounts receivable for sales by or through a DISC), a written obligation which qualifies as a debt under the safe harbor rule of [§ 1.992-1(d)(2)(ii)](/cfr/26/1.992-1.md?p=d-2-ii), or an accounting entry offsetting the account receivable against an existing debt owed by the person in whose favor the account receivable was established to the person with whom it engaged in the transaction and that payment is made no later than 60 days following the close of the taxable year of accrual of the interest. This [paragraph (f)](#f) is effective for taxable years beginning after January 10, 1985 except that the taxpayer may at its option apply the provisions of this paragraph to taxable years ending after December 31, 1971. - (g) **Stock or securities of related foreign corporations.** For purposes of this section, the term “stock or securities”, with respect to a related foreign export corporation (as defined in [§ 1.993-5](/cfr/26/1.993-5.md)), has the same meaning as such term has as used in [section 351](/cfr/26/351.md) (relating to transfers to controlled corporations), except that the term “securities” does not include obligations which are repaid, in whole or in part, at any time during the taxable year of the DISC following the taxable year of the DISC during which such obligations were acquired by the DISC or were issued, unless the DISC demonstrates to the satisfaction of the district director that the repayment was for bona fide business purposes and not for the purpose of avoidance of Federal income taxes. - (h) **Export-Import Bank obligations.** For purposes of this section, the term “Export-Import Bank obligations” means obligations issued, guaranteed, insured, or reinsured (in whole or in part) by the Export-Import Bank of the United States or by the Foreign Credit Insurance Association, but only if such obligations are acquired by the DISC— - (1) From the Export-Import Bank of the United States, - (2) From the Foreign Credit Insurance Association, or - (3) From the person selling or purchasing the goods or services by reason of which such obligations arose, or from any corporation which is a member of the same controlled group (as defined in [§ 1.993-1(k)](/cfr/26/1.993-1.md?p=k)) as such person. - (i) **Financing obligations.** For purposes of this section, financing obligations are obligations (held by a DISC) of a domestic corporation organized solely for the purpose of financing sales of export property pursuant to an agreement with the Export-Import Bank of the United States under which such corporation makes export loans guaranteed by such Bank. - (j) **Funds awaiting investment—** - (1) **In general.** For purposes of this section, subject to the limitation descibed in [subparagraph (2)](#j-2) of this paragraph, if, at the close of a DISC's taxable year, the sum of the DISC's money, bank deposits, and other similar temporary investments is determined under [paragraph (e)](#e) of this section to exceed an amount reasonably necessary to meet the DISC's requirements for working capital, the amount of the DISC's bank deposits in the United States to the extent of the amount of this excess are funds awaiting investment at the close of such taxable year. - (2) **Limitation.** Bank deposits described in [subparagraph (1)](#j-1) of this paragraph are funds awaiting investment only if, by the last day of each of the sixth, seventh, and eighth months after the close of such taxable year, the sum of the adjusted bases of the qualified export assets of the DISC (other than such bank deposits) equals or exceeds 95 percent of the sum of the adjusted bases of all assets of the DISC (including such bank deposits) it held on the last day of such taxable year. For purposes of this subparagraph, the adjusted bases of assets of a DISC are determined as of the end of each of the months referred to in this subparagraph. Funds awaiting investment as described in this paragraph need not be traceable to any of the qualified export assets held by the DISC at the end of any of the months referred to in this subparagraph. - (3) **Coordination with certain deficiency distribution provisions.** Under [section 992(c)(3)](/cfr/26/992.md?p=c-3) and [§ 1.992-3(d)](/cfr/26/1.992-3.md?p=d) a deficiency distribution made on or before the 15th day of the ninth month after the end of a corporation's taxable year is deemed to be for reasonable cause if certain requirements are met, including the requirement (described in [section 992(c)(3)(B)](/cfr/26/992.md?p=c-3-B) and [§ 1.992-3(d)(2)](/cfr/26/1.992-3.md?p=d-2)) that the sum of the adjusted bases of the qualified export assets held by the corporation on the last day of each month of such year equals or exceeds 70 percent of the sum of the adjusted bases of all assets held by the corporation on each such last day. If, on any such last day, the sum or a DISC's money, bank deposits, and other similar temporary investments is determined under [paragraph (e)](#e) of this section to exceed an amount reasonably necessary to meet the DISC's requirements for working capital, the amount of the DISC's bank deposits to the extent of the amount of this excess are funds awaiting investment on such last day, if either— - (i) The requirements of [subparagraph (2)](#j-2) of this paragraph are satisfied with respect to the taxable year of the DISC which includes such month or - (ii) At the close of such taxable year the sum of the DISC's money, bank deposits, and other similar temporary investments is determined under [paragraph (e)](#e) of this section not to exceed an amount reasonably necessary to meet the DISC's requirements for working capital. # §1.993-3. Definition of export property. - (a) **General rule.** Under [section 993(c)](/cfr/26/993.md?p=c), except as otherwise provided with respect to excluded property in [paragraph (f)](#f) of this section and with respect to certain short supply property in paragraph (i) of this section, export property is property in the hands of any person (whether or not a DISC)— - (1) Manufactured, produced, grown, or extracted in the United States by any person or persons other than a DISC (see [paragraph (c)](#c) of this section), - (2) Held primarily for sale or lease in the ordinary course of a trade or business to any person for direct use, consumption, or disposition outside the United States (see [paragraph (d)](#d) of this section), - (3) Not more than 50 percent of the fair market value of which is attributable to articles imported into the United States (see [paragraph (e)](#e) of this section), and - (4) Which is not sold or leased by a DISC, or with a DISC as commission agent, to another DISC which is a member of the same controlled group (as defined in [§ 1.993-1(k)](/cfr/26/1.993-1.md?p=k)) as the DISC. - (b) **Services.** For purposes of this section, services (including the written communication of services in any form) are not export property. Whether an item is property or services shall be determined on the basis of the facts and circumstances attending the development and disposition of the item. Thus, for example, the preparation of a map of a particular construction site would constitute services and not export property, but standard maps prepared for sale to customers generally would not constitute services and would be export property if the requirements of this section were otherwise met. - (c) **Manufacture, production, growth, or extraction of property—** - (1) **By a person other than a DISC.** Export property may be manufactured, produced, grown, or extracted in the United States by any person, provided that such person does not qualify (and is not treated) as a DISC. Property held by a DISC which was manufactured, produced, grown, or extracted by it at a time when it did not qualify (and was not treated) as a DISC is not export property of the DISC. Property which sustains further manufacture or production outside the United States prior to sale or lease by a person but after manufacture or production in the United States will not be considered as manufactured, produced, grown, or extracted in the United States by such person. - (2) **Manufactured or produced—** - (i) **In general.** For purposes of this section, property which is sold or leased by a person is considered to be manufactured or produced by such person if such property is manufactured or produced (within the meaning of either subdivision (ii), (iii), or (iv) of this subparagraph) by such person or by another person pursuant to a contract with such person. Except as provided in subdivision (iv) of this subparagraph, manufacture or production of property does not include assembly or packaging operations with respect to property. - (ii) **Substantial transformation.** Property is manufactured or produced by a person if such property is substantially transformed by such person. Examples of substantial transformation of property would include the conversion of woodpulp to paper, steel rods to screws and bolts, and the canning of fish. - (iii) **Operations generally considered to constitute manufacturing.** Property is manufactured or produced by a person if the operations performed by such person in connection with such property are substantial in nature and are generally considered to constitute the manufacture or production of property. - (iv) **Value added to property.** Property is manufactured or produced by a person if with respect to such property conversion costs (direct labor and factory burden including packaging or assembly) of such person account for 20 percent of more of— (a) The cost of goods sold or inventory amount of such person for such property is such property is sold or held for sale, or (b) The adjusted basis of such person for such property, as determined in accordance with the provisions of [section 1011](/cfr/26/1011.md), if such property is held for lease or leased. - (d) **Primary purpose of which property is held—** - (1) **In general—** - (i) **General rule.** Under [paragraph (a)(2)](#a-2) of this section, export property (a) must be held primarily for the purpose of sale or lease in the ordinary course of trade or business to a DISC, or to any other person, and (b) such sale or lease must be for direct use, consumption, or disposition outside the United States. Thus, property cannot qualify as export property unless it is sold or leased for direct use, consumption or disposition outside the United States. Property is sold or leased for direct use, consumption, or disposition outside the United States if such sale or lease satisfies the destination test described in [subparagraph (2)](#d-2) of this paragraph, the proof of compliance requirements described in [subparagraph (3)](#d-3) of this paragraph, and the use outside the United States test described in [subparagraph (4)](#d-4) of this paragraph. - (ii) **Factors not taken into account.** In determining whether property which is sold or leased to a DISC is sold or leased for direct use consumption, or disposition outside the United States, the fact that the acquiring DISC holds the property in inventory or for lease prior to the time it sells or leases it for direct use, consumption, or disposition outside the United States will not affect the characterization of the property as export property. Export property need not be physically segregated from other property. - (2) **Destination test.** - (i) For purposes of [subparagraph (1)](#d-1) of this paragraph the destination test in this subparagraph is satisfied with respect to property sold or leased by a seller or lessor only if it is delivered by such seller or lessor (or an agent of such seller or lessor) regardless of the F.O.B. point or the place at which title passes or risk of loss shifts from the seller or lessor— (a) Within the United States to a carrier or freight forwarder for ultimate delivery outside the United States to a purchaser or lessee (or to a subsequent purchaser or sublessee), (b) Within the United States to a purchaser or lessee, if such property is ultimately delivered, directly used, or directly consumed outside the United States (including delivery to a carrier or freight forwarder for delivery outside the United States) by the purchaser or lessee (or a subsequent purchaser or sublessee) within 1 year after such sale or lease, (c) Within or outside the United States to a purchaser or lessee which, at the time of the sale or lease, is a DISC and is not a member of the same controlled group (as defined in [§ 1.993-1(k)](/cfr/26/1.993-1.md?p=k)) as the seller or lessor, (d) From the United States to the purchaser or lessee (or a subsequent purchaser or sublessee) at a point outside the United States by means of a ship, aircraft, or other delivery vehicle, owned, leased, or chartered by the seller or lessor, (e) Outside the United States to a purchaser or lessee from a warehouse, a storage facility, or assembly site located outside the United States, if such property was previously shipped by such seller or lessor from the United States, or (f) Outside the United States to a purchaser or lessee if such property was previously shipped by such seller or lessor from the United States and if such property is located outside the United States pursuant to a prior lease by the seller or lessor, and either (1) such prior lease terminated at the expiration of its term (or by the action of the prior lessee acting alone), (2) the sale occurred or the term of the subsequent lease began after the time at which the term of the prior lease would have expired, or (3) the lessee under the subsequent lease is not a related person (as defined in [§ 1.993-1(a)(6)](/cfr/26/1.993-1.md?p=a-6)) with respect to the lessor and the prior lease was terminated by the action of the lessor (acting alone or together with the lessee). - (ii) For purposes of this subparagraph (other than (c) and (f)(3) of subdivision (i) thereof), any relationship between the seller or lessor and any purchaser, subsequent purchaser, lessee, or sublessee is immaterial. - (iii) In no event is the destination test of this subparagraph satisfied with respect to property which is subject to any use (other than a resale or sublease), manufacture, assembly, or other processing (other than packaging) by any person between the time of the sale or lease by such seller or lessor and the delivery or ultimate delivery outside the United States described in this subparagraph. - (iv) If property is located outside the United States at the time it is purchased by a person or leased by a person as lessee, such property may be export property in the hands of such purchaser or lessee only if it is imported into the United States prior to its further sale or lease (including a sublease) outside the United States. Paragraphs [(a)(3)](#a-3) and (e) of this section (relating to 50 percent foreign content test) are applicable in determining whether such property is export property. Thus, for example, if such property is not subjected to manufacturing or production (as defined in [paragraph (c)](#c) of this section) within the United States after such importation, it does not qualify as export property. - (3) **Proof of compliance with destination test—** - (i) **Delivery outside the United States.** For purposes of [subparagraph (2)](#d-2) of this paragraph (other than subdivision (i)(c) thereof), a seller or lessor shall establish ultimate delivery, use, or consumption of property outside the United States by providing— (a) A facsimile or carbon copy of the export bill of lading issued by the carrier who delivers the property, (b) A certificate of an agent or representative of the carrier disclosing delivery of the property outside the United States, (c) A facsimile or carbon copy of the certificate of lading for the property executed by a customs officer of the country to which the property is delivered, (d) If such country has no customs administration, a written statement by the person to whom delivery outside the United States was made, (e) A facsimile or carbon copy of the shipper's export declaration, a monthly shipper's summary declaration filed with the Bureau of Customs, or a magnetic tape filed in lieu of the Shipper's Export Declaration, covering the property, (f) Any other proof (including evidence as to the nature of the property or the nature of the transaction) which establishes to the satisfaction of the Commissioner that the property was ultimately delivered, or directly sold, or directly consumed outside the United States within 1 year after the sale or lease. - (ii) The requirements of subdivision (i) (a), (b), (c), or (e) of this subparagraph will be considered satisfied even though the name of the ultimate consignee and the price paid for the goods is marked out provided that, in the case of a Shipper's Export Declaration or other document listed in such subdivision (e) or a document such as an export bill of lading such document still indicates the country in which delivery to the ultimate consignee is to be made and, in the case of a certificate of an agent or representative of the carrier, that such document indicates that the property was delivered outside the United States. - (iii) A seller or lessor shall also establish the meeting of the requirement of [subparagraph (2)(i)](#d-2-i) of this paragraph (other than subdivision (c) thereof), that the property was delivered outside the United States without further use, manufacture, assembly, or other processing within the United States. - (iv) **Sale or lease to an unrelated DISC.** For purposes of subparagraph (2)(i)(c) of this paragraph, a purchaser or lessee of property is deemed to qualify as a DISC for its taxable year if the seller or lessor obtains from such purchaser or lessee a copy of such purchaser's or lessee's election to be treated as a DISC as described in [§ 1.992-2(a)](/cfr/26/1.992-2.md?p=a) together with such purchaser's or lessee's sworn statement that such election has been filed with the Internal Revenue Service Center. The copy of the election and the sworn statement of such purchaser or lessee must be received by the seller or lessor within 6 months after the sale or lease. A purchaser or lessee is not treated as a DISC with respect to a sale or lease during a taxable year for which such purchaser or lessee does not qualify as a DISC if the seller or lessor does not believe or if a reasonable person would not believe at the time such sale or lease is made that the purchaser or lessee will qualify as a DISC for such taxable year. - (v) **Failure of proof.** If a seller or lessor fails to provide proof of compliance with the destination test as required by this subparagraph, the property sold or leased is not export property. - (4) **Sales and leases of property for ultimate use in the United States—** - (i) **In general.** For purposes of [subparagraph (1)](#d-1) of this paragraph, the use test in this subparagraph is satisfied with respect to property which— (a) Under subdivisions (ii) through (iv) of this subparagraph is not sold for ultimate use in the United States or (b) Under subdivision (v) of this subparagraph is leased for ultimate use outside the United States. - (ii) **Sales of property for ultimate use in the United States.** For purposes of subdivision (i) of this subparagraph, a purchaser of property (including components, as defined in subdivision (vii) of this subparagraph) is deemed to use such property ultimately in the United States if any of the following conditions exists: (a) Such purchaser is a related person (as defined in [§ 1.993-1(a)(6)](/cfr/26/1.993-1.md?p=a-6)) with respect to the seller and such purchaser ultimately uses such property, or a second product into which such property is incorporated as a component, in the United States. (b) At the time of the sale, there is an agreement or understanding that such property, or a second product into which such property is incorporated as a component, will be ultimately used by the purchaser in the United States. (c) At the time of the sale, a reasonable person would have believed that such property or such second product would be ultimately used by such purchaser in the United States unless, in the case of a sale of components, the fair market value of such components at the time of delivery to the purchaser constitutes less than 20 percent of the fair market value of the second product into which such components are incorporated (determined at the time of completion of the production, manufacture or assembly of such second product). - (iii) **Use in the United States.** For purposes of subdivision (ii) of this subparagraph, property (including components incorporated into a second product) is or would be ultimately used in the United States by such purchaser if, at any time within 3 years after the purchase of such property or components, either such property or components (or the second product into which such components are incorporated) is resold by such purchaser for use by a subsequent purchaser within the United States or such purchaser or subsequent purchaser fails, for any period of 365 consecutive days, to use such property or second product predominantly outside the United States as defined in subdivision (vi) of this subparagraph). - (iv) **Sales to retailers.** For purposes of subdivision (ii)(c) of this subparagraph, property sold to any person whose principal business consists of selling from inventory to retail customers at retail outlets ouside the United States will be considered as property for ultimate use outside the United States. - (v) **Leases of property for ultimate use outside the United States.** For purposes of subdivision (i) of this subparagraph a lessee of property is deemed to use such property ultimately outside the United States during a taxable year of the lessor if such property is used predominantly outside the United States (as defined in subdivision (vi) of this subparagraph) by the lessee during the portion of the lessor's taxable year which is included within the term of the lease. A determination as to whether the ultimate use of leased property satisfies the requirements of this subdivision is made for each taxable year of the lessor. Thus, leased property may be used predominantly outside the United States for a taxable year of the lessor (and thus, constitute export property if the remaining requirements of this section are met) even if the property is not used predominantly outside the United States in earlier taxable years or later taxable years of the lessor. - (vi) **Predominant use outside the United States.** For purposes of this subparagraph, property is used predominantly outside the United States for any period if, during such period, such property is located outside the United States more than 50 percent of the time. An aircraft, railroad rolling stock, vessel, motor vehicle, container, or other property used for transportation purposes in deemed to be used predominantly outside the United States for any period if, during such period, either such property is located outside the United States more than 50 percent of the time or more than 50 percent of the miles traversed in the use of such property are traversed in outside the United States. However, any such property is deemed to be within the United States at all times during which it is engaged in transport between any two points within the United States, except where such transport constitutes uninterrupted international air transportation within the meaning of [section 4262(c)(3)](/cfr/26/4262.md?p=c-3) and the regulations thereunder (relating to tax on air transportation of persons). For purposes of applying [section 4262(c)(3)](/cfr/26/4262.md?p=c-3) to this subdivision, the term “United States” has the same meaning as in [§ 1.993-7](/cfr/26/1.993-7.md). - (vii) **Component.** For purposes of this subparagraph, a component is property which is (or is reasonably expected to be) incorporated into a second product by the purchaser of such component by means of production, manufacture, or assembly. - (e) **Foreign content of property—** - (1) **The 50 percent test.** Under [paragraph (a)(3)](#a-3) of this section, no more than 50 percent of the fair market value of export property may be attributable to the fair market value of articles which were imported into the United States. For purposes of this paragraph, articles imported into the United States are referred to as “foreign content”. The fair market value of the foreign content of export property is computed in accordance with [subparagraph (4)](#e-4) of this paragraph. The fair market value of export property which is sold to a person who is not a related person with respect to the seller is the sale price for such property (not including interest finance or carrying charges, or similar charges) - (2) **Application of 50 percent test.** The 50 percent test described in [subparagraph (1)](#e-1) of this paragraph is applied on an item-by-item basis If, however, a person sells or leases a substantial volume of substantially identical export property in a taxable year and if all of such property contains substantially identical foreign content is substantially the same proportion, such person may determine the portion of foreign content contained in such property on an aggregate basis. - (3) **Parts and services.** If, at the time property is sold or leased the seller or lessor agrees to furnish parts pursuant to a services contract (as provided in [§ 1.993-1(d)(4)(v)](/cfr/26/1.993-1.md?p=d-4-v)) and the price for the parts is not separately stated, the 50 percent test described in [subparagraph (1)](#e-1) of this paragraph is applied on an aggregate basis to the property and parts. If the price for the parts is described in [subparagraph (1)](#e-1) of this paragraph is applied separately to the property and to the parts. - (4) **Computation of foreign content—** - (i) **Valuation.** For purposes of applying the 50 percent test described in [subparagraph (1)](#e-1) of this paragraph, it is necessary to determine the fair market value of all articles which constitute foreign content of the property being tested to determine if it is export property. The fair market value of such imported articles is determined as of the time such articles are imported into the United States. With respect to articles imported into the United States before July 1, 1980, the fair market value of such articles is their appraised value as determined under section 402 or 402a of the Tariff Act of 1930 (19 U.S.C. [1401a](/usc/19/1401a.md) or [1402](/usc/19/1402.md)) in connection with their importation. With respect to articles imported into the United States on or after July 1, 1980, the fair market value of such articles is their appraised value as determined under section 402 of the Tariff Act of 1930 ([19 U.S.C. 1401a](/usc/19/1401a.md)) in connection with their importation. The appraised value of such articles is the full dutiable value of such articles, determined, however, without regard to any special provision in the United States tariff laws which would result in a lower dutiable value. Thus, an article which is imported into the United States is treated as entirely imported even if all or a portion of such article was originally manufactured, produced, grown, or extracted in the United States. - (ii) **Evidence of fair market value.** For purposes of subdivision (i) of this subparagraph, the fair market value of imported articles constituting foreign content may be evidenced by the customs invoice issued on the importation of such articles into the United States. If the holder of such articles is not the importer (or a related person with respect to the importer), the fair market value of such articles may be evidenced by a certificate based upon information contained in the customs invoice and furnished to the holder by the person from whom such articles (or property incorporating such articles) were purchased. If a customs invoice or certificate described in the preceding sentence is not available to a person purchasing property, such person shall establish that no more than 50 percent of the fair market value of such property is attributable to the fair market value of articles which were imported into the United States. - (iii) **Interchangeable component articles.** (a) Where identical or similar component articles can be incorporated interchangeably into property and a person acquires some such component articles that are imported into the United States and other such component articles that are not imported into the United States, the determination whether imported component articles were incorporated in such property as is exported from the United States shall be made on a substitution basis as in the case of the rules relating to drawback accounts under the customs laws. See section 313(b) of the Tariff Act of 1930, as amended ([19 U.S.C. 1313(b)](/usc/19/1313.md?p=b)). (b) The provisions of (a) of this subdivision may be illustrated by the following example: - (f) **Excluded property—** - (1) **In general.** Notwithstanding any other provision of this section, the following property is not export property— - (i) Property described in [subparagraph (2)](#f-2) of this paragraph (relating to property leased to a member of a controlled group), - (ii) Property described in [subparagraph (3)](#f-3) of this paragraph (relating to certain types of intangible property), - (iii) Products described in [paragraph (g)](#g) of this section (relating to depletable products), and - (iv) **Products described in paragraph (h) of this section (relating to certain export controlled products).** - (2) **Property leased to member of controlled group—** - (i) **In general.** Property leased to a person (whether or not a DISC) which is a member of the same controlled group (as defined in [§ 1.993-1(k)](/cfr/26/1.993-1.md?p=k)) as the lessor constitutes export property for any period of time only if during the period— (a) Such property is held for sublease, or is subleased, by such person to a third person for the ultimate use of such third person; (b) Such third person is not a member of the same controlled group; and (c) Such property is used predominantly outside the United States by such third person. - (ii) **Predominant use.** The provisions of [paragraph (d)(4)(vi)](#d-4-vi) of this section apply in determining under subdivision (i)(c) of this subparagraph whether such property is used predominently outside the United States by such third person. - (iii) **Leasing rule.** For purposes of this subparagraph, leased property is deemed to be ultimately used by a member of the same controlled group as the lessor if such property is leased to a person which is not a member of such controlled group but which subleases such property to a person which is a member of such controlled group. Thus, for example, if X, a DISC for the taxable year, leases a movie film to Y, a foreign corporation which is not a member of the same controlled group as X, and Y then subleases the film to persons which are members of such group for showing to the general public, the film is not export property. On the other hand, if X, a DISC for the taxable year, leases a movie film to Z, a foreign corporation which is a member of the same controlled group as X, and Z then subleases the film to Y, another foreign corporation, which is not a member of the same controlled group for showing to the general public, the film is not disqualified under this subparagraph from being export property. - (iv) **Certain copyrights.** With respect to a copyright which is not excluded by [subparagraph (3)](#f-3) of this paragraph from being export property, the ultimate use of such property is the sale or exhibition of such property to the general public. Thus, if A, a DISC for the taxable year, leases recording tapes to B, a foreign corporation which is a member of the same controlled group as A, and if B makes records from the recording tape and sells the records to C, another foreign corporation, which is not a member of the same controlled group, for sale by C to the general public, the recording tape is not disqualified under this subparagraph from being export property, notwithstanding the leasing of the recording tape by A to a member of the same controlled group, since the ultimate use of the tape is the sale of the records (i.e., property produced from the recording tape). - (3) **Intangible property.** Export property does not include any patent, invention, model, design, formula, or process, whether or not patented, or any copyright (other than films, tapes, records, or similar reproductions, for commercial or home use), goodwill, trademark, tradebrand, franchise, or other like property. Although a copyright such as a copyright on a book does not constitute export property, a copyrighted article (such as a book) if not accompanied by a right to reproduce it is export property if the requirements of this section are otherwise satisfied. However, a license of a master recording tape for reproduction outside the United States is not disqualified under this subparagraph from being export property. - (g) **Depletable products—** - (1) **In general.** Under [section 993(c)(2)(C)](/cfr/26/993.md?p=c-2-C), a product or commodity which is a depletable product (as defined in [subparagraph (2)](#g-2) of this paragraph) or contains a depletable product is not export property if— - (i) It is a primary product from oil, gas, coal, or uranium (as described in [subparagraph (3)](#g-3) of this paragraph), or - (ii) It does not qualify as a 50-percent manufactured or processed product (as described in [subparagraph (4)](#g-4) of this paragraph). - (2) **Definition of “depletable product”.** For purposes of this paragraph, the term “depletable product” means any product or commodity of a character with respect to which a deduction for depletion is allowable under section [613](/cfr/26/613.md) or [613A](/cfr/26/613A.md). Thus, the term depletable product includes any mineral extracted from a mine, an oil or gas well, or any other natural deposit, whether or not the DISC or related supplier is allowed a deduction, or is eligible to take a deduction, for depletion with respect to the mineral in computing its taxable income. Thus, for example, iron ore purchased by a DISC from a broker is a depletable product in the hands of the DISC for purposes of this paragraph even though the DISC is not eligible to take a deduction for depletion under section [613](/cfr/26/613.md) or [613A](/cfr/26/613A.md). - (3) **Primary product from oil, gas, coal, or uranium.** A primary product from oil, gas, coal, or uranium is not export property. For purposes of this paragraph— - (i) **Primary product from oil.** The term “primary product from oil” means crude oil and all products derived from the destructive distillation of crude oil, including— (a) Volatile products, (b) Light oils such as motor fuel and kerosene, (c) Distillates such as naphtha, (d) Lubricating oils, (e) Greases and waxes, and (f) Residues such as fuel oil. - (ii) **Primary product from gas.** The term “primary product from gas” means all gas and associated hydrocarbon components from gas wells or oil wells, whether recovered at the lease or upon further processing, including— (a) Natural gas, (b) Condensates, (c) Liquefied petroleum gases such as ethane, propane, and butane, and (d) Liquid products such as natural gasoline. - (iii) **Primary product from coal.** The term “primary product from coal” means coal and all products recovered from the carbonization of coal including— (a) Coke, (b) Coke-oven gas, (c) Gas liquor, (d) Crude light oil, and (e) Coal tar. - (iv) **Primary product from uranium.** The term “primary product from uranium” means uranium ore and uranium concentrates (known in the industry as “yellow cake”), and nuclear fuel materials derived from the refining of uranium ore and uranium concentrates, or produced in a nuclear reaction, including— (a) Uranium hexafluoride, (b) Enriched uranium hexafluoride, (c) Uranium metal, (d) Uranium compounds, such as uranium carbide, (e) Uranium dioxide, and (f) Plutonium fuels. - (v) **Primary products and changing technology.** The primary products from oil, gas, coal, or uranium described in subdivisions (i) through (iv) of this subparagraph and the processes described in those subdivisions are not intended to represent either the only primary products from oil, gas, coal, or uranium, or the only processes from which primary products may be derived under existing and future technologies, such as the gasification and liquefaction of coal. - (vi) **Petrochemicals.** For purposes of this paragraph, petrochemicals are not considered primary products from oil, gas, or coal. - (4) **50-percent manufactured or processed product—** - (i) **In general.** A product or commodity (other than a primary product from oil, gas, coal, or uranium) which is or contains a depletable product is not excluded from the term “export property” by reason of [section 993(c)(2)(C)](/cfr/26/993.md?p=c-2-C) if it is a 50-percent manufactured or processed product. Such a product or commodity is a “50-percent manufactured or processed product” if, after the cutoff point of the depletable product, it is manufactured or processed (as defined in subdivision (ii) of this subparagraph) and either the cost test described in subdivision (iv) of this subparagraph or the fair market value test described in subdivision (v) of this subparagraph is satisfied. To determine cutoff point, see subdivisions (vi) and (vii) of this subparagraph. - (ii) **Manufactured or processed.** A product is manufactured or processed if it is manufactured or produced within the meaning of [paragraph (c)(2)](#c-2) of this section, except that for purposes of this subdivision the term manufacturing or processing does not include any excluded process (as defined in subdivision (iii) of this subparagraph) and the term conversion costs (as used in subdivision (iv) of such [paragraph (c)(2)](#c-2)) does not include any costs attributable to any excluded process. - (iii) **Excluded processes.** For purposes of this paragraph, excluded processes are extracting (i.e., all processes which are applied before the cutoff point of the mineral to which such processes are applied), and handling, packing, packaging, grading, storing, and transporting. - (iv) **Cost test.** A product or commodity will qualify as a 50-percent manufactured or processed product if— (a) Its manufacturing and processing costs (that is, the portion of the cost of goods sold or inventory amount of the product or commodity attributable to the aggregate cost of manufacturing or processing each mineral contained therein) equal or exceed— (b) An amount equal to either of the following: (1) 50 percent of its cost of goods sold or inventory amount (decreased, at the DISC's option, by the portion of such cost or amount the DISC establishes is allocable to the difference between each prior owner's selling price for each depletable product contained in such product or commodity and such prior owner's cost of goods sold with respect thereto). (2) The aggregate of the cost at the cutoff point (see subdivisions (vi) and (vii) of this subparagraph) properly attributable to each mineral contained in such product or commodity. However, if this subdivision (2) is applied, then the amount in (a) of this [subparagraph (iv)](#g-4-iv) shall be decreased and the amount in this subdivision (2) shall be increased, by so much of the cost of goods sold or inventory amount of the product or commodity as is properly allocable to any process other than transportation applied after the cutoff point of such mineral which would be a mining process (within the meaning of [§ 1.613-4](/cfr/26/1.613-4.md)) were it applied before such point. - (v) **Fair market value test.** A product or commodity will qualify as a 50-percent manufactured or processed product if— (a) The excess of its fair market value on the date it is sold, exchanged, or otherwise disposed of (or, if not sold, exchanged, or otherwise disposed of, the last day of the DISC's taxable year) over the portion thereof properly allocable to excluded processes other than extracting is equal to or greater than (b) Twice the aggregate of the fair market value at the cutoff point for each mineral contained in such product or commodity. - (vi) **Cutoff point of a mineral.** For purposes of this subparagraph: (a) The cutoff point is the point at which gross income from the property (within the meaning of [section 613(a)](/cfr/26/613.md?p=a)) was in fact determined. (b) The cost at the cutoff point is deemed to be the amount of the gross income from the property of the taxpayer eligible for a depletion deduction with respect to the mineral. (c) The fair market value at the cutoff point is deemed to be the amount of the gross income from the property of the taxpayer eligible for a depletion deduction with respect to the mineral, except that, if (1) the fair market value of a product or commodity on the date specified in subdivision (v)(a) of this subparagraph exceeds the aggregate of the fair market value at the cutoff point for each mineral contained therein and (2) 10 percent or more of such excess is attributable to a net increase in the fair market values of such minerals by reason of factors other than manufacturing or processing or the application of excluded processes (such as, for example, increases in the fair market values of some minerals by reason of inflation or speculation exceed decreases in such values of other minerals by reason of deflation or speculation), then the aggregate of the fair market value at the cutoff point for each such mineral shall be increased to reflect the net excess so attributable. (d) The provisions of this subdivision (vi) are illustrated by the following example. - (vii) [Reserved] - (viii) **Special rule for certain used products and scrap products.** If a product or commodity is a used 50-percent manufactured or processed product, or is recovered as scrap from a 50-percent manufactured or processed product, such product or commodity will be treated as a 50-percent manufactured or processed product. - (ix) **Special rule for byproducts and waste products.** For purposes of applying the cost test or fair market value test of subdivision (iv) or (v) of this subparagraph if a depletable product is recovered from a manufacturing process as a byproduct or waste product, then the cost and fair market value at the cutoff point are each deemed to be the lesser of— (a) The fair market value of the waste product or byproduct containing the depletable product, determined as of the date the byproduct or waste product is recovered, or (b) The amount the cost at the cut-off point would be for a depletable product of like kind and grade which is extracted, determined as of the date the byproduct or waste product is recovered. - (x) **Proof of satisfaction of 50-percent manufactured or processed test.** (a) No substantiation is required to establish that either the cost test or the fair market value test of subdivisions (iv) or (v) of this subparagraph is satisfied or that a product or commodity qualifies under (viii) of this subdivision as either a used 50-percent manufactured or processed product or as scrap from a 50-percent manufactured or processed product as long as it is reasonably obvious, on the basis of all relevant facts and circumstances, that either the cost test or fair market value test is satisfied, or that the product or commodity qualifies as either as used 50-percent manufactured or processed product or as scrap from a 50-percent manufactured or processed product. Thus, for example, in the case of a DISC exporting a high precision lens at least 50 percent of the fair market value of which is obviously attributable to grinding, no substantiation of gross income from the property properly allocable to the depletable products contained in the lens, cost, or fair market values will be required. (b) In cases in which satisfaction of either the cost test or the fair market value test is not reasonably obvious, a DISC will be required to substantiate the gross income from the property properly allocable to each depletable product in a product or commodity and either all costs or fair market values relied upon the DISC. (c) For purposes of substantiating (1) gross income from the property properly allocable to a depletable product, (2) costs, and (3) fair market values, the DISC and related supplier shall each identify items in (or that were in) inventory in the same manner each used to identify items in inventory for purposes of computing Federal income tax. - (xi) **Application of 50-percent test.** The 50-percent test described in this subparagraph is applied on an item-by-item basis. If, however, a DISC sells a substantial volume of substantially identical products or commodities and if all or a group of such products or commodities contain substantially identical depletable products in substantially the same proportions and have cost or fair market value relationships (as the case may be) that are in substantially the same proportions, such DISC may apply the 50-percent test on an aggregate basis with respect to all such products or commodities, or group, as the case may be. - (5) **Effective dates.** Except as provided in [subparagraph (6)](#g-6) of this paragraph, [section 993(c)(2)(C)](/cfr/26/993.md?p=c-2-C) applies— - (i) With respect to any product or commodity not owned by a DISC, to sales, exchanges, or other dispositions made after March 18, 1975, with respect to which the DISC derives gross receipts. - (ii) **With respect to any product or commodity acquired by a DISC after March 18, 1975.** - (iii) With respect to any product or commodity owned by a DISC on March 18, 1975, to sales, exchanges, or other dispositions made after March 18, 1976, and to owning such product or commodity after such date. - (6) **Fixed contracts.** Section 1101(f) of the Tax Reform Act of 1976 provides an exception to the effective date rules in this paragraph and in [paragraph (h)](#h) of this section. Section 1101(f)(2) of the Act provides that section [993(c)(2)(C)](/cfr/26/993.md?p=c-2-C) and [(D)](/cfr/26/993.md?p=c-2-D) shall not apply to sales, exchanges, and other dispositions made after March 18, 1975, but before March 19, 1980, if they are made pursuant to a fixed contract. [Section 1101(f)(2)](/cfr/26/1101.md?p=f-2) also defines fixed contract. Under that definition, if the seller can vary the price of the product for unspecified cost increases (which could include tax cost increases), or if the quantity of products or commodities to be sold can be increased or decreased under the contract by the seller without penalty, the contract is not to be considered a fixed contract with respect to the amount over which the seller has discretion. For example, if a contract calls for a minimum delivery of x amount of a product but allows the seller to refuse to deliver goods beyond that minimum amount (or allows a renegotiation of the sales price of goods beyond that amount), then with respect to the amount above the minimum the contract is not a fixed quantity contract. - (h) **Export controlled products—** - (1) **In general.** An export controlled product is not export property. A product or commodity may be an export controlled product at one time but not an export controlled product at another time. For purposes of this paragraph, a product or commodity is an “export controlled product” at a particular time if at that time the export of such product or commodity is prohibited or curtailed under section 4(b) of the Export Administration Act of 1969 or section 7(a) of the Export Administration Act of 1979, to effectuate the policy relating to the protection of the domestic economy set forth in such Acts (paragraph (2)(A) of section 3 of the Export Administration Act of 1969 and paragraph (2)(C) of section 3 of the Export Administration Act of 1979). Such policy is to use export controls to the extent necessary “to protect the domestic economy from the excessive drain of scarce materials and to reduce the serious inflationary impact of foreign demand.” - (2) **Products considered export controlled products—** - (i) **In general.** For purposes of this paragraph, an export controlled product is a product or commodity which is subject to short supply export controls under [15 CFR part 377](/cfr/15/part377.md). A product or commodity is considered an export controlled product for the duration of each control period which applies to such product or commodity. A control period of a product or commodity begins on and includes the initial control date (as defined in subdivision (ii) of this subparagraph) and ends on and includes the final control date (as defined in subdivision (iii) of this subparagraph). - (ii) **Initial control date.** The initial control date of a product or commodity which was subject to short supply export controls on March 19, 1975, is March 19, 1975. The initial control date of a product or commodity which is subject to short supply export controls after March 19, 1975, is the effective date stated in the regulations to [15 CFR part 377](/cfr/15/part377.md) which subjects such product or commodity to short supply export controls. If there is no effective date stated in such regulations, the initial control date of such product or commodity is the date on which such regulations are filed for publications in the Federal Register. - (iii) **Final control date.** The final control date of a product or commodity is the effective date stated in the regulations to [15 CFR part 377](/cfr/15/part377.md) which removes such product or commodity from short supply export controls. If there is no effective date stated in such regulations, the final control date of such product or commodity is the date on which such regulations are filed for publication in the Federal Register. - (iv) **Expiration of Export Administration Act.** An initial control date and a final control date cannot occur after the expiration date of the Export Administration Act under the authority of which the short supply export controls were issued. - (3) **Effective dates—** - (i) **Products controlled on March 19, 1975.** Except as provided in [paragraph (g)(6)](#g-6) of this section, if a product or commodity was subject to short supply export controls on March 19, 1975, this paragraph applies— (a) With respect to any such product or commodity not owned by a DISC, to sales, exchanges, other dispositions, or leases made after March 18, 1975, with respect to which the DISC derives gross receipts. (b) With respect to any such product or commodity acquired by a DISC after March 18, 1975, and (c) With respect to any such product or commodity owned by a DISC on March 18, 1975, to sales, exchanges, other dispositions, and leases made after March 18, 1976, and to owning such product or commodity after such date. - (ii) **Products first controlled after March 19, 1975.** If a product or commodity becomes subject to short supply export controls after March 19, 1975, this paragraph applies to sales, exchanges, other dispositions, or leases of such product or commodity made on or after the initial control date of such product or commodity, and to owning such product or commodity on or after such date. - (iii) **Date of sale, exchange, lease, or other disposition.** For purposes of this subparagraph, the date of sale, exchange, or other disposition of a product or commodity is the date as of which title to such product or commodity passes. The date of a lease is the date as of which the lessee takes possession of a product or commodity. The accounting method of a person is not determinative of the date of sale, exchange, other disposition, or lease. - (iv) **Property in short supply.** If the President determines that the supply of any property which is otherwise export property as defined in this section is insufficient to meet the requirements of the domestic economy, he may by Executive order designate such property as in short supply. Any property so designated will be treated as property which is not export property during the period beginning with the date specified in such Executive order and ending with the date specified in an Executive order setting forth the President's determination that such property is no longer in short supply. # §1.993-4. Definition of producer's loans. - (a) **General rule—** - (1) **Definition.** Under [section 993(d)](/cfr/26/993.md?p=d), a loan made by a DISC to a person, referred to in this section as the “borrower,” is a producer's loan if— - (i) The loan is made out of accumulated DISC income within the meaning of [subparagraph (3)](#a-3) of this paragraph. - (ii) **The loan is evidenced by an obligation described in subparagraph (4) of this paragraph.** - (iii) The requirement as to the trade or business of the borrower described in [subparagraph (5)](#a-5) of this paragraph is satisfied. - (iv) At the time the loan is made, the obligation referred to in subdivision (ii) of this subparagraph bears a legend stating “This Obligation Is Designated A Producer's Loan Within The Meaning of section 993(d) of the Internal Revenue Code” or words of substantially the same meaning. - (v) The limitation as to the export-related assets of the borrower described in [paragraph (b)](#b) of this section is satisfied. - (vi) The requirement as to the increased investment of the borrower in export-related assets described in [paragraph (c)](#c) of this section is satisfied, and - (vii) The requirement of [paragraph (d)](#d) of this section as to proof of compliance with paragraphs [(b)](#b) and [(c)](#c) of this section is satisfied. - (2) **Application of this section—** - (i) **In general.** A loan which is a producer's loan is a qualified export asset of the DISC (see § [1.993-2(a)(5)](/cfr/26/1.993-2.md?p=a-5) and [(F)](/cfr/26/1.993-2.md?p=a-F)). The interest on a producer's loan is a qualified export receipt of the DISC (see [§ 1.993-1(g)](/cfr/26/1.993-1.md?p=g)). A producer's loan is not a dividend to a borrower which is also a shareholder of the DISC making the loan. For rules with respect to deemed distributions by reason of the amount of foreign investment attributable to producer's loans, see section [995(b)(1)(G)](/cfr/26/995.md?p=b-1-G) and [(d)](/cfr/26/995.md?p=b-1-d) and the regulations thereunder. - (ii) **No tracing of loan proceeds.** For purposes of applying this section, in order to qualify as a producer's loan, the proceeds of the loan need not be traced to an investment in any specific asset. - (iii) **Unrelated borrower.** For purposes of applying this section, it is not necessary for a borrower to be a related person with respect to the DISC from which it receives a producer's loan, or a member of the same controlled group as the DISC. - (iv) **Unpaid balance of producer's loans.** For purposes of applying this section, the unpaid balance of producer's loans does not include the unpaid balance of any producer's loan to the extent the loan has been deducted or charged off by the DISC as totally or partially worthless under section [165](/cfr/26/165.md) or [166](/cfr/26/166.md). - (v) **Refinancing, renewal, and extension.** For purposes of applying this section, the refinancing, renewal, or extension of a producer's loan shall be treated as the making of a new loan which may qualify as a producer's loan only if the requirements of [subparagraph (1)](#a-1) of this paragraph are met. - (vi) **Events subsequent to time loan is made.** The determination as to whether a loan qualifies as a producer's loan is made on the basis of the relevant facts taken into account for purposes of determining whether the loan was a producer's loan when made. Thus, for example, if the accumulated DISC income of the lender is later reduced below the unpaid balance of all producer's loans previously made by the DISC, such subsequent decrease in the amount of accumulated DISC income will not result in later disqualification of such loan (or part thereof) as a producer's loan. Similarly, if a loan (or part of a loan) does not qualify as a producer's loan because of an insufficient amount of accumulated DISC income at the time the loan is made, a subsequent increase in the amount of accumulated DISC income will not result in later qualification of such loan (or part thereof) as a producer's loan. As a further example, for purposes of applying the borrower's export related assets limitation described in [paragraph (b)](#b) of this section, a loan which qualifies as a producer's loan when made will not later be disqualified if property, the gross receipts from the sale or lease of which were includible in the numerator of the fraction described in [paragraph (b)(3)(i)](#b-3-i) of this section at the time of sale or lease by the borrower, is later characterized as excluded property (as defined in [§ 1.993-3(f)](/cfr/26/1.993-3.md?p=f)). - (vii) **Application of tests under paragraphs (b) and (c) on controlled group bases.** If the borrower is a member of a controlled group (as defined in [§ 1.993-1(k)](/cfr/26/1.993-1.md?p=k)) at the time a loan is made, all amounts that must be determined for purposes of applying the limitation and increased investment requirement with respect to the export-related assets of the borrower (described in paragraphs [(b)](#b) and [(c)](#c), respectively, of this section) may be determined at the election of the borrower by aggregating such amounts for all members of the controlled group, determined for the taxable year of each member of the controlled group during which the loan is made, excluding only such members of the group as are DISC's or foreign corporations for such year. However, such amounts may be included only to the extent that such amounts have not already been taken into account in applying the limitation and increased investment requirement with respect to any other borrower. Amounts to be aggregated for all such members if such election is made include, for example, gross receipts (described in paragraphs [(b)(3)(i)](#b-3-i) and [(ii)](#b-3-ii) of this section) and export-related assets (described in [paragraph (b)(2)](#b-2) of this section). The borrower may make such election by causing its written statement of election to be attached to the lending DISC's return under [section 6011(e)(2)](/cfr/26/6011.md?p=e-2) for the first taxable year of the lending DISC within which or with which the borrower's taxable year for which the election is to apply ends. An election once made is binding on all members of the controlled group which includes the borrower with respect to all taxable years of the borrower beginning with its first taxable year for which the election is made. A borrower who makes such election may revoke it only if it secures the consent of the Commissioner to such revocation upon application made through the lending DISC. - (3) **Loan out of accumulated DISC income—** - (i) **In general.** A loan is a producer's loan only to the extent that it is made out of accumulated DISC income. A loan is made out of accumulated DISC income only if the amount of the loan, when added to the unpaid balance at the time such loan is made of all other producer's loans made by a DISC, does not exceed the amount of accumulated DISC income of the DISC at the beginning of the month in which the loan is made. The amount of accumulated DISC income at the beginning of any month is determined as if the DISC's taxable year closed at the end of the immediately preceding month. - (ii) **Presumption.** A loan made during a taxable year shall be deemed under subdivision (i) of this subparagraph to have been made out of accumulated DISC income if the balance of producer's loans at the beginning of the year and those made during the year do not exceed accumulated DISC income at the end of the year. - (iii) **Deemed distributions.** For purposes of this subparagraph, accumulated DISC income as of the end of any taxable year (or month) shall be determined without regard to deemed distributions under [section 995(b)(1)(G)](/cfr/26/995.md?p=b-1-G) for the amount of foreign investment attributable to producer's loans for such year (or for the taxable year for which such month is a part) but actual distributions shall be taken into account. - (4) **Evidence and terms of obligation.** A loan is a producer's loan only if the loan is evidenced by a note or other evidence of indebtedness which is made by the borrower and which has a stated maturity date not more than 5 years from the date the loan is made. Accordingly, a loan which does not have a stated maturity date or which has a stated maturity date more than 5 years from the date such loan is made can never meet the 5-year requirement of this subparagraph. Thus, for example, even if there is a period of less than 5 years remaining to the stated maturity date of a loan, the loan can never be a producer's loan if it had a stated maturity date more than 5 years from the date it was made. For a further example, if a loan having a period remaining to maturity of 2 years is extended for a further period of 3 years (making a total of 5 years to maturity from the date of the extension), the extension of the loan would under [subparagraph (2)(v)](#a-2-v) of this paragraph constitute the making of a new producer's loan and the original producer's loan would terminate. If, however, a loan having a period remaining to maturity of 2 years is extended for a further period of 4 years (making a total of 6 years to maturity from the date of the extension), the original producer's loan will terminate and the new loan will not be a producer's loan. If a producer's loan is not paid in full at its maturity date and is not formally refinanced, renewed, or extended, such loan shall be deemed to be a new loan which does not have a stated maturity date and, thus, will not be a producer's loan. For purposes of this subparagraph, an evidence of indebtedness is a written instrument of indebtedness. [Section 482](/cfr/26/482.md) and the regulations thereunder are applicable to determine, in the case of a loan by the DISC to a borrower which is owned or controlled directly or indirectly by the same interests as the DISC within the meaning of [section 482](/cfr/26/482.md), whether the interest charged on such loan is at an arm's length rate. - (5) **Borrower's trade or business.** A loan is a producer's loan only if the loan is made to a person engaged in the United States in the manufacture, production, growth, or extraction (within the meaning of [§ 1.993-3(c)](/cfr/26/1.993-3.md?p=c)) of export property determined without regard to § [1.993-3(f)(1)(iii)](/cfr/26/1.993-3.md?p=f-1-iii) and [(iv)](/cfr/26/1.993-3.md?p=f-1-iv). The borrower may also be engaged in other trades or businesses and the loan need not be traceable to specific investments in export property. - (b) **Borrower's export related assets limitation—** - (1) **General rule.** A loan to a borrower is a producer's loan only to the extent that the amount of the loan, when added to the unpaid balance of all other producer's loans made by all DISC's to the borrower which are outstanding at the time the loan is made, does not exceed an amount equal to the amount of the borrower's export-related assets (determined under [subparagraph (2)](#b-2) of this paragraph) multiplied by the fraction set forth in [subparagraph (3)](#b-3) of this paragraph. - (2) **Amount of export-related assets—** - (i) **In general.** For purposes of [subparagraph (1)](#b-1) of this paragraph, the amount of the borrower's export-related assets is the sum of the amounts described in subdivisions (ii), (iii), and (iv) of this subparagraph. - (ii) **Borrower's plant and equipment.** The amount described in this subdivision is the sum of the borrower's adjusted bases (determined as of the beginning of the borrower's taxable year in which a loan is made to it) for plant, machinery, equipment, and supporting production facilities, which are located in the United States. Supporting production facilities are all property used primarily in connection with the manufacture, production, growth, or extraction (within the meaning of [§ 1.993-3(c)](/cfr/26/1.993-3.md?p=c)) or storage, handling, transportation, or assembly of property by the borrower. - (iii) **Borrower's property held primarily for sale or lease.** The amount described in this subdivision is the amount of the borrower's property (at the beginning of the taxable year of the borrower in which a loan is made to it) held primarily for sale or lease to customers in the ordinary course of its trade or business. The amount of such property held for sale is determined under the methods of identifying and valuing inventory normally used by the borrower. The amount of such property held for lease or leased is the borrower's adjusted bases, determined under [section 1011](/cfr/26/1011.md), for such property. - (iv) **Borrower's research and experimental expenditures.** The amount described in this subdivision is the aggregate amount, whether or not charged to capital account, of research and experimental expenditures (within the meaning of [section 174](/cfr/26/174.md)) incurred in the United States by the borrower during each of its taxable years which begin after December 31, 1971, and precede the taxable year in which the loan is made to the borrower. Such research and experimental expenditures need bear no relationship to export property (as defined in [§ 1.993-3](/cfr/26/1.993-3.md)) of the borrower. The aggregate amount of all such expenditures for each of such preceding taxable years is taken into account for purposes of this subparagraph, regardless of whether all or any portion of the aggregate amount has been taken into account with respect to producer's loans made to the borrower by any DISC in preceding taxable years. The aggregate amount of all such expenditures shall include such expenditures of a corporation, the assets of which were acquired by the borrower in a distribution or a transfer described in section [381(a)(1)](/cfr/26/381.md?p=a-1) or [(2)](/cfr/26/381.md?p=a-2) (relating to carryovers in certain corporate acquisitions). - (3) **Fraction referred to in subparagraph (1) of this paragraph—** - (i) **Numerator of fraction.** The numerator of the fraction set forth in this subparagraph is the sum of the borrower's gross receipts for each of its 3 taxable years immediately preceding the taxable year in which the loan is made (but not including any taxable year beginning before January 1, 1972) from the sale or lease of export property (determined without regard to § [1.993-3(f)(1)(iii)](/cfr/26/1.993-3.md?p=f-1-iii) and [(iv)](/cfr/26/1.993-3.md?p=f-1-iv)) which is manufactured, produced, grown, or extracted (within the meaning of [§ 1.993-3(c)](/cfr/26/1.993-3.md?p=c)) by the borrower whether or not sold or leased directly or through a related domestic person (notwithstanding § [1.993-3(a)(4)](/cfr/26/1.993-3.md?p=a-4) and [(f)(2)](/cfr/26/1.993-3.md?p=f-2)). For purposes of the preceding sentence, with respect to a sale or lease to a related DISC in which the transfer price is determined under section [994(a)(1)](/cfr/26/994.md?p=a-1) or [(2)](/cfr/26/994.md?p=a-2), the rules under [§ 1.994-1(c)(5)](/cfr/26/1.994-1.md?p=c-5) (relating to incomplete transactions) shall be applied, and with respect to all other sales and leases the rules under [§ 1.994-1(c)(5)](/cfr/26/1.994-1.md?p=c-5) other than subdivision (i)(d) thereof shall be applied. - (ii) **Denominator of fraction.** The denominator of the fraction set forth in this subparagraph is the sum of the amount included in the numerator and all other gross receipts of the borrower, for each of its taxable years for which gross receipts are included in the numerator of the fraction, from all sales or leases of all property held by the borrower primarily for sale or lease to customers in the ordinary course of its trade or business. For purposes of subdivision (i) of this subparagraph and this subdivision, if such property is sold or leased to a domestic related person which resells or subleases such property, the borrower's gross receipts shall be the gross receipts derived by the domestic related person from the resale or sublease of the export property. - (iii) **Taxable years.** If the borrower has not engaged in the sale or lease of property (as described in this subparagraph) for the 3 immediately preceding taxable years, or if 3 taxable years beginning after December 31, 1971, have not elapsed, the fraction will be computed on the basis of such gross receipts for its taxable years immediately preceding the loan and beginning after December 31, 1971, during which the borrower has so engaged. No producer's loans can be made to a borrower until after the end of the first taxable year of the borrower beginning after December 31, 1971. - (c) **Requirement for increased investment in export-related assets—** - (1) **In general.** A loan to a borrower is a producer's loan only to the extent that the amount of the loan, when added to the unpaid balance of all other producer's loans made by all DISC's to the borrower during the borrower's taxable year during which such loan is made, does not exceed the amount of the borrower's increase for the year in investment in export-related assets. Such increase for any taxable year is the sum of— - (i) The increase (if any) in the borrowers adjusted basis of certain types of assets as determined under [subparagraph (2)](#c-2) of this paragraph and - (ii) The amount (if any) during the year of its research and experimental expenditures as determined under [paragraph (b)(2)(iv)](#b-2-iv) of this section. - (2) **Increase in adjusted basis.** The amount under this subparagraph is the amount (not less than zero) by which— - (i) The borrower's adjusted basis (determined as of the end of its taxable year in which the producer's loan is made) in all of its property which is described in [paragraph (b)(2)(ii)](#b-2-ii) (plant and equipment), and (iii) (property held primarily for sale or lease) of this section, including any such property acquired by it during such taxable year, exceeds - (ii) **Its adjusted bases in all such property (determined as of the beginning of such year).** - (3) **Ordering rule.** If during the borrower's taxable year the amount of increase in investment in export-related assets determined under this subparagraph is exceeded by amounts loaned to the borrower during such year that would otherwise qualify as producer's loans, such loans shall be applied in the order made against the amount of such increase in order to determine which loans qualify as producer's loans. - (d) **Proof of borrower's compliance with paragraphs (b) and (c) of this section.** For purposes of paragraphs [(b)](#b) and [(c)](#c) of this section, a DISC shall be prepared to establish initially the compliance of the borrower with the requirements of such paragraphs by providing the written statement of the borrower, certified by a certified public accountant, stating that the borrower has complied with the limitation and increased investment requirement in section 993(d)(2) and (3) of the Internal Revenue Code of 1954. In lieu of certification by a certified public accountant, the DISC may attach to its return a statement signed by the borrower under penalties of perjury on a form provided by the Internal Revenue Service certifying that the borrower has complied with the limitation and increased investment requirement in section 993(d)(2) and (3) of the Internal Revenue Code of 1954. For taxable years ending after October 17, 1977, the DISC must attach either the certification by the certified public accountant or the certification by the borrower to its return. Additional full substantiation of the borrower's compliance with the requirements of such paragraphs may be required by the district director. If full substantiation of such compliance is not provided by the DISC (or the borrower) when required, the loan shall be deemed not to be a producer's loan. - (e) **Special limitation in the case of domestic film maker—** - (1) **General rule.** The limitation of [paragraph (b)](#b) of this section as to the export-related assets of the borrower will be considered satisfied if the DISC— - (i) Is engaged in the trade or business of selling or leasing films which are export property, or is acting as a commission agent for a person who is so engaged, - (ii) Makes a loan to a borrower which is a domestic film maker (as defined in [subparagraph (5)](#e-5) of this paragraph) for the purpose of making a film, and - (iii) The amount of such loan, when added to the unpaid balance of all other producer's loans made by all DISC's to the borrower which are outstanding at the time the loan is made, does not exceed an amount determined by multiplying— (a) The sum of (1) the amount of the export-related assets of the borrower (determined under [paragraph (b)(2)(i)](#b-2-i) of this section as of the beginning of the borrower's taxable year in which the loan is made), plus (2) the amount of a reasonable estimate of the amount of such export related assets obtained or to be obtained by the borrower during such year and subsequent years with respect to films as to which filming begins within such year by (b) The percentage which, based on the experience of other film makers of similar films for the 5 calendar years preceding the calendar year in which the loan is made, the annual gross receipts (as described in [§ 1.993-6(a)(1)](/cfr/26/1.993-6.md?p=a-1), whether or not such films constitute property described therein) of such other film makers from the sale or lease of such films outside the United States is of the annual gross receipts of such other film makers from all sales or leases of such films. - (2) **Purpose of loan.** A loan by a DISC will be deemed to be for the making of a film if there exists a written agreement between the DISC and the borrower, executed at or before the time the loan is made, stating that the loan is made or to be made to enable the borrower to make such film. - (3) **Reasonable estimate of amounts.** For purposes of subparagraph (1)(iii)(a)(2) of this paragraph, a reasonable estimate shall be based on the conditions known by the DISC and borrower to exist at the time a loan is made (or which the DISC and borrower have reason to know to exist at such time). - (4) **Experience of film makers.** For purposes of subparagraph (1)(iii)(b) of this paragraph, the experience of other film makers of similar films for the 5 calendar years preceding the calendar year in which the loan is made shall be derived from such records and statistics as are acknowledged in the trade as reasonably reliable. - (5) **Domestic film maker.** For purposes of this section, a borrower is a domestic film maker with respect to a film if— - (i) The borrower is a U.S. person within the meaning of [section 7701(a)(30)](/cfr/26/7701.md?p=a-30), except that (a) with respect to a partnership all of the partners must be U.S. persons and (b) with respect to a corporation all of its officers and at least a majority of its directors must be U.S. persons, - (ii) The borrower is engaged in the trade or business of making the film with respect to which the loan is made, - (iii) Each studio, if any, used or to be used for filming or for recording sound incorporated into such film is located in the United States (as defined in [section 7701(a)(9)](/cfr/26/7701.md?p=a-9)), - (iv) At least 80 percent of the aggregate playing time of the film is or will be photographed within the United States (as defined in [section 7701(a)(9)](/cfr/26/7701.md?p=a-9)), and - (v) At least 80 percent of the total amount (not including any amount which is contingent upon receipts or profits of such film and which is fully taxable by the United States) paid or to be paid for services performed in the making of the film is either paid or to be paid to persons who are U.S. persons at the time such services are performed or consists of amounts which are fully taxable by the United States. - (6) **Amounts as fully taxable.** For purposes of [subparagraph (5)(v)](#e-5-v) of this paragraph, an amount is considered fully taxable by the United States if the entire amount is included in gross income under [section 61](/cfr/26/61.md) or is subject to withholding under any provision of U.S. law or treaty to which the U.S. is a party and is not exempt from taxation under any provision of such law or treaty. Where a nonresident alien individual is engaged for the making of a film or where a foreign corporation is engaged to furnish the services of one of its officers or employees for the making of a film, the amount paid such individual or corporation will be considered as fully taxable by the United States only if it meets the test of this subparagraph. # §1.993-5. Definition of related foreign export corporation. - (a) **General rule—** - (1) **Definition.** Under [section 993(e)](/cfr/26/993.md?p=e), a foreign corporation is a related foreign export corporation with respect to a DISC if— - (i) It is a foreign international sales corporation described in [paragraph (b)](#b) of this section, - (ii) It is a real property holding company described in [paragraph (c)](#c) of this section, or - (iii) **It is an associated foreign corporation described in paragraph (d) of this section.** - (2) **Application of this section.** It is necessary to determine whether a foreign corporation is a related foreign export corporation with respect to a DISC for the following two purposes: - (i) **Qualified export assets.** Under [§ 1.993-2(g)](/cfr/26/1.993-2.md?p=g), the stock or securities of a related foreign export corporation held by the DISC are qualified export assets. - (ii) **Qualified export receipts.** Under § [1.993-1 (e)](/cfr/26/1.993-1.md?p=e), [(f)](/cfr/26/1.993-1.md?p=f), and [(g)](/cfr/26/1.993-1.md?p=g), certain receipts of the DISC with respect to stock or securities of a related foreign export corporation held by the DISC are qualified export receipts. - (b) **Foreign international sales corporation—** - (1) **In general.** A foreign corporation is a foreign international sales corporation with respect to a taxable year of a DISC if— - (i) On each day during such taxable year of the DISC on which the foreign corporation has stock issued and outstanding, the DISC owns directly stock of the foreign corporation possessing more than 50 percent of the total combined voting power of all classes of stock of the foreign corporation entitled to vote as determined under the principles of [§ 1.957-1(b)](/cfr/26/1.957-1.md?p=b) (relating to definition of controlled foreign corporation), - (ii) 95 percent or more of such foreign corporation's gross receipts (as defined in [§ 1.993-6](/cfr/26/1.993-6.md)) for its taxable year ending with or within such taxable year of the DISC consists of qualified export receipts described in [§ 1.993-1 (b) through (e)](/cfr/26/1.993-1.md?p=b..e) or interest described in [§ 1.993-1(g)](/cfr/26/1.993-1.md?p=g) derived from any obligations described in § [1.993-2 (d)](/cfr/26/1.993-2.md?p=d) or [(e)](/cfr/26/1.993-2.md?p=e), and - (iii) The sum of the adjusted bases of the assets of the foreign corporation which are qualified export assets described in [§ 1.993-2 (b) through (e)](/cfr/26/1.993-2.md?p=b..e) and which are held by the foreign corporation at the close of its taxable year which ends with or within such taxable year of the DISC equals or exceeds 95 percent of the sum of the adjusted bases of all assets held by the foreign corporation at the close of such taxable year. - (2) **Certain determinations.** The determinations as to whether gross receipts are qualified export receipts described in [subparagraph (1)(ii)](#b-1-ii) of this paragraph and as to whether assets are qualified export assets described in [subparagraph (1)(iii)](#b-1-iii) of this paragraph are made by applying the requirements of §§ [1.993-1](/cfr/26/1.993-1.md) and [1.993-2](/cfr/26/1.993-2.md) to the foreign corporation as if it were a domestic corporation being tested to determine whether it is a DISC. For purposes of making either of such determinations, the principles of accounting applicable for purposes of computing earnings and profits under [§ 1.964-1](/cfr/26/1.964-1.md) (relating to a controlled foreign corporation's earnings and profits) shall apply. - (c) **Real property holding company—** - (1) **In general.** A foreign corporation is a real property holding company with respect to a taxable year of a DISC if— - (i) On each day during such taxable year of the DISC on which the foreign corporation has stock issued and outstanding, the DISC owns directly stock of the foreign corporation possessing more than 50 percent of the total combined voting power of all classes of stock of the foreign corporation entitled to vote as determined under the principles of [§ 1.957-1(b)](/cfr/26/1.957-1.md?p=b) and - (ii) The sole function of the foreign corporation is to hold title to real property situated outside the United States for the exclusive use of the DISC, title to which may not be held by the DISC (and, if the DISC subleases such property to a related supplier, as described in [subparagraph (3)](#c-3) of this paragraph, by such related supplier) under the law of the country in which such property is situated. - (2) **Activities of the foreign corporation.** For purposes of [subparagraph (1)(ii)](#c-1-ii) of this paragraph, a foreign corporation which holds title to real property situated outside the United States may also perform activities with respect to such property (such as management, maintenance, and payment of taxes) which are ancillary to its function of holding title to such property. - (3) **Exclusive use by the DISC.** Real property held by the foreign corporation must be used exclusively by the DISC whether under a lease or any other arrangement. Real property is not so used by the DISC if the DISC subleases such property to any other person. If, however, during a taxable year of the DISC— - (i) 90 percent or more of the qualified export receipts of the DISC for such year are derived from transactions with respect to which it is a commission agent for a related supplier (as defined in [§ 1.994-1(a)(3)(ii)](/cfr/26/1.994-1.md?p=a-3-ii)), and - (ii) The DISC subleases such property to such related supplier - (d) **Associated foreign corporation—** - (1) **In general.** A foreign corporation is an associated foreign corporation with respect to a taxable year of the DISC if— - (i) On each day during such taxable year of the DISC on which the foreign corporation has stock issued and outstanding, the DISC, or one or more members of the same controlled group of corporations (as defined in [subparagraph (2)](#d-2) of this paragraph) as the DISC, owns (within the meaning of section [1563 (d)](/cfr/26/1563.md?p=d) and [(e)](/cfr/26/1563.md?p=e)) stock of the foreign corporation possessing less than 10 percent of the total combined voting power of all classes of stock of the foreign corporation entitled to vote, as determined under the principles of [§ 1.957-1(b)](/cfr/26/1.957-1.md?p=b), or owns no stock of such corporation, and - (ii) The ownership of stock, or of securities (as defined in [§ 1.993-2(g)](/cfr/26/1.993-2.md?p=g)), of the foreign corporation by the DISC or by one or more members of such controlled group of corporations reasonably furthers a transaction or transactions giving rise to qualified export receipts for the DISC. - (2) **Controlled group of corporations.** For purposes of this paragraph, the term “controlled group of corporations” has the same meaning assigned to the term in [section 1563(a)](/cfr/26/1563.md?p=a) and not [section 993(a)(3)](/cfr/26/993.md?p=a-3) and [§ 1.993-1(k)](/cfr/26/1.993-1.md?p=k). Thus, for purposes of this paragraph, the test of control is 80 percent control and, since the rules of [section 1563(b)](/cfr/26/1563.md?p=b) apply, only domestic members are considered to be members of the controlled group. - (3) **Furtherance of qualified export receipts.** Ownership of stock or securities of a foreign corporation will be considered as reasonably furthering a transaction or transactions giving rise to qualified export receipts for a DISC if— - (i) The ownership is necessary to obtain or maintain the foreign corporation as a customer of the DISC or of a related supplier, as defined in [§ 1.994-1(a)(3)(ii)](/cfr/26/1.994-1.md?p=a-3-ii) of the DISC or to aid the sales distribution system of the DISC or of such related supplier, and - (ii) The amount of the investment in the foreign corporation bears a reasonable relationship to the amount of the DISC's annual net profit from transactions in its trade or business which it may reasonably expect to derive on account of such ownership. # §1.993-6. Definition of gross receipts. - (a) **General rule.** Under [section 993(f)](/cfr/26/993.md?p=f), for purposes of [sections 991 through 996](/cfr/26/991..996.md), the gross receipts of a person for a taxable year are— - (1) The total amounts received or accrued by the person from the sale or lease of property held primarily for sale or lease in the ordinary course of a trade or business, and - (2) **Gross income recognized from all other sources, such as, for example, from—** - (i) The furnishing of services (whether or not related to the sale or lease of property described in [subparagraph (1)](#a-1) of this paragraph), - (ii) Dividends and interest, - (iii) The sale at a gain of any property not described in [subparagraph (1)](#a-1) of this paragraph, and - (iv) **Commission transactions as and to the extent described in paragraph (e) of this section.** - (b) **Nongross receipts items.** For purposes of [paragraph (a)](#a) of this section, gross receipts do not include amounts received or accrued by a person from— - (1) The proceeds of a loan or of the repayment of a loan, or - (2) A receipt of property in a transaction to which [section 118](/cfr/26/118.md) (relating to contribution to capital) or 1032 (relating to exchange of stock for property) applies. - (c) **Nonreduction of total amounts.** For purposes of [paragraph (a)](#a) of this section, the total amounts received or accrued by a person are not reduced by returns and allowances, costs of goods sold, expenses, losses, a deduction for dividends received under [section 243](/cfr/26/243.md), or any other deductible amounts. - (d) **Method of accounting.** For purposes of [paragraph (a)](#a) of this section, the total amounts received or accrued by a person shall be determined under the method of accounting used in computing its taxable income. If, for example, a DISC receives advance or installment payments for the sale or lease of property described in [paragraph (a)(1)](#a-1) of this section, for the furnishing of services, or which represent recognized gain from the sale of property not described in [paragraph (a)(1)](#a-1) of this section, any amount of such advance payments is considered to be gross receipts of the DISC for the taxable year for which such amount is included in the gross income of the DISC. - (e) **Commission transactions.** - (1) In the case of transactions which give rise to a commission on the sale or lease of property or the furnishing of services by a principal, the amount recognized by the commission agent as gross income from all such transactions shall be the gross receipts derived by the principal from the sale or lease of the property, or the gross income derived by the principal from the furnishing of services, with respect to which the commissions are derived. In the case of a commission agent for a related supplier (as defined in [§ 1.994-1(a)(3)(ii)](/cfr/26/1.994-1.md?p=a-3-ii)), the gross receipts or gross income of such agent shall be determined as if it used the same method of accounting as its related supplier. In the case of a commission agent for a principal other than a related supplier, the gross receipts or gross income of such principal shall be determined as if such principal used the same method of accounting as its agent. - (2) If the commission arrangement provides that the commission agent will receive a commission only with respect to sales or leases of export property, or the furnishing of services, which result in qualified export receipts, the commission agent will not take into account the gross receipts or gross income, as the case may be, derived by the principal from any transaction for which the commission agent would not be entitled to a commission under the commission arrangement. - (f) **Example.** The provisions of this section may be illustrated by the following example: