1. International Tax Committee 6/22/17
IC-DISC Planning
International Tax Committee
6/22/17

2. IC-DISC Summary
Explore the Interest Charge Domestic International Sales Corporation (IC-DISC) benefit for qualified manufacturers and distributors
Understand restrictions and compliance requirements that apply to IC-DISCs
Discuss the availability of qualified dividends on the IC-DISC benefit
Discuss recent court guidance on the use of Roth IRAs to own IC-DISC stock

3. Taxation of IC-DISCs The IC-DISC entity is tax exempt
Shareholders are taxed on dividends
Actually paid
In certain cases, on deemed dividends
Dividends are qualified dividends taxed at 15%/20% (plus 3.8% NIIT)
Shareholders must pay an interest charge on undistributed DISC income
Recent rate of % (just over ½ of 1%)

4. IC-DISC Structure
Operating company (Supplier) sets up domestic corporation (IC-DISC)
Sales of export property generate earnings to DISC, paid pursuant to the “Supplier’s Agreement”
Shareholders of the DISC are typically the same as the operating company, or the Supplier itself

5. Intercompany Pricing
4% of qualified export receipts on the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses 50% of the IC-DISC's and the seller's combined taxable income from qualified export receipts on the property, derived from the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses, or
Taxable income based on the sale price actually charged, provided that under section 482 the price actually charged clearly reflects the taxable income of the IC-DISC and the related person.

6. Intercompany Pricing 4% and 50/50 methods are safe harbor methods
Sec. 482 method is generally only available to an IC-DISC that is an operating entity
Consideration must be given to the “no loss rule”

7. Qualified Export Property (EP)
Use Test
Made/grown/extracted in the US by other than the IC-DISC
Destination Test
For sale, lease or disposition outside the United States
Must be delivered outside of the US within 12 months of the date of sale
Not more than 50% of the FMV of the EP is attributable to articles imported into the United States

8. Qualified Export Receipts (QER)
95% of DISC receipts must relate to sale or lease of EP
Also includes architectural services for building plans to be constructed outside of the United States, whether services are performed here or abroad.
Excluded Receipts
Sales for ultimate use inside the US

9. Qualified Export Assets (QEA)
95% of DISC assets must be QEA
Working capital
Inventory
Supplier receivables / Accounts receivable
Producer’s loans
Certain other assets
EX/IM Paper
Funds awaiting investment

10. Beyond Dividends - Producer’s Loans
Limited to accumulated IC-DISC income at the start of the month in which loan is made.
Note must carry a stated maturity date of not more than 5 years
Be made to a producer of Export Property

11. Recent Guidance - Roth IRAs
Summa Holdings, Inc. v. Commissioner, 848 F.3d 779
Funds in two newly created Roth IRAs used to contribute to a newly formed IC-DISC in exchange for shares
Subsequently a newly formed holding company acquired the shares in the IC-DISC from the Roth IRAs
Each Roth owned 50% of the holding company, which owned 100% of the IC-DISC

12. Recent Guidance - Roth IRAs
IRS is challenging this type of structure as abusive
Tax Court held that transferring funds from an IC-DISC to a Roth IRA circumvented the limitations on contributions to a Roth IRA
6th Circuit reversed and held for taxpayers.
Similar cases are at issue in other circuits