[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.923-1T]

[Page 50-51]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.923-1T  Temporary regulations; exempt foreign trade income.

    (a) Foreign trade income. Foreign trade income of a FSC is the FSC's 
gross income attributable to its foreign trading gross receipts. (Any 
further reference to a FSC in this section shall include a small FSC 
unless indicated otherwise.) If the FSC is the principal on the sale of 
export property which it purchased from a related supplier, the FSC's 
gross income is determined by subtracting from its foreign trading gross 
receipts the transfer price determined under the transfer pricing 
methods of section 925(a). If the FSC is the commission agent on the 
sale of export property by its related supplier, the FSC's gross income 
is the commission paid or payable by the related supplier to the FSC 
with respect to the transactions that would have generated foreign 
trading gross receipts had the FSC been the principal on the 
transaction. See Sec. 1.925(a)-1T(f) Examples 1 and 6 for illustrations 
of the computation of a FSC's foreign trade income, exempt foreign trade 
income and taxable income.
    (b) Exempt foreign trade income--(1) Determination. (i) If a FSC 
uses either of the two administrative pricing rules, provided for by 
sections 925(a)(1) and (2), to determine its income from a transaction, 
or group of transactions, to which section 925 applies (see Sec. 
1.925(a)-1T(b)(2) (ii) and (iii)), 15/23 of the foreign trade income 
that it earns from the transaction, or group of transactions, will be 
exempt foreign trade income. If a FSC has a non-corporate shareholder 
(shareholders), 16/23 of its foreign trade income attributable to the 
noncorporate shareholder's (shareholders') proportionate interest in the 
FSC will be exempt foreign trade income. See section 291(a)(4).
    (ii) If a FSC does not use the administrative pricing rules to 
determine its income from a transaction, or group of transactions, which 
gives rise to foreign trade income, 30 percent of its foreign trade 
income will be exempt foreign trade income. If a FSC has a non-corporate 
shareholder (shareholders), 32 percent of its foreign trade income 
attributable to the non-corporate shareholder's (shareholders') 
proportionate interest in the FSC will be exempt foreign trade income. 
See section 291(a)(4).
    (iii) Exempt foreign trade income so determined under subdivisions 
(1)(i) and (ii) of this paragraph is treated as foreign source income 
which is not effectively connected with the conduct of a trade or 
business within the United States. See section 921(a).
    (2) Special rule for foreign trade income allocable to a qualified 
cooperative. (i) Pursuant to section 923(a)(4), if a qualified 
cooperative is a shareholder of a FSC, the FSC's non-exempt foreign 
trade income determined by use of either of the administrative pricing 
methods of section 925(a)(1) or (2) which is allocable to the marketing 
of agricultural or horticultural products, or the providing of related 
services, for any taxable year will be treated as exempt foreign trade 
income to the extent that it is distributed to the qualified cooperative 
shareholder. A qualified cooperative is defined as any organization to 
which chapter 1, subchapter T, part 1 of the Code applies. See section 
1381(a).
    (ii) This special rule of section 923(a)(4) shall apply only if the 
distribution is made before the due date under section 6072(b), 
including extensions, for filing the FSC's income tax return for that 
year. Any distribution which satisfies this requirement will be treated 
as made on the last day of the FSC's taxable year. In addition, this 
special rule shall apply only if the income of the cooperative is based 
on arm's length transactions between the

[[Page 51]]

cooperative and its members or patrons.
    (iii) Income attributable to the marketing of agricultural or 
horticultural products, or the providing of related services, shall be 
allocated to the FSC shareholders on a per share basis. See Sec. 
1.926(a)-1T(b) for ordering rules for distributions from a FSC.
    (3) Special rule for military property. (i) Under section 923(a)(5), 
the exempt foreign trade income of a FSC relating to the disposition of, 
or services relating to, military property shall be equal to 50 percent 
of the amount which, but for section 923(a)(5), would be treated as 
exempt foreign trade income under section 923(a)(2) or (3). The foreign 
trade income no longer treated as exempt because of this special rule of 
section 923(a)(5) will remain income of the FSC and will be treated as 
non-exempt foreign trade income.
    (ii) The term ``military property'' is defined in section 
995(b)(3)(B) and includes any property which is an arm, ammunition, or 
implement of war designated in the munitions list published pursuant to 
section 38 of the International Security Assistance and Arms Export 
Control Act of 1976 (22 U.S.C. 2778) (which repealed and replaced the 
Military Security Act of 1954).

[T.D. 8126, 52 FR 6438, Mar. 3, 1987]