[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: 26CFR1.927(b)-1T] [Page 117-118] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.927(b)-1T Temporary regulations; Definition of gross receipts. (a) General rule. Under section 927(b), for purposes of sections 921 through 927, the gross receipts of a person for a taxable year are-- (1) Business income. 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) Other income. Gross income recognized from whatever source derived, such as, for example, from-- (i) The furnishing of services (whether or not related to the sale or lease of property described in subdivision (1) of this paragraph), (ii) Dividends and interest (including tax exempt interest), (iii) The sale at a gain of any property not described in subdivision (1) of this paragraph, and (iv) Commission transactions to the extent described in paragraph (e) of this section. (b) Non-gross receipts items. For purposes of paragraph (a) of this section, gross receipts do not include amounts received or accrued by a person from-- (1) Loan transactions. The proceeds of a loan or of the repayment of a loan, or (2) Non-taxable transactions. A receipt of property in a transaction to which section 118 (relating to contribution to capital) or section 1032 (relating to exchange of stock for property) applies. (c) Non-reduction of total amounts. For purposes of paragraph (a) of this section, the total amounts received or accrued by a person are not reduced by costs of goods sold, expenses, losses, a deduction for dividends received, or any other deductible amounts. The total amounts received or accrued by a person are reduced by returns and allowances. (d) Method of accounting. For purposes of paragraph (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 FSC receives advance or installment payments for the sale or lease of property described in paragraph (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) of this section, any amount of such advance payments is considered to be gross receipts of the FSC for the taxable year for which such amount is included in the gross income of the FSC. (e) Commission transactions--(1) In general--(i) With a related supplier. In the case of transactions which give rise to a commission from the FSC's related supplier on the sale or lease of property or the furnishing of services by a principal, the FSC's gross income from all such transactions is the commission paid or payable to the FSC by the related supplier. The FSC's gross receipts for purposes of computing its profit under the administrative pricing methods of section 925(a)(1) and (2) shall be the gross receipts (other than gross receipts which would not be foreign trading gross receipts had they been received by the FSC) derived by the related supplier from the sale or lease of the property or from the furnishing of services, with respect to which the commissions are derived. Also, in determining whether the 50% test in section 924(a) has been met, the relevant gross receipts are the gross receipts of the related supplier. (ii) With an unrelated principal. In the case of transactions which give rise to a commission from an unrelated principal to a FSC on the sale or lease of property or the furnishing of services by a principal, the amount recognized by the FSC as gross income from all such transactions shall be the commission received from the principal. (2) Selective commission arrangements--(i) In general. A commission arrangement between the FSC and its related supplier may provide that the FSC will not be the related supplier's commission agent with respect to sales or leases of export property, or the furnishing of services, which do not result [[Page 118]] in foreign trading gross receipts. In addition, the commission agreement may provide that the FSC will not be the related supplier's commission agent on transactions which would result in a loss to the related supplier under the transfer pricing rules of section 925(a). In a buy- sell FSC situation, selective commission arrangements are not applicable. Determination of which transactions fall within the selective commission arrangement may be made up to the due date under section 6072(b), including extensions provided for under section 6081, of the FSC's income tax return for the taxable year of the FSC during which a transaction occurs. (ii) Example. The treatment of a selective commission arrangement may be illustrated by the following example: Example. A calendar year commission FSC (``F'') entered into a selective commission arrangement with related supplier RS which provided that F will not be RS's commission agent on transactions which would result in a loss to RS under the transfer pricing rules of section 925(a). During 1987, RS sold three different articles of export property A, B and C, all of which fall within the same three digit Standard Industrial Classification. In July of 1988, while preparing the FSC's 1987 income tax return, RS determined that the sale of export property A resulted in a loss to RS under the section 482 method of section 925(a)(3) and that applying that method to the sales of export property B and C resulted in only a small amount of income to both RS and F. In addition, RS determined that grouping export property B and C, while excluding export property A from the grouping, resulted in the highest profit to F under the combined taxable income administrative pricing method of section 925(a)(2). Using the same grouping, the gross receipts method of section 925(a)(1) would result in a lower profit to F. Under the special no-loss rule of Sec. 1.925(a)-1T(e)(1)(iii), RS would be prohibited from using the combined taxable income administrative pricing method to determine F's profit for the grouping of export property B and C if it used the section 482 method on the sale of export property A. This results because there was a loss to RS on the sale of export property A. Under the selective commission arrangement, RS could exercise its option and exclude the sale of export property A. Since F is no longer deemed to have been operating as RS's commission agent on that sale, the combined taxable income method may be used to compute F's profit on the grouping of the sales of export property B and C. (f) Example. The definition of gross receipts under this section may be illustrated by the following example: Example. During 1985, M, a related supplier of N, is engaged in the manufacture of machines in the United States. N, a calendar year FSC, is engaged in the sale and lease of such machines in foreign countries. N furnishes services which are related and subsidiary to its sale and lease of those machines. N also acts as a commission agent in foreign countries for Z, an unrelated supplier, with respect to Z's sale of products. N receives dividends on stock owned by it, interest on loans, and proceeds from sales of business assets located outside the United States resulting in recognized gains and losses. N's gross receipts for 1985 are $3,550, computed on the basis of the additional facts assumed in the table below: N's sales receipts for machines manufactured by M (without $1,500 reduction for cost of goods sold and selling expenses)....... N's lease receipts for machines manufactured by M (without 500 reduction for depreciation and leasing expenses)............. N's gross income from related and subsidiary services for 400 machines manufactured by M (without reduction for service expenses).................................................... N's sales receipts for products manufactured by Z (without 550 reduction for Z's cost of goods sold, commissions on sales and commission sales expenses)............................... Dividends received by N....................................... 150 Interest received by N........................................ 200 Proceeds received by N representing recognized gain (but not 250 losses) for sales of business assets located outside the United States................................................ --------- N's gross receipts............................................ 3,550 ========= [T.D. 8126, 52 FR 6464, Mar. 3, 1987]