Taxation

• Author: International Law Group

Congress created the Domestic International Sales Corporation (DISC) program established by the Revenue Act of 1971 [Pub. Law 92- 178, 85 Stat. 497] to increase exports by providing tax incentives for selling products abroad. [The main benefit is a tax deferral on otherwise immediately taxable net income.] A corporation that qualifies as a DISC does not pay federal income tax. Instead, a portion of the DISC's taxable income earned from sales of "export property" is deemed distributed to (and taxable to) the DISC shareholders in the taxable year in which the income was earned by the DISC. The remainder of the taxable income earned by the DISC from exports is generally not taxable until distributed by the DISC, the DISC stock is sold, or the corporation ceases to qualify as a DISC.

The Tax Reform Act of 1984 greatly narrowed the DISC program and largely replaced it by the so-called "Foreign Sales Corporation." [The latter notion is the subject of controversy between the U.S. and the European Union before the World Trade Organization (WTO). The WTO considered the tax benefits improper export subsidies, and the U.S. and the EU are cooperating in finding a mutually acceptable solution. See 2000 International Law Update 162.]

General Electric Company (GE) manufactures, among other things, aircraft engines and thrust reversers. In this case, GE claimed DISC tax benefits for the years 1979 and 1980 for aircraft engines and thrust reversers that GE sold to Boeing Aircraft, Inc. and to McDonnell Douglas Corporation (MDC). These manufacturers attached these products to their airframes for export. GE claimed DISC tax benefits based on the exportation of the engines.

The Tax Court ruled that the engines did not constitute "export property" under the Act. They were not distinct export products, but merely a part of the aircraft itself. Thus, GE was...