This document provides an overview of an IC-DISC (Interest Charge Domestic International Sales Corporation) strategy session. The session began at 2:00 pm Eastern Time and covered IC-DISC benefits, qualifications, and operations. Speakers discussed how an IC-DISC can increase a company's after-tax cash flow by taking advantage of a 15% tax rate on dividends from qualified export sales. The session included examples of how to calculate IC-DISC commissions and addressed technical questions from participants.

1. Taking advantage of IC-DISC opportunitiesToday's session begins at 2:00 p.m. (Eastern) / 11:00 a.m. (Pacific)To receive 1.0 hours of CPE, you must individually participate by remaining logged in for the entire session and responding to all polling questionsFor technical support, please contact LearnLive at:E-mail - gt_support@learnlivetech.comPhone - 888.228.0988 Video Audio Slides

2. Awarding CPE for this session If you experience any technical difficulties, please contact 888.228.0988 or gt_support@learnlivetech.com

3. We will address questions in Q & A at the end of the program. Please type in your questions at any time. If you experience any technical difficulties, please contact 888.228.0988 or gt_support@learnlivetech.com Addressing your questionsDownloading presentation materials Download presentation materials from the Handouts Tab. 3

4. Leading today’s discussion Michael Reeves Sr. Manager,International Tax Boston Randy Free Partner, International Tax Practice Leader Irvine Jim Loizeaux Director,International Tax Minneapolis

6. After repeal of ETI exclusion, the IC-DISC is the only option available to obtain export tax benefits—IC-DISC has existed since the '70s and not been challenged by courts or WTO.

8. IC-DISC benefits Foreign trading gross receipts 10,000,000 Cost of goods sold (8,000,000) Gross Margin 2,000,000 Selling, general and administrative costs (1,500,000) Export sales net income 500,000 IC-DISC commission (greater of): 50% of export net income 250,000 4% of export gross receipts 400,000 IC-DISC commission 400,000 Federal tax savings (35%) 140,000 IC-DISC Dividend 400,000 Federal tax cost (15%) (60,000) IC-DISC net tax savings 80,000

9. Background and overview Benefit computation Advanced topics Questions and answers Today's agenda We will address questions in Q & A at the end of the program. Please type in your questions at any time. 8

10. DISC is exempt from income tax A DISC is exempt not only from the regular corporate income tax but also is exempt from the minimum tax on tax preferences and the accumulated earnings tax.

11. Question 1 Who was President of the United States when the IC-DISC entity was created by the Deficit Reduction Act? Ronald Reagan Bill Clinton Gerald Ford 10

12. Qualifying as a DISC To qualify as a DISC for a tax year the corporation must meet all of the following requirements for that tax year: Be an eligible corporation Be an actual corporation Meet the qualified gross receipts test Meet the qualified export assets test Have one class of stock Make a timely election A DISC cannot be a member of any controlled group of which a FSC is a member.

13. These corporations cannot be DISCs The following corporations are not eligible to be treated as a DISC: Tax exempt corporation Personal holding companies Banks and trust companies Insurance companies Regulated investment companies (mutual funds) S corporations

14. No restriction on who can be a DISC stockholder The law contains no restrictions on who can be a DISC stockholder. DISC stockholders can include: Corporation Tenants in Common Partnership Joint Tenants Estate Tenants by the Entirety Trust Minor Husband and Wife Foreign Person

15. Actual corporation The corporation must be incorporated under the laws of a state (any state) or the District of Columbia. The separate incorporation of a DISC is required by statute, but this does not necessitate in all other respects the separate relationships which otherwise would exist between a parent corporation and its subsidiary.

17. One class of stock The corporation must have only one class of stock, and the par or stated value of its outstanding stock must be at least $2,500 on each day of the tax year.

18. Making timely election to be treated as DISC The corporation must make a timely election to be treated as a DISC and that election must be in effect for the tax year.

19. When to elect For a corporation’s first tax year, elect within 90 days after the beginning of the year. For any other year, elect during the 90 day period just before the first day of the year the election is to apply.

20. How to elect The corporation files Form 4876-A with the service center with which it would file an income tax return if it were subject to income tax. Consents of each person who is a shareholder as of the beginning of the first tax year for which the election is effective are to be or attached to the form.

21. DISC accounting methods A DISC generally may choose any permissible method of accounting. But if a DISC is a member of a controlled group it may not choose a method of accounting which would result in a material distortion of the income of the DISC or any other member of the controlled group. These are examples of what IRS considers a material distortion of income: a DISC uses the cash basis and acts as a commission agent in a substantial volume of sales of property by a related corporation which is on the accrual basis and which customarily pays commissions to the DISC more than two months after the sales. a DISC uses the accrual basis and leases a substantial amount of property from a related corporation on the cash basis, and the DISC customarily accrues any part of the rent more than two months before the rent is paid.

22. DISC accounting periods The tax year of a DISC must be the tax year of that shareholder (or group of shareholders with the same 12-month tax year) who has the highest percentage of voting power. If two or more shareholders (or group of shareholders) have the highest percentage of voting power under the above rule, the tax year of the DISC is the same 12-month period as that of any such shareholder (or group).

24. 4% of gross receipts method

25. Commission cannot exceed sum of 4% of qualified export receipts of IC-DISC plus 10% of export promotion expenses

26. 50% of combined taxable income method

27. Commission cannot exceed 50% of the combined taxable income of supplier and IC-DISC plus 10% of export promotion expenses

29. A sale of property to an American manufacturer for incorporation in a product to be exported isn’t an export sale.

31. Whether property is held for export The destination test (for use, etc., outside the US) is generally considered satisfied if: The DISC delivers the property to a carrier or freight forwarder for delivery outside the US, regardless of the FOB point or place of passage of title, whether to a US or foreign purchaser and whether for use of the purchaser or for resale; or The sale is to an unrelated DISC for such a purpose, whether delivery is to be made in the US or at a foreign destination, or

32. Rental, etc. of export property Qualified export receipts include gross receipts from the leasing or rental of export property which is used by the lessee of the property outside the US. This includes receipts from subleasing. Whether leased property satisfied the usage test is to be determined on a year-to-year basis. Thus, the receipts on a lease of export property might qualify in some years and not in others depending on the lessee’s use of property in the year involved. But a de minimus use of the property in the US is permissible.

33. Services related to the sales and lease of export property Qualified export receipts include gross receipts for services which are both (1) related and (2) subsidiary to any sale, exchange, lease, rental or other disposition of export property by the corporation. Such services may be performed within or without the US. The DISC need not itself perform the services.

34. Services related to the sales and lease of export property Examples of related services include: Warranty Maintenance Repair Installation Transportation, including insurance, provided its cost is included in the sale price or rental, or, if separately stated, is paid by the DISC or its principal.

35. Engineering or architectural services Qualified export receipts include gross receipts for engineering or architectural services for construction projects located (or proposed for location) outside the US. These services include feasibility studies and design, engineering and construction supervision. They do not include the provision of technical assistance or know-how or services connected with the exploration for oil.

36. Qualified export assets defined Qualified export assets include the following: Export property Export property assets Accounts receivable, etc. Temporary investments of working capital Producer’s loans Stock or securities in a related foreign export corporation Export-Import Bank and Foreign Credit Insurance Association obligations Export sales finance obligations Temporary bank deposits in US

38. Employee/shareholders could choose to reduce their salary from C-Corp and increase dividend from IC-DISC

39. Commission agreement between supplier and IC-DISC must be executed with assistance from Counsel

40. Separate bank account and books and records must be maintained

41. Annual financial statements (I/S & B/S) must be prepared

43. Question 2 According to the Statistics of Income Bulletin, the most common type of majority shareholder of the 1,209 IC-DISC returns filed in 2006 was Corporations (except S-Corporations) Individuals, partnerships, trusts, estates or S-Corporations No majority shareholder 34

44. The IC-DISC Benefit An IC-DISC may act as either a buy-sell or commission-based entity. In either case, the income of an IC-DISC is calculated under one of the following: 4% of qualified export receipts, 50% of combined taxable income, or Arm's length amount determined under the principles of Code section 482. 35

48. Maximizing the IC-DISC Commission An exporter can use any of the methods to achieve the greatest IC-DISC income. IC-DISC rules permit the use of different methods to different groups based on product lines, industry or trade usage, or by transaction. Where the net pre-tax margins of export sales are lower than worldwide net pre-tax margins, the exporter may use marginal costing of combined taxable income to compute IC-DISC income. 39

49. Grouping AB Company Groupings must conform to recognized industry usage or SIC/NAICS codes. May use grouping for one product line and transaction-by-transaction for another product line. A Product Line B Product Line A Transaction A Transaction B Transaction 40

50. Grouping Example

51. Marginal Costing If the profit margin on export sales is less than the profit margin on worldwide sales of the same product, the marginal costing rules may be applied to allocate only marginal or variable costs against export receipts. Overall profit percentage limitation (OPP) limits export CTI to full costing CTI from all sales (foreign and domestic). 42

52. Marginal Costing Example

53. Expense Allocation and Apportionment When using the CTI method, overhead costs are generally allocated between export and domestic sales, based on the rules under Treasury Reg. Sec. 1.861-8. 44

54. Transaction-by-Transaction The pricing method chosen is required on a transaction-by-transaction basis; however, an annual election can be made to group transactions in accordance with products or product lines. Neither the gross receipts nor CTI method may be applied in a way that causes, in any taxable year, a loss the U.S. exporter (related supplier). 45

55. Documentation Source Data (Sales and Cost of Sales) Support Product Hierarchy and Support Expense Allocation & Apportionment Methodology Transactional Analysis Qualified Export Sales (U.S. Manufactured, Non-U.S. Destination and 50% Content) Pricing Method Reports Form 1120-IC-DISC 46

56. Question 3 IC‐DISC shareholders pays an “Interest Charge” to the IRS when DISC earnings are accumulated and not distributed. The interest charge rate is the Base Period T-Bill rate published annually by the IRS. What is the current rate? 20% zero .34 percent 47

57. Background and overview Benefit computation Advanced topics Questions and answers Today's agenda 48

58. Advanced Topics Roth IRA Executive Compensation Sourcing (Passive) Transaction-by-Transaction Producer's Loans IC-DISC and 863(b) Shared DISCs 49

59. Executive Compensation IC-DISC ownership is set up through key employees. Owner Employee C-Corp IC-DISC Commission 50

60. Sourcing Benefits IC-DISC dividends are considered foreign sourced income to U.S. owners IC-DISC dividends are categorized into the passive basket Can use IC-DISC to increase the ability to utilize tax credits in the passive basket Title passage FISC income 51

61. Transaction-by-Transaction May significantly increase IC-DISC benefit Compared to aggregate Requires advanced software applications Iteration of alternative groupings and marginal costing analyses Redetermination of open years Documentation 52

62. Producer's Loans Producer's loans are a category of qualified export assets which permits a DISC to loan its tax deferred profits back to its parent manufacturing company (or any other U.S. export manufacturing corporation). The borrower must increase its inventory, plant, etc. by an amount equal to the loan by the end of the year of the loan. These producer's loans are qualified export assets and the interest of these loans constitutes qualified export receipts. The loan is designated as a "producer's loan" within the meaning of IRC s. 993(d) at the time of the loan. 53

63. IC-DISC and 863(b) Sales Use of IC-DISC does not preclude use of Section 863(b) to increase foreign source income Can claim IC-DISC benefit on 863(b) sales May be required to allocate/apportion IC-DISC commission to foreign source income under Section 861 54

64. Shared IC-DISC Available for smaller exporters to share costs Availability and structure is fact specific 55

65. Background and overview Benefit computation Advanced topics Questions and answers Today's agenda 56

66. Our presenters will answer your questions Please type any questions into Q&A 57

67. Who to contact 58

68. 59 After the program Respond to online evaluation form Print your CPE Certificate from a CPE confirmation email Note: Group participation will not receive CPE Download today’s slides as a reference resource For questions regarding your CPE certificate, contact LearnLive at 888.228.0988

69. Thank you. Tax Professional Standards Statement This document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.