Description of the structure of a Domestic International Sales Corporation or IC-DISC for the Agriculture Industry

1. Domestic International Sales Corporation (IC-DISC)
Agriculture Industry

2. Domestic International Sales Corporation (IC-DISC)
Who Can Benefit?
 Growers
 Farmers
 Processors
 Suppliers
 Cooperatives and others associated with
agriculture
 IC-DISC is available even if your company is
not the ultimate producer or exporter of the
goods or services.

3. Common IC-DISC Structure (without cooperatives)
Farmers
IC-DISC without Cooperatives
Operating
Company
(S Corporation)
IC-DISC
(C Corporation)
Foreign
Customer
Deductible
Commission
(Offset
income taxed
at 39.6%)
Qualified
Dividend
(Taxed at
15% -23.8%)

4. Tax Benefit of IC-DISC
 Tax Consequence
 No federal level tax on the DISC.
 Tax deferred until income is distributed (but regularly distributions
often necessary).
 Shareholders pay interest on the deferred income.
 Tax Arbitrage
 Convert ordinary income into qualified dividend taxed at
preferential rates when distributing to shareholders.

5. Setting up the IC-DISC
 Form a US C corporation
‒ Only have one class of stock
‒ Choose an IC-DISC friendly State
 Electing IC-DISC Treatment
‒ Form 4876-A must be filed with the IRS within 90 days of the beginning of
the IC-DISC’s taxable year for the election to apply to such year.
 Entering into a Commission Agreement
‒ The permitted commission rate is set by statute, and is generally limited
to the greater of:
 4% of the exporter’s qualified export receipts, subject to certain
limitations; or
 50% of the exporter’s taxable income attributable to qualified export
receipts.

6. Maintaining the IC-DISC Status
 95% qualified gross receipts test
‒ I.R.C. §993(a)
 95% qualified export asset test
‒ I.R.C. §993(c)(1)(B)
‒ REV. RUL. 77-484, 1977-2 C.B. 289
 $2,500 capital at all times
 Timely payment of commissions
 Annual Filings
 Books and Records

7. Challenges for IC-DISC with Cooperative Entities
Farmers
Operating
Company
(S Corporation)
IC-DISC
(C Corporation)
Foreign
Customer
Deductible
Commission
(Offset
income taxed
at 39.6%)
Qualified
Dividend
(Taxed at
15% -23.8%)
Model A
Cooperative
Entity
Domestic
Customer
Profits
Products
REV. RUL. 77-484
• IC-DISC failed the destination test for “qualified export sales” if the
product is commingled with other fungible product acquired by the
cooperative from other farmers, and cannot be traced to the export
sale.
• The IRS IC-DISC Audit Guide suggests that the destination test can be
satisfied if the cooperative set up systems for segregation under the
FSC regulations.

8. Challenges for IC-DISC with Cooperative Entities
Farmers
IC-DISC
(C Corporation)
Foreign
Customer
Deductible
Commission
(Offset
income taxed
at 39.6%)
Qualified
Dividend
(Taxed at
15% -23.8%)
Cooperative
Entity
Qualified
Export Sales
Model B
Domestic
Customer
 Uncertainty created by Subchapter T of
the I.R.C
• Cooperatives are allowed
deductions for certain
distributions to its members.
• It is unclear if the “combined
taxable income” upon which the
commission is determined
would take into account the
deductions.
 Farmers have two stream of taxable
income
• One from the cooperative.
• One from the partnership.
• It adds complexity to the tax
accounting treatment for the
two revenue streams.
Partnership

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