Moss Adams International Tax Partner Christine Ballard provides an in-depth look at the structures, benefits, and formalities for Domestic International Sales Corporations

1. 1
IC-DISCs as a Tax Arbitrage
and Wealth Transfer Strategy
By: Christine Ballard
August 23, 2016

2. 2
WHAT IS AN IC-DISC?
 Interest Charge Domestic International Sales
Corporation (“IC-DISC”)
oAllows IC-DISC shareholders to defer tax on
export related income
oNo federal taxation at the IC-DISC level
oTaxes deferred until the income is distributed
oIC-DISC shareholders are required to pay interest
on the deferral of income

3. 3
WHY SHOULD YOU CARE?
 IC-DISC reduces shareholder’s tax liability
oOrdinary income is converted into qualified
dividend taxed at preferential tax rates when
distributed to IC-DISC shareholders
 Exporting company can pay IC-DISC a tax deductible
commission
o The IC-DISC can distribute the commission to its
shareholders in the form of qualified dividend
o Exporting company must have taxable income
 Tax rate reduction usually about 16%

4. 4
COMMON USED BY
 US-based manufacturers and value added assembly
operations
 Distributors of US-manufactured products
 Food and agriculture exporting nuts, apples, wine, etc.
 Recyclers
 US-based architects and civil engineers with foreign
projects

5. 5
IC-DISC BASICS
IC-DISC
Shareholder
Commission
Flow of Funds
Exporter
IC-DISC
(Tax Exempt)
Dividend
Tax deduction at
ordinary rates
35% or 39.6%
Tax Exempt
* Watch States*
Qualified
Dividend
23.8%

6. 6
COMMON STRUCTURES
Related
Supplier
IC-DISC
Shareholder Shareholder
Commission
Qualified
Dividend
Example 1 - Passthrough
Taxed at
preferential
rate to
shareholders
Deductible
to supplier

7. 7
COMMON STRUCTURES
IC-DISC
Related Supplier
(C Corporation)
Shareholder Shareholder
Commission
Qualified
Dividend
Example 2 - Corporation

8. 8
USES IN FAMILY WEALTH TRANSFER
 To recap – benefits for everyone
o Tax rate arbitrage opportunity
o Converts ordinary income to qualified
dividend, taxed at capital gain rates
 Uses in family wealth transfer
o Ability to push income and cash to another
generation
o Set-up of an IC-DISC usually not considered a
gift

9. 9
COMMON STRUCTURES
LLC
IC-DISC
Shareholder
(Patriarch)
Heirs
Commission
Qualified
Dividend
Example 3 – Wealth Transfer
Related Supplier

10. 10
WHO CAN BENEFIT?
 Manufacturers, producers and resellers of “qualified
export property”
 Qualified export property include goods:
oThat are produced in the US;
oWith ultimate destination outside the US (sales to
unrelated party); and
oWhere the cost of foreign content does not exceed
50% of the sales price
 IC-DISCs are widely used by owner-managed and
family-owned businesses

11. 11
SETTING UP AN IC-DISC
 IC-DISC must be set up as a separate entity
o Incorporated as C corporation
o Election has to be made to treat entity as IC-DISC
(Form 4876)
o Election must be filed within 90 days of the
beginning of tax year in which the election will
take effect
o Single class of stock
o Minimum capital $2,500
o Commission agreement between IC-DISC and
exporter

12. 12
DETERMINING THE COMMISSION
AMOUNT
 Commission DISCs: Two primary methods may be used to
determine the commission paid to IC-DISC
o 4% of the “qualified export receipts” (simple
method);
o 50% of the combined taxable income of the related
supplier & IC-DISC from the sale of qualified export
property (i.e. foreign source income)
o The former is generally used when related supplier
is selling a high volume with low profit margins
 Buy-Sell DISCs: Use Section 482 intercompany pricing
methods. The DISC will have employees
 Commission (or reasonable estimate) should be paid within
60 days after the close of tax year

13. 13
EXAMPLE – TAX SAVINGS
IC-DISC Creates Tax Savings: Combined Almonds Walnuts
Export sales gross receipts $105,000,000 50,000,000 55,000,000
Cost of goods sold (94,500,000) (45,000,000) (49,500,000)
Gross margin 10,500,000 5,000,000 5,500,000
Selling, general and administrative expenses (7,350,000) (3,500,000) (3,850,000)
Combined taxable income 3,150,000 1,500,000 1,650,000
% Foreign 90% 80%
IC-DISC commission, greater of:
50% of export sales net income $ 1,335,000 $ 675,000 $ 660,000
4% of export sales gross receipts $ 3,560,000 1,800,000 1,760,000
IC-DISC commission (limited to taxable income) $ 2,670,000 $ 1,350,000 $ 1,320,000
Federal tax savings to exporter 39.60% 1,057,320
IC-DISC dividend $ 2,670,000
Federal tax on dividends paid by IC-DISC shareholder 23.80% (635,460)
IC-DISC Federal net tax savings $ 421,860

14. 14
MAINTAINING IC-DISC STATUS
 The IC-DISC must meet the following requirements
annually
o 95% or more of the gross receipts are “qualified
export receipts”
o The adjusted basis of the qualified export assets
meets or exceeds 95% of the total adjusted basis of all
assets held by the IC-DISC
o The IC-DISC maintains only one class of stock
o The par value of the stock is at least $2,500 for each
day of the tax year
o The IC-DISC maintains separate books and records
o The election to be an IC-DISC is in effect for the tax
year

15. 15
MAINTAINING IC-DISC STATUS
 export assets under §993(b) include:
oExport property
oAssets used primarily in connection with the
sale, lease, or other specified activities relating to
qualified export property, and in connection
with performing certain services
oSufficient cash required to meet the working
capital requirements
oSubject to limitations, amounts on deposit in the
US to acquire other qualified export assets

16. 16
CALIFORNIA CONSEQUENCES
 FTB Ruling 2015-02
 “Unwinds” IC-DISC transactions
 IC-DISC files its own California return
 IC-DISC pays only $800 minimum tax

17. 17
THANK YOU
Christine Ballard CPA, MST
Partner, National Tax
International Tax Services
MOSS ADAMS LLP
635 Campbell Technology Parkway
Campbell, CA 95008
D (408) 558-4338
T (408) 558-7500
C (703) 328-4180
christine.ballard@mossadams.com