U.S. Code » Title 26 » Subtitle Subtitle A— Income Taxes › Chapter CHAPTER 1— NORMAL TAXES AND SURTAXES › Subchapter Subchapter N— Tax Based on Income From Sources Within or Without the United States › Part PART IV— DOMESTIC INTERNATIONAL SALES CORPORATIONS › Subpart Subpart A— Treatment of Qualifying Corporations

26 U.S.C. § 994

Inter-company pricing rules

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(a) In generalIn the case of a sale of export property to a DISC by a person described in section 482, the taxable income of such DISC and such person shall be based upon a transfer price which would allow such DISC to derive taxable income attributable to such sale (regardless of the sales price actually charged) in an amount which does not exceed the greatest of—(1) 4 percent of the qualified export receipts on the sale of such property by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts,(2) 50 percent of the combined taxable income of such DISC and such person which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts, or(3) taxable income based upon the sale price actually charged (but subject to the rules provided in section 482).(b) Rules for commissions, rentals, and marginal costingThe Secretary shall prescribe regulations setting forth—(1) rules which are consistent with the rules set forth in subsection (a) for the application of this section in the case of commissions, rentals, and other income, and(2) rules for the allocation of expenditures in computing combined taxable income under subsection (a)(2) in those cases where a DISC is seeking to establish or maintain a market for export property.(c) Export promotion expenses

For purposes of this section, the term “export promotion expenses” means those expenses incurred to advance the distribution or sale of export property for use, consumption, or distribution outside of the United States, but does not include income taxes. Such expenses shall also include freight expenses to the extent of 50 percent of the cost of shipping export property aboard airplanes owned and operated by United States persons or ships documented under the laws of the United States in those cases where law or regulations does not require that such property be shipped aboard such airplanes or ships.

(Added Pub. L. 92–178, title V, § 501, Dec. 10, 1971, 85 Stat. 543; amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.)Editorial NotesAmendments

1976—Subsec. (b). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

Notes of Decisions
Cited in 15 cases, 1985–2003 · leading case: Boeing Co. v. United States, 537 U.S. 437 (2003).
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Boeing Co. v. United States, 537 U.S. 437 (2003). · cites it 12× “See 26 U. S. C. §§ 994 (a)(1)-(3). Each of the alternatives assumes that the parent has sold the product to the DISC at a hypothetical "transfer price" that produced a profit for both seller and buyer when the product was resold to the foreign customer.”
Cwt Farms, Inc. & Cwt Int'l, Inc. v. Comm'r of Internal Revenue, 755 F.2d 790 (11th Cir. 1985). · cites it 4× “The only other relevant mention of commissions is found in 26 U.S.C.A. § 994 (b). 14 This section specifically authorizes the Secretary of the Treasury to promulgate regulations concerning the price due to be paid by the DISC or received by the DISC in cases of commissions,…”
Dresser Indus., Inc. & Consol. Subsidiaries v. Comm'r of Internal Revenue, 911 F.2d 1128 (5th Cir. 1990). · cites it 3× “See 26 U.S.C. § 994 (a). Dresser chose alternative (2), in which the transfer price, and ultimately DISC taxable income, is based on combined total income (“CTI”) of the DISC and its parent.”
Anchor Hocking Corp. v. United States, 11 Cl. Ct. 173 (Ct. Cl. 1986). · cites it 2× “, AHI was entitled to receive commissions from the plaintiff in accordance with the intercompany pricing rules of 26 U.S.C. § 994 (1976). AHI elected to be treated as a “Domestic International Sales Corporation” [“DISC”] under newly enacted sections 991 et seq.”
Gen. Motors Corp. v. Arizona Dep't of Revenue, 938 P.2d 481 (Ariz. Ct. App. 1996). · cites it 2× “In order to receive the statutory incentives, the DISC rules required GM to pay “commissions” to GMEC, calculated on a 50-50 combined taxable income method under 26 U.S.C. § 994 . Specifically, 26 U.S.C.”
Dresser Indus., Inc. v. United States, 73 F. Supp. 2d 682 (N.D. Tex. 1999). · cites it 2× “26 U.S.C. § 994 (a)(2). Combined taxable income is computed by deducting expenses related to the production and sale of export property from gross receipts of the DISC.”
Bowater, Inc. & Subsidiaries, Formerly Known as Bowater Holdings, Inc. v. Comm'r of Internal Revenue, 108 F.3d 12 (2d Cir. 1997). “861-8(e)(2) of the 1978 regulations does not permit Taxpayer to increase the CTI of its DISCs and their related suppliers under 26 U.S.C. § 994 , and thereby increase the income of its DISCs, which is subject to preferential tax treatment, by allocating interest expense to…”
Computervision Corp. v. Comm'r, 164 F.3d 73 (1st Cir. 1999). “In their returns for 1983 and 1984, Compu-tervision and Computervision International had computed the commission payable to Computervision International by using the “50 percent of the combined taxable income” method provided by 26 U.S.C. §§ 994 (a)(2), (b). In the Tax Court,…”
Dow Corning Corp. v. The United States, 984 F.2d 416 (Fed. Cir. 1993). “26 U.S.C. § 994 (1982). 5 . The regulation also requires that certain of the DISC’S export promotion expenses be taken into account.”
Int'l Paper Co. v. United States, 33 Fed. Cl. 384 (Fed. Cl. 1995). “Specifically, § 994(a)(2) provides: 50 percent of the combined taxable income of such DISC and such person [described in section 482] which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export…”
Archer-Daniels-Midland Co. v. United States, 37 F.3d 321 (7th Cir. 1994). · cites it 3× “Congress didn’t want to go that far to stimulate exports, so it provided in 26 U.S.C. § 994 (a) that the taxable income of the DISC and of the DISC’S owner “shall be based upon a transfer price which would allow such DISC to derive taxable income attributable to such [export]…”
Brown-Forman Corp. v. Comm'r, 955 F.2d 1037 (6th Cir. 1992). · cites it 4× “994-2) purport to impose for purposes of applying the combined taxable income price rule of 26 U.S.C. § 994 (a)(2). The Commissioner interprets his marginal costing rules as imposing a profit limitation determined by taking worldwide taxable income from the product line in…”
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