U.S. Income Tax Return of a Foreign Sales Corporation

Who Must File

File Form 1120-FSC if the corporation elected to be treated as a FSC or small FSC, and the election is still in effect.

Note: A FSC that elects to be treated as a domestic corporation under section 943(e)(1) does not file Form 1120-FSC. Instead, it files Form 1120 (or Form 1120-A).

When To File

Generally, a corporation must file Form 1120-FSC by the 15th day of the 3rd month after the end of the tax year. A FSC that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.

If the due date falls on a Saturday, Sunday, or legal holiday, the FSC may file by the next business day.

Private delivery services. FSCs can use certain private delivery services designated by the IRS to meet the timely mailing as timely filing/paying rule for tax returns and payments. The most recent list of designated private delivery services was published by the IRS in October 2001. The list includes only the following:

• Airborne Express (Airborne): Overnight Air Express Service, Next Afternoon Service, Second Day Service.
• DHL Worldwide Express (DHL): DHL Same Day Service, DHL USA Overnight.
• Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day.
• United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Extension of time to file. File Form 7004, Application for Automatic Extension of Time To File Corporation Income Tax Return, to request a 6-month extension of time to file.

Where To File

File Form 1120-FSC with the Internal Revenue Service Center, Philadelphia, PA 19255.

Who Must Sign

The return must be signed and dated by:

• The president, vice president, treasurer, assistant treasurer, chief accounting officer or
• Any other corporate officer (such as tax officer) authorized to sign.

Receivers, trustees, or assignees must also sign and date any return filed on behalf of a corporation.

If an employee of the corporation completes Form 1120-FSC, the paid preparer's space should remain blank. In addition, anyone who prepares Form 1120-FSC but does not charge the corporation should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the Paid Preparer's Use Only area.

The paid preparer must complete the required preparer information and -

• Sign the return, by hand, in the space provided for the preparer's signature (signature stamps and labels are not acceptable).
• Give a copy of the return to the taxpayer.

Paid Preparer Authorization

If the FSC wants to allow the IRS to discuss its 2001 tax return with the paid preparer who signed it, check the Yes box in the signature area of the return. This authorization applies only to the individual whose signature appears in the Paid Preparer's Use Only section of the FSC's return. It does not apply to the firm, if any, shown in that section.

If the Yes box is checked, the FSC is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The FSC is also authorizing the paid preparer to:

• Give the IRS any information that is missing from the return,
• Call the IRS for information about the processing of the return or the status of its refund or payment(s), and
• Respond to certain IRS notices that the FSC has shared with the preparer about math errors, offsets, and return preparation. The notices will not be sent to the preparer.

The FSC is not authorizing the paid preparer to receive any refund check, bind the FSC to anything (including any additional tax liability), or otherwise represent the FSC before the IRS. If the FSC wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The authorization cannot be revoked. However, the authorization will automatically end no later than the due date (excluding extensions) for filing the FSC's 2002 tax return.

Other Forms, Returns,
Schedules, and Statements
That May Be Required

The FSC may have to file some of the following forms. See the form for more information.

• Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements. Use these forms to report wages, tips, and other compensation, and withheld income, social security, and Medicare taxes for employees.
• Form 940 or Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return. The FSC may be liable for FUTA tax and may have to file Form 940 or Form 940-EZ if either of the following applies.
  1. It paid wages of $1,500 or more in any calendar quarter in 2000 or 2001 or
  2. It had at least one employee who worked for the FSC for some part of a day in 20 or more different weeks in 2000 or 20 or more different weeks in 2001.
• Form 941, Employer's Quarterly Federal Tax Return. Employers must file this form to report income tax withheld, and employer and employee social security and Medicare taxes. Also, see Trust fund recovery penalty on page 7.
• Form 945, Annual Return of Withheld Federal Income Tax. File Form 945 to report income tax withheld from nonpayroll distributions or payments, including pensions, annuities, IRAs, gambling winnings, and backup withholding.

  See Trust fund recovery penalty on page 7.

• Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and
• Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. Use these forms to report and send withheld tax on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations to the extent these payments constitute gross income from sources within the United States (see sections 861 through 865).

  Also see Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and sections 1441 and 1442.

• Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
• Forms 1099. Use these information returns to report the following:
  1. 1099-A, Acquisition or Abandonment of Secured Property.
  2. 1099-B, Proceeds From Broker and Barter Exchange Transactions.
  3. 1099-C, Cancellation of Debt.
  4. 1099-DIV, Dividends and Distributions.
  5. 1099-INT, Interest Income.
  6. 1099-MISC, Miscellaneous Income. Use this form to report payments: to certain fishing boat crew members, to providers of health and medical services, of rent or royalties, of nonemployee compensation, etc.

     Note: Every corporation must file Form 1099-MISC if it makes payments of rents, commissions, or other fixed or determinable income (see section 6041) totaling $600 or more to any one U.S. person in the course of its trade or business during the calendar year.

  7. 1099-OID, Original Issue Discount.

  Also use these returns to report amounts received as a nominee for another person.

• Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form may have to be filed by certain officers, directors, or U.S. shareholders of a FSC.

  Form 5471 does not have to be filed when the FSC is organized. However, this form may be required for subsequent changes in ownership (see sections 6046 and the related regulations). If a Form 1120-FSC is filed, Form 5471 is not required to be filed to satisfy the requirements of section 6038 (see Temporary Regulations section 1.921-1T(b)(3). However, if the FSC is involved in other than FSC activities, Form 5471 and the applicable schedules may have to be filed.

• Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Generally, a FSC that is engaged in a trade or business in the United States that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472.
• Form 5713, International Boycott Report. If the FSC had operations in, or related to, certain boycotting countries, the U.S. shareholders, if any, must file Form 5713.
• Form 8264, Application for Registration of a Tax Shelter. Tax shelter organizers use this form to receive a tax shelter registration number from the IRS.
• Form 8271, Investor Reporting of Tax Shelter Registration Number. FSCs which have acquired an interest in a tax shelter that is required to be registered use this form to report the tax shelter's registration number. Attach Form 8271 to any tax return (including an application for tentative refund (Form 1139) and an amended return) on which a deduction, credit, loss, or other tax benefit attributable to a tax shelter is taken or any income attributable to a tax shelter is reported.
• Form 8275, Disclosure Statement, and Form 8275-R, Regulation Disclosure Statement. Disclose items or positions taken on a tax return that are not otherwise adequately disclosed on a tax return or that are contrary to Treasury regulations (to avoid parts of the accuracy-related penalty or certain preparer penalties).
• Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Use this form to report the receipt of more than $10,000 in cash or foreign currency in one transaction or a series of related transactions.
• Form 8810, Corporate Passive Activity Loss and Credit Limitations. Closely held FSCs (and FSCs that are personal service corporations) must use this form to compute the passive activity loss and credit allowed under section 469.
• Form 8842, Election To Use Different Annualization Periods for Corporate Estimated Tax. FSCs use Form 8842 for each year they want to elect one of the annualization periods in section 6655(e)(2) for figuring estimated tax payments under the annualized income installment method.
• Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method. Figure the interest due or to be refunded under the look-back method of section 167(g)(2) for property placed in service after September 13, 1995, that is depreciated under the income forecast method.
• Schedule P (Form 1120-FSC), Transfer Price or Commission. Complete and attach Schedule P, as appropriate, using the administrative pricing rules of section 925.

Statements

Corporate tax shelters. A FSC is required to disclose its participation in certain tax shelters:

• By attaching a disclosure statement to its income tax return for a reportable transaction for each tax year its income tax liability is affected by its participation in the transaction and
• For the first tax year a disclosure statement is attached to its tax return, by sending a copy of the disclosure statement to the Internal Revenue Service, LM:PFTG:OTSA, Large & Mid-Size Business Division, 1111 Constitution Ave., NW, Washington, DC 20224.

Disclosure is required for reportable transactions that are: (a) listed transactions that the IRS has identified as tax avoidance transactions and (b) other reportable transactions that have tax shelter characteristics. A listed transaction must be reported if it is expected to reduce the taxpayer's income tax liability by more than $1 million in a single tax year or by a total of more than $2 million for any combination of years. For other reportable transactions, the threshold increases to $5 million for a single tax year and to $10 million for any combination of years. Generally, reporting is not required for customary business transactions or transactions with tax benefits that the IRS has no reasonable basis to challenge.

See Temporary Regulations section 1.6011-4T for details, including:

• The definitions of a reportable transaction and a listed transaction,
• The relevant tax shelter characteristics for other reportable transactions,
• The form and content of the disclosure statement, and
• The filing requirements of the disclosure statement.

Also see Notice 2001-51, 2001-34 I.R.B. 190, for certain listed transactions determined to have a tax avoidance purpose and the intended tax benefits that are subject to disallowance. The listed transactions in these notices may be updated from time to time when other tax avoidance transactions are identified.

Personal Holding Companies and Foreign Personal Holding Companies

Personal holding company. A FSC that is a personal holding company (as defined in section 542) but not a foreign personal holding company, must file Schedule PH (Form 1120), U.S. Personal Holding Company (PHC) Tax, with Form 1120-FSC. On line 8, Schedule J, Form 1120-FSC, the FSC reports the personal holding company tax. See section 542 and Schedule PH (Form 1120) for details.

Foreign personal holding company. Regulations section 1.551-4 requires certain shareholders of a FSC that is a foreign personal holding company (as defined in section 552) to attach a statement to their personal returns containing the information required by section 551(c).

Form 5471. Section 6035 and the related regulations require certain officers, directors, and shareholders of a foreign personal holding company to file Schedule N (Form 5471), Return of Officers, Directors, and 10% or More Shareholders of a Foreign Personal Holding Company, and the appropriate schedules of Form 5471. See the Instructions for Form 5471 for additional information.

Assembling the Return

To ensure that the FSC's tax return is correctly processed, attach all schedules and other forms after page 6, Form 1120-FSC, and in the following order.

1. Form 4136.
2. Form 4626.
3. Form 851.
4. Additional schedules in alphabetical order.
5. Additional forms in numerical order.

Complete every applicable entry space on Form 1120-FSC. Do not write See attached instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Also, be sure to enter the FSC's name and EIN on each supporting statement or attachment.

Accounting Methods

An accounting method is a set of rules used to determine when and how income and expenses are reported.

Figure taxable income using the method of accounting regularly used in keeping the FSC's books and records. Generally, permissible methods include:

• Cash,
• Accrual, or
• Any other method authorized by the Internal Revenue Code.

In all cases, the method used must clearly show taxable income. If inventories are required, the accrual method must be used for sales and purchases of merchandise. However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method and may account for inventoriable items as materials and supplies that are not incidental. For details, see Schedule A, Cost of Goods Sold Related to Foreign Trading Gross Receipts, on page 8.

A member of a controlled group cannot use an accounting method that would distort any group member's income, including its own. For example, a FSC acts as a commission agent for property sales by a related corporation that uses the accrual method and pays the FSC its commission more than 2 months after the sale. In this case, the FSC should not use the cash method because that method would materially distort its income.

Generally, a FSC (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. See section 448(c).

Under the accrual method, an amount is includible in income when:

• All the events have occurred that fix the right to receive the income, which is the earliest of the date: (a) the required performance takes place, (b) payment is due, or (c) payment is received; and
• The amount can be determined with reasonable accuracy.

See Regulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when:

• All events that determine the liability have occurred,
• The amount of the liability can be figured with reasonable accuracy, and
• Economic performance takes place with respect to the expense.

There are exceptions to the economic performance rule for certain items, including recurring expenses. See section 461(h) and the related regulations for the rules for determining when economic performance takes place.

Change in accounting method. Generally, the FSC must get IRS consent to change the method of accounting used to report taxable income (for income as a whole or for any material item). To do so, it must file Form 3115, Application for Change in Accounting Method. For more information, see Pub. 538, Accounting Periods and Methods.

The FSC may also have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment, which is taken into account over a period not to exceed 4 years.

Example. A FSC changes to the cash method of accounting. It accrued sales in 2000 for which it received payment in 2001. It must report those sales in both years as a result of changing its accounting method and must make a section 481(a) adjustment to prevent duplication of income.

See Rev. Proc. 99-49, 1999-2 C.B. 725, to figure the amount of this adjustment for 2001.

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