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Learn about DiSC. You will have to determine what they are called. Often the accounting department has made judgments about which expenses should be applied to a given product line.

These statements are not on a tax basis, and may not consider every expense. For example, they might only allocate direct material and labor, and normal applied overhead and only certain below the line expenses.

Usually, the answer will be yes, and you will need the help of the CAS. The taxpayer made a series of allocations regarding expenses.

It allocated all, part, or none of a given expense to the QER. Are the allocations made on a reasonable basis? When no part of a material expense or department is allocated to QER, determine why. Always consider the end result. As expenses are increased or decreased, there is more or less expense to allocate to CTI. Also, when income is increased or decreased, the gross income will change, which will also impact the expenses that were allocated to CTI on the basis of gross income.

As discussed above, these rules are complex, so often determining whether a taxpayer has complied is not easy.

Ideally, you would start with all the relevant facts and then research whether the sales qualify as QER. However, you will rarely start with all of the relevant facts. As such, you should review the rules discussed in the outline above on export property and QER before you start your examination to better understand what facts are required.

Then you can proceed to obtain the relevant facts through IDRs, interviews, or both. You will be able to eliminate or further develop the issues as facts are gathered. The discussion below is intended to highlight some of the facts you will need to keep in mind. The list is not all inclusive, nor will every item listed be present in a given case. Was the property subject to any further manufacturing, assembly, or other processing between the time of sale or lease and the delivery outside the U.

If so, consider General Electric, which was discussed earlier. Sales to related parties are subject to additional rules. The rules are summarized in the chart in bullet 4 below. As you review the records, ask yourself whether the end result complies with Treas. For example:. The widgets sold in the U. The above does not mean you have an automatic adjustment, however, it does suggest a need for further analysis.

This issue was discussed in General Dynamics Corps. In General Dynamics Corps, the taxpayer accounted for long-term contracts on the completed contract method. Though normally income and expenses connected with long-term contracts are not reported or claimed until the completion of the contract, the taxpayer may elect to currently deduct certain period expenses.

In computing CTI, the taxpayer excluded the certain period expenses deducted prior to completion of the contract. The court held that taxpayer must account for all related costs, including period costs, of both current and prior years in determining their CTI. The court provided that requiring taxpayer to account for all period costs in determining CTI is consistent with the completed contract method of accounting. To numerically illustrate General Dynamics Corps please consider the following example.

The taxpayer uses the completed contract method of accounting; the sale is booked in year 3. Boeing Co. United States abrogates St. Jude Medical, Inc. Commissioner , 34 F.

Boeing manufactures commercial airliners. Its product lines include the , , etc. Erroneously relying on Treas. The Supreme Court noted that Treas. The court held, however, that Treas.

The court provided that Treas. For a numerical illustration please assume that the was a new product line that did not generate any sales until year 3. Quick overview of Treas.

For most U. This concept was discussed in Rev. The issue here is whether when allocating interest expenses to CTI, must the taxpayer allocate the interest expense without any offset or can it allocate the net of the interest income and interest expense. Bowater v. Commissioner , F. The Second Circuit reversed a Tax Court decision which had allowed the taxpayer to allocate the net interest expense.

The Second Circuit stated that the plain language of Treas. In other words, the aggregate of deductions for interest must be allocated ratably to interest income on the same basis as if it allocated to all other income producing activities.

However, since Treas. In Dresser Industries Inc. In Dresser Industries, Inc. United States , 73 F. Supp 2d N. Dresser filed a refund claim for the to tax years.

One of the issues involved the netting of interest income and expenses for the purposes of calculating CTI. See Temp. Generally, the effective date of the regulations is January 11, However, the taxpayer may elect to apply these rules to tax years beginning on or after January 1, If a taxpayer allocates a loss, you need to know the applicable regulation s.

It is suggested you start with the Supplemental Information contained in TD , to find the answer. The position in FSA is the losses on the forward sale of foreign currency should be allocated pursuant to sections Temp. Also, currency gains from hedging by forward contracts constitute FTGR in the same manner as the underlying export property. The containers store: steel pellets, medical waste, and nuclear fuel.

Each of these product lines contains 2 products. Some of the receipts qualify as QER. At this point, the taxpayer must answer two questions:.

Can the taxpayer construct a CTI statement from its books and records for the product or product line? The first question is answered by applying the SIC Codes or recognized trade or industry usage standard as specified by Treas.

The taxpayer's products or product lines are listed below. Level 3 Product. The containers are made in two sizes. The containers from one product line can be substituted for one in another product line. This is illustrated in the chart attached PDF. The taxpayer can prepare income statements for each of the 4 levels.

All of the income statements can track the specific sales, direct material costs, direct labor costs, normal applied overhead, and inventory. The below the line expenses are allocated by the tax department.

Assume the income statements are on a full costing tax basis and are in accordance with Treas. When you audit the DISC, you are going to have to retrace these steps. With this in mind, a discussion of certain audit steps and issues follows. Ask the taxpayer to state its definition of a product, product line or transaction. See if the definition conforms to definition under Treas.

You must know what products are included in each Schedule P and the groupings used on each Schedule P. A format similar to the chart above —or the equivalent—will help. Since each product, product line or transaction is on a separate Schedule P, obtain the audit trail from the books to the Schedule Ps.

The audit trail should identify whether all of the expenses have been included. For sub-bullets a and b above, consider the use of the Computer Audit Specialist when the data is in a machine sensible format. In this example, assume the above chart satisfies the definition of a product line, product, or transaction.

Review the data obtained in 1 above. What is acceptable and not acceptable, in the context of the above example, following the FSC guidance is discussed below. Level 2 Product Line. Three Schedule Ps: Steel total of 12 export sales , medical total of 30 export sales and nuclear total 40 export sales. Six schedule Ps. For example steel pellets would have 2 schedule Ps: Product A total of 10 export sales and product B total of 2 export sales. The same idea would apply to medical and nuclear, each of which would have two products.

Consider product A, at level 3 in the steel pellet product line. If the taxpayer placed product A on a separate Schedule P, it cannot prepare a schedule P for:. For the entire entity.

Both of these are example of where the same product, product A, was used in more than one Schedule P. It has not included all products and transactions in the product line. There is no justification for this combination.

The taxpayer cannot prepare a Schedule P with a combination of steel pellets with medical waste, and ignore nuclear fuel. All of level 2, not selected product lines of level 2. Any combination based solely on its computer program's ability to maximize FTI. The group must be based upon SIC or recognized industry trade and usage. Example of what would be acceptable: Consider the 10 export transactions for product A. Assume that the taxpayer places the first 9 on separate Schedule Ps.

To compute the OPPL for the 10th transaction, the taxpayer can use either:. The sum of all of the transactions in product A 50 transactions plus product B 5 transactions , or. All transactions of the entire container division. Example of what would NOT be acceptable. The taxpayer used MC for steel pellets. The OPPL consisted of all 55 transactions. Now it wants to use MC for product M in medical.

Taxpayer is limited to either:. The transactions in medical. He cannot use all transactions, because that group includes steel, which cannot again be used. Assume that the taxpayer used the product grouping illustrated above for all products except product Y. Taxpayer further grouped product Y with product N because it would benefit from such a grouping.

This is not acceptable for two reasons:. Without a clear audit trail from the books of the R-S into the Schedule Ps, you will not be able to determine whether the taxpayer has used the same transaction more than once. A sale transaction cannot be grouped with a lease transaction. So if product N was only leased, it could not be included in the medical waste product line grouping or the entity grouping.

Under the FSC tax regime military property sales was only allowed to be grouped with other military property sales. There is no similar rule under the DISC tax regime.

Product X could not be included in the nuclear fuel product line grouping nor the entity grouping. There was no similar rule under the DISC regulations. QER from related and subsidiary services, which are booked in the same taxable year as the export property, can be grouped with the sale or lease to which they relate. QER from related and subsidiary services which are NOT booked in the same taxable year as the export property is subject to a different rule.

These QERs can be grouped with the products or product lines to which the services are related, so long as the grouping of services chosen is consistent with the grouping of products or product lines for the taxable year the export property was sold. QER from engineering or architectural services are treated on a transaction by transaction basis. DISC Claims When the taxpayer files a claim, certain issues may arise including whether the claim was timely filed.

The issues listed below were included in recent claims. If the claim is for tax returns that were not audited, see IV above discussing how to start the audit. You will have to obtain the basic information: the audit trail, a description of the business and products exported, etc.

If the claim is for tax returns that were audited, obtain the additional information described in the item 2 above regarding the claim. Read section V. Does the taxpayer have sufficient data to use the transaction by transaction method and is the computation of CTI correct? It may in fact be creating a group that is not permitted. Determine whether these sales qualify. Sales were excluded from being QER under Treas.

This list is not all inclusive. This can occur if the gross receipts are from certain management, engineering, or architectural services.

This will be discussed in part III-C of this guide. Wholesale Contacts. New Products. Add to Compare. Add to Cart. Out of stock. Alina Doe Web Designer. Jhon Doe Web Designer. DiSC profiles level the playing field by giving trainers and trainees the non-judgmental information they need to train more effectively.

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