FSC Provisions: Licensing Computer Software

By Burge, Marianne | Journal of Accountancy, March 1994 | Go to article overview

FSC Provisions: Licensing Computer Software


Burge, Marianne, Journal of Accountancy


In technical advice memorandum 9344002, the IRS concluded that a company that licensed computer software for reproduction outside the United States did not qualify for foreign sales corporation (FSC) benefits because it failed to meet several key tests. The IRS also ruled on the foreign management requirement of the FSC provisions.

FSCs are foreign corporations formed either in U.S. possessions or in certain countries with which the United States has exchange-of-information agreements. U.S. companies use FSCs to exempt from U.S. tax a portion of income earned by exporting property. To qualify for the exemption, a FSC and the export property must satisfy the requirements of tax code sections 921 through 927. (For more information on FSCs, see "Tax Incentives for Small Exporters," JofA, Oct.93, page 39.)

Management requirement. One requirement is that a FSC must be managed outside the United States. This mandates, among other things, that a FSC

1. Maintain throughout the taxable year a principal bank account outside the United States.

2. Disburse by its tax return's filing date any dividends, legal and accounting fees and officer or board member salaries for the taxable year from bank accounts outside the United States.

In the case before the IRS, a FSC opened a bank account in a U.S. possession but did not deposit funds in the account for over two years. During this time, the FSC's parent made any necessary payments on behalf of the FSC and was reimbursed when funds were deposited in the account.

* Issue no. 1. Was the principal bank account requirement satisfied? The IRS concluded the tax code and regulations did not require funds to be deposited in the account, only that the account be opened and maintained on the bank's books and records. …

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FSC Provisions: Licensing Computer Software
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