Treasury Regulations · 26 CFR
§ 1.994-1. Inter-company pricing rules for DISC's.
Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).
Regulation under 26 U.S.C. § 994
Cite as 26 CFR § 1.994-1
At a glance
Read from the text and its source citation. Not part of the regulation.
- Status
- In the current eCFR
- Issued
- July 16, 1975 by T.D. 7364
- Last amended
- October 12, 1984 by T.D. 7984
- Issued under
- 26 U.S.C. § 994
- Length
- 10,965 words · about 48 min to read
- Defines
- 4 terms
- Cross-references
- cites 14 Code sections and 10 regulations; cited by 9
Transactions are included, for purposes of this paragraph, only if they give rise to qualified export receipts (within the meaning of section 993(a)) in the hands of the related DISC. If a transaction is not included in subparagraph (1), (2), (3), (4), or (5) of this paragraph, the rules of section 994(a)(1) or (2) do not apply. Thus, for example, the rules of section 994(a)(1) or (2) would not apply if a DISC purchased export property from its related supplier and leased such property to a third party.
(a) The transfer price of such property sold by the DISC during such year shall be computed separately from the transfer price of the property not sold by the DISC during such year,
(b) With respect to such property not sold by the DISC during such year, the transfer price paid by the DISC for such year shall be the related supplier's cost of goods sold (see subparagraph (6)(ii) of this paragraph) with respect to the property, except that, with respect to such taxable years ending on or before August 15, 1975, the transfer price paid by the DISC shall be at least (but need not exceed) the related supplier's cost of goods sold with respect to the property.
(c) For the subsequent taxable year during which such property is resold by the DISC, an additional amount shall be paid by the DISC (to be treated as income for such year by the related supplier) equal to the excess of the amount which would have been the transfer price under this section had the transfer to the DISC by the related supplier and the resale by the DISC taken place during the taxable year of the DISC during which it resold the property over the amount already paid under (b) of this subdivision.
(d) The time and manner of payment of transfer prices required by (b) and (c) of this subdivision shall be determined under paragraphs (e)(3), (4), and (5) of this section.
(b) With respect to incomplete transactions to which paragraph (c)(5)(i)(b) of this section applies and which were initiated during a taxable year ending after August 15, 1975, the amount actually paid shall be deemed to be a reasonable estimate of such transfer price if any one of the following three tests is met:
(c) For purposes of this subdivision (iv), whether the transfer price or commission actually paid is deemed a reasonable estimate may be determined on the basis for grouping transactions chosen by the taxpayer under paragraph (c)(5) and (7) of this section.
(b) If, for example, during 1972, a DISC which uses the calendar year as its taxable year sold a product which it purchased that year from its related supplier and paid a price of $10,000 which price is a reasonable estimate under subparagraph (3)(iii) of this paragraph but is later determined under section 994 to be $8,000 immediately before the DISC filed its return for 1972, the DISC must be paid $2,000 (i.e., $10,000−$8,000) by its related supplier or establish an account receivable from its related supplier of $2,000. The account receivable may be paid without tax consequences, provided that such account receivable is paid within 90 days after the date it is established (or deemed established). Such account receivable paid within such 90 days will be considered to relate to the taxable year in which the transaction occurred which gave rise thereto rather than the taxable year during which it is established or paid.
(b) If, for example, during 1982, a DISC commission from a related supplier with respect to a transaction completed in 1980 was redetermined to be $1,000 less than the commission actually charged by, and paid to, the DISC, the amount of any distribution previously made by the DISC from its 1980 previously taxed income to the related supplies as a shareholder may, to the extent of $1,000, be treated not as a distribution but as a repayment of the commission.
(i) During 1975, a DISC which uses the calendar year as its taxable year purchased a product from its related supplier and made an initial payment of $8,500. If $8,500 were determined to be the transfer price under section 994, the DISC's taxable income from the transaction would be $1,000. Immediately before the DISC filed its return for 1975, under section 994 it is determined that the transfer price is $8,000 and the DISC's taxable income is $1,500. Thus, the requirement of a reasonable estimate under subparagraph (3) of this paragraph was met because the amount ($8,500) actually paid resulted in the DISC realizing taxable income of $1,000 which is not less than 50 percent of the DISC's taxable income ($1,500) from the transaction as determined under section 994.
(ii) Pursuant to subparagraph (5) of this paragraph, an account receivable due the DISC for $500, i.e., $8,500−$8,000, is established on September 15, 1976, the date the DISC files its return for 1975, and is paid on December 1, 1976. The account receivable for $500 will be considered to relate to the taxable year (1975) in which the transaction occurred which gave rise thereto and will be a qualified export asset under § 1.993-2(d)(3) for the last day of such year.
Assume the same facts as in example 1 except that the account receivable for $500 is paid on January 1, 1977. The account receivable for $500 will still be considered to relate to the taxable year (1975) in which the transaction occurred which gave rise thereto. However, such account receivable will be treated as an asset which is not a qualified export asset under § 1.993-2(d)(3) for the last day of such year.
J and K are calendar year taxpayers. J, a domestic manufacturing company, owns all the stock of K, a DISC for the taxable year. During 1972, J manufactures only 100 units of a product (which is eligible to be export property as defined in section 993(c)). J enters into a written agreement with K whereby K is granted a sales franchise with respect to exporting such property and K will receive commissions with respect to such exports equal to the maximum amount permitted to be received under the intercompany pricing rules of section 994. Thereafter, the 100 units are sold for $1,000. J's cost of goods sold attributable to the 100 units is $650. J's direct selling expenses so attributable are $100. Although J has other deductible expenses, for purposes of this example assume that J has no other deductible expenses. K pays $230 to independent contractors which qualify as export promotion expenses under paragraph (f)(7)(ii) of this section. K does not perform functions substantial enough to entitle it to an allocation of income which meets the arm's length standard of section 482. The income which K may earn under section 994 under the franchise is $20, computed as follows:
| (1) Combined taxable income: | ||
| (a) K's sales price | $1,000 | |
| (b) Less deductions: | ||
| J's cost of goods sold | $650 | |
| J's direct selling expenses | 100 | |
| K's export promotion expenses | 230 | |
| Total deductions | 980 | |
| (c) Combined taxable income | 20 | |
| (2) K's profit under combined taxable income method (before application of loss limitation): | ||
| (a) 50 percent of combined taxable income | 10 | |
| (b) Plus: 10 percent of K's export promotion expenses (10% of $230) | 23 | |
| (c) K's profit | 33 | |
| (3) K's profit under gross receipts method (before application of loss limitation): | ||
| (a) 4 percent of K's sales price (4% of $1,000) | 40 | |
| (b) Plus: 10 percent of K's export promotion expenses (10% of $230) | 23 | |
| (c) K's profit | 63 | |
Since combined taxable income ($20) is lower than both K's profit under the combined taxable income method ($33) and under the gross receipts method ($63), the maximum income K may earn is $20. Accordingly, the commissions K may receive from J are $250, i.e., K's expenses ($230) plus K's profit ($20).
M and N are calendar year taxpayers. M, a domestic manufacturing company, owns all the stock of N, a DISC for the taxable year. During 1972, M produces and sells a particular product line of export property to N for $75, a price which can be justified as satisfying the standard of arm's length price of section 482. N performs substantial functions with respect to the transaction and resells the export property for $100. M's cost of goods sold attributable to the export property is $60. M's direct selling expenses so attributable (relating to advertising of the product line in foreign markets) are $12. Although M has other deductible expenses, for purposes of this example, assume that M has no other deductible expenses. N's expenses attributable to resale of the export property are $22 of which $20 are export promotion expenses. The maximum profit which N may earn with respect to the product line is $6, computed as follows:
| (1) Combined taxable income: | ||
| (a) N's sales price | $100 | |
| (b) Less deductions: | ||
| M's cost of goods sold | $60 | |
| M's direct selling expenses | 12 | |
| N's expenses | 22 | |
| Total deductions | 94 | |
| (c) Combined taxable income | 6 | |
| (2) N's profit under combined taxable income method (before application of loss limitation): | ||
| (a) 50 percent of combined taxable income | 3 | |
| (b) Plus: 10 percent of N's export promotion expenses (10% of $20) | 2 | |
| (c) N's profit | 5 | |
| (3) N's profit under gross receipts method (before application of loss limitation): | ||
| (a) 4 percent of N's sales price (4% of $100) | 4 | |
| (b) Plus: 10 percent of N's export promotion expenses (10% of $20) | 2 | |
| (c) N's profit | 6 | |
| (4) N's profit under section 482 method: | ||
| (a) N's sales price | 100 | |
| (b) Less deductions: | ||
| N's cost of goods sold (price paid by N to M) | 75 | |
| N's expenses | 22 | |
| Total deductions | 97 | |
| (c) N's profit | 3 | |
Since the gross receipts method results in greater profit to N ($6) than does the combined taxable income method ($5) or section 482 method ($3), and does not exceed combined taxable income ($6), N may earn a maximum profit of $6. Accordingly, the transfer price from M to N may be readjusted as long as the transfer price is not readjusted below $72, computed as follows:
| (5) Transfer price from M to N: | ||
| (a) N's sales price | $100 | |
| (b) Less: | ||
| N's expenses | $22 | |
| N's profit | 6 | |
| Total subtractions | 28 | |
| (c) Transfer price | 72 |
Q and R are calendar year taxpayers. Q, a domestic manufacturing company, owns all the stock of R, a DISC for the taxable year. During 1972, Q produces and sells a product line of export property to R for $170, a price which can be justified as satisfying the standards of arm's length price of section 482, and R resells the export property for $200. Q's cost of goods sold attributable to the export property is $115 so that the combined gross income from the sale of the export property is $85 (i.e., $200 minus $115). Q's expenses incurred in connection with the property sold are $35. Q's deductible overhead and other supportive expenses allocable to all gross income are $6. Apportionment of these supportive expenses on the basis of gross income does not result in a material distortion of income and is a reasonable method of apportionment. Q's gross income from sources other than the transaction is $170 making total gross income of Q and R (excluding the transfer price paid by R) $255 (i.e., $85 plus $170). R's expenses attributable to resale of the export property are $20, all of which are export promotion expenses. The maximum profit which R may earn with respect to the product line is $16, computed as follows:
| (1) Combined taxable income: | |||
| (a) R's sales price | $200 | ||
| (b) Less deductions: | |||
| (i) Q's cost of goods sold | 115 | ||
| (ii) Q's expenses incurred in connection with the property sold | 35 | ||
| (iii) Apportionment of Q's supportive expenses: | |||
| Q's supportive expenses | $6 | ||
| Combined gross income from sale of export property | 85 | ||
| Total gross income of Q and R | 255 | ||
| Apportionment | (6 × 85)/255 | 2 | |
| (iv) R's expenses | 20 | ||
| Total deductions | 172 | ||
| (c) Combined taxable income | 28 | ||
| (2) R's profit under combined taxable income method (before application of loss limitation): | |||
| (a) 50 percent of combined taxable income | 14 | ||
| (b) Plus: 10 percent of R's export promotion expenses (10% of $20) | 2 | ||
| (c) R's profit | 16 | ||
| (3) R's profit under gross receipts method (before application of loss limitation): | |||
| (a) 4 percent of R's sales price (4% of $200) | 8 | ||
| (b) Plus: 10 percent of R's export promotion expenses (10% of $20) | 2 | ||
| (c) R's profit | 10 | ||
| (4) R's profit under section 482 method: | |||
| (a) R's sales price | 200 | ||
| (b) Less deductions: | |||
| R's cost of goods sold (price paid by R to Q) | 170 | ||
| R's expenses | 20 | ||
| Total deductions | 190 | ||
| (c) R's profit | 10 | ||
Since the combined taxable income method results in greater profit to R ($16) than does the gross receipts method ($10) or section 482 method ($10), and does not exceed combined taxable income ($28), R may earn a maximum profit of $16. Accordingly, the transfer price from Q to R may be readjusted as long as the transfer price is not readjusted below $164 computed as follows:
| (5) Transfer price from Q to R: | ||
| (a) R's sales price | $200 | |
| (b) Less: | ||
| R's expenses | $20 | |
| R's profit | 16 | |
| Total | 36 | |
| (c) Transfer price | 164 |
S and T are calendar year taxpayers. S, a domestic manufacturing company, owns all the stock of T, a DISC for the taxable year. During 1972, S produces and sells 100 units of a particular product to T under a written agreement which provides that the transfer price between S and T shall be that price which allocates to T the maximum permitted to be received under the intercompany pricing rules of section 994. Thereafter, the 100 units are sold by T for $950. S's cost of goods sold attributable to the 100 units is $650. S's other deductible expenses so attributable are $300. Although S has other deductible expenses, for purposes of this example, assume that S has no deductible expenses not definitely allocable to any item of gross income. T's expenses attributable to the resale of the 100 units are $50. S chooses not to apply the section 482 method. T may not earn any income under the gross receipts or combined taxable income method with respect to resale of the 100 units because combined taxable income is a negative figure, computed as follows:
| (1) Combined taxable income: | ||
| (a) T's sales price | $950 | |
| (b) Less deductions: | ||
| S's cost of goods sold | $650 | |
| S's expenses | 300 | |
| T's expenses | 50 | |
| Total deductions | 1,000 | |
| (c) Combined taxable income (loss) | ($50) |
Under paragraph (e)(1)(i) of this section, T is permitted to recover its expenses attributable to the 100 units ($50) even though such recovery results in a loss or increased loss to the related supplier. Accordingly, the transfer price from S to T may be readjusted as long as the transfer price is not readjusted below $900, computed as follows:
| (2) Transfer price from S to T: | |
| (a) T's sales price | $950 |
| (b) Less: T's expenses | 50 |
| (c) Transfer price | 900 |
Assume the same facts as in example 4 except that S chooses to apply the section 482 method and that under arm's length dealings T would have derived $10 of income. Accordingly, the transfer price from S to T may be set at an amount not less than $890, computed as follows:
| (1) Transfer price from S to T: | ||
| (a) T's sales price | $950 | |
| (b) Less: | ||
| T's expenses | $50 | |
| T's profit | 10 | |
| Total deductions | 60 | |
| (c) Transfer price | 890 |
X and Y are calendar year taxpayers. X, a domestic manufacturing company, owns all the stock of Y, a DISC for the taxable year. During March 1972, X manufactures a particular product of export property which it leases on April 1, 1972, to Y for a term of 1 year at a monthly rental of $1,000, a rent which satisfies the standard of arm's length rental under section 482. Y subleases the product on April 1, 1972, for a term of 1 year at a monthly rental of $1,200. X's cost for the product leased is $40,000. X's other deductible expenses attributable to the product are $900, all of which are incurred in 1972. Although X has other deductible expenses, for purposes of this example, assume that X has no other deductible expenses. Y's expenses attributable to sublease of the export property are $450, all of which are incurred in 1972 and are export promotion expenses. X depreciates the property on a straight line basis without the use of an averaging convention, assuming a useful life of 8 years and no salvage value. The profit which Y may earn with respect to the transaction is $2,895 for 1972 and $1,175 for 1973, computed as follows:
| computation for 1972 | ||
| (1) Combined taxable income: | ||
| (a) Y's sublease rental receipts for year ($1,200 × 9 months) | $10,800 | |
| (b) Less deductions: | ||
| X's depreciation ($40,000 × 1/8 × 9/12) | $3,750 | |
| X's other expenses | 900 | |
| Y's expenses | 450 | |
| Total deductions | 5,100 | |
| (c) Combined taxable income | 5,700 | |
| (2) Y's profit under combined taxable income method (before application of loss limitation): | ||
| (a) 50 percent of combined taxable income | 2,850 | |
| (b) Plus: 10 percent of Y's export promotion expenses (10% of $450) | 45 | |
| (c) Y's profit | 2,895 | |
| (3) Y's profit under gross receipts method (before application of loss limitation): | ||
| (a) 4 percent of Y's sublease rental receipts for year (4% of $10,800) | 432 | |
| (b) Plus: 10 percent of Y's export promotion expenses (10% of $450) | 45 | |
| (c) Y's profit | 477 | |
| (4) Y's profit under section 482 method: | ||
| (a) Y's sublease rental receipts for year | $10,800 | |
| (b) Less deductions: | ||
| Y's lease rental payments for year | $9,000 | |
| Y's expenses | 450 | |
| Total deductions | 9,450 | |
| (c) Y's profit | 1,350 | |
Since the combined taxable income method results in greater profit to Y ($2,895) than does the gross receipts method ($477) or section 482 method ($1,350), Y may earn a profit of $2,895 for 1972. Accordingly, the monthly rental payable by Y to X for 1972 may be readjusted as long as the monthly rental payable is not readjusted below $828.33, computed as follows:
| (5) Monthly rental payable by Y to X for 1972: | ||
| (a) Y's sublease rental receipts for year | $10,800.00 | |
| (b) Less: | ||
| Y's expenses | 450.00 | |
| Y's profit | 2,895.00 | |
| Total | 3,345.00 | |
| (c) Rental payable for 1972 | 7,455.00 | |
| (d) Rental payable each month ($7,455 ÷ 9 months) | 828.33 | |
| computation for 1973 | ||
| (1) Combined taxable income: | ||
| (a) Y's sublease rental receipts for year ($1,200 × 3 months) | $3,600 | |
| (b) Less: X's depreciation ($40,000 × 1/8 × 3/12) | 1,250 | |
| (c) Combined taxable income | 2,350 | |
| (2) Y's profit under combined taxable income method (before application of loss limitation): | ||
| (a) 50 percent of combined taxable income | $1,175 | |
| (b) Y's profit | 1,175 | |
| (3) Y's profit under gross receipts method (before application of loss limitation): | ||
| (a) 4 percent of Y's sublease rental receipts for year (4% of $3,600) | 144 | |
| (b) Y's profit | 144 | |
| (4) Y's profit under section 482 method: | ||
| (a) Y's sublease rental receipts for year | 3,600 | |
| (b) Less: Y's lease rental payments for year | 3,000 | |
| (c) Y's profit | 600 | |
Since the combined taxable income method results in greater profit to Y ($1,175) than does the gross receipts method ($144) or section 482 method ($600), Y may earn a profit of $1,175 for 1973. Accordingly, the monthly rental payable by Y to X for 1973 may be readjusted as long as the monthly rental payable is not readjusted below $808.33, computed as follows:
| (5) Monthly rental payable by Y to X for 1973: | |
| (a) Y's sublease rental receipts for year | $3,600.00 |
| (b) Less: Y's profit | 1,175.00 |
| (c) Rental payable for 1973 | 2,425.00 |
| (d) Rental payable for each month ($2,425 ÷ 3 months) | 808.33 |
(Secs. 995(e)(7), (8) and (10), 995(g) and 7805 of the Internal Revenue Code of 1954 (90 Stat. 1655, 26 U.S.C. 995 (e)(7), (8) and (10); 90 Stat. 1659, 26 U.S.C. 995(g); and 68A Stat 917, 26 U.S.C. 7805))
[T.D. 7364, 40 FR 29827, July 16, 1975, as amended by T.D. 7435, 41 FR 43142, Sept. 30, 1976; T.D. 7854, 47 FR 51741, Nov. 17, 1982; T.D. 7984, 49 FR 40018, Oct. 12, 1984]
Terms defined here
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Cross-references
Computed from the citations in the text of 26 CFR.
Code sections it cites
- § 994 Inter-company pricing rules
- § 482 Allocation of income and deductions among taxpayers
- § 993 Definitions and special rules
- § 471 General rule for inventories
- § 631 Gain or loss in the case of timber, coal, or domestic iron ore
- § 992 Requirements of a domestic international sales corporation
- § 861 Income from sources within the United States
- § 162 Trade or business expenses
- § 404 Deduction for contributions of an employer to an employees’ trust or annuity plan and compensation under a deferred-payment plan
- § 167 Depreciation
- § 901 Taxes of foreign countries and of possessions of United States
- § 7701 Definitions
- § 995 Taxation of DISC income to shareholders
- § 7805 Rules and regulations
Regulations it cites
- § 1.993-1 Definition of qualified export receipts.
- § 1.482-1 Allocation of income and deductions among taxpayers.
- § 1.991-1 Taxation of a domestic international sales corporation.
- § 1.61-3 Gross income derived from business.
- § 1.631-1 Election to consider cutting as sale or exchange.
- § 1.861-8 Computation of taxable income from sources within the United States and from other sources and activities.
- § 1.992-1 Requirements of a DISC.
- § 1.993-2 Definition of qualified export assets.
- § 1.482-2 Determination of taxable income in specific situations.
- § 1.994-2 Marginal costing rules.
Cited by 9 other regulations
- § 1.861-9T Allocation and apportionment of interest expense (temporary).
- § 1.921-1T Temporary regulations providing transition rules for DISCs and FSCs.
- § 1.936-6 Intangible property income when an election out is made: Cost sharing and profit split options; covered intangibles.
- § 1.993-1 Definition of qualified export receipts.
- § 1.993-2 Definition of qualified export assets.
- § 1.993-4 Definition of producer's loans.
- § 1.993-5 Definition of related foreign export corporation.
- § 1.993-6 Definition of gross receipts.
- § 1.994-2 Marginal costing rules.
Amendment history
From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.
- Amended by T.D. 7984 (49 FR 40018)
- Amended by T.D. 7854 (47 FR 51741)
- Amended by T.D. 7435 (41 FR 43142)
- Issued by T.D. 7364 (40 FR 29827)
Where it sits in 26 CFR
- Subchapter A Income tax
- Part 1 Income taxes
- Domestic International Sales Corporations
Nearby sections
- § 1.993-4 Definition of producer's loans.
- § 1.993-5 Definition of related foreign export corporation.
- § 1.993-6 Definition of gross receipts.
- § 1.993-7 Definition of United States.
- § 1.994-1 Inter-company pricing rules for DISC's.
- § 1.994-2 Marginal costing rules.
- § 1.995-1 Taxation of DISC income to shareholders.
- § 1.995-2 Deemed distributions in qualified years.
- § 1.995-3 Distributions upon disqualification.