EXPORT SALES INVOLVING A FSC CANNOT USE INDEPENDENT FACTORY PRICE TO DETERMINE SOURCE OF INCOME.

Notice 89-11

For purposes of determining the source of income from export sales of inventory, section 1.863-3(b)(2) of the Income Tax Regulations requires the use of an independent factory or production price ("IFP") if available. See Rev. Rul. 88-73, 1988-38 I.R.B. 18. Further guidance concerning the definition of the term independent factory or production price is provided by Notice 89-10, issued simultaneously with this Notice. This Notice provides guidance concerning the application of section 1.863-3(b)(2) in the case of sales to a foreign sales corporation ("FSC") as defined under section 922 of the Internal Revenue Code. Regulations to be issued under section 927 of the Code will provide that if inventory is sold to a FSC, or with a FSC acting as commission agent, EXAMPLE (2) of section 1.863-3(b)(2) will apply for purposes of determining the source of income of the related supplier to the FSC. However, the foreign source income of the related supplier will be subject to the limitation of section 927(e)(1). Thus, such income cannot exceed the amount that would have been earned had the sale been made to or by a domestic international sales corporation under the pricing rules of section 994. Section 1.863-3(b)(2) permits a taxpayer to "otherwise" establish an IFP if its own non-FSC related sales do not establish such a price. Under the regulations to be issued under section 927, however, use of such an IFP will not be permitted in the case of sales involving a FSC. This document is an "administrative pronouncement" as that term is used in section 1.6661-3(b)(2) of the Regulations and may be relied on to the same extent as a revenue ruling or revenue procedure.