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the FSC can deduct for the tax year is

Cost or market value (whichever is

For more information on inventory

figured on line 8.

lower); or

valuation methods, see Pub. 538,

•

Any other method approved by the IRS

Accounting Periods and Methods.

Note: All FSCs not using the cash

that conforms to the requirements of the

method of accounting should see Section

applicable regulations cited below.

Additional Information

263A uniform capitalization rules in the

instructions for Schedule G on page 12.

However, if the FSC is using the cash

Line 2. Show any tax-exempt interest

See those instructions before completing

method of accounting, it is required to use

received or accrued. Include any

Schedule A.

cost.

exempt-interest dividends received as a

If the FSC uses intercompany pricing

shareholder in a mutual fund or other

FSCs that account for inventoriable

rules (for purchases from a related

regulated investment company.

items in the same manner as materials

supplier), use the transfer price figured in

and supplies that are not incidental may

Line 4. See section 542 for the definition

Part II of Schedule P (Form 1120-FSC).

currently deduct expenditures for direct

of personal holding company and section

Line 1. Inventory at beginning of year.

labor and all indirect costs that would

552 for the definition of foreign personal

If the FSC is changing its method of

otherwise be included in inventory costs.

holding company. Also, see Personal

accounting for the current tax year, it

Holding Companies and Foreign

The average cost (rolling average)

must refigure last year’s closing inventory

Personal Holding Companies on page 5

method of valuing inventories generally

using its new method of accounting and

for information and other details if the

does not conform to the requirements of

enter the result on line 1. If there is a

FSC meets the definition of either.

the regulations. See Rev. Rul. 71-234,

difference between last year’s closing

1971-1 C.B. 148.

Line 6. If the FSC owned at least a 10%

inventory and the refigured amount,

interest, directly or indirectly, in any

attach an explanation and take it into

FSCs that use erroneous valuation

foreign partnership, attach a statement

account when figuring the FSC’s section

methods must change to a method

listing the following information for each

481(a) adjustment (explained on page 6).

permitted for Federal income tax

foreign partnership. For this purpose, a

purposes. To make this change, use

Line 4. Additional section 263A costs.

foreign partnership includes an entity

Form 3115.

An entry is required on this line only for

treated as a foreign partnership under

FSCs that have elected a simplified

On line 9a, check the method(s) used

Regulations section 301.7701-2 or

method of accounting.

for valuing inventories. Under lower of

301.7701-3.

For FSCs that have elected the

cost or market, the term “market” (for

1. Name and EIN (if any) of the

simplified production method,

normal goods) means the current bid

foreign partnership;

additional section 263A costs are

price prevailing on the inventory valuation

2. Identify which, if any, of the

generally those costs, other than interest,

date for the particular merchandise in the

following forms the foreign partnership

that were not capitalized under the FSC’s

volume usually purchased by the

filed for its tax year ending with or within

method of accounting immediately prior to

taxpayer. If section 263A applies to the

the FSC’s tax year: Form 1042, 1065 or

the effective date of section 263A but are

taxpayer, the basic elements of cost must

1065-B, or 8804;

now required to be capitalized under

reflect the current bid price of all direct

3. Name of the tax matters partner (if

section 263A. For details, see

costs and all indirect costs properly

any); and

Regulations section 1.263A-2(b).

allocable to goods on hand at the

4. Beginning and ending dates of the

inventory date.

For FSCs that have elected the

foreign partnership’s tax year.

simplified resale method, additional

Inventory may be valued below cost

section 263A costs are generally those

Line 7. If the FSC has a net operating

when the merchandise is unsalable at

costs incurred with respect to the

loss (NOL) for its 2003 tax year, it may

normal prices or unusable in the normal

following categories.

elect under section 172(b)(3) to waive the

way because the goods are subnormal

•

Off-site storage or warehousing.

entire carryback period for the NOL and

due to damage, imperfections, shopwear,

•

Purchasing; handling, such as

instead carry the NOL forward to future

etc., within the meaning of Regulations

processing, assembling, repackaging,

tax years. To do so, check the box on line

section 1.471-2(c). The goods may be

and transporting.

7 and file the tax return by its due date,

valued at the current bona fide selling

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General and administrative costs

including extensions (do not attach the

price, minus direct cost of disposition (but

(mixed service costs).

statement described in Temporary

not less than scrap value) if such a price

Regulations section 301.9100-12T). Once

For details, see Regulations section

can be established.

made, the election is irrevocable. See

1.263A-3(d).

If this is the first year the Last-in,

Pub. 542, Corporations, section 172, and

Enter on line 4 the balance of section

First-out (LIFO) inventory method was

Form 1139, Corporation Application for

263A costs paid or incurred during the tax

either adopted or extended to inventory

Tentative Refund, for more details.

year not includible on lines 2, 3, and 5.

goods not previously valued under the

Line 8. Enter the amount of the NOL

Line 5. Other costs. Enter on line 5 any

LIFO method provided in section 472,

carryover to the tax year from prior years,

costs paid or incurred during the tax year

attach Form 970, Application To Use

even if some of the loss is used to offset

not entered on lines 2 through 4.

LIFO Inventory Method, or a statement

income on this return. The amount to

with the information required by Form

Line 7. Inventory at end of year. See

enter is the total of all NOLs generated in

970. Also check the LIFO box on line 9c.

Regulations sections 1.263A-1 through

prior years but not used to offset income

On line 9d, enter the amount or the

1.263A-3 for details on figuring the

(either as a carryback or carryover) to a

percent of total closing inventories

amount of additional section 263A costs

tax year prior to 2003. Do not reduce the

covered under section 472. Estimates are

to be included in ending inventory. If the

amount by any NOL deduction reported

acceptable.

FSC accounts for inventoriable items in

on line 19a, Part II of Schedule B.

the same manner as materials and

If the FSC changed or extended its

Lines 9c and 10b(2). See Definition of

supplies that are not incidental, enter on

inventory method to LIFO and had to

a Foreign Sales Corporation (FSC) on

line 7 the portion of its merchandise

write up the opening inventory to cost in

page 2 for definitions of qualifying foreign

purchased for resale that is included on

the year of election, report the effect of

country and U.S. possession.

line 6 and was not sold during the year.

the write-up as other income (as

Lines 9a through 9f. Inventory

appropriate on Schedule F, line 16),

Line 10. All FSCs (except small FSCs)

valuation methods. Inventories can be

proportionately over a 3-year period that

must answer these questions. For more

valued at:

begins with the year of the LIFO election

information, see Foreign Management

•

Cost;

(section 472(d)).

Rules on page 3.

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Instructions For Form 1120-Fsc - U.s. Income Tax Return Of A Foreign Sales Corporation - 2003 Page 9

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