Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-71

1973-1 C.B. 361

Sec. 993

IRS Headnote

Proceeds of sales of non-durable goods by a DISC to U. S. military agencies for resale abroad through post exchanges are qualified export receipts; however, the proceeds of the sales to the Department of Defense for resale abroad at military commissaries are excluded receipts and do not qualify.

Full Text

Rev. Rul. 73-71

Advice has been requested whether the proceeds of sale by a Domestic International Sales Corporation ("DISC") of nondurable goods, under the circumstances described below, will constitute qualified export receipts under section 993(a)(1) of the Internal Revenue Code of 1954.

X, a domestic corporation is a manufacturer of women's toiletries. X formed Y, a wholly-owned corporation which elected to be a DISC. A portion of X's products are sold through post exchanges and commissaries situated at United States military establishments in foreign countries. Upon receipt of orders from the appropriate military agency, X delivers its merchandise to ports of embarkation for shipment abroad. X's products, non-durable consumer goods among which are shampoo and powders, are consumed within a short period of time after purchase and, thus, are not likely to be returned to the United States for use. Y will sell X's products to the post exchanges and commissaries.

The question is whether the proceeds of sale by Y, a DISC, of nondurable goods to post exchanges or to commissaries, for resale abroad, will constitute qualified export receipts under section 993(a)(1) of the Code.

Receipts from the sale of property otherwise constituting qualified export receipts under section 993(a)(1)(A) of the Code may be excluded from qualification by section 993(a)(2) of the Code. Section 993(a)(2)(C) of the Code provides, in part, that receipts from sales of export property for the use of instrumentalities of the United States, where the use of such property is required by law or regulations, will be excluded from the definition of qualified export receipts. The purchases of property by the Department of Defense out of appropriated funds subject to the Armed Services Procurement Regulations, fall within the exclusion of section 993(a)(2)(C) of the Code. Such purchases by the Department of Defense would include purchases of goods for resale at commissaries, but not at post or base exchanges.

Section 993(c)(1)(B) of the Code provides, in pertinent part, that export property includes certain property held primarily for sale for direct use or consumption outside the United States. Non-durable consumer goods which are used predominantly outside the United States by the ultimate purchaser, will satisfy the requirements of section 993(c)(1)(B) of the Code. The products described above constitute such goods.

Accordingly, it is held that the proceeds of sales by Y of non-durable consumer goods for resale abroad through United States military post and base exchanges, will constitute qualified export receipts under the terms of section 993(a)(1)(A) of the Code. However, the proceeds of sales of goods to the Department of Defense for resale at commissaries at United States military establishments situated in foreign countries, are excluded receipts under section 993(a)(2)(C) of the Code, and will not constitute qualified export receipts.