Rev. Rul. 88-11

1988-1 C.B. 296, 1988-6 I.R.B. 10.

                       Internal Revenue Service

                                 Revenue Ruling

                  DISC; DEFINITIONS; QUALIFIED EXPORT RECEIPTS

                          Published: February 8, 1988

SECTION 993. - DEFINITIONS, 26 CFR 1.993-1: Definition of qualified export receipts.

  DISC; definitions; qualified export receipts. Gross receipts from the sale in 1984 of personal care products to overseas U.S. military post and base exchanges and commissary stores are qualified export receipts under section 994(a)(1) of the Code. Rev. Rul. 73-71 is modified.

  Are the gross receipts of a domestic international sales corporation ('DISC ') from the sale in 1984 of personal care products to commissary stores and post and base exchanges located on United States military installations in foreign countries 'qualified export receipts' under section 993(a)(1) of the Internal Revenue Code of 1986?

FACTS

  X, a domestic corporation, manufactures personal care products. During 1984, X sold these products to Y, a domestic corporation owned by X that qualified as a DISC for 1984 under section 992(a) of the Code. Y resold the product to post and base exchanges and commissary stores located on United States military installations in foreign countries. The products were 'export property' within the meaning of section 993(c).

LAW AND ANALYSIS

  Section 993(a)(1) of the Code defines the 'qualified export receipts' of a DISC to include gross receipts from the sale of export property. Section 993(a)(2)(C) provides in part that the Secretary may exclude from qualified export receipts the receipts of a DISC from the sale of export property for the use of the United States or any instrumentality thereof, where the use of the property is required by law or regulations.

  Rev. Rul. 73-71, 1973-1 C.B. 361, considers whether receipts from a DISC's sale of export property to the Department of Defense for resale at overseas post and base exchanges and commissaries constitute qualified export receipts. The ruling holds that the post and base exchange receipts are qualified export receipts, but the commissary receipts are not because the Department of Defense purchases commissary property using appropriated funds that are subject to the Armed Services Procurement Regulations. The ruling does not cite a provision of those regulations requiring the use of the property.

  Section 1.993-1(j)(4)(i) of the Income Tax Regulations, promulgated after Rev. Rul. 73-71 was issued, provides that receipts from a DISC's sale of export property to the Department of Defense for overseas use are not qualified export receipts if the property is purchased from appropriated funds that are subject to any provisions of the Armed Forces Procurement Regulations, or of any Department of Defense appropriations act, that restricts use of the funds to the procurement of items that are grown, reprocessed, reused, or produced in the United States. No law or regulation applicable to the commissary sales contains this restriction; in fact, the Armed Forces Procurement Regulations explicitly exempt property purchased for commissary resale from any such requirement. See 32 C.F.R. section 6- 103.7 (1984). The portion of Rev. Rul. 73-71 dealing with commissary sales is therefore inconsistent with section 1.993-1(j)(4)(i) of the Income Tax Regulations.

HOLDING

  Y's gross receipts from the sale in 1984 of personal care products to overseas United States military post and base exchanges and commissary stores are qualified export receipts under section 993(a)(1) of the code.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 73-71 is modified.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Richard Chewning of the Office of the Associate Chief Counsel (International). For further information about the ruling, call Mr. Chewning at (202) 566- 6384 (not a toll-free call).

Rev. Rul. 88-11, 1988-1 C.B. 296, 1988-6 I.R.B. 10.