From time to time the question comes up if it is possible to calculate or even take a deduction for an IC-DISC commission during a year in which the supplier company is experiencing a net loss. Most practitioners are generally aware of the prohibition of an IC-DISC “causing a loss to its related supplier,” but are unclear as to its application and operation.
According to the Treasury Regulations, the broad framework states that neither the gross receipts method nor the combined taxable income method of calculating an IC-DISC commission may be applied to “cause in any taxable year a loss to the related supplier,” but either of these methods may be applied to the extent it does not cause a loss. However, a loss to a related supplier will only result if the taxable income of the IC-DISC exceeds the combined taxable income (CTI) of the related supplier and the IC-DISC. The CTI of an IC-DISC is determined by taking the gross receipts of export property less the total costs of the IC-DISC and related supplier which relate to such gross receipts.
The determination as to whether a loss to a related supplier has been sustained is to be made on a transaction-by-transaction basis, not measured by looking at the operations as a whole. Further, at the annual choice of the taxpayer some or all of these transactional determinations may be made on the basis of groups of transactions consisting of products or product lines. Therefore, each sale or group of sales is analyzed on its own to see if a loss as described above is created for the supplier.
On that basis it is certainly possible to develop a deductible IC-DISC commission (an IRC §162(a) ordinary business expense) for a loss year, as in many cases numerous transactions can be identified and accumulated for computing a commission that does not “cause a loss” to the supplier as defined by the IC-DISC regulations.