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This paper discusses how a Federal Tax Court decision in 1996 opened the door for Subchapter S Corporations to export goods produced in the United States to selected countries through a foreign sales corporation (FSC). It looks at how the court ruling also permitted an individual retirement account (IRA) of a Subchapter S Corporation owner to be the owner of the FSC and how this structure made it possible for individuals to benefit both from export incentive tax reductions through an FSC and tax benefits available through an IRA. It researches various models designed to maximize federal income tax-related benefits and wealth deriving from these developments. Outline Introduction The Subchapter S Corporation IRA/FSC Model The Subchapter S Corporation Direct Export Model The Subchapter C Corporation Direct Export Model The Subchapter C Corporation FSC Subsidiary Model Postulated Theory and Hypotheses Analysis of the Two Postulated Hypotheses Discussion Conclusion
"Subchapter S Corporations always have had the authority to engage in the export of goods to foreign countries. No special benefits accruing directly from profits on exports, however, were available to the owners of Subchapter S Corporations. Rather, the benefit to the owners of such corporations was the ability of a Subchapter S Corporation to elect to be taxed as individual owners, as opposed to being taxed as a corporation. Thus, the owners of a Subchapter S Corporation making such an election would benefit to the extent that individual tax rates were lower that the applicable corporate tax rate, as well as to the extent that other incentives initiated by government to spur exports led to increased profits on export sales."
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