DISC profit can be maximized by including in the DISC certain export sales which generate a loss to the DISC. This strange result occurs because of the interrelationship between the two safe-haven rules for computing DISC profit: 4 percent of gross receipts or 50 percent of combined taxable income, and because of the flexible rules provided for grouping DISC sales.
DISC income can be determined on a transaction-by-transaction basis, or transactions can be grouped by product or by product line, providing the grouping conforms to any recognized industry or trade usage. Because of this wide latitude, many groupings are permissible.2 If loss sales are incurred, it may be possible to aggregate some or all of them with profitable transactions. This analysis demonstrates that selective inclusion and aggregation can be advantageous.
We first turn our attention to the "shell" DISC situation in which there are no export promotion expenses. Let P represent DISC profit, G represent gross receipts, and C represent combined taxable income. Therefore, C/G is the profit margin. Where C/G is greater than .08, 50% of combined taxable income will exceed 4% of gross receipts. Where C/G is between .04 and .08, 4% of gross receipts will exceed 50% of combined taxable income. Where C/G is less than .04, DISC profit will be limited to combined taxable income because of no-loss rule. Thus,
|.08 >/||C/G >/||.04||P=.04G|
|.04 >/||C/G >/||P=C|