Proposed DISC intercompany pricing regulations provide general safe haven rules and special marginal costing rules. However, these proposed regulations curtail the statutory benefits of Section 994 intercompany pricing by restricting eligibility to a limited category of transactions and by imposing other constraints.
The general safe haven pricing rules encompass only a portion of the transactions which produce qualified gross receipts. The initial restriction is a "related supplier" rule l. A related supplier is a related entity which singly engages in a transaction directly with the DISC. Not all entities related to the DISC qualify as a related supplier. Thus, if Y Corp. and a DISC are wholly-owned subsidiaries of C Corp. and X sells a product to y which is resold to the DISC, Y but not X is a related supplier.
Consequently, only the resale from Y to the DISC is eligible for the Section 994 intercompany rules. Although a DISC can have different related suppliers with respect to different transactions, the "related supplier" rule can be particularly disadvantageous to a business which operates through multiple corporations rather than through a single entity because only the transaction with the DISC is eligible for the safe haven rules.2
The second restriction embodied in the general safe haven rules is a complete exclusion of certain categories of transactions. Only the following five are eligible for the Section 994 intercompany pricing rules:3
I) The DISC is purchaser and seller, or a commission agent, on a sale of goods.
