1. A. For purposes of this Section, “DISC” means a corporation that elects to be treated as a DISC under Internal Revenue Code § 992. The Arizona gross income of a DISC is the DISC’s federal taxable income computed as if the DISC were a corporation that had not elected to be treated as a DISC. A DISC that meets the combined return filing requirements of R15-2D-401 shall file as part of a combined return unless:

   1. 1. The DISC is a foreign corporation that is not subject to Arizona income tax, or
   2. 2. The corporation with which the DISC would otherwise be required to file a combined return is a member of an Arizona affiliated group as defined in A.R.S. § 43-947.

2. B. For purposes of subsections (B) and (C), “deducted amount” means the amount of commissions, rentals, and other amounts paid or accrued to a DISC that is deducted in computing federal taxable income. A corporation that directly or indirectly owns or controls 50% or more of the voting stock of a DISC shall add to Arizona gross income the entire deducted amount, unless either subsection (B)(1) or (B)(2) applies.

   1. 1. If the corporation and the DISC file as part of the same Arizona combined return, no addition to Arizona gross income is required.

   2. 2. If the DISC is taxable in Arizona and subsection (B)(1) does not apply, the addition to Arizona gross income is the deducted amount minus the quotient of the DISC’s Arizona taxable income attributable to the deducted amount divided by the corporation’s apportionment ratio computed under A.R.S. § 43-1139. In no case shall the addition to Arizona gross income be less than zero.

      Example: Corporation A owns 60% of the voting stock of a DISC. Corporation A has a 50% Arizona apportionment ratio and the DISC has a 10% Arizona apportionment ratio for the taxable year. Corporation A and the DISC are not required to file a combined return. Corporation A pays the DISC commissions of $100,000 and deducts this amount on its federal income tax return. The DISC’s Arizona taxable income attributable to the commission is $10,000 ($100,000 x 10%). Therefore, Corporation A’s addition to Arizona gross income for the DISC commissions is $80,000 ($100,000 - ($10,000 ÷ .50)).

3. C. A corporation that deducts the interest charge required under Internal Revenue Code § 995(f) in determining federal taxable income for the taxable year shall add to Arizona gross income the amount of the interest charge deducted, unless subsection (C)(1), (C)(2), or (C)(3) applies.

   1. 1. If the corporation and a DISC file as part of the same Arizona combined return for the taxable year in which the corporation reports DISC income related to the interest charge, the corporation shall not add the interest charge to Arizona gross income.
   2. 2. If the interest charge is attributable to the deducted amount that the corporation is required to add to Arizona gross income under subsection (B), the corporation shall not add the interest charge to Arizona gross income.

   3. 3. If the interest charge is attributable to income of a DISC, the dividends of which are includible in the corporation’s Arizona taxable income, the corporation shall not add the interest charge to Arizona gross income.

      Example: Corporation B owns 30% of a DISC that is not a foreign corporation. If the DISC dividends are includible in the Arizona taxable income of Corporation B, the interest charge is not added to Corporation B’s Arizona gross income.

4. D. The Department shall not adjust DISC transactions that comply with the inter-company pricing provisions of Internal Revenue Code § 994.

Historical Note

Recodified at 6 A.A.R. 2308, filed in the Office of the Secretary of State June 2, 2000 (Supp. 00-2). Amended by final rulemaking at 7 A.A.R. 2896, effective June 13, 2001 (Supp. 01-2).