International Tax

882. Tax on Income of Foreign Corporations Connected with U.S. Business

(a) —(1) A foreign corporation engaged in a trade or business WITHIN the U.S. during the year . . . is taxable under 11, 55, 59A, or 1201(a) on ANY taxable income that is EFFECTIVELY CONNECTED to that trade or business —(2) for paragraph (1), gross income includes ONLY income that is EFFECTIVELY CONNECTED with the conduct of a trade or business in the U.S. —(3) for special treatment of gains or losses when a foreign corporation disposes of U.S. real property interests, see 897. (b) For a foreign corporation, except where context clearly indicates otherwise, gross income includes ONLY —(1) gross income derived from U.S. SOURCES and NOT effectively connected; *and* —(2) income effectively connected to a trade or business conducted WITHIN the U.S. (c) —(1) ——(A) for a foreign corporation, DEDUCTIONS are allowed ONLY for the purposes of subsection (a) and ONLY IF and to the extent they are effectively connected. ———the proper apportionment of deductions is determined by Secretary-provided regulations ——(B) Deduction for charitable gifts and contributions allowed REGARDLESS of whether effectively connected or not —(2) a Foreign Corporation shall receive the benefit of credits and deductions . . . ONLY by filing a tax return. ——doesn't apply for taxes imposed under 541 (personal holding company tax) ——should not be construed to deny credits under 33 (taxes withheld at source) or 34 (certain uses of gasoline) (3) except as under 906, foreign corporations are NOT allowed a credit for paying taxes in foreign countries or U.S. possession under 901 (4) Certain foreign taxes are not taken into account when determining credits or deductions under 906(b)(1).

Reg. § 1.861-3. Dividends

(a) —(1) Dividends are defined under 316 as "any distribution of property made by a corporation to its shareholders out of its earnings and profits as calculated AT THE CLOSE of the taxable year." Dividends considered as being from SOURCES WITHIN include: —(2) Dividends from domestic corporations, EXCEPT those having made the § 936-election; —(3) ——(i) ———(a) Dividends from foreign corporations, UNLESS less than 50% of the corporation's total gross income FROM ALL SOURCES . . . for the 3-year period ending at the END of the year BEFORE dividends were given . . . is EFFECTIVELY CONNECTED ———(b) if more than 50% is effectively connected, the AMOUNT of the dividend treated as from within is the RATIO of the dividend to the effectively connected gross income of that 3-yr period ———(c) Gross income includes any "earnings and profits" effectively connected under § 882(d) or (e) ——(ii) *Rule applicable in applying limitation on amount of foreign tax credit* For purposes of determining the 904 limitation upon the foreign tax credit ———(a) any dividend amount that exceeds 100/85 of the amount of the deduction allowed under 245(a) (i.e., the deduction allowed for U.S. source dividends from a 10% owned foreign corporation. The deduction is the % of the U.S. source portion of the dividends) ———(b) *plus* any amount that is the same percentage of the 78 dividend . . . as the excess in (a) is to the total dividend ————so (amount in (a) / total dividend) x (78 dividend) is treated as foreign source income. ——but only applies where no dividends received deduction is allowed under 245 or for which the 85% dividends-received deduction of 245 is allowed . . . but does not apply to a dividend for which a deduction is already allowable under 245(b) ——if a dividend is 100% deductible under 245, it is all U.S. source (b) —(1) If the foreign corporation has no gross income for the 3-yr period, the 50% test or the apportionment test should be applied to the year in which the dividends were DECLARED —(2) For any year before 1967, income from sources within is considered to ALSO be effectively connected —(3) for paragraphs, (a)(2) or (3) ——(i) determine the gross income of domestic corporations by excluding anything SPECIFICALLY excluded under chapter 1 of the Code; ——(ii) determine a foreign corporation's income that is EFFECTIVELY CONNECTED under 882(b)(2), also excluding anything specifically excluded under chapter 1; *and* ——(iii) determine a foreign corporation's gross income from ALL SOURCES without regard to 882(b), and WITHOUT excluding any items under chapter 1 (c) any taxpayer who applies this section at all to exclude a dividend must file a statement setting forth the amount, the date of its receipt, the name and address of the corporation, and the location of the records that substantiate the exclusion. —a statement from the corporation setting all this out works, too (d) This section applies after 1966. —(a)(5) only applies to certain dividends from DISC after 1971. —(a)(6) only applies after 1997

Reg. § 1.861-2. Interest

(a) —(1) Interest income from the U.S. or a U.S resident on a bond, note, or other obligation is treated as from WITHIN. Any other kind of interest is as from WITHOUT —(2) For this paragraph, "resident" means: ——(i) an individual who, at the time of payment, was a resident ——(ii) a domestic corporation ——(iii) a domestic partnership engaged in a trade or business in the U.S. at any point during the year; *or* ——(iv) a foreign corporation or partnership engaged in a trade or business in the U.S. at any point during the year —(3) how payment of interest is made doesn't matter to deciding whether it is from WITHIN or WITHOUT —(4) For this section, "interest" includes all amounts under 483, and OID regardless of whether its instrument was a capital asset of the taxpayer. —(5) If a nonresident pays a resident's interest obligation as a guarantor, then it is U.S. source —(6) for NRAs or foreign corporations, this section applies regardless of whether the interest was EFFECTIVELY CONNECTED for that year —(7)

871. Tax on NRAs

(a) —(1) Nonresident aliens are taxed 30% on all income from within the U.S., including on: ——(A) interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other FDAP gain, profits, or income. ——(B) gains under §§ 631 or 1235 ——(C) ———(i) when an OID obligation is sold, the AMOUNT of OID accruing while held by the NRA; *And* ———(ii) when paying OID obligations, AMOUNT equal to the OID accruing while held by the NRA; *and* ——(D) gains from sales or exchanges of patents, copyrights, secret processes, formulas, good will, trademarks, trade brands, franchises, etc. to the extent such gains are FROM payments that are CONTINGENT on the productivity, use or disposition of the property sold; ———But only to the amount *not* effectively connected with a U.S. trade or business. —(2) For a NRA who is PRESENT in the U.S. for a period or periods totaling 183 days or more . . . there is a 30% tax on gains from SOURCES WITHIN from the sale or exchange of CAPITAL ASSETS in which gains exceed losses. ——gains and losses taken into account ONLY IF, and to the extent that, they would be recognized IF they were EFFECTIVELY CONNECTED. ——Determine these gains and losses without regard to 1202. ——For the 183-day requirement, a NRA who is NOT engaged in a trade or business WITHIN the U.S. and who has NOT established a taxable year . . . is on the CALENDAR YEAR

Reg. § 1.861-18. Classification of Transactions involving computer programs

(a) —(1) This section provides rules for classifying computer transactions for 367, 404A, 482, 551, 679, 1059A, 842, and 845 (to the extent involving a foreign person). ——also covers transfers to foreign trusts not covered by 679 —(2) This section requires computer transactions be placed into ONLY ONE of FOUR separate categories. Rules for deciding are further in ——Transfers of copyrights could be sales, exchanges, or a license generating royalties ——Transfers of copyrighted articles could be sales, exchanges, or leases generating rental income —(3) "Computer program" is a set of statements or instructions to be used . . . directly or indirectly in a computer to bring about a certain result. ——Includes any media, user manuals, documentation, data base or similar item IF it is INCIDENTAL to the operation of a computer program

Reg. § 1.1441-2(a). Amounts subject to withholding

(a) "Amounts subject to withholding" means amount from sources WITHIN that constitute FIXED OR DETERMINABLE ANNUAL OR PERIODICAL income (FDAP). ——Amounts are treated as from WITHIN if the amount CANNOT be determined at the time of payment. ——non-FDAP income is subject to withholding when specifically required Amounts subject to withholding do NOT include: —(1) Amounts described in 1.1441-1(b)(4)(i), i.e., portfolio interest and substitute interest payments, to the EXTENT they involve interest on obligations in bearer form or on foreign-targeted registered obligations but ONLY to the extent to amounts paid to registered financial institutions —(2) Bank deposit interest from sources WITHIN are exempt from withholding under 1441(a). Documentation establishing foreign status not required —(3) Interest or OID on obligations from WITHIN payable 183 days or less from issue or on any obligation with tax-exempt interest. Documentation establishing foreign status not required —(4) income from gambling of NRAs on blackjack, baccarat, craps, roulette, or big-6 wheel. Documentation establishing foreign status not required —(5) Amounts paid as part of the PURCHASE PRICE of an obligation SOLD or exchanged between interest PAYMENT dates . . . . UNLESS the sale or exchange is PART of a plan to avoid paying taxes and the withholding agent KNOWS or SHOULD know of the plan —(6) OID paid as part of the PURCHASE PRICE of an obligation sold in a transaction OTHER than a redemption . . . UNLESS the purchase is part of a PLAN to avoid tax and the withholding agent KNOWS or SHOULD know of the plan —(7) insurance premiums on a contract subject to 4371 excise taxes

957. Controlled Foreign Corporations; U.S. persons

(a) "CFC" means any foreign corporation if more than 50% of —(1) the total combined voting power of all classes of stock entitled to vote; *or* —(2) the total value of stock of such corporation is owned (under 958(a)), or is constructively owned (under 958(b)) by U.S. shareholders of any day during the taxable year (b) For insurance income. . . "CFC" includes the definition above AND it includes a corporation in which more than 25% of the total combined voting power of all classes of stock is owned by U.S. shareholders on any day during the taxable year . . . if the gross amount of premiums or other consideration in respect of the reinsurance or the issuing of insurance or annuity contracts described in 953(a)(1) exceeds 75% of the gross amount of all premiums (c) *U.S. Person* "U.S. person means what it does under 7701(a)(3), except —(1) for corporations organized in Puerto Rico, it does not include an individual who is a bona fide resident of Puerto Rico . . . IF a dividend received by such individual during the year . . . from such corporation would, under 933(1) be treated as income derived from sources within Puerto Rico —(2) for Guam, American Samoa, or the Northern Mariana Islands ——(A) 80% or more of the gross income which was derived from sources within the possession . . . or was effectively connected with a trade or business there . . . for the 3 year period ending at the end of the taxable year; *and* ——(B) 50% or more fo the gross income for such period was derived from the active conduct of a trade or business with the possession; such term does not include an individual who is a bona fide resident of any of these places

316. Dividend Defined

(a) "Dividend" means any distribution of property made by a corporation to its shareholders —(1) out of EARNINGS and PROFITS accumulated after Feb. 28, 1913; *or* —(2) out of earnings and profits of the taxable year . . . as computed at the CLOSE of the year without reducing it for any distributions made DURING the year . . . without regard to the amount of the E&P at the time the distribution was made Except as otherwise provided, every distribution is made out of the most recently accumulated EARNINGS and PROFITS.

954. Foreign Base Company Income

(a) "Foreign base company income" means the sum of —(1) foreign personal holding company income —(2) foreign base company sales income —(3) foreign base company services income —(5) foreign base company oil related income (b) —(3) ——(A) If the sum of foreign base company income and the gross insurance income . . . for a year is LESS than the lesser of either ———(i) 5% of gross income; *or* ———(ii) $1 mil. no part of the gross income for the year is foreign base company or insurance income ——(B) If the sum of foreign base company income . . . and gross insurance income for the year exceeds 70% of gross income . . . the ENTIRE gross income for the year shall be treated as foreign base company income or insurance income (whichever is appropriate) —(C) "Gross insurance income" means any item of gross income taken into account in determining insurance income under 953 —(4) Foreign base company income and insurance income does NOT include any item of income received by a controlled foreign corporation . . . IF the taxpayer establishes that such income was subject to an effect rate of tax imposed by a foreign country . . . greater than 90% of the maximum rate in section 11. —(5) Foreign personal holding income, foreign base company sales income, foreign base company services income, and foreign base company oil related income . . . shall be REDUCED . . . to take into account DEDUCTIONS properly allocable to such income. ——any interest paid or accrued by the controlled foreign corporation . . . to any U.S. shareholder . . . shall be allocated first to foreign personal holding company income that IS passive —(6) Income of a corporation that is foreign base company oil related income . . . is NOT foreign base company income for a corporation under (a)(2) or (a)(3). (c) Has its own section (d) *Foreign Base Company Sales Income* —(1) "Foreign base company sales income" means income derived in connection with . . . the purchase of PERSONAL PROPERTY from a RELATED PERSON and its sale to any person . . . , the sale of personal property to any person on behalf of a related person , . . . . the purchase of personal property from any person and its sale to a related person . . . , or the purchase of personal property from any person on behalf of a related person where ——(A) the purchased property is MANUFACTURED, produced, grown, or extracted outside the country under which the CFC is created or organized; *and* ——(B) the property is sold for use, consumption, or disposition outside that foreign country . . . , or, in the case of property purchase on behalf of a related person, is purchased for consumption, use, or disposition outside of that country. "Personal property" does NOT include agricultural commodities that are not grown in the U.S. in commercially marketable quantities —(2) *Certain Branch Income* To determine FBCS income where a CFC operating through a branch outside the country of its incorporation . . . has substantially the same effect as IF it were a wholly owned subsidiary . . . the income is treated as income derived from a wholly owned subsidiary of the CFC and shall constitute FBCS income of the CFC —(3) *related person defined* For this section, a person is related with respect to a CFC if ——(A) that person is an individual, corporation, partnership, trust, or estate that controls, or is controlled by, the CFC; *or* ——(B) that person is a corporation, partnership, trust, or estate controlled by the same person or persons that control the CFC "Control" means the ownership, directly or indirectly, of stock possessing more than 50% of the total voting power of all classes of stock entitled to vote . . . or of the total stock value of the corporation. ——in the case of a partnership, trust, or estate, "control" means the ownership, directly or indirectly, of more than 50% of the beneficial interests. ——rules similar to 958 apply —(4) *Special rule for certain timber products* FBCS income includes any income derived in connection with ——(A) the sale of any unprocessed timber under 865(b); *or* ——(B) the milling of any such timber outside the U.S. (e) *Foreign Base Company Services Income* —(1) "FBCServ. income" means income derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services that ——(A) are performed for or on behalf of any RELATED person; *and* ——(B) are performed outside the country under the laws of which the controlled foreign corporation is created or organized —(2) But FBCServ. income does not include income from performance of services directly related to ——(A) the sale or exchange by the CFC of property manufactured, produced, grown, or extracted by it and which are performed before the time or sale of exchange; *or* ——(B) an offer or effort to sell or exchange such property (f) *Foreign Base Company Shipping Income* "FBCShip. income" means income derived from the use of any aircraft or vessel in foreign commerce . . . or from the peformance of services . .. directly related to the use of the aircraft or vessel, or from the sale or exchange of such aircraft or vessel. Includes, but is not limited to: —(1) dividends and interest from a foreign corporation in respect of which taxes are deemed paid under 902 . . . and gain from the sale of stock or obligations to the extent such dividends, interest, and gains are attributable to FBCShip.; *and* —(2) the portion of the distributive share of income of apartnership attributable to FBCShip. Includes any income derived from space or ocean activity

317. Other Definitions

(a) "Property" means money, securities, and any other property; except that such term does NOT include stock in the corporation making the distribution

952. Subpart F income defined

(a) "Subpart F income" means . . . for any controlled foreign corporation . . . the sum of —(1) insurance income (defined under 953) —(2) foreign base company income (defined under 954) —(3) an amount equal to the product of ——(A) income other than income ———(i) attributable to earnings and profits of the foreign corporation included in the gross income of the U.S> under 951; *or* ———(ii) is described in (b) ——(B) the international boycott factor —(4) the sum of the amounts of any illegal bribes, kickbacks, or other payments . . . paid by or on behalf of the corporation during the taxable year of the corporation directly or indirectly to an official, employee, or agent of government; *and* —(5) the income of such corporation derived from any foreign country during any period during which 901(j) applies to such country (b) For a controlled foreign corporation . . . subpart F income does NOT include any item of income . . . from SOURCES WITHIN . . . that is EFFECTIVELY CONNECTED . . . . unless it is exempt from taxation pursuant to a treaty

951. Amounts Included in Gross Income of U.S. Shareholders

(a) *Amounts Included* —(1) If a foreign corporation is CONTROLLED foreign corporation . . . for an uninterrupted period of 30 days or more during a year . . . every U.S. shareholder who owns stock in such corporation on the last day of that year . . . shall include in his gross income for his year in which the CORPORATION'S year ends . . . ——(A) the sum of ———(i) his pro rata share of the corporation's subpart F income for such year ———(ii) his pro rata share of the corporation's PREVIOUSLY EXCLUDED subpart F income withdrawn from investment . . . in less developed countries for such year; *and* ———(iii) the amount determined under 956 for such shareholder for such year ——(B) amounts included under 956 (investments of earnings in U.S. property) —(2) The pro rata share from above is the amount ——(A) which would have been distributed on stock the shareholder owns (under 958(a)) . . . IF on the last day of the year in which the corporation is a controlled foreign corporation . . . it had distributed pro rata to its shareholders an amount ———(i) which bears the same ratio to its subpart F income for the year *as* ———(ii) the part of such year during which the corporation is controlled foreign corporation bears to the entire year . . *reduced by* ——(B) the amount of distributions received by any other person during such year as a dividend with respect to such stock . . . but only to the extent of the dividend which would have been received if the distribution by the corporation had been the amount ———(i) which bears the same ratio to the subpart F income *as* ———(ii) the part of such year during which the shareholder did NOT own such stock bears to the entire year ————any gain included in gross income for any person as a dividend under 1248 shall be treated as a distribution received by such person with respect to the stock involved (b) "U.S. shareholder" means a U.S. person (defined by 957(c)) who owns (defined by 958(a)) or is considered as owning . . . 10% or more of the total combined voting power of all classes of stock entitled to vote of such corporation

Reg. § 1.861-4. Compensation for Labor or Personal Services

(a) *Compensation for labor/services performed wholly within the U.S.* —(1) Compensation for labor or personal services performed wholly within the U.S. . . . is U.S. source income. This INCLUDES fees, commissions, fringe benefits, etc. Does NOT matter WHERE the payer has his residence, WHERE the contract was made, *or* the time and place of payment. It will be deemed NOT U.S. source IF: ——(i) labor/services performed by a NRA who is present for an aggregate total of 90 days or less; ——(ii) compensation is >= $3000 ——(iii) compensation is for labor/services by an employee under any form of contract with ———(a) a NRA, foreign partnership, or foreign corporation that is NOT engaged in a trade or business within the U.S. ———(b) an U.S. citizen or resident, domestic partnership, or domestic corporation IF labor/services performed for an office or place of business that employer maintains in a FOREIGN country or U.S. possession (2) "Day" means a calendar day during any portion of which a NRA is physically present (3) the NRA or foreign partnership or corporation, that hires such NRA performing the labor/service within the U.S. . . . is NOT considered engaged in a trade or business because of such labor/performance (4) Travel expenses are not included in the $3000 compensation limit IF the employer pays these costs for the performing NRA and that NRA accounts for them by accounting tests under § 1.162-17. —If advancements or reimbursements exceed such expenses, the amount of excess shall be included as compensation —Pensions and retirement pay attributable to the labor are NOT taken into account (5) For a geographical definition of the U.S., see 638 and 7701(a)(9).

958. Rules for Determining Stock Ownership

(a) *Direct and Indirect Ownership* —(1) "Stock owned" means ——(A) stock owned directly; *and* ——(B) stock owned indirectly under (2) —(2) Stock owned, directly or indirectly, by a foreign corporation, partnership, trust, or estate . . . shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries ——Stock considered owned by a person by reason of the above sentence shall, for purposes of applying such sentence, be treated as actually owned by such person —(3) "For foreign mutual insurance companies, "stock" includes any certificate entitling the holder to voting power (b) *Constructive Ownership* Section 318(a) applies to the extent that the effect is to treat any U.S. person as a U.S. shareholder . .. to treat a person as a related person . . . to treat stock of a domestic corporation as owned by a U.S> shareholder of a CFC . . . or to treat a foreign corporation as a controlled foreign corporation . .. EXCEPT that —(1) for 318(a)(1)(A), stock owned by a NRA is not considered as owned by a citizen or a resident alien; —(2) for 318(a)(2)(A)-(C), if a partnership, trust, or estate, or corporation, owns directly r indirectly more than 50% of the total combined voting power of all classes of stock entitled to vote . . . it is considered as owning ALL the stock entitled to vote —(3) For 318(a)(2)(C), use "10%" instead of "50%" —(4) Don't apply 318(a)(3)(A)-(C) to treat a U.S. person as owning a stock owned by a non-US person These don't apply for purposes of 956(c)(2) to treat stock of a domestic corporation as not owned by a U.S. shareholder.

901. Taxes of Foreign Countries and U.S. Possessions

(a) *Foreign Tax Credit* Taxes imposed by this chapter are credited . . . plus, for a corporation, the taxes are deemed to be paid. —the choice to elect to have these credits is available to be made or changed any time before the election period has ended. —the credits don't apply to any taxes not part of this chapter, though (b) *Credits that are allowed* The following are allowed as credits under (a): —(1) For citizens and domestic corporations . . . any income, war profits, and excess profits taxes . . . paid during the year to a foreign country or any U.S. possession —(2) for U.S. residents and residents of Puerto Rico . . . who are residents during the ENTIRE taxable year . . .any income, war profits, and excess profits taxes . . . paid during the year to U.S. POSSESSIONS —(3) for *alien* U.S. residents and for "bona fide" residents of Puerto Rico . . . who are residents the ENTIRE year . . . any income, war profits, and excess profits taxes . . . paid during the year to any FOREIGN COUNTRY; —(4) for NRAs . . . who are NOT alien residents of a U.S. possession . . . and for foreign corporations . . . whatever is determined under 906; *and* —(5) for any of the persons described above . . . who are members of a PARTNERSHIP or are the BENEFICIARY of a trust or estate . . . he gets a credit for his PROPORTIONATE SHARE of the partnership or trust/estate's taxes . . . paid during the year to a FOREIGN COUNTRY or U.S. possession. ——for a FOREIGN TRUST . . . where the settlor would be treated as the owner but for 672(f) . . . the taxes imposed include income, war profits, and excess profits paid to a foreign country or U.S. possession (c) *If Other Countries Don't Give Our Citizens Abroad Similar Credits* If the President finds —(1) a foreign country that imposes income, war profits, or excess profits taxes . . . does NOT allow U.S. citizens residing there a CREDIT for any of these taxes paid to the U.S. . . . or to any OTHER foreign country . . .; *and* —(2) the U.S. requests this country to provide the credit; *and* —(3) it is in the PUBLIC INTEREST for the U.S. to allow these credits to the citizens of this foreign country ONLY that country allows it to our citizens . . . *then*, under President's orders, the citizens of this foreign country will only get a credit when that country gives our citizens a corresponding credit. (d) *Dividends from a DISC* Dividends form a DISC or former DISC are treated as dividends from a foreign corporation to the extend they are income from without the U.S. (e) *Foreign Taxes on Mineral Income* —(1) Any income, war profits, and excess profits taxes . . . paid to a foreign country or U.S. possession . . . in connection with MINERAL INCOME from sources within that country or possession . . . MUST BE REDUCED by ——(A) the amount such tax *exceeds* ——(B) the amount computed under this chapter with resepct to such income —(2) "Foreign mineral income" means income from extracting minerals from mines, wells, or other natural deposits; the processing of such minerals into their primary products; and the transportation, distribution, or sale of such minerals or primary products. It includes (but is not limited to): ——(A) dividends from a foreign corporation, to the extent attributable to foreign mineral income; *and* ——(B) that portion of the taxpayer's distributive share of partnership income attributable to foreign mineral income

Reg. § 1.954-3. FBC Sales Income

(a) *Income included* —(3) *Property sold for use, consumption, or disposition within the country in which the CFC is created or organized* ——(ii) *Rules for determining country of use, consumption, or disposition* Personal property sold to an unrelated person . . . is presumed to have been sold for use, consumption, or disposition in the country of destination of the property sold. ——temporary interruptment in shipment does not make the interruptor country the country of destination ——but if the CFC knew or should have known from the facts that, at the time of the sale, the property would not be used in the country of destination . . . the CFC must determine the country of ultimate use .. . . or the property will be presumed to have been used outside the country under the laws which the CFC is organized ——a CFC that sells personal property to a RELATED PERSON is presumed to sell such property for use OUTSIDE the CFC's incorporation country —— a CFC that sells personal property to any person ALL OF WHOSE BUSINESS except for an insubstantial part consists of selling from inventory to retail customers all within one country . . . may assume that the property will be used that in that country

961. Adjustments to Basis of Stock in Controlled Foreign Corporations and of Other Property

(a) *Increase in Basis* The U.S. shareholder's stock in a CFC . . . shall be increased by the amount required to be included in his gross income under 951(a) ——only to the extent to which such amount was included in the gross income of the U.S. shareholder ——For individuals who are U.S. shareholders making 962 election . . . the increase under this section may NOT exceed the amount of tax paid under 951(a) (b) *Reduction in basis* —(1) If a U.S. shareholder receives an amount that is excluded from gross income under 959(a) . . . its A/B in the CFC's stock shall be reduced by that amount ——For individuals who are U.S> shareholders making a 962 election . . . the decrease can't exceed the amount excluded —(2) *Amount in excess of basis* ——To the extent an amount excluded from gross income under 959(a) exceeds the A/ of the stock . . . the amount shall be treated as a gain from the sale or exchange of property (c) *Basis Adjustments in Stock Held by Foreign Corporations* If a U.S. shareholder is treated under 958(a)(2) as owning stock in a CFC . . . that is owned by another CFC . . . then adjustments similar to the above shall be made —(1) to the basis of the stock; *and* —(2) to the basis of stock in any other CFC the shareholder is considered as owning under 958(a)(2) but only for the purposes of determining the amount included under 951 in the gross income of the U.S> shareholder ——but this doesn't apply to stock to which (a) and (b) already apply

960. Special Rules for Foreign Tax Credits

(a) *Taxes Paid by a Foreign Corporation* —(1) *Deemed paid credit* Under 951(a), if any amount attributable to the EARNINGS AND PROFITS of a foreign corporation that is a member of a qualified group with a domestic corporation . . is included in the gross income of that domestic corporation . . . THEN 902 is applies as if the amount were a DIVIDEND paid by the foreign corporation —(2) *Taxes previously deemed paid by domestic corporation* If a domestic corporation receives a distribution from a foreign corporation . .. any portion of which is excluded from gross income under 959 . . . the income, war profits, and excess profits taxes paid or deemed paid by the foreign corporation to ANY foreign country or U.S> possession . . . in connection with EARNINGS AND PROFITS . . . from which the distribution is made . . . shall NOT be taken into account for 902 purposes, to the extent they were deemed paid by a domestic corporation for any prior taxable year —(3) *Taxes paid by foreign corporation and not previously deemed paid by domestic corporation* Any portion of a distribution from a foreign corporation received by a domestic corporation . . . which is EXCLUDED from gross income under 959(a) . . . shall be treated by the domestic corporation as a DIVIDEND, solely for purposes of taking into account under 902 any income, war profits, or excess profits taxes paid to any foreign country or to any U.S. possession . . . on or with respect to the accumulated profits of such foreign corporation from which such distribution is made, which were not deemed paid by the domestic corporation under (1) for any prior taxable year (b) *Special Rules for Foreign Tax Credit in Year of Receipt of Previously Taxed Earnings and Profits* —(1) *Increase in 904 Limitation.* In case of any taxpayer who ——(A) either ———(i) chose to have the benefits of subpart A of this part for a taxable year after Sept. 30, 1993 . . . in which he was required under 951(a) to include any amount in his gross income; *or* ———(ii) did not pay or accrue for that year any income, war profits, or excess profits taxes to any foreign country or U.S. possession ——(B) chooses to havet he benefits of subpart A of this part for any taxable year in which he receives 1 or more distributions or amounts which are excludable from gross income under 959(a) . . . and which are attributable to amounts included in his gross income fro taxable years referred to in (A); *and* ——(C) for the taxable year in which such distributions or amounts are received, pays or is deemed to have paid or accrues income, war profits, or excess profits taxes to a foreign country or U.S. possession with respect to such distributions or amounts the limitation under 904 for the taxable year in which such distributions or amounts are received shall be increased by the lesser of the amount of such taxes paid, or deemed paid, or accrued with respect to such distributions or amounts or the amount in excess limitation account as of the beginning of such taxabe year —(2) *Excess Limitation Amount* ——(A) Each taxpayer meeting the requirements of (1)(A) shall establish an excess limitation account. The opening balance must be zero. ——(B)

881. Tax on Income of Foreign Corporations not connected with U.S. business

(a) 30% tax on income a foreign corporation receives from sources WITHIN, including as —(1) interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other FDAP gain, profits, or income. —(2) gains under 631(b) or (c); —(3) ——(A) if an OID obligation is sold, the AMOUNT of the OID accruing while such obligation was held by a FOREIGN CORPORATION; *and* ——(B) if an OID obligation is paid, an AMOUNT equal to the OID accruing while the obligation was HELD by a FOREIGN CORPORATION; *and* —(4) gains from the sale of patents, copyrights, secret processes, formulas, good will, trademarks, trade brands, franchises, etc. . . to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property sold; but only to the extent NOT effectively connected with the conduct of a trade or business WITHIN the U.S.

Reg. § 301.7701-2(a). Business Entities

(a) A "business entity" is any entity recognized for federal tax purposes . . . that is NOT a trust and does NOT receive any special treatment under the Code. —a business entity with TWO OR MORE members is classified as either a corporation or a partnership —a business entity with ONLY ONE owner is either a corporation OR disregarded ——if disregarded, it's treated like a sole proprietorship

874. Allowance of Deductions and Credits

(a) A NRA is allowed to have the deductions and credits of this section ONLY if he files a true and accurate tax return. —this shouldn't be construed to deny the credits of 31 and 33 for tax withheld at the source, or the one in 34 for certain fuel/gasoline uses (b) The benefit of the deductions for exemptions under 151 (deductions for person exemptions) may be received by a NRA by filing a claim with the withholding agent (c) Except as under 906, a NRA is NOT allowed credits for the payment of taxes in foreign countries or U.S. possessions allowed under 901

902. Deemed Paid Credit Where Domestic Corporation Owns 10% or More of voting Stock of Foreign Corporation

(a) A domestic corporation which owns 10% or more of the voting stock of a foreign corporation from which it receives dividends in a year . . . is deemed to have paid the same proportion of such corporation's post 1986 foreign income taxes —(1) the amount of such dividends bears to —(2) such foreign corporation's post 1986 undistributed earnings (b) —(1) If ——(A) any foreign corporation is a member of a qualified group; *and* ——(B) such foreign corporation owns 10% or more of the voting stock of another member of such group from which it receives dividends in any year then that foreign corporation is deemed to have paid the same proportion of the other foreign corporation's post-1986 foreign incomes taxes as would be determined under (a) if it were a domestic corporation —(2) "Qualified group" means ——(A) the foreign corporation described in (a); *and* ——(B) any other foreign corporation IF ———(i) the domestic corporation owns at least 5% of the voting stock indirectly through a chain of foreign corporations connected through stock ownership of at least 10% of their voting stock ———(ii) the foreign corporation described in subsection (a) is the first tier corporation in such chain; *and* ———(iii) such other corporation is not below the sixth tier in the chain Does not include any foreign corporation below the third tier in the chain referred to in clause (i) UNLESS such corporation is a CONTROLLED FOREIGN CORPORATION (defined in 957) . . . and the domestic corporation is a U.S. shareholder (defined in 951(b)) in such foreign corporation ——Paragraph (1) only applies to taxes paid by a member of the qualified group below the third tier only with respect to periods during which it was a controlled foreign corporation (c) —(1) "post-1986 undistributed earnings" means the amount of the earnings and profits of the foreign corporation accumulated in taxable years after 1986 ——(A) as of the close of the taxable year of the foreign corporation in which the dividend is distributed; *and* ——(B) without diminution by reason of dividends distributed during such taxable year —(2) "post-1986 foreign income taxes" means the sum of ——(A) foreign income taxes of the year in which the dividend is distributed; *and* ——(B) the foreign income taxes for prior taxable years beginning after 1986 to the extent such foreign taxes were NOT attributable to dividends distributed by the foreign corporation in prior years —(3) ——(A) if the 1st day on which the requirements of (B) are met . . . is in a taxable year of the foreign corporation after 1986 . . . the post-1986 undistributed earnings and post-1986 foreign income taxes of such foreign corporation shall be determined by taking into account only periods beginning on and after the 1st day of the 1st taxable year the ownership is met ——(B) The requirements of this subparagraph are met with respect to any foreign corporation IF ———(i) 10% or more of the voting stock of such corporation is owned by a domestic corporation; *or* ———(ii) the requirements of (b)(2) are met with respect to such foreign corporation —(4) *Foreign Income Taxes* ——(A) "Foreign Income taxes" means any income, war profits, or excess profits taxes paid by the foreign corporation to any foreign country or U.S. possession ——(B) Except for purposes of determining the amount of post-1986 foreign income taxes of a sixth tier foreign corporation referred to in (b)(2) . . . the term "foreign income taxes" includes any such taxes deemed to be paid by the foreign corporation under this section —(5) for a foreign corporation, the income, war profits, and excess profits taxes that are determined on an accounting period of a year or less . . . the word "year" means such an accounting period —(6) ——(A) in the case of any dividend paid by a foreign corporation out of accumulated profits . . . for taxable years beginning BEFORE the first taxable year taken into account . . . in determining the post-1986 undistributed earnings of the corporation ———(i) this section doesn't apply but ———(ii) this section applies ——(B) any dividend in a taxable year beginning after Dec. 31, 1986 . . . shall be treated as made out of post-1986 undstributed earnings thereof —(7)

1441. Withholding of Tax on Nonresident Aliens

(a) All persons with control, receipt, custody, disposal, or payment of the income of any NRA or foreign corporation . . . to the extent from sources within the U.S. . . . must withhold 30% to pay the tax. (b) Must withhold interest, dividends, wages, rent, salaries, premiums, annuities, compensations, remuneratinos, emoluments, or other fixed or determinable gains, profits, etc. . .. gains under 631(b), gain on transfers under 1235. But you can withhold a rate of only 14% any scholarship AMOUNT for study or training received by a NRA who is temporarily present as a non-immigrant and which is —(1) incident to a qualified scholarship, but only to the extent includible in gross income; —(2) for an individual not trying to get an educational degree, granted by: ——(A) a 501(c)(3) organization; ——(B) a foreign government; ——(C) an international organization, or binational or multinational educational foundation; *or* ——(D) the U.S., or an agency thereof, or a State or any political subdivision thereof

Reg. § 301.7701(b)-2, Closer Connection and Tax Home

(a) An alien who meets the substantial presence test might still be a NRA if —(1) he is present in the U.S. for less that 183 days in the current year; —(2) he has a tax home in a foreign country during the year; —(3) he has a CLOSER CONNECTION to a single foreign country where HE HAS his tax home; (b) "Foreign country" includes any territory under the sovereignty of the United Nations or a government other than the U.S. —Includes seabed, sea, etc. (c) (1) "Tax home" means the same thing as under § 162(a)(2) (relating to travel expenses while away from home). —located at the individual's regular or principal (if more than one regular) place of business. —If the individual has no regular or principal place of business because of the nature of the business, then the individual's tax home is the individual's regular place of abode in a real and substantial sense. (2) Tax home must be in existence the entire year. —It must be located in the same foreign country for which the individual is claiming a "closer connection." (d) (1) An individual has a CLOSER CONNECTION with a foreign country if he has more *significant contacts* there. Use the following factors to decide: —(i) location of permanent home; —(ii) location of individual's family; ; —(iii) location of personal belongings, like cars, furniture, clothing, and jewelry —(iv) location of social, political, cultural, or religious organizations the individual has a relationship with —(v) location where the individual conducts his or her routine personal banking activities; —(vi) location where he conducts business —(vii) location where individual holds a driver's license —(viii) location where he votes —(ix) country of residence he designates on forms, etc. —(x) types of forms and documents filed (e.g., Form 1078, which claims residence here) (2) Doesn't matter whether the permanent home is a house, an apartment, or a furnished room. Also doesn't matter whether owned or rented. —But it MUST be available at all times, and not only for stays of short duration

301. Distributions of Property

(a) Distributions of property made by a corporation to a shareholder WITH RESPECT TO STOCK shall be treated in the manner provided by subsection (c) (c) In the case of a distribution under (a): —(1) The distribution which is a DIVIDEND is included in gross income; —(2) whatever is NOT a dividend shall be applied against and REDUCE the A/B of the stock —(3) ——(A) to the extent that whatever is NOT a dividend in a distribution EXCEEDS adjusted basis . . . it is treated as a GAIN from the sale or exchange of property ——(B) the portion which is NOT a dividend . . . to the extent it exceeds the A/B . . . and to the extent it is out of INCREASE in value accrued BEFORE March 1, 1913 . . . is exempt from tax

959. Exclusion from Gross Income of Previously Taxed Earnings and Profits

(a) Earnings and profits of a foreign corporation attributable to amounts that have been included in gross income of a U.S. shareholder under 951(a) shall NOT, when —(1) such amounts are distributed to; *or* —(2) such amounts would be, but for this subsection, included in 951(a)(1)(B) for gross income to or of the shareholder, directly or indirectly, be included in the U.S. shareholders gross income. (b) *Exclusion from Gross Income of Certain Foreign Subsidiaries* For 951(a), the EARNINGS AND PROFITS of a CFC . . . attributable to amounts which are or have been included in U.S. shareholder's gross income under 951(a) . . . shall NOT be included in the gross income of another CFC in the chain of ownership for 951(a) applications. (c) *Allocation of Distributions* For the above, apply 316(a)(2), and then 316(a)(1) —(1) first to the aggregate of ——(A) earnings and profits attributable to amounts included in gross income under 951(a)(1)(B); *and* ——(B) earnings and profits attributable to amounts included in gross income under 951(a)(1)(C) with any distribution being allocated between earnings and profits of (A) and (B) proportionately on the basis of the respective amounts of such earnings and profits —(2) then to earnings and profits attributable to amounts included in gross income under 951(a)91)(A) and —(3) then to other earnings and profits (d) *Distributions excluded from gross income not to be treated as dividends* Except as under 960(a)(3), any distribution excluded from gross income under (a) shall be treated . . . as a distribution that is NOT A DIVIDEND ——these distributions shall immediately REDUCE earnings and profits (e) *Coordination with amounts previously taxed under 1248* For 960(b) . . . any amount included in gross income of any person AS A DIVIDEND by reason of 1248(a) or (f) . . . shall be treated as an amount INCLUDED in the gross income of such person or domestic corporation (under 1248(e)) (f) *Allocation Rules for Certain Inclusions* —(1) For purposes of this section, amounts that would be included under 951(a)(1)(B) shall be treated as attributable first to earnings under (c)(2), and then to earnings under (c)(3) —(2) In applying this section, actual distributions shall be taken into account before amounts that would be included under section 951(a)(1)(B)

865. Source Rules for Personal Property Sales

(a) Except as otherwise provided, income from the sale of PERSONAL PROPERTY —(1) by a U.S. resident shall be SOURCED to the U.S.; *or* —(2) by a nonresident shall be sourced WITHOUT (b) for income from the sale of INVENTORY —(1) this section doesn't apply; *and* —(2) its sourced under 861(a)(6); 862(a)(6); and 863 Any income from the sale of any unprocessed timber and cut from the U.S., though, shall be sourced to the U.S> —unprocessed timber means logs, cants, etc. (c) *Exception for Depreciable Property* —(1) Gain (not in excess of the depreciation adjustments) from the sale of depreciable personal property shall be allocated between sources WITHIN the U.S. and OUTSIDE the U.S. ——(A) whatever proportion of the total depreciation that was deducted against U.S. source income ("U.S. depreciation adjustments") will be sourced to the U.S.; *and* ——(B) by treating the remaining portion of such gain as sourced OUTSIDE the U.S. —(2) *Gain in Excess of Depreciation.* Any gain that exceeds the total depreciation deduction for a particular property will be sourced . . . as if the property were INVENTORY —(3) *U.S. Depreciation Adjustments* ——(A) "U.S. depreciation adjustments" means the portion of the depreciation adjustments to the A/B of the property which are attributable to depreciation deduction allowed in computing U.S. source taxable income ——(B) Except for 168(g)(4) property, IF ———(i) such property is used predominately in the U.S.; *or* ———(ii) such property is used predominately OUTSIDE the U.S. all depreciation deductions for the year are treated as having been allocated to income from sources in the U.S. if used within . . . and allocated to foreign income if used without. —(4) ——(A) "Depreciable personal property" means any personal property IF the A/B of such property includes depreciation adjustments. ——(B) "Depreciation Adjustments" means adjustments reflected in the A/B of any property on account of depreciation deductions ——(C) "Depreciation deductions" means any deductions for depreciation or amortization or any other deduction allowable under any provision of this chapter which treats an otherwise capital expenditure as a deductible expense (d) —(1) Any time INTELLECTUAL PROPERTY is sold ——(A) this section applies ONLY to the extent the payments are NOT contingent on the productivity, use, or disposition of the intangible; *and* ——(B) to the extent such payments ARE so contingent, the SOURCE of such payments shall be determined as though they were ROYALTIES —(2) "Intangible" means any patent, copyright, secret process or formula, goodwill, trademark, trade brand, franchise, or other like property —(3) To the extent this section applies to GOODWILL, payments for the sale shall be treated as SOURCED from the country where the goodwill was generated —(4) ——(A) Notwithstanding (1), any GAIN from the sale of an intangible shall be sourced under subsection (c) to the extent such gain does NOT exceed the depreciation adjustments with respects to the intangible ——(B) Paragraph (2) of subsection (c) shall NOT apply to any gain from the sale of an intangible (e) —(1) *Sales by residents* ——(A) for income not sourced under (b), (c), (d)(1)(B) or (3) or (f) . . . if a U.S. resident maintains an office or other fixed place of business in a FOREIGN COUNTRY . . . income from sales of PERSONAL PROPERTY attributable to that office are non-U.S. source ——(B) but that doesn't apply UNLESS an income tax of at LEAST 10% is paid to a foreign country for that income —(2) *Sales by nonresidents* ——(A) if a NONRESIDENT maintains an office or other fixed place of business within the U.S. . . . income from any sale of PERSONAL PROPERTY attributable to it are U.S. source ———does not apply for 971 purposes ——(B) but the previous rule doesn't apply to the sale of inventory that is sold for use, disposition, or consumption OUTSIDE the U.S. . . . IF an office or other fixed place of business of the taxpayer located in a foreign country MATERIALLY PARTICIPATED in the sale —(3) 864(c)(5) applies to determine whether a taxpayer has an office or other fixed place of business . . . and wehther a sale is attributable to it or not (f) *Stock of Affiliates* If —(1) a U.S. resident sells stock in an affiliate that is a foreign corporation; *and* —(2) such sale occurs in a foreign country in which such affiliate is engaged in the active conduct of a trade or business; *and* —(3) more than 50% of the gross income of such affiliate . . . for the 3-year period ending with the close of such affiliate's taxable year immediately preding the sale year . . . was derived from the active conduct of a trade or business in that foreign country then any gain from the sale shall be sourced OUTSIDE the U.S. The U.S. resident may elect to treat an affiliate and all other corporations which are wholly owned by that affiliate . . . either direclty or indirectly . . . as one corporation (g) —(1) Except as otherwise provided ——(A) "U.S. resident" means ———(i) any individual who ————(I) is a U.S. citizen or resident alien and does NOT have a tax home in a FOREIGN country; *or* ————(II) is a NRA and has a tax home in the U.S.; *and* ———(ii) any corporation, trust, or estate that is a U.S. person ——(B) "Nonresident" means any person other than a U.S. resident (i) —(1) "Inventory property" means personal property described in 1221(a)(1) . . . i.e., stock in trade or any other property that would ordinarily be included in inventory or held for customers in the ordinary course of business —(2) "Sale" includes an exchange or other disposition —(3) Any U.S. possession is treated as a FOREIGN COUNTRY —(4) "Affiliate" means a member of the same affiliated group —(5) For partnerships, this sections applies at the partner level

873. Deductions

(a) For a NRA, deductions allowed only for income from within the U.S. or "effectively connected with a U.S. trade or business." (b) The following deductions, though, are allowed whether or not they are connected with "effectively connected" income: —(1) § 165 casualty or theft losses . . . if property is located w/i the U.S. —(2) § 170 deduction for charitable contributions and gifts —(3) § 151 personal exemptions . . . but only one exemption is allowed *unless* the taxpayer is a resident of a contiguous country or a U.S. national.

956. Investment of Earnings in U.S. Property

(a) For any CFC, the amount determined with respect to any U.S. shareholder for any year is the lesser of —(1) the excess of ——(A) the U.S. shareholder's pro rata share of the average of the amounts of U.S. property held by the CFC as of the close of each quarter of the year, *minus* ——(B) the amount of earnings and profits under 959(c)(1)(A) for the shareholder; *or* —(2) the U.S. shareholder's pro rata share of the applicable earnings of the CFC the amount under (1) for any property is its A/B as determined for purposes of computing earnings and profits . . . reduced by any liability to which it is subject (b) *Special Rules* —(1) "Applicable earnings" means, with respect to the CFC, the sum of ——(A) the amount under 316(a)(1) to the extent it was accumulated in prior taxable years; *and* ——(B) the amount under 316(a)(2) but REDUCED by distributions made during the year AND by earnings and profits under 959(c)(1). —(2) *When U.S. property is acquired before corporation is a CFC* Disregard any U.S. property acquired BEFORE the CFC first became a CFC. ——but the total amount of disregarded property for this shall NOT exceed the portion of the applicable earnings of such CFC that were accumulated before the day it first became a CFC —(3) *Where a CFC ceases to be a CFC* If a foreign corporation CEASES to be a CFC ——(A) the determination of any U.S. shareholder's pro rata share shall be made on the basis of stock owned (under the meaning of 958(a)) by that shareholder on the LAST DAY of the year in which the CFC is a corporation ——(B) the average referred to in (a)(1)(A) shall be determined by only taking to account quarters ending ON or BEFORE the last day; *and* ——(C) in determining applicable earnings, the amount taken into account by reason of 316(a)(2) is the portion of the amount so described that is allocable . . . to the part of such year during which the corporation is a CFC (c) *U.S. property defined* —(1) "U.S. property" means any property acquired after 1962 that is ——(A) tangible property located in the U.S. ——(B) stock of a domestic corporation ——(C) an obligation of a U.S. person; *or* ——(D) any right to the use in the U.S. of ———(i) a patent or copyright ———(ii) an invention, model, or design (whether or not patented) ———(iii) a secret formula or process; *or* ———(iv) any other similar property right that is acquired or developed by the CFC for use in the U.S. —(2) "U.S. property" does NOT include ——(A) U.S. government obligations, money, or deposits with ———(i) any bank; *or* ———(ii) any corporation with respect to which a bank holding company or financial holding company owns . . . . directly or indirectly . . . more than 80% by vote or value of the stock of that corporation ——(B) property located in the U.S. that is purchased in the U.S. . . . for export to, or use in, a foreign country ——(C) any obligation of a U.S. person arising in connection with the sale or processing of property . . . IF the amount, at no time during the year . . . exceeds what would be ordinary and necessary to carry on the trade or business of both the OTHER PARTY to the sale . . . and the U.S. person . .. had the sale been made between unrelated persons ——(D) any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominately outside the U.S. ——(E) any amount of assets of an insurance company equivalent to the unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts that are not contracts described in 953(a)(1) ——(F) the stock or obligations of a domestic corporation that is neither a U.S. shareholder of the CFC nor a domestic corporation that has 25% or more of the total combined ovting power that immediately after the acquisition of any stock in such domestic corporation by the CFC, is owned orconsidered as being owned by such U.S. shareholders in the aggregate ——(G) any movable property that is used for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or under such waters when used on the Continental Shelf of the U.S. ——(H) an amount of assets of the CFC equal to the earnings and profits after 1962 and excluded from subpart F income under 952(b) ——(I) deposits of cash or securities made or received on commercial terms in the ordinary course of a U.S. or foreign person's business . . . as a DEALER in securities or in commodities, but ONLY to the extent such deposits are made or received as collateral or margin for ———(i) a securities loan, notional principal contract, options contract, forward contract, or futures contract; *or* ———(ii) any other financial transaction in which the Secretary determines that it is customary to post collateral or margin; ——(J) a U.S. person's obligation, to the extent the principal amount of the obligation does NOT exceed the FMV of readily marketable securities sold or or purchased pursuant to a sale and repurchase agreement or otherwise posted or received as collateral for the obligation in the ordinary course of its business by a U.S. or foreign person which is a dealer in securities or commodities; ——(K) securities acquired and held by a CFC in the ordinary course of its business as a DEALER in securities . . . IF ———(i) the dealer accounts for the securities as securities held primarily for sale to the customers in the ordinary course of business; *and* ———(ii) the dealer disposes of the securities within a period consistent with the holding of securities for sale to customers in the ordinary course of business; ——(L) an obligation of a U.S. person that ———(i) is not a domestic corporation; *and* ———(ii) is not ————(I) a U.S. shareholder of the CFC; *or* ————(II) a partnership, estate, or trust in which the CFC or any related person (under 954(d)(3)) is a partner, beneficiary, or trustee immediately after the acquisition of any obligation of such partnership, estate or trust by the CFC "Dealer in securities" means what it does under 475(c)(1). "Dealer of commodities" means what it does under 475(e), except that it includes a futures commission merchant. —(3) ——(A) "U.S> property" includes any trade or service receivable IF ———(i) such trade or service receivable is acquired from a related person who is a U.S. person AND ———(ii) the obligor under such receivable is a U.S. person ——(B) "Trade or service receivable" and "related person" have the respective meanings given such terms by 864(d) (d) a CFC shall be considered as holding an obligation of a U.S. person IF it is a pledgor or guarantor of such an obligation

884. Branch Profits Tax

(a) Foreign corporations are taxed at a rate of 30% of the dividend equivalent amount for the taxable year (b) "Dividend equivalent amount" means the foreign corporation's EFFECTIVELY CONNECTED earnings and profits for the year year as adjusted below: —(1) If ——(A) the corporation's U.S. net equity at the close of the taxable year EXCEEDS ——(B) its U.S. net equity at the close of the PRECEDING taxable year . . . the effectively connected earnings and profits for the taxable year shall be REDUCED by the excess (but not below zero) —(2) *Increase for decrease in net equity* ——(A) If ———(i) the corporation's U.S. net equity at the close of the PRECEDING taxable year EXCEEDS ———(ii) its U.S. net equity at the close of the current year the effectively connected earnings and profits of the year shall be INCREASED by the excess ——(B) *Limitation* ———(i) the INCREASE under (A) shall NOT exceed the accumulated effectively connected earnings and profits . . . as of the close of the PRECEDING taxable year ———(ii) "Accumulated effectively connected earnings and profits" means the EXCESS of ————(I) the aggregate effectively connected earnings and profits for PRECEDING taxable years beginning after Dec. 31, 1986 . . . over ————(II) the aggregate dividend equivalent amounts determined for such preceding taxable years.

Reg. § 1.861-7. Sale of Personal Property

(a) Gains profits, and income derived from the sale of personal property . . . are sourced to the country where the property was sold. —U.S. source income thus includes gains, profits, and income from the purchase of personal property outside the U.S. and its sale within the U.S. (b) But the purchase of personal property from a U.S. possession only to sell it in the U.S. is PARTLY within/without (c) a sale of personal property is consummated at the time, and in the place where, the seller's rights, title, and interest in the property are transferred to the buyer. —where seller retains bare legal title, the sale is deemed to occur when beneficial ownership and risk of loss pass —but if the transaction is arranged to avoid tax, the foregoing rules won't apply and the FACTS AND CIRCUMSTANCES will be used to determine when and where the sale occurred

305. Distributions of Stock and Stock Rights

(a) General rule Except as otherwise provided in this section, gross income does NOT include the amount of any DISTRIBUTION OF STOCK of a corporation made by such corporation to its shareholders with respect to its stock.

909. Suspension of Taxes and Credits until related income taken into account

(a) If there is a foreign tax credit splitting event. . . respecting a foreign income tax paid . . . such tax shall not be taken into account . . . before the taxable year in which the related income is taken into account under this chapter by the taxpayer (b) If there is a foreign tax credit splitting event . . . for a foreign tax paid by a 902 corporation . . . such tax shall not be taken into account —(1) under 902 or 960, *or* —(2) for purposes of determining earnings and profits under 964(a) before the taxable year in which the related income is taken into account under this chapter by the 902 corporation . . . or a domestic corporation which meets the ownership requirements of subsection (a) or (b) of 902 (c) —(1) for partnerships, the above should be applied at the partner level. Same for S-corporations and trusts —(2) for any foreign income tax not accounted for in (a) or (b), such tax shall be so taken into account in the taxable year referred to in such subsection as a foreign income tax paid or accrued in such taxable year (d) —(1) There is a "foreign tax credit splitting event" with respect to a foreign income tax IF the related income is (or will be) taken into account under this chapter by a covered person —(2) "Foreign income tax" means any income, war profits, or excess profits tax paid or accrued to any foreign country or U.S. possession —(3) "Related income" means, with respect to any portion of any foreign income tax, the income to which such portion of foreign income tax relates —(4) "Covered person" means, with respect to any person who pays or accrues a foreign income tax ——(A) any entity in which the payor holds, directly or indirectly, at least a 10% ownership interest ——(B) any person which holds, directly or indirectly, a 10% ownership interest or more ——(C) any person who is a related party ——(D) any other person specified by the Secretary —(5) "section 902" corporation means any foreign corporation with respect to which one or more domestic corporations meets the ownership requirements of (a) or (b) or 902

1211. Limitation on Capital Losses

(a) In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges

863. Special Rules for Determining Source

(a) Income, expense, loss, and deduction, OTHER THAN THOSE specified already as within or without . . . shall be allocated as either WITHIN or WITHOUT . . . according to secretary regs. —where items are separately allocated to sources within . . . deduct the expenses, losses, and other deductions allocated thereto . . . AND a RATABLE PART of other expenses that can't be definitely allocated. —anything remaining is fully taxable as U.S. source (b) Income derived from sources PARTLY within and PARTLY without . . . may FIRST be computed by deducting expenses, losses, other deductions allocated thereto . . AND by deducting a RATABLE portion of any that can't be definitely allocated elsewhere. Gains, profits, and income —(1) from services rendered partly within/without —(2) from the sale/exchange of INVENTORY produced WITHIN and sold without . . . or produced without and sold within; *or* —(3) derived from the purchase of inventory within a POSSESSION and its sale within the U.S. shall be treated as derived from sources PARTLY within/without

1442. Withholding of Tax on Foreign Corporations

(a) Like under 1441, the source of a payment to a foreign entity must withhold 30% of the payment as a tax when the payment is U.S. source income. (b) But not if the foreign corporation is engaged in a trade or business WITHIN the U.S. and the Secretary decides enacting the tax is too much of a burden. (c) —(1) For this section, "foreign corporation" does not include a corporation created or organized in Guam, American Samo, the Northern Marian Islands, or the Virgin Islands. —(2) ——(A) if dividends are received by a corporation ———(i) organized or created in Puerto Rico; *and* ———(ii) the requirements of 881(b)(1)(A)-(C) are met, they are only taxed at 10%, not 30% ——(B) if the withholding tax on Puerto Rico which is generally applicable to dividends paid to U.S. corporations increases to greater than 10%, this paragraph won't apply to dividends

275. Certain Taxes

(a) No deduction allowed for —(4) Income, war profits, and excess profits taxes imposed by a foreign country or U.S. possession . .. IF the taxpayer chooses to take advantage of 901

Reg. § 1.884-1. Branch Profits Tax

(a) Tax imposed in addition to tax of 882.

904. Limitation on Credit

(a) The credits allowed under § 901 can't exceed the proportion the taxpayer's income from *without* the U.S. bears to his entire taxable income. (b) *Taxable Income for Purpose of Computing Limitation* —(1) For (a), the taxable income of an individual, estate, or trust is computed without ANY deduction for personal exemptions under 151 or 642(b) —(2) *Capital gains* ——(A) Taxable income from sources OUTSIDE the U.S. shall include gain from the sale or exchange of capital assets ONLY to the extent of foreign source capital gain net income. ——(B) In the case of any taxable year where there is a CAPITAL GAIN RATE DIFFERENTIAL ———(i) in lieu of (A), the taxable income from sources WITHOUT includes gain only in an amount EQUAL to foreign source capital gain net income REDUCED by the rate differential portion of net capital gain, ———(ii) the entire taxable income shall include gain ONLY in an amount equal to capital gain net income REDUCED by the rate differential portion of net capital gain, *and* ———(iii) any net capital loss (or short-term capital losses under 1212(a)) from sources OUTSIDE the U.S. . . . to the extent taken into account in determining capital gin net income . . . shall be REDUCED by an amount equal to the rate differential portion of the excess of the net capital gain from sources WITHIN over net capital gain (c) Foreign income taxes in excess of the 904 limitation are carried back one year and forward 10 years, in that order. Credit is allowed in a year to which the taxes are carried . . . to the extent foreign income taxes for the carryback or carryover year are LESS than the limitation for that year. (d) —(1)The provisions above, and sections 902, 907, and 960 are applied SEPARATELY to ——(A) passive category income; *and* ——(B) general category income —(2) ——(A) ———(i) "Passive category income" means passive income and specified passive category income ———(ii) "General category income" means income other than passive category income. ——(B) *Passive Income* ———(i) "Passive income" means any income received or accrued by any person which is of a kind which would be FOREIGN PERSONAL HOLDING COMPANY INCOME (see 954(c)) ———(ii) It includes any amount under 1293 ———(iii) It does not include ————(I) any export financing interest; *and* ————(II) any high-taxed income ———(iv) to determine whether income would be foreign personal holding company income, 864(d)(6) applies only to the income of a foreign controlled corporation ———(v) "Specified passive category income" means ————(I) dividends from a DISC or former DISC to the extent such dividends are treated as income from sources without the U.S.; *and* ————(II) distributions from a former FSC out of earnings and profits attributable to a foreign trade income or interest or carryingn charges ——(C) *Treatment of Financial Services Income and Companies* ———(i) Financial services income shall be treated as a general category of income in the case of ————(I) a member of a financial services group; ————(II) any other person if such person is predominately engaged in the active conduct of banking, insurance, financing, or a similar business ———(ii) "Financial services group" means any affiliated group that is predominately engaged in the active conduct of a banking, insurance, financing, or similar business. Take into account only the income of the members who are: ————(I) U.S. corporations; *or* ————(II) controlled foreign corporations in which U.S. corporations own, directly or indirectly, 80% or more of the total voting power and value of the stock ———(iii) Secretary must specify how to treat pass-throughs ——(D) ———(i)"Financial services income" means any income received or accrued by any person predominately engaged in banking, insurance, financing, or a similar business, AND is ————(I) described in clause (ii) below; *or* ————(II) passive income ———(ii) Income is described here if it is ————(I) derived from the active conduct of banking, financing, or similar business; ————(II) derived from the investment by an insurance company of its unearned premiums, or reserves ordinary and necessary for the proper conduct of its insurance business; *or* ————(III) of a kind which would be insurance income as defined in 953(a) determined without regard to those provisions of (1)(A) of such section that limit insurance income to income from countries other than the country where the corporation was created or organized ——(E) *Noncontrolled Section 902 Corporations* ———(i) "Noncontrolled 902 Corporation" means any foreign corporation . . . for which the taxpayer meets the stock ownership requirements of 902(a) ————For any period of time an entity is a controlled foreign corporation . . . it can't be treated as an uncontrolled foreign corporation ———(ii) If any foreign corporation is noncontrolled with respect to the taxpayer . . . any inclusion under 1293 with respect to such corporation shall be treated as a dividend ——(F) *High-Taxed Income.* "High-tax income" means any income which would be passive income IF the sum of ———(i) the foreign income taxes paid or accrued by the taxpayer with respect to such income, *and* ———(ii) the foreign income taxes deemed paid by the taxpayer on that income under 902 or 960 EXCEEDS the highest rate of tax specified in 1 or 11 . . . multiplied by the amount of such income. ————For this sentence, "foreign income taxes" means income, war profits, or excess profits taxes imposed by a foreign country or U.S. possession ——(G) *Export Financing Interest.* "Export financing interest" means any interest derived from financing the sale . . . for use or consumption outside the U.S. of any property ———(i) manufactured, produced, grown, or extracted in the U.S. by the taxpayer or a related person; *and* ———(ii) not more than 50% of the FMV of which is attributable to U.S. imports ——(H) *Treatment of Income Tax Base Differences* ———(i) After 2006, tax imposed under foreign law on an amount that does NOT constitute income under U.S. tax principles . . . shall be treated as imposed on income described under (1)(B) ———(ii) ————(I) Anything between 2004 and 2007 . . . that is taxed under foreign law but is not income under U.S. law . . . can be treated as income under (C) or (1)(I) ————(II) Any such election applies to the taxable year made and all subsequent years . . . unless revoked ——(I) "Related person" means what it does under 954(d)(3) . . . except use "the person with respect to whom the determination is being made" instead of "controlled foreign corporation." ——(J) *Transitional Rule* ———(i) taxes paid before 1987 . . . that are described in (A)(1) . . . are treated as taxes paid or accrued under (1)(A) ———(ii) taxes paid before 1987 . . . described in (E)(1) . . . are treated as paid or accrued under (1)(I) . . . EXCEPT that ————(I) such taxes shall such taxes are treated as paid. . . .with respect to shipping income . . . to the extent taxpayer proves they were for that income ————(II) for a person under (C)(i), such taxes are treated as paid . . . for financial services income . . . to the extent taxpayer proves they were accrued in connection with that income ————(III) same for high-withholding tax interest; *and* ———(iii) ——(K) ———(i) any taxes accrued before 2007 . . . to any taxable year on or after such date . . . will be treated as described under (1) in which such income would be described were such taxes paid or accrued in a taxable year beginning on or after such date; *and* ——(ii) the secretary can provide regulations for the allocation of any carryback taxes with respect to income from a taxable year beginning on or after Jan. 1, 2007 to a taxable year beginning before such date for the purposes of allocating such income among the separate categories in effect for the taxable year —(3) *Look-thru in case of controlled foreign corporations* ——(A) Dividends, interest, rents, and royalties received or accrued . . . from a CONTROLLED FOREIGN CORPORATION in which the taxpayer is a U.S. shareholder . .. shall NOT be treated as PASSIVE income ——(B) Any amount included in gross income under 951(a)(1)(A) . . . shall be treated as PASSIVE to the extent attributable to passive category income ——(C) Any interest, rent, or royalty received from a CONTROLLED FOREIGN CORPORATION . . . in which the taxpayer is a U.S. shareholder . . . is PASSIVE income to the extent allocable to passive category income of the controlled foreign corporation ——(D) Any dividend paid out of the earnings and profits of any controlled foreign corporation . . . in which the taxpayer is a U.S. shareholder . . . is PASSIVE in proportion to the ratio of ———(i) the portion of the earnings and profits attributable to passive category income; *to* ———(ii) the total amount of earnings and profits ——(E) If a controlled foreign corporation meets the requirements of 954(b)(3)(A) . . . (relating to the de minimis rule) . . . for any year . . . none of its FOREIGN BASE COMPANY INCOME (defined in 954(a)) . . . and none of its GROSS INSURANCE INCOME (defined in 954(b)(3)(C) . . . for that year shall be treated as passive ————does not apply to any income that would be treated as FINANCIAL SERVICES INCOME ————passive income of a controlled foreign corporation shall not be treated as passive category income . . . IF the requirements of 954(b)(4) are met ——(F) ———(i) In determining whether any income of a controlled foreign corporation is passive . . . (2)(B)(iii)(II) does NOT apply ———(ii) any income of the taxpayer treated as PASSIVE under this paragraph . . . regardless of what's specified under (2) ————but you must determine whether income is HIGH-TAXED income only AFTER applying this paragraph ——(G) For this paragraph, "dividend" includes any amount under 951(a)(1)(B) ———any amount included in gross income under 78 . . . shall not be treated as a dividend but instead as included in gross income under 951(a)(1)(A) . . . to the extent attributable to amounts under 951(a)(1)(A). ——(H) If ———(i) a passive foreign investment company is a controlled foreign corporation; *and* ———(ii) the taxpayer is a U.S. shareholder in such controlled foreign corporation any amount included in gross income under 1293 is treated as in SEPARATE category to the extent attributable to such category —(4) *Look-thru applies to dividends from noncontrolled 902 corporations* ——(A) Any dividend from a noncontrolled 902 corporation shall be treated as income under (1) in proportion to the ratio of ———(i) the portion of earnings and profits attributable to income described in such income; *to* ———(ii) the total amount of earnings and profits. ——(B) for any distribution from a controlled foreign corporation to a U.S. shareholder . . . the same rules as above apply . . . to determining the extent to which earnings and profits of a controlled foreign corporation are attributable to DIVIDENDS received from a noncontrolled 902 corporation . . . may be treated as income in a separate category ——(C) ———(i) *Earnings and Profits* ————(I) 316 applies ————(II) ———(ii) If secretary determines that the proper subparagraph of paragraph (1) in which a dividend is described has not been substantiated . . . such dividend shall be treated as income in (1)(A) ———(iii)f

861. Income from U.S. Sources

(a) The following are treated as income from sources *within* the U.S. —(1) *Interest* from the U.S., and interest on bonds, notes, and other obligations of noncorporate residents or domestic corporations, NOT including: ——(A) interest ———(i) on deposits with a foreign branch of a domestic corporation or partnership IF it is engaged in commercial banking; *AND* ———(ii) on amounts under 871(i)(3) paid by a foreign branch of a domestic corporation or partnership; *AND* ——(B) for a foreign partnership predominately engaged in business OUTSIDE of the U.S., any interest NOT paid by a partnership engaged in trade or business in the U.S., and NOT allocable to effectively connected income —(2) *Dividends* ——(A) from a domestic corporation, *or* ——(B) from a foreign corporation . . . unless LESS than 25% of its total gross income . . . for a 3-year period ending with the end of the year BEFORE dividends were distributed . . .was *effectively connected* with a U.S. trade or business. ———but it's only from "within" the U.S. in the same proportion that the "effectively connected" income was to the company's entire gross income ———otherwise, dividends from a foreign corporation are treated as income from sources *without* the U.S. to the extent they exceed 100/70th of the deduction allowed under § 245 for dividends; *OR* ——(C) from a FOREIGN corporation to the extent such amount is required by 243(e) to be treated as dividends from a DOMESTIC corporation, *or* ——(D) from a DISC or former DISC, except to the extent attributable to qualified export receipts In the case of a 20% owned corporation, (2)(B) applies, except that 100/80 is used instead of 100/70 (3) Labor or services performed in the U.S., *unless* —(A) performed by a NRA who is present 90 days or less; —(B) his compensation is >= $3000; *and* —(C) he did it as an employee of: ——(i) a NRA, foreign partnership, or foreign corporation NOT engaged in trade or business in the U.S.; *or* ——(ii) a domestic citizen, resident, partnership, or corporation if performed for any place of business maintained in a foreign country or a U.S. possession Additionally, it's not U.S. source income if it's done by a NRA who is the regular crew of a foreign vessel engaged in transportation between the U.S. and a foreign country or U.S. possession (4) Rentals and royalties from property located in the U.S. (i.e., USED in the U.S.) and ANY interest from such property (think trademarks, patents, good will, etc.) (5) Income from the disposition of U.S. real property (6) Income from the purchase of inventory WITHOUT but selling it WITHIN (7) Underwriting income from any insurance of annuity contract in connection with —(A) U.S. property, liability from U.S. activities, or the lives and health of U.S. residents; *or* —(B) risks not described above . . . but in an amount equal to the premium paid to another corporation for taking the above-described risks (8) Any social security benefit (9) Amounts from —(A) noncorporate resident or domestic corporation for guaranteeing any indebtedness of the corporation; *or* —(B)any foreign person for the provision of a guarantee of indebtedness, if it was effectively connected

862. Income from Sources Without the U.S.

(a) The following items shall be treated as from sources *WITHOUT* the U.S.: —(1) Interest other than that from within —(2) Dividends OTHER than those derived from sources *within* the U.S. —(3) income from labor or personal services performed without —(4) rentals or royalties from property located without . . . or any interest from that property —(5) income from disposition of property WITHOUT the U.S. —(6) Income from purchase of inventory WITHIN and sale WITHOUT —(7) underwriting income OTHER than from within —(8) income from disposition of U.S. real property in the Virgin Islands; *and* —(9) amounts received from a foreign person for guaranteeing indebtedness OTHER than amounts from within

164. Taxes

(a) The following taxes are allowed as a deduction for the taxable year paid or accrued: —(1) State, local, and foreign real property taxes; —(3) State, local, and foreign income, war profits, and excess profits taxes

Reg. § 1.1464-1. Refunds or Credits

(a) The refund or credit for overpayment of tax which has actually been withheld at the source . . . shall be made to the taxpayer from whose income the amount of such tax was in fact withheld. ——To the extent it was not in fact withheld . . . but was paid by the withholding agent . . . the refund or credit shall be made to the withholding agent.

Reg. § 1.861-1. Income from Sources Within

(a) These sections decide whether gross income is within or without. If it's not specifically dealt with, the Secretary can decide. There are 3 categories of income —(1) Taxable income from sources within shall be determined by DEDUCTING expenses, losses, and other deductions specifically for source income. ——Also deduct a RATABLE part of any other expenses, deductions, and losses which are not definitely allocated to a class of gross income —(2) Taxable income from sources WITHOUT determined by DEDUCTING expenses, losses, and other deduction specifically for without income. ——also a RATABLE portion of anything not definitely allocated —(3) Partly within, partly without. —(4) Owners of certain aircraft and vessels can elect to treat income from them as from WITHIN if leased before Dec. 28, 1980 (b) WITHIN income consists of income described in (a)(1) (c) If a taxpayer has any combination of these income types, they are SEPARATED, and U.S. source income calculated separately therefrom

911

(a) a qualified individual can elect to exclude from gross income: —(1) foreign earned income; *and* —(2) housing costs (d)(1) "Qualified individual" means an individual whose tax home is a foreign country and who is —(A) a citizen of the U.S. and who establishes he has been a resident of a foreign country for an uninterrupted period which includes the taxable year; *or* —(B) a citizen or U.S. resident who, during any period of 12 consecutive months, is present in a foreign country during at least 330 full days in such period.

1446.Withholding Tax on Foreign Partners' Share of Effectively Connected Income

(a) if —(1) a partnership has effectively connected taxable income for any taxable year; *and* —(2) any portion of such income is allocable under 704 to a foreign partner; that foreign partner pays a withholding tax. (b) *Amount of Withholding Tax* —(1) The amount of the withholding tax is equal to the applicable percentage of the effectively connected taxable income of the partnership which is allocable under 704 to foreign partners —(2) "Applicable percentage" means ——(A) for foreign partners who are NOT corporations, the highest tax rate specified in § 1; *and* ——(B) for foreign partners who ARE corporations, the highest tax rate specified in § 11(b)(1) (c) "Effected connected taxable income" means the partnership's taxable income that is effectively connected, but with the following adjustments: —(1) § 703(a)(1) doesn't apply —(2) partnership allowed deduction for depletion of oil and gas wells, but amount determined w/o regard to 613 or 613A —(3) No tax item taken into account to the extent allocable under 704 to any partner who is NOT a foreign partner (d) *Treatment of Foreign Partners* —(1) Each foreign partner is allowed a credit under 33 for his share of the withholding tax paid by the partnership under this section. ——credit allowed for the partner's taxable year during which the partnership taxable year (for which the tax was paid) ends —(2) A foreign partner's share of any withholding tax paid by the partnership under this section shall be treated as DISTRIBUTED to him on the earlier of ——(A) the day the tax was paid; *or* ——(B) the last day of the partnership taxable year for which the tax was paid (e) "Foreign partner" means any partner who is NOT a U.S. person (f) Secretary may prescribe regulations to carry out this section, including: —(1) regulations for publicly traded partnerships; *and* —(2) regulations providing ——(A) that, for the purposes of 6655, the withholding tax imposed under this section shall be treated as a tax imposed by 11 and any partnership required to pay such tax shall be treated as a corporation; *and* ——(B) appropriate adjustments in applying 6655 to the withholding tax

Reg. § 1.864-2. Trade or business within the U.S.

(b) —(1) "Engaged in a trade or business within the U.S." does NOT include the performance of personal services: ——(i) for a NRA or a foreign partnership or corporation that is NOT engaged in a trade or business within the U.S. at ANY time during the taxable year; *or* ——(ii) For an OFFICE OR PLACE OF BUSINESS a U.S. citizen or domestic partnership or corporation maintains in a foreign country or U.S. possession by a NRA who is temporarily present in the U.S. for >= 90 days during the year and whose compensation is >= $3000 —(2) ——(i) "Day" means a calendar day during any portion of which the NRA is physically present ——(ii) only for this paragraph, the NRA or foreign partnership or corporation who is HIRING the performing NRA will NOT be considered to be engaged in a trade or business within the U.S. by reason of the performing individual's services ——(iii) it is IMMATERIAL whether the services are performed by an EMPLOYEE or under ANY OTHER contract ——(iv) to decide whether compensation exceeds $3000, any amounts received as ADVANCES or REIMBURSEMENTS for TRAVEL are omitted . . . IF the performing NRA is required to and actually did account for them and has met the tests for this under § 1.162-17. ———If advances and reimbursements EXCEED the expenses, the excess is included as compensation ———PENSIONS and RETIREMENT payments are NOT taken into account (d) —(1) "Engaged in a trade or business WITHIN the U.S." does NOT include EFFECTING TRANSACTIONS in the U.S. of commodities . . . through a resident broker, commission agent, custodian, or other independent agent . . . IF ——(i) the commodities are of a kind customarily dealt in on an organized commodity exchange; ——(ii) the transaction is of a kind customarily consummated at such place; *and* ——(iii) the taxpayer at no time during the taxable year has an OFFICE or other fixed place of business in the U.S. through which, or by the direction of which, the transactions are effected. ————the volume of the transactions does not matter for the determination of whether the taxpayer is engaged in a trade or business within the U.S. —(2) ——(i)"Engaged in a trade or business within the U.S." does NOT include effecting transactions in the U.S. of commodities . . . for the taxpayer's OWN account IF the commodities are of a kind customarily dealt on an organized commodity exchange . . . and IF the transaction is a kind customarily consummated at such a place. This applies regardless of whether the transactions are effected by: ———(a) the taxpayer himself while present in the U.S.; ———(b) employees of the taxpayer, whether or not such employees are present in the U.S. while effecting the transactions; *or* ———(c) a broker, commission agent, custodian, or other agent of the taxpayer, whether or not such agent is: ————(1) dependent or independent; *or* ————(2) resident, nonresident, or just present in the U.S. ————and irrepsective of whether such employee or agent has discretionary authority to make decisions in effecting such transactions. ————volume of transactions doesn't matter to determining whether he is engaged in a trade or business within the U.S. ————This paragraph does NOT apply to the effecting of transactions in the U.S. for the account of a DEALER of commodities ——(ii) A NRA, foreign partnership, foreign estate, foreign trust, or foreign corporation . . . shall NOT be considered to be engaged in a trade or business within the U.S . . . solely because such person is a MEMBER of a partnership (whether domestic or foreign) . . . which, based on authority he granted it . . . effects transactions in the U.S. in commodities for the partner's account OR . . . because an employee, broker, commission agent, custodian, or other agent, under direction of the partnership, does it. ———but this doesn't apply to any member of a partnership which is a DEALER in commodities.

Reg. § 1.871-7. Taxation of NRAs who are NOT engaged in business in the U.S.

(b) —(1) the 30% tax applies to the GROSS AMOUNT received as FDAP gains, profits, or income. ——specific FDAP items are listed in 871(a)(1)(A) as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, and emoluments ——other FDAP items are also subject to tax, like royalties; royalties for use on patents, copyrights, secret processes and formulas, and other property ——Reg. § 1.1441-2(b) provides rules for determining FDAP ——for rules to treating gain on disposition of 306 stock as FDAP, see 306(f) and Reg. § 1.306-3(h). —(2) A "substitute interest payment" received by a FOREIGN person in a securities lending transaction or a sale-repurchase transaction . . . is treated the same as INTEREST INCOME paid or accrued with respect to the terms of the transferred security. ——a "substitute dividend payment" RECEIVED by a FOREIGN person in a securities lending or sale-repurchase transaction . . . shall have the SAME character as a DISTRIBUTION received with respect to the security ——where, in a securities lending transaction or sale-repurchase transaction, a FOREIGN person TRANSFERS to another person a SECURITY in the interest . . . which would qualify as PORTFOLIO INTEREST in the hands of the lender . . . SUBSTITUTE INTEREST payments made with respect to the transferred security will be treated as portfolio interest ————but the transferor must comply with the documentation requirement of § 1.871-14(c)(1)(ii)(C) with respect to the payment of the substitute interest and none of the exceptions to portfolio interest in 871(h)(3) or (4) apply

Reg. § 1.1441-1. Requirement for the deduction and withholding of tax on payments to foreign persons

(b) —(2) ——(ii) A withholding agent who pays a U.S. person . . . and has ACTUAL KNOWLEDGE this person receives payment as an AGENT to a foreign person . . . must treat the payment as MADE to the foreign person. ———The withholding agent may treat the payment as made to the U.S. person IF the U.S. person is a FINANCIAL INSTITUTION and the agent has NO REASON to believe the institution will comply with its obligation to withhold ——(iv) ———(B) A withholding agent can treat the payments in one of the following ways: ————(1) As a payment to a U.S. person. In that case, the withholding agent is not responsible for withholding to the extent it can reliably associate the payment with a withholding certificate ———(D) A payment is treated as a payment to a U.S. branch of a foreign bank or insurance company IF it is credited to an account maintained in the U.S. in the name of the branch . . . or made to an address where the U.S. branch is located. (c) —(6) ——(i) For payments OTHER than for which a REDUCED rate is claimed under a tax treaty, "BENEFICIAL OWNER" means the person who is the OWNER of the income for tax purposes and who beneficially owns that income. ———a person is the owner to the EXTENT he must include it in his gross income for tax purposes ———determine beneficial ownership under 7701(l) and any other application of general U.S. principles, such as agency ———for scholarships, the student receiving one is the beneficial owner ———for payment of an amount that's not income, beneficial ownership is determined as though it were income (d) —(1) A withholding agent is NOT REQUIRED TO WITHHOLD payments to a U.S. payee, to a person PRESUMED to be a U.S. payee,or to a person that may be treated as a U.S. beneficial owner. ——Use this paragraph to determine whether to treat a payee or beneficial owner as a U.S. person —(2) Anyone who must submit a W-9 may be treated as a U.S. payee. It signifies the person whose name is on the form is a U.S. person. ——foreign persons do not submit W-9s (e) —(1) ——(ii) ———(A) A withholding agent may treat a payment as made to a foreign person that is a beneficial owner IF it complies with (e)(1)(ii)(B), BUT only to the extent ————(1) the withholding agent can reliably associate the payment with a beneficial owner withholding certificate described in (e)(2) and whose name is on the certificate —(2) ——(i) A "beneficial owner withholding certificate" is a statement by which the beneficial owner of the payment represents that it is a FOREIGN PERSON and, IF applicable, claims a REDUCED rate of withholding. ———separate certificates must be submitted to each withholding agent ———might have to submit more than one certificate to the same withholding agent if there are different types of payments involved

Reg. § 1.1441-1T. Requirement for the deduction and withholding of tax on payments to foreign persons (TEMPORARY)

(b) —(1) A withholding agent must withhold 30% of any payment SUBJECT to withholding made to a foreign person . . . UNLESS it can reliably associate the payment with documentation allowing it to treat the payee as a U.S. person. ——but the withholding agent doesn't need to take responsibility for withholding if the foreign person assumes it as a QUALIFIED INTERMEDIARY, a U.S. branch of a foreign person, as a withholding foreign partnership, or as a withholding foreign trust. ——Withholding is also not required if the withholding under chapter 4 is effective —(2) ——(i) A payee is the person to whom a payment is made. Generally, a withholding agent determines whether its a U.S. or a foreign payee based on a Form W-8 or 8233. ——(iii) ———(A) Payments to wholly-owned domestic, disregarded entities . . . whose sole owner is a single foreign person . . . shall be treated as a payment to said OWNER. ——(iv) ———(A) A payment to a U.S. BRANCH of a foreign person is a payment TO a FOREIGN person. ————Some FFIs can elect to be treated as U.S. persons, though. But if they so elect, they must act like a U.S. person for ALL potential withholding agents. ————But for reporting purposes, the withholding agent will NOT treat a U.S. branch so electing as a U.S. person. ————An agreement to be treated as a U.S. person has to be evidenced by a withholding certificate ————Any U.S. branch of a FOREIGN BANK is treated as a U.S. person if it is SUPERVISED by the Federal Reserve Board ————Any U.S. branch of a FOREIGN INSURANCE company is treated as a U.S. person IF it is required to file a statement with the Insurance Department of a State ————Territory financial institutions (including flow-throughs) are treated as U.S. branches ——(vi) A payment to a foreign person that the withholding agent would TREAT as a payment to a foreign person WITHOUT obtaining documentation . . . is treated as a payment to a foreign person.

Reg. § 301.7701-2(b). Business Entities

(b) "Corporation" means —(1) a business entity . . . organized under a Federal or State statute . . . if that statute describes or refers to it as incorporated, or as a corporation, body corporate, or body politic; —(2) An association; —(3) a business entity . . . organized under a State statute, if that statute describes it as a JOINT-STOCK company or association; —(4) an insurance company; —(5) a state-chartered business entity conducting banking activities . . . . if any deposits are insured by the FDIC or a similar federal statute; —(6) a business entity . . . wholly owned by a State or subdivision . . . or wholly owned by a foreign government; —(7) a business entity . . . taxable as a corporation under any other provision. —(8) ——(i) *Provides a list of all per se corporations from other countries* ——(ii) The following are NOT corporations: ———(A) ————(1) a Canadian "Nova Scotia Unlimited Liability Co.", or any other company or corporation all of whose owners have unlimited liability ————(2) India: a company deemed to be a public limited company . . . provided the organizational documents meet certain requirements ————(3) Malaysia: a "Sendirian Berhad" ———(B) Mexico: a "Sociedad Anonima" includes those that apply the variable capital provision of Mexican law ——(iii) For Cyprus, Hong Kong, and Jamaica, *"Public Limited Company"* includes any limited company that is not defined as a private company under the corporate laws of those jurisdictions. It includes all companies DEFINED as public companies ——(iv) *Limited Company* includes companies limited by shares and companies limited by guarantee ——(v) Different linguistic renderings of the name of an entity shall be disregarded. —(9) ——(i) "Corporation" includes an entity created or organized under the laws of more than one jurisdiction IF these rules would treat it as a corporation in any of those jurisdictions. ——whether an entity is a corporation is determined SEPARATELY from whether it is domestic or foreign

Reg. § 1.864-7. Definition of Office or other fixed place of business

(b) *Fixed Facilities* —(1) An office or other fixed place of business is a FIXED FACILITY . . . which is a place, site, structure, or other similar facility through which a NRA or foreign corporation engages in a T/B. ——office or fixed place or business includes, but is not limited to: factories; stores or other sales outlets; workshops; mines, quarries, or other place to extract natural resources. ——a fixed facility may be considered an office or other fixed place of business . . . whether or not the facility is CONTINUOUSLY USED

Reg. § 1.864-6. Income, gain, or loss attributable to an office or other fixed place of business WITHIN the U.S.

(b) *Material Factor test* —(1) Income or G/L is attributable to a NRA or foreign corporation's OFFICE or other fixed place of business WITHIN the U.S. . . . *only if* that office is a material factor in realizing the tax item . . . AND it is realized in the ordinary course of business that is carried on by that office. ——an office's activities are NOT a material factor in realizing a tax item UNLESS they provide a SIGNIFICANT CONTRIBUTION to the realization by being an ESSENTIAL ECONOMIC ELEMENT ——the office can still be a material factor EVEN IF it's not present in the U.S. when the gain is actually realized; i.e., it's material as long as the work done was a significant contribution while it WAS present —(2) the NRA or foreign corporation's office in the U.S. shall be considered a material factor in the realization of income or G/L consisting of ——(iii) income or G/L from the SALE OF GOODS or MERCHANDISE UNDER 1.864-5(b)(3) . . . IF that office is part of soliciting the order, negotiating the sales contract, or performing other significant, necessary services for the sale that are NOT subject to a separate agreement between buyer and seller ———if that office isn't held out as a place to send sales orders, but a customer sends an UNSOLICITED one to that office anyway . . . that office is deemed a material factor for that sale ———any income or G/L must be realized in that office's ORDINARY COURSE OF BUSINESS ———e.g., if a U.S. office occasionally makes a sale in Europe, it's still U.S. source income a NRA or foreign corporation's office in the U.S. will NOT be considered a material factor merely because one of the following factors are present: ———(a) sale is made subject to the final approval of such office ———(b) the property sold is held in, and distributed from, such office ———(c) samples of the property sold are displayed (but not otherwise promoted or sold) in that office; *or* ———(d) that office performs merely CLERICAL functions incident to sale. ————activities carried on by employees of an office constitute activities of that office.

641

(b) An estate or trust's income is computed the same way as for an individual . . . except as otherwise provided. — A foreign trust or foreign estate shall be treated as a nonresident alien individual who is not present in the United States at any time.

702. Income and Credits of Partner

(b) The character of any tax item a partner separately accounts for in his distributive share . . . shall be determined as if such item were realized directly from the source the partnership itself realized it . . . or incurred in the same manner as the partnership incurred it

Reg. § 1.1441-3. Determination of amounts to be withheld

(c) —(1) A corporation making a distribution with respect to stock . . . or any intermediary making a payment of such distribution . . . . is required to withhold on the ENTIRE amount under 1441 through 1443. ——UNLESS it elects to reduce the amount of withholding under (c) ——any exceptions provided by (c) don't need documentation —(2) ——(i) An election under (c)(1) is made by actually REDUCING the amount of withholding at the time of payment. An intermediary making a payment is NOT required to reduce the withholding based on the corporation's estimates. BUT the intermediary can also elect to withhold even when the corporation does NOT. The amounts the corporation or intermediary may elect to withhold as are follows: ———(A) may elect to NOT withhold to the extent it represents a nontaxable distribution payable in STOCK or STOCK RIGHTS; ———(B) may elect to NOT withhold to the extent a distribution represents payment in full or in part for stock ———(C) may elect to NOT withhold on a distribution to the extent it is NOT paid out of accumulated EARNINGS and PROFITS or current year EARNINGS AND PROFITS. ———(D) a REGULATED investment company or intermediary may elect to NOT withhold on a distribution representing a CAPITAL GAIN dividend . . . or an EXEMPT INTEREST dividend ———(E) a U.S. real property holding corporation under 897(c)(2) or a real estate investment trust under 856 can elect to NOT withhold to the extent it is subject to withholding under 1445 ——(ii) ———(A) A reasonable estimate of accumulated earnings and profits on the date of payment under (c)(2)(i)(C) is a determination made by the corporation at a time REASONABLY CLOSE to the date of payment of the extent to which the distribution will constitute a DIVIDEND. ———(B) if a corporation under-withholds under 1441, it is LIABLE for the amount under-withheld under 1461. ————any amount under-withheld shall NOT be treated as income subject to additional withholding EVEN IF that amount is treated as additional income . . . UNLESS that amount is income to the shareholder as a result of a contractual arrangement between the parties regarding the satisfaction of the shareholder's tax liabilities. No penalties imposed for failure to withhold and deposit tax if: ————(1) distributing corporation made a reasonable estimate as provided under (c)(2)(ii)(A), *and* ————(2) either —————(i) the corporation or intermediary pays over the underwithheld amount on or BEFORE the due date for filing Form 1042 for the calendar year in which the distribution is due; *or* —————(ii) the corporation or intermediary is NOT a calendar year taxpayer and it files an amended return on Form 1042X for the CALENDAR YEAR in which the distribution is made and pays the underwithheld amount and interest WITHIN 60 days after the close of the taxable year in which the distribution is made ———(C) To determine whether a CORPORATE distribution is a DIVIDEND, a withholding agent that is NOT the distributing corporation may . . . without having ACTUAL or CONSTRUCTIVE knowledge . . . rely on representations made by the distributing corporation . . . regarding the reasonable estimate of the anticipated accumulated EARNINGS AND PROFITS under (c)(2)(ii)(A). ————failure by the withholding agent to withhold the required amount due to failure BY the CORPORATION to reasonably make an estimate . . . shall be imputed to the corporation. ————In that case, the IRS can collect the underwithheld amount from the corporation

Reg. § 1.864-4. U.S. source income EFFECTIVELY CONNECTED with U.S. business

(c) —(6) ——(i) Income from sources WITHIN that are FDAP *and* derived from an asset . . . *AND* G/L from the sale of CAPITAL assets . . . realized by a NRA who is ENGAGED in a trade or business in the U.S. . . . SOLELY by reason of performing personal services in the U.S. . . . shall NOT be treated as EFFECTIVELY CONNECTED *unless* there is a direct economic relationship between his holding of the asset and his trade or business of performing the personal services ——(ii) Wages, salaries, fees, compensations, emoluments, or other remunerations, including bonuses . . . received by a NRA for performing personal services in the U.S. that constitute a trade or business in the U.S. . . . and PENSIONS and RETIREMENT pay for such services *are* EFFECTIVELY CONNECTED . . . IF he is engaged in a T/B at some time during the year they are received

Reg. § 1.904-4. Separate Application of § 904 with respect to certain categories of income.

(c) *High-taxed income* —(1) Income received by a U.S. person that would otherwise be passive income . . . shall not be treated as passive income IF it is HIGH-TAXED INCOME. ——It's high-taxed income IF the sum of the foreign income taxes paid on the income . . . and the taxes paid on the income under 902 . . . exceeds (highest rate in 1 or 11) x (amount of the income). ——if it's high-taxed income, it is treated as GENERAL CATEGORY income ——U.S. passive income is treated as any other passive income for the purposes of grouping income ——but only foreign source income is important to determining whether it is high-taxed —(2) *Grouping items of income to determine whether passive income is high-taxed* ——(i) *Initial allocation and apportionment of deductions and taxes* To determine whether passive income is high-taxed . . . expenses, losses, and other deductions should be allocated to each of the groups of passive income. ————taxpayers that allocate and apportion interest expense on an asset basis may nevertheless apportion passive interest expense among the groups of passive income on a gross income basis ————if a loss on a disposition of property gives rise to foreign tax . . . (i.e., the transaction giving rise to the loss in the U.S> is treated under foreign law as having given rise to a gain) . . . the foreign tax shall be allocated to the group of passive income . . . to which gain on the sale would have been assigned under (c)(3) or (4) ————only determine whether passive income is high-taxed after applying (c)(2)(ii) ——(ii) *Reallocation of loss groups.* If, after allocation and apportionment of expenses, losses and other deductions . . . the sum of the allocable deductions EXCEEDS the gross income in one or more groups . . . the EXCESS deductions shall proportionately reduce income in the other groups

884

(c) *U.S. net equity* —(1) "U.S. net equity" means ——(A) U.S. assets . . . reduced (even if below zero) by ——(B) U.S. liabilities —(2) *U.S. assets and liabilities* ——(A) "U.S. assets" means the foreign corporation's money and aggregate A/B of property treated as connected with the conduct of a T/B within the U.S. ———A/B of any property shall be its A/B for purposes of computing earnings and profits ——(B) "U.S. liabilities" means the foreign corporation's liabilities that are connected with the conduct of a U.S. T/B ——(C) Must be consistent with the allocation of deductions under 882(c)(1) (d) *Effectively connected earnings and profits* —(1) "Effectively connected earnings and profits" means earnings and profits that are effectively connected with a T/B within the U.S. ——don't diminish it because any distributions were made during the year —(2) "Effectively connected earnings and profits" do NOT include any earnings and profits attributable to ——(A) income NOT includible in gross income under 883(a)(1) or (2) ——(B) income treated as effectively connected under 921(d) or 926(b) ——(C) gain on the disposition of a U.S. real property interest under 897(c)(1)(A)(ii) ——(D) income effectively connected with the conduct of a T/B in the U.S. under 953(c)(3)(C); *or* ——(E) income effectively connected with a T/B within the U.S. under 882(e) Property and liabilities treated as connected under secretary-prescribed regulations . . . shall not be taken into account while determining the corporation's U.S. assets or liabilities

1441

(c) EXCEPTIONS —(1) No withholding required for any effectively connected amount that is included in the recipient's gross income —(2) if the withholding agent doesn't know the owner's identity, the Secretary may authorize a withholding —(3) Withholding for bonds, mortgages, and deeds of trust under 1451 should not exceed 27.5% —(4) At the Secretary's decision, compensation for personal services can be exempted from withholding. —(5) For gains under 631, 871, and 1235, the amount required to be withheld shall, if the gain is NOT known to the withholding agent, be the amount not exceeding 30% of the amount payable . . . to ensure the 30% marker is met —(6) No withholding of per diem amounts paid by the U.S. government to a NRA engaged in any training under the Mutual Security Act —(7) No withholding required for any amount receied as an annuity if, under 871, it is exempt from 871's tax —(8) OID rule —(9) for portfolio interest, no withholding required unless the person meant to withhold it has reason to know, OR does know, that it isn't actually portfolio interest as defined —(10) —(11) (d) The 30% withholding does not apply to a foreign partnership engaged in a trade or business within the U.S. IF the secretary decides it would impose an undue administrative burden (e) For this section, NRA includes an alien resident of Puerto Rico

Reg. § 1.861-4 (con't)

(c) Wages received for services rendered inside the territorial limits of the U.S. and wages of an ALIEN SEAMAN earned on a coast-wise vessel are to be regarded as U.S. SOURCE (d) This Reg. § 1.861-4 applies after Dec. 31, 1966

Reg. § 1.861-8. Computation of Taxable income from sources within the U.S. and from other sources and activities

(e) *Allocation and Apportionment of Certain Deductions* —(7) *Losses on the sale, exchange, or other disposition of property* ——(i) The deduction allowed for loss on the sale, exchange, or other disposition of a capital asset described in 1231(b) as property used in a trade or business . . . is considered a deduction that is definitely related and allocable to the class of gross income to which such asset or property ordinarily gives rise in the hands of the taxpayer. ———where the nature of the asset's gross income has varied significantly over several year . . . then determine the class of income from what it generated immediately preceding the sale. ——(ii) Where apportionment of the losses on the sale of a capital asset under 1231(b) is necessary . . . the amount of such deduction shall be apportioned between the statutory grouping of gross income . . . and residual grouping . . . in the same proportion that the amount of gross income within the class of gross income. ———apportionment is necessary where the class of gross income to which the deduction is allocated consists of gross income attributable to an intangible asset . . . used both within and without the U.S. . . . or gross income attributable to a tangible asset used both within and without

Reg. § 301.7701-3

(e) An entity resulting from the sale or termination of a partnership is STILL a partnership (f) —(1) Classification as an ASSOCIATION is NOT effected by the number of its members —(2) Partnerships become DISREGARDED entities when reduced to only ONE member. A single-member disregarded entity becomes a PARTNERSHIP when it has more than one member —(3) Classification changes resulting from a change in the number of members does NOT constitute an election for the 60 month limitation after an election (5) Effective Nov. 29, 1999

901 (con't . . .)

(f) *Oil or gas* Any income, profits, and/or excess profits taxes paid to a foreign country . . . on the purchase/sale of oil or gas extracted IN THAT COUNTRY . . . is NOT a tax under this section that can get a credit if —(1) the taxpayer has no economic interest in the oil or gas; *and* —(2) the purchase/sale is at a price DIFFERING from FMV at the time of sale (g) *Taxes on distributions from possessions corporations* —(1) Any tax paid to a foreign country or U.S. possession on distributions from a corporation ——(A) that is attributable to a period where the corporation is a POSSESSIONS CORPORATION; *and* ——(B) ———(i) if a dividends received deduction is allowable; *or* ———(ii) to the extent the distribution is connected with a LIQUIDATION or other transaction . . . with respect to which G/L is not recognized . . . that tax is NOT treated as income, war profits, or excess profits tax paid to foreign country or U.S. possession . .. AND no deduction is allowed —(2) A corporation is a "possessions corporation" for any period during which an election under 936 applies, 931 applies, or 957(c) applies (i) *Taxes Used For Subsidies* Any income, war profits, or excess profits taxes shall NOT be treated as taxes for providing credits IF —(1) that tax is used to provide a subsidy to the taxpayer, a related person, or any party to the transaction (or a related transaction); *and* —(2) the subsidy is determined by reference to the amount of the tax . .. or the base used to compute the tax itself (j) *Denial of the Foreign Tax Credit For Other Countries* —(1) ——(A) no credit is allowed for taxes paid to a country if this subsection applies to that country; *and* ——(B) subsections (a), (b), and (c) of 904, and 902 and 960 shall be applied separately to sources within that country —(2) ——(A) This subsection applies to any foreign country ———(i) the U.S. does not recognize, unless it's allowed to purchase defense articles under the Arms Export Control Act; ———(ii) the U.S. has severed diplomatic relations with ———(iii) the U.S. hasn't severed relations with, but it just doesn't conduct relations with; *or* ———(iv) any country designated as supporting acts of international terrorism ——(B) This subsection applies to any foreign country described above for the period ———(i) beginning after either ————(I) Jan. 1, 1987, *or* ————(II) 6 months after that country is described above; *and* ———(ii) and ends on the date the secretary says this subsection no longer applies to a country —(3) 275 and 78 don't apply to any tax not allowed as a credit under subsection (a) by reason of this subsection —(4) Secretary can prescribe regulations to effectuate this subsection . . . including regulations treating income paid through 1 or more entities as derived from a foreign country . . . to which this subsection applies . . . if it was, in fact, derived from such country —(5) *Waiver of Denial* ——(A) Paragraph (1), which makes the foreign tax credit not apply to countries described, DOES NOT APPLY if the President ———(i) determines that allowing the credit to apply will support NATIONAL INTERESTS *and* expand trade and investment opportunities in that country; *and* ———(ii) reports the waiver as required below ——(B) 30 days or more before granting the waiver, the President must report to Congress ———(i) the intention to grant the waiver; *and* ———(ii) the reason for doing so

Reg. § 1.901-2. Income, War Profits, or Excess Profits Tax Paid or Accrued

(f) *Taxpayer* —(1) The person considered to pay a tax for 901 and 903 . . . is the person on whom foreign law imposes legal liability for the tax . . . EVEN IF another person (like a withholding agent) remits such tax. —(2) *Party undertaking tax obligations as part of transaction* ——(i) Tax is considered paid by the taxpayer . . . even if another party to a direct or indirect transaction agrees, as part of the transaction . . . to assume the taxpayer's foreign tax liability. —(3) *Taxes imposed on combined income of two or more persons* ——(i) If foreign tax is imposed on the combined income of two or more persons . . . foreign law is considered to impose legal liability on EACH such person for the amount of the tax attributable to that person's portion of the combined income. ———combined income with respect to EACH foreign tax imposed on a combined basis . . . is computed separately . . . and the tax on that incoe is allocated separately ———if foreign law exempts form tax, or provides for specific rates of tax with respect to certain types of income . . . or if certain expenses, deductions, or credits are taken into account ONLY with respect to a particular type of income . . . combined income with respect to such portions of combined income is ALSO computed separately . . . and the tax on that combined income is allocated separately ———the rules of this paragraph apply regardless of who is obligated to, or actually does, remit the tax ———"Person" means an individual or an entity that is subject to tax in a foreign country as a corporation (or at the entity level) ——(ii) *Combined Income.* Foreign tax is imposed on the combined income of two or more persons IF such persons compute their taxable income on a combined basis under foreign law . . . and foreign tax would be imposed on each such person on their separate taxable income ———income is combined if two or more persons add their items of income, gain, deduction, and loss together to compute a single taxable income for foreign tax purposes ———income is combined EVEN IF its just by attributing to one person the income of another . . . or treating separate entities as unincorporated branches of a single corporation ———but foreign tax is NOT considered imposed on combined income IF, b/c one of the persons is a fiscally transparent entity under foreign law . . . only ONE person is considered taxed under foreign law Foreign tax is NOT considered imposed on combined income solely because foreign law: ———(A) permits one person to surrender a loss to another person pursuant to a group relief or other loss-sharing regime ———(B) requires a shareholder of a corporation to include in income amounts attributable to taxes imposed on the corporation . . .with respect to distributed earnings, pursuant to an integrated tax system that allows shareholder a credit for such taxes ———(C) requires a shareholder to include . . . pursuant to an anti-deferral regime . . . income attributable to the shareholder's interest in the corporation; ———(D) reallocates income from one person to a related person under foreign transfer pricing rules; ———(E) requires a person to take into account a distributive share of income of an entity that is a partnership or other fiscally transparent entity for foreign tax law purposes; ———(F) requires a person to take all or part of the income of an entity that is a corporation for U.S. federal income tax purposes into account . . . because foreign law treats the entity as a branch or fiscally transparent entity (a reverse hybrid). ————reverse hybrids don't include entities that are treated as branches or fiscally transparent entities under foreign law ——(iii) *Portion of Combined Income* ———(A) Each person's portion of combined income is determined by reference to any return, schedule, or other document . . . that must be filed or maintained for foreign tax purposes ————if there is no such return . . then determine the income from the books the taxpayer maintains for his foreign business ———(B) *Effect of certain payments.* ————(1) Each person's portion of the combined income . . . . is determined by giving effect to payments and accrued amounts of interests, rents, and royalties . . . between persons whose income is included in the combined base . . . to the extent such amounts would be taken into account in computing the separate taxable incomes under foreign law . . . IF they did not compute their income on a combined basis —————each person's portion of the combined income is determined without taking into account any payments from other persons whose income is included in the combined base . . . that are treated as DIVIDENDS or OTHER nondeductible distributions ————(2) treatment of payments are determined under foreign law. ———(C) *Net Losses.* if tax is imposed on the combined income of THREE OR MORE persons . . . and one or more of them has a net loss for foreign tax purposes . . . ————if foreign law has mandatory rules for allocating the loss, then those rules apply ————if not, it is allocated among all persons on a pro rata basis in proportion to each person's income ————foreign law doesn't provide mandatory rules just because such a loss is attributed from one person to another ——(iv) *Collateral Consequences.* US rules apply to determine the tax consequences if one person remits a tax that is the legal liability of another person —(4) *Taxes imposed on partnerships and disregarded entities.* ——(i) *Partnership.* If foreign law imposes tax at the entity level on a partnership, the partnership is considered legally liable. ———applies regardless of which person is obligated to remit ———if the partnership is terminated and the partnership year closes for U.S. purposes . . . but not for foreign purposes . . . then the foreign tax paid for the foreign taxable year is allocated between the terminating partnership and its successors/assigns. ———if multiple terminations occur, foreign tax paid with respect to that foreign taxable year is allocated among all terminating and new partnerships ——(ii) *Disregarded entities.* If foreign law imposes tax at the entity level on a disregarded entity . . . the person who is treated as owning the assets is considered to be legally liable ———applies regardless of who actually remits the tax ———if there is a change of ownership during the year, but the entity remains, then the foreign tax is divided between the transferor and transferee ———if there is more than one change of ownership, foreign tax is allocated among all transferors and transferees ———if it becomes a partnership, it's allocated between the owner and the partnership

884 (con't)

(f) *Treatment of Interest Allocable to Effectively Connected Income* —(1) in the case of a foreign corporation engaged in a T/B in the U.S. . . . or treated as having effectively connected income . . . ——(A) any interest paid by it in the U.S. is treated as if it were paid by a domestic corporation; *and* ——(B) to the extent that the allocable interest EXCEEDS the interest described in subparagraph (A) . . . that corporation shall be liable for tax under 881(a) as if this excess were INTEREST PAID to that foreign corporation by a wholly owned domestic corporation on the last day of that corporation's taxable year —(2) "Allocable interest" means any interest that is allocable to income that is effectively connected with a U.S. T/B —(3) *Coordination with treaties* ——(A) in the case of any interest described in paragraph (1) . . . that is paid or accrued by a foreign corporation . . . no benefit under any treaty between the U.S. and the foreign country where the corporation is a resident applies . . . UNLESS ———(i) that treaty is an INCOME TAX TREATY; *and* ———(ii) that foreign corporation is a qualified resident of that foreign country ——(B) in the case of interest described in paragraph (1) . . . that is received or accrued by ANY corporation . . . no benefit under any treaty between the U.S. and a foreign country where that corporation is a resident shall apply . . . UNLESS ———(i) that treaty is an INCOME TAX treaty; *and* ———(ii) that corporation is a qualified resident of that foreign country (g) Secretary shall prescribe regulations necessary to carry out the purposes of this section ——including providing for appropriate adjustments in the determination of the dividend equivalent amount in connection with the distribution to shareholders . . . or transfer to a controlled corporation of the taxpayer's U.S. assets and other adjustments

954 (continued)

(g) *Foreign Base Company Oil Related Income* —(1) "FBC Oil income" means foreign oil related income OTHER than income derived from a source within a foreign country in connection with ——(A) oil or gas extracted from an oil or gas well there; *or* ——(B) oil, gas, or primary product of oil or gas sold by the foreign corporation or related person for use or consumption within such country or is loaded in such country on a vessel or aircraft as fuel for such vessel or aircraft Does not include any FPHC income —(2) ——(A) Does not include income from a foreign corporation if it is NOT a large oil producer for the year ——(B) "Large oil producer" means 1000 barrels or more per day by the related group including such corporation ——(C) "related group" means a group consisting of the foreign corporation and any other related person (h) *Special Rule for Income Derived in the Active Conduct of Banking, Financing, Or Similar Businesses* —(1) FPHC income does NOT include qualified banking or financing income of an eligible CFC —(2) *Eligible Controlled Foreign Corporation* ——(A) "Eligible CFC" means a CFC that ———(i) is predominately engaged in the active conduct of banking, financing, or similar business; *and* ———(ii) conducts substantial activity regarding that business ——(B) A CFC is treated as "predominately engaged" in banking, financing, or similar business IF ———(i) more than 70% of the gross income of the CFC is derived directly from the ACTIVE AND REGULAR conduct of a lending or financing business . . . from transactions with customers who are NOT related persons ———(ii) it is engaged in the active conduct of a banking business and is an institution licensed to do business as a bank in the U.S.; *or* ———(iii) it is engaged in the active conduct of a securities business and is registered as a securities broker under 15(a) of the Sec. Exchange Act —(3) *Qualified Banking or Financing Income* ——(A) "Qualified banking or financing income" means income of an eligible CFC that ———(i) is derived in the ACTIVE conduct of a banking, financing, or similar business by ————(I) the eligible CFC; *or* ————(II) a qualified business unit of the CFC; ———(ii) is derived from one or more transactions ————(I) with customers located outside the US; *and* ————(II) substantially all of the activities in connection with which are conducted directly by the corporation or unit in its home country; *and* ———(iii) is treated as earned by such corporation or unit in its home country for purposes of the country's tax laws ——(B) *Limitation on Nonbanking and Nonsecurities Business* No income of an eligible CFC not described in (2)(B)(ii) or (iii) shall be treated as qualified banking or financing income . . . UNLESS more than 30% of the corporation's or unit's gross income is derived directly from the active and regular conduct of a lending or finance business from transactions with customers that ar enot related persons which are located within such corporation's or unit's home country ——(C) *Substantial activity requirement fro cross border income* "Qualified banking or financing income" does not include income derived from 1 or more transactions with customers located in a country other than the home country of the eligible CFC or qualified business unit of such corporation . . . UNLESS such corporation or unit conducts substantial activity with respect to a banking, financing, or smilar business in its home country ——(D) Qualified banking or financing income shall be determed separately for such corporations and their qualified business units by taking into account ———(i) in the case of an eligible CFC, only items of income, deduction, gain, or loss . . . and activities of such corporation not properly allocable or attributable to any qualified business unit of such corporation; *and* ———(ii) in the case ofa qualified busines unit, only items of income, deduction, gain or loss and activities properly allocable to such unit ——(E) *Direct conduct of activities* An activity shall be treated as conducted directly by an eligible CFC or qualified business unit in its home country IF the activity is performed by employees of a related person and ———(i) the related person is an eligible CFC in the home country of which the same as the home country of the corporation or unit to which (A)(ii)(II) is being applied ———(ii) the activity is performed in the home country of the related person; *and* ———(iii) the related person is compensated on an arm's length basis for the performance of the activity by its employees and such compensation is treated as earned by such person in its home country for purposes of the home country's tax laws —(4)

Reg. § 1.904-5(c)(2). Interest

(i) "Related person interest" is any interest paid or accrued by a CFC to any U.S. shareholder (or any other related person) to which the look-through rules of 904(d)(3) apply. ——"Unrelated person interest" is all other interest ——it is treated as income in a separate category to the extent allocable to income of the CFC in that category ——if it is received by two or more persons, the amount of interest received or accrued by each person that is allocable to any separate category of income . . . shall be determined by multiplying the amount of related person interest allocable to that separate category of income by the following fraction . . . (amount of related person interest received) / (total amount of related person interest paid by CFC) (ii) Related person interest of a CFC is allocated in the following manner: —(A) gross income in each separate category is determined —(B) any expenses that are definitely related to less than all of gross income as a class, including unrelated person interest that is directly allocated to income from a specific property, shall be allocated and apportioned under 1.861-8, as applicable, to income in each separate category —(C) related person interest ashall be allocated to and shall reduce (but not below zero) the amount of passive FPHC income as determined after application of (c)(2)(ii)(B). —(D) to the extent that related person interest exceeds passive FPHC income . . . the related person shall be apportioned under the rules of this paragrpah to separate caegories other than passive

901 (continued again)

(k) *Minimum Holding Period for Certain Taxes on Dividends* —(1) *Withholding Taxes* ——(A) No credit is allowed for any WITHHOLDING TAX on a DIVIDEND *if* ———(i) such stock is held by the recipient for 15 days or less . . . during the 31-day period . . . beginning 15 days before the share becomes ex-dividend; *or* ———(ii) to the extent the recipient is under obligation to make a RELATED PAYMENT on positions on substantially similar or related property ——(B) "Withholding tax" includes any tax determined on a gross basis. It does NOT include any tax that is a prepayment of a net-basis tax —(2) For income, war profits, or excess profits taxes deemed paid under 853, 902, or 960 . . . through a CHAIN OF OWNERSHIP of stock . . . no credits are allowed IF ——(A) any stock in any part of the chain is held for less than the 15 days in (A)(i); *or* ——(B) the corporation holding the stock has to make the related payment under (A)(ii) —(3) For stock having preference dividends . . . and the dividends are attributable to a period or periods of more than 366 days . . . (1)(A)(i) applies, but ——(A) but 45 days instead of 15 ——(B) and 91 day period instead of 31 day period —(4) *Exception for Taxes Paid by Securities Dealers* ——(A) Paragraphs (1) and (2) don't apply to any QUALIFIED TAX on securities held in the ACTIVE CONDUCT of a business in a foreign country by a SECURITIES DEALER ———(i) who is registered as a securities broker or dealer under the Securities Exchange Act; ———(ii) who is registered as a Government securities broker under the Act; *or* ———(iii) who is licensed or authorized in that foreign country to conduct securities activities and is subject to BONA FIDE REGULATION by a securities authority in that country ——(B) "Qualified tax" above means a tax paid to a foreign country IF ———(i) the dividend to which the tax is attributable is subject to taxation on a NET BASIS by that country, *and* ———(ii) that country allows a credit against its net basis tax for the full amount of the tax paid to such other foreign country ——(C) Secretary can prescribe appropriate regulations —(5) For this subsection, 246(c) applies. —(6) If a person's holding period is reduced by reason of 246(c)(4) to any contract for the bona fide sale of stock, the determination of whether such person's holding period meets the requirements of (k)(2) is made at the time the contract is ENTERED INTO —(7) Sections 275 and 78 don't apply to any tax not allowed as a credit

901 (continued again) part ii

(l) *Minimum Holding Period for Withholding Taxes on Gain and Income Other than Dividends* —(1) No credits for any withholding tax on income or gain with respect to any property IF ——(A) the property is held for 15 days or less during the 31-day period beginning on the date . . . 15 days before the date on which the right to receive payment arises, *or* ——(B) to the extent the recipient of the item is under an obligation to make related payments with respect to positions in substantially similar or related property This paragraph doesn't apply to any dividend that (k) applies to —(2) ——(A) Paragraph (1) doesn't apply to any QUALIFIED TAX with respect to any property held in the active conduct of a business in a foreign country as a DEALER in such property ——(B) "Qualified tax" means a tax paid to a foreign country IF ———(i) the item to which such tax is attributable is subject to taxation on a net basis by that country, *and* ———(ii) that country allows a credit against its net basis tax for the full amount of the tax paid to that other country ——(C) "Dealer" means ———(i) for securities, any person under (k) who paragraphs (1) and (2) wouldn't apply to ———(ii) for other property, any person to whom such property is described under 1221(a)(1). ——(D) Secretary may prescribe regulations to prevent the abuse of the exception provided by this paragraph and to treat other taxes as qualified taxes —(3) Secretary can prevent paragraph (l)(1) from applying to property not necessary to carrying out the purposes of this subsection —(4) (k)(5)-(7) apply —(5) Holding periods shall be determined for purposes of this subsection without regard to 1235

901 (continued once again)

(m) *Denial of Foreign Tax Credit with respect to Foreign Income Not Subject to U.S. Taxation by reason of Covered Asset Acquisitions* —(1) for covered asset acquisitions, the DISQUALIFIED portion of any foreign income tax . . . determined with respect to the income attributable to the foreign assets . . . ——(A) won't be taken into account to determine the credit; *and* ——(B) in the case of foreign income tax . . . paid by a 902 corporation . . . it won't be taken into account for 902 or 960 purposes —(2) "Covered asset acquisition" means ——(A) a qualified stock purchase to which 338(a) applies ——(B) any transaction which ———(i) is treated as an acquisition of assets for purposes of this chapter; *and* ———(ii) is treated as the acquisition of stock of a corporation (or is disregarded) for purposes of the foreign income taxes of the relevant jurisdiction ——(C) any acquisition of an interest in a partnership that has an election under 754 ——(D) other similar transactions designated by the secretary —(3) *Disqualified portion* ——(A) "Disqualified portion" means the ratio of ———(i) the aggregate basis differences allocable to such taxable year under (B) with respect to all relevant foreign asset, DIVIDED BY ———(ii) the income on which the foreign income tax is determined ——(B) *Allocation of basis difference* ———(i) the basis difference with respect to any relevant foreign asset shall be allocated to taxable years using the applicable cost recovery method under this chapter ———(ii) in the case of DISPOSITION of any relevant foreign asset ————(I) the basis difference allocated to the taxable year . . that includes the date of such disposition . . . shall be the excess of the basis difference with respect to such asset . . . over the aggregate basis difference with respect to such asset which has been allocated under clause (i) to all prior taxable years; *and* ————(II) no basis difference with respect to such asset shall be allocated under clause (i) to any taxable year thereafter ——(C) *Basis difference* ———(i) "Basis difference" means the excess of ————(I) A/B of the asset immediately after the covered asset acquisition, *over* ————(II) the A/B immediately before the covered asset acquisition ———(ii) *Built-in loss assets* in the case of a relevant foreign asset . . . where the amount described in (i)(II) exceeds the amount of (i)(I) . . . the excess is taken into account as a basis difference of a negative amount ———(iii) in the case of a covered asset acquisition . . . the acquisition shall be treated as occurring at the close of the acquisition date —(4) "Relevant foreign asset" means any asset . . . if income, deduction, G/L attributable to the asset is taken into account in determining the foreign income tax —(5) "Foreign income tax" means any income, war profits, or excess profits tax paid or accrued to any foreign country or U.S. possession —(6) Sections 275 and 78 shall not apply to any tax not allowed as a credit under this subsection —(7) Secretary may issue regulations to exempt from this subsection certain covered asset acquisitions and relevant foreign assets with respect to which the basis difference is minimal

Reg. § 1.6013-6(a)(2)(v)

...

Reg. § 1.871-2(b)

...

Reg. § 301.7701-3(b)(2)

...

Reg. § 301.7701-3(a). Classification of certain business entities

A business entity that is NOT classified as a corporation (an ELIGIBLE ENTITY). . . can ELECT its classification (unless its an association). —If it has at least 2 members, it can elect to be either an ASSOCIATION . . . or a PARTNERSHIP —an entity with a SINGLE OWNER . . . can elect to be a CORPORATION or DISREGARDED Only necessary if an entity chooses to be categorized as other than its default. —An entity retains its default until an election is made

6013(a)(1).

A husband and wife may make a single return jointly of income taxes under subtitle A, even though one of the spouses has neither gross income nor deductions, except as provided below: —(1) But a husband and wife can't have a joint return if one of them is a nonresident alien

Reg. § 301.7701(d)

An alien who is present . . . who is not a mere transient . . . is a resident. —whether someone is transient depends on intent—a mere "floating intention" to return to another country is not enough to make him a transient. —if he lives here and has no definite intention as to his stay, he is a resident —if he comes for a definite purpose, which can be promptly accomplished, he is a transient —but if the purpose requires an extended stay, he's a resident . . . even if he definitely plans to eventually return to his home country

7701(b)(6) Lawful Permanent Resident

An individual is a LPR if: —(A) he has a green card (i.e., officially has the status); *and* —(B) that status hasn't been revoked. An individual ceases to be a LPR if he begins to be treated as a resident of a foreign country under a *tax treaty*, does NOT waive the benefits, *and* notifies the Secretary.

Reg. § 301.7701(b)-3(b)(6). Substantial Compliance

An individual substantially complies with visa requirements if he has not engaged in activities that are prohibited. —can't show substantial compliance just by showing the visa hasn't been revoked

1464. Refunds and Credits to Withheld Tax

Any overpayments of the withholding taxes shall be made to the withholding agent UNLESS that amount was actually withheld by the withholding agent

1461. Liability for Withheld Tax

Every person required to deduct and withhold any tax is LIABLE for that tax . . . but is INDEMNIFIED against any claims by the person who has been withheld from

Reg. § 1.954-1(c)(1)(C)(i).

FPHC income that is PASSIVE under 904 . . . before application of the high-taxed kickout . . . is reduced by related person interest expense allocable to passive income.

882(b)

For a foreign corporation, gross income includes only: —(1) income from sources within the U.S. but not effectively connected to a U.S. trade or business; *and* —(2) income effectively connected to a U.S. trade or business

872(a)

For a nonresident alien individual, gross income includes only: —(1) income from sources *within* the U.S. . . . and *not* effectively connected with a U.S. trade or business; *and* —(2) income effectively connected with a U.S. trade or business

875. Partnerships; Beneficiaries of Trusts and Estates

For the purposes of this title: (1) a NRA is considered engaged in a TRADE OR BUSINESS within the U.S. . . . if the partnership or corporation he is a member of is so engaged; *and* (2) a NRA or foreign corporation . . . that is a beneficiary of an estate or trust, which is engaged in a trade or business in the U.S. . . . is treated itself as being engaged in a trade or business within the U.S.

1463. Tax Paid by Recipient of Income

If —(1) any person fails to deduct and withhold any tax under this chapter; and —(2) thereafter the tax is paid; the tax won't be collected from such person. But they still might be liable for penalties.

78. Dividends Received From Certain Foreign Corporations By Domestic Corporations Choosing Foreign Tax Credit

If a domestic corporation chooses to have a foreign tax credit . . . an amount equal to the taxes DEEMED to be paid under 902(a) . . . or under 906(a)(1) . . . for such year shall be treated as a DIVIDEND RECEIVED BY THE DOMESTIC CORPORATION

Reg. § 301.7701(b)-8(a)(1). Closer Connection Exception

If an alien who satisfies the substantial presence test wants to AVOID being a resident by way of a "closer connection" to another foreign country, he must file a statement to explain the basis for this exception

861(c)

If the foreign corporation has no gross income from any source for a 3-year period, the requirements shall be applied with respect to the taxable year in which payment of the dividend is made under (a)(2)(B)

1462. Withheld Tax as Credit to Recipient Income

Income subject to the withholding tax is included in the recipient's return . . . but the amount withheld is CREDITED against the total income

881(d).

No tax shall be imposed under (a)(1) or (a)(3) on any amount described in 871(i)(2).

Reg. § 1.861-18(e). Provision of Know-How

Providing information in regards to a computer program is treated as providing KNOW-HOW . . . *only if* the information is —(1) information relating to computer programming techniques —(2) furnished under conditions preventing unauthorized disclosure, specifically contracted for between parties; *AND* —(3) considered property subject to trade secret protections

3121(b)(19)

Service which is performed by a NRA for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended, and which is performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q), as the case may be "employment"

Reg. § 1.861-18(d). Provision of Services

The determination of whether a transaction involving a NEWLY DEVELOPED or modified computer program . . . is treated as either the provision of SERVICES or another transaction under (b)(1) . . . is based on ALL THE FACTS AND CIRCUMSTANCES . . . including the intent of the parties as to WHO is to own the copyright rights in the computer program and HOW the risks of loss are allocated —intent of parties can be evidenced by conduct or agreement

741. Recognition and Character of Gain or Loss on Sale of Exchange for Partnerships

When a partnership interest is sold or exchanged, the transferring partner recognizes gain or loss. —Consider the gain or loss as one from a capital asset

Reg. § 1.875-1. Partnerships

Whether a NRA who is a member of a partnership is taxable in accordance with subsection (a), (b), or (c) of section 871 may depend on the status of the partnership. —a NRA who is a member of a partnership which is not engaged in trade or business within the United States is subject to the provisions of section 871 (a) or (b) . . . depending on whether or not he receives during the taxable year an aggregate of more than $15,400 gross income described in section 871(a). . . IF he is not otherwise engaged in trade or business within the United States. —a NRA who is a member of a partnership which at any time within the taxable year is engaged in trade or business within the United States . . . is considered as being engaged in trade or business within the United States and is therefore taxable under section 871(c). —For definition of what the term "partnership" includes, see section 7701(a)(2) and the regulations in part 301 of this chapter (Regulations on Procedure and Administration). —The test of whether a partnership is engaged in trade or business within the United States is the same as in the case of a nonresident alien individual. See § 1.871-8.

Reg. § 1.1441-1T (part II)

—(3) ——(ii) ———(A) A withholding agent that can't determine the payee's classification may PRESUME, under these rules, what the classification is. BUT the payee must actually furnish proper documentation to get a reduced rate of taxation ———(B) If the withholding agent can't reliably associate a payment with a withholding certificate or valid documentary evidence, it must PRESUME the payee is an INDIVIDUAL, TRUST, OR ESTATE . . . but only if there are reliable indications. ————if no reliable indications, it must presume the payee is a CORPORATION or other as under 1.6049(c)(1)(ii)(B). ————if it can't decide under 6049, it must be treated as a PARTNERSHIP. If that partnership is foreign, then it is NOT the beneficial owner of the payment. If it is domestic, it is a U.S. non-exempt recipient ———(C) If the withholding agent gets valid documents or certificate, but NO evidence as to classification . . . PRESUME as 6049 entity. ————Otherwise, presume corporation UNLESS it has no reason to know that's not what the payee is. If the corporation is foreign, it is NOT the beneficial owner. ————it is also not the beneficial owner if it is a bank, broker, intermediary, custodian, or other agent. It can treat these entities as beneficial owners, though, if they get a signed document explaining that these parties are the beneficial owner. ——(iii) If no reliable documentation, presume that it is a U.S. person, except as otherwise provided. Known or presumed trusts must be treated under 1.1441-5(e)(6)(ii). ———(A) ————(1) If no reliable documentation, and the payee is an exempt recipient in the case of interest . . . but not a foreign intermediary . . . the payee is presumed to be a foreign person, and NOT a U.S. person —————(i) if the agent has actual knowledge of the payee's employer ID and it begins with "98" —————(ii) if communications are mailed to a foreign country —————(iii) if the payee's name indicates that it is a "per se" corporation; —————(iv) if the payment is made to an OFFSHORE obligation, as defined under (c)(37); —————(v) ————(2) withholdable payments to entities exempt in the case of interest are presumed to be made to a FOREIGN payee if thre is no documentation establishing a U.S. person identity. ———(D) a payment is presumed made to a foreign payee IF made outside the U.S. . . . and the withholding agent does not have actual knowledge that the payee is a U.S. taxpayer

Reg. § 1.1441-1T (part III)

—(7) ——(i) A withholding agent that CAN'T reliably associate a payment with VALID documentation . . . .and withholds nothing or less than the 30% as a result . . . is liable under 1461 for the required amount . . . WITHOUT the benefit of a reduced rate, UNLESS ———(A) the agent has appropriately relied on the presumptions allowed in (b)(3), which allowed him to treat the payee as a U.S. person . . . or on the presumptions of 1.1441-4(a)(2)(ii) or (3)(i), which allowed him to treat the income as EFFECTIVELY CONNECTED ———(B) the agent can show the proper amount of tax was paid to the IRS ———(C) No documentation is required under 1441 for the reduced withholding rate to apply

7701(b)(4). First Year Election

—(A) An individual meets the election requirements if: ——(i) he is not a resident this year; ——(ii) he was not a resident in the prior year; ——(iii) he IS a resident in the year immediately following the election year; *and* ——(iv) he is BOTH: ———(I) present for 31 *consecutive* days in the election year; *and* ———(II) between the beginning of that 31-day period and the end of the election year (the *"testing period"*), he is present for at least 75% of the total number of days in the testing period —(B) if you meet all the above requirements and *elect to be*, you can be treated as a resident for the election year (THIS PROVISION GIVES ELECTION POWER) —(C) A person who makes the election is treated as a resident for the election from the first day of the testing period onward —(D) if a person is an exempt individual for the day, he is deemed not present —(E) The election should be made on the tax return AFTER he has met the substantial presence test for the following year —(F) An election remains in effect for the election year unless revoked by the Secretary

903. Credit for Taxes in Lieu of Income

"Income, war profits, and excess profits taxes" shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or U.S. possession

864(b). Trade or Business Within the U.S.

"Trade or business within the U.S" includes the performance of personal services within the U.S. at any time, but DOES NOT include: —(1) when a NRA, who is temporarily present, performs personal services for a period of less than or equal to 90 days . . . and whose compensation does not exceed, in the aggregate, $3,000 . . . ——(A) for a NRA, foreign partnership, or foreign corporation not engaged in trade or business within the U.S., *or* ——(B) for any office or place of business maintained in a foreign country or U.S. possession by a U.S. citizen or resident or by a domestic partnership or a domestic corporation —(2) ——(A) ———(i) Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent. ———(ii) Trading in stocks or securities for the taxpayer's own account . . . whether by the taxpayer, his employees, a broker or agent . . . and regardless of whether such employee or agent has discretionary authority to make decisions in effectuating transactions. BUT THIS DOESN'T APPLY TO SOMEONE WHO ACTUALLY DEALS IN STOCKS ——(B) ———(i) Trading commodities through a resident broker, commissioning agent, custodian, or other independent agent. ———(ii) Trading in commodities for taxpayer's own account . . . whether himself or employees or a resident broker/agent . . . and regardless of whether they have discretionary authority to make decisions in effecting transactions. BUT THIS DOESN'T APPLY TO SOMEONE WHO ACTUALLY DEALS IN COMMODITIES ———(iii) only applies if the commodities are dealt in an organized commodity exchange . . and the transaction is of a kind customarily done —(C) but for this section (B)(i) to work, taxpayer cannot have, at any time, an office or other fixed place of business in the U.S. through which stocks, securities, or commodities are sold or exchanged. ——but this does not apply to (B)(ii). Thus, if a taxpayer (even if a corporation) trades on its own account, it doesn't matter if it has an office or even if the agent doing it for the corp has discretionary authority

871(g). Special Rules for OID

(1) —(A) "Original issue discount" means any bond or other evidence of indebtedness having OID —(B) Does not include ——(i) any obligation payable 183 days or less from issue ——(ii) any obligation with tax-exempt interest (2) Determine the amount of any OID under § 1272, without regard to any short-term obligations (3) any OID obligation is determined to be from WITHIN or WITHOUT at the time of payment, as though the payment involved interest

7701(b). Definition of Resident and Nonresident Alien

(1) —(A) Aliens are *"residents"* only if: ——(i) he is a *lawful permanent resident* ——(ii) he meets the *substantial presence test* ——(iii) he makes the *election* —(B) An individual is a *"nonresident alien"* if he is neither a citizen nor a resident. (2) —(A) ——(i) If someone is a resident for the current year . . . but wasn't a resident in the preceding year . . . he'll be treated as a resident only from his *residency date* on ——(ii) If a person is a lawful permanent resident (LPR) . . . *but doesn't* meet the substantial presence test . . . his residency starting date is the first day he was here as a LPR ——(iii) If a person meets the substantial presence test . . . residency starting date is first day physically here. ——(iv) If person elects . . . residency date is first day treated as resident —(B) A person is NOT a resident IF ——(i) it is after the last day of the year where he was present here; ——(ii) he has a closer connection to a foreign country than the US; *AND* ——(iii) he is NOT a resident AT ALL during the next year —(C) ——(i) A person is treated as NOT PRESENT during any period where he has a closer connection to a foreign country than the US ——(ii) But this can last for 10 days at most

864(c). Effectively Connected Income

(1) —(A) for a NRA or foreign corporation engaged in a trade or business within the U.S. during the taxable year . . . the rules in (2), (3), (4), (6), and (7) apply to determining tax items treated to be treated as EFFECTIVELY CONNECTED with the conduct of a trade or business within the U.S. —(B) For a nonresident alien or foreign corporation . . . *not* engaged in a trade or business within the U.S. for the year . . . no income, gain, or loss shall be treated as "effectively connected" to a U.S. trade or business (2) FDAP or capital gains from sources within the U.S. . . . are EFFECTIVELY CONNECTED when: —(A) *Asset Use test:* the income, gain, or loss is derived from assets USED IN or held for us in the conduct of such trade or business; *or* —(B) *Business Activities test:* the activities of this trade or business were a material factor in the realization of the income, gain, or loss. In considering these factors, an important fact is whether or not the business itself accounted for the income, gain, or loss from the asset (3) All income or G/L from sources WITHIN . . . other than FDAP or capital gains. . . are treated as effectively connected by default —so this INCLUDES income from the sale of personal property, which is not FDAP (4) —(A) No income or G/L from sources WITHOUT . . . shall be treated as effectively connected —(B) Income or G/L from sources WITHOUT are deemed effectively connected . . . with the T/B within the U.S. of a NRA or foreign corporation . . . IF such person has an OFFICE or other fixed place of business within the U.S. to which the I/G/L is attributable *and* it ——(i) consists of RENTS or ROYALTIES ——(ii) consists of DIVIDENDS, INTEREST, or amounts received for guarantees of INDEBTEDNESS . . . *and* is EITHER derived in the active conduct of banking or finance OR received by a corporation whose principal business is trading in stocks; *or* ——(iii) is derived from the sale of PERSONAL PROPERTY outside the U.S. through that office .. . except NOT if sold for use, consumption, or disposition outside the U.S. *and* an office the taxpayer had in outside the U.S. MATERIALLY PARTICIPATED in the sale Anything income or gain that is basically the same as these should be treated the same way —(C) in the case of a foreign corporation taxable under subchapter L . . . any income from sources without attributable to a U.S. business is treated as effectively connected with a T/B within —(D) No income from sources without is treated as effectively connected IF ——(i) it consists of dividends, interest, or royalties paid BY a foreign corporation in which the taxpayer owns more than 50% ——(ii) OR is subpart F income (5) for paragraph 4(B), where income is effectively connected if the foreign taxpayer has an office here and receives dividends, royalties, etc. —(A) an OFFICE or other fixed place of business OF AN AGENT shall be DISREGARDED *unless* the agent: ——(i) has authority to negotiate and conclude contracts *and* regularly do so . . . OR has a stock of merchandise from which he regularly fills orders; *and* ——(ii) is NOT a general commission agent, broker, or other agent —(B) income or G/L is NOT considered attributable to an office or fixed place of business within the U.S. *unless* it is a MATERIAL FACTOR in the production of such tax item . . . AND the office regularly carries on activities of the type; *and* —(C) the income/G/L attributable to an office or fixed place of business within shall be that which is applicable to it . . . BUT, for a sale/exchange outside the U.S. under 4(B)(iii) . . . the income attributable to the office WITHIN can't exceed the income it would have derived from within had it taken place in the U.S. (6) For an income or gain of a NRA or foreign corporation that —(A) is taken into account for any taxable year; *but* —(B) is attributable to the disposition of property or performance of services in any OTHER year, Determine whether it is taxable as if it were taken into account in the year the transaction actually occurred (the OTHER year) —Doesn't matter whether taxpayer was engaged in a trade or business within the U.S. during the taxable year he took it into account (7) If —(A) any property ceases to be used or held for use in connection with a T/B within; *and* —(B) the property is disposed of within 10 years after cessation, determine whether income/gain attributable to the disposition is taxable under 871 or 882 as if the disposition occurred immediately BEFORE such cessation and without regard to the requirement that the taxpayer be engaged in a T/B within during the year it's taken into account

Reg. § 1.1441-2(b). FDAP

(1) —(i) "fixed or determinable annual or periodical income (FDAP)" includes ALL income included in gross income under § 61 . . . except for the exceptions under (b)(2). ——income excluded from gross income under law without regard to foreign or U.S. status are *not* FDAP ——Income excluded under 892 or 115 *is*, however, FDAP because they are dependent on the foreign status of the owner —(ii) FDAP is just a classification of income. It doesn't matter whether payment is made in a series or in one lump sum. ——Doesn't need to be paid annually if it is paid periodically ——just because it's not paid annually or periodically DOES NOT mean it's not FDAP ——the fact that the time between payments might vary does NOT mean it's not FDAP ——the share of FDAP. . . from an estate or trust FROM WITHIN . . . distributed to a NRA . . . is FDAP —(iii) Income is FIXED when it is to be paid in definitely pre-determined amounts. It is DETERMINABLE if it is not currently known, but there is a formula that will definitely determine it at a later time. ——payment based upon events in the future that ARE NOT anticipated are *not* FDAP. But if they ARE anticipated, they *are* FDAP. ——that the SOURCE of income can't be determined at the time of payment does NOT mean it isn't determinable (2) The following are *not* FDAP —(i) Gains from the sale of property, except for that in (b)(3); *and* —(ii) anything else the IRS says isn't FDAP

Reg. § 301.7701-3(d)

(1) —(i) A foreign eligible entity's classification is RELEVANT when it affects any persons federal tax liabilities. E.g., partnership v. corporation might affect income determinations ——the date a classification is relevant is the date an event occurs that creates an obligation to file a federal tax return —(ii) ——(A) if a foreign eligible entity files Form 8832, its classification is relevant only on the date its election is effective ——(B) UNLESS it was relevant as determined above in (d)(1)(i). Then (d)(ii)(A) doesn't apply (2) If a foreign eligible entity's classification has never been relevant . . . then its classification will be determined as soon as it DOES become relevant (3) if a foreign eligible entity's classification is not relevant anymore for 60 consecutive months, then it will be determined as soon as it becomes relevant again. —classification BECOMES irrelevant WHEN an event occurs causing it to no longer be relevant . . . *or*, if no event occurred, then on the first day of that year (4) Section (d) is effective after Oct. 22, 2003

Reg. § 301.7701-3(g).

(1) —(i) if a partnership elects to become an association, then it is considered that the partnership contributes ALL OF ITS assets and liabilities to the association in EXCHANGE for the association's stock ——immediately afterward, the partnership is considered liquidated by distributing the association stock to the partners —(ii) If an association elects to become a partnership, the association is deemed as DISTRIBUTING all its assets and liabilities to its shareholders in liquidation ——immediately afterward, the shareholders contribute all the distributed assets and liabilities into a newly formed partnership —(iii) If an association elects to become a DISREGARDED entity, the association is deemed to distribute all its assets and liabilities to its single owner in liquidation —(iv) if a disregarded entity elects to become an association, it is deemed that the owner of the eligible entity contributes all its assets and liabilities to the association in exchange for stock (2) —(i) The Tax Code determines the effects of classification changes —(ii) When an association elects to become either a partnership or a disregarded entity, it is considered that the association has created a plan of liquidation ——can be used retroactively (3) —(i) An election to change classification is treated as occurring at the start of the day for which the election is effective —— any transactions deemed to occur because of the election are treated as occurring before the close of the day prior to the day of election —(ii) A corporation that makes a qualified stock purchase of an eligible entity taxed as a corporation . . . may make an election under § 338 regarding the acquisition if it satisfies the requirements for the election. ——it may also elect to change the classification of the target corporation ——transactions under paragraph (g) are deemed to occur immediately after the deemed asset purchase by the new target corporation —(iii) if there a tiered system of entities makes the election, the transactions are deemed to occur from highest tier to lowest tier UNLESS they specify otherwise on their Form 8832 ——e.g., corporation A owns corporation B. If not declared, A's transactions occur before B's.

Reg. § 1.861-18(c). Transfers involving copyright rights and copyrighted articles.

(1) —(i) A transfer of a computer program is classified as a transfer of a COPYRIGHT . . . IF, as a result, a person acquires any one or more of the rights described in (c)(2)(i) to (iv). ——use (b)(1) and (2) to decide whether it is a separate transaction —(ii) If a person acquires a COPY of a computer program . . . BUT does NOT acquire any of the rights described in (c)(2)(i) to (iv) . . . or only a DE MINIMIS grant of such rights . . . AND the transaction does NOT involve (or only a de minimis involvement of) provisions from subparagraph (d) . . . .or know-how under (e) . . . .THEN the transfer is classified only as that of a COPYRIGHTED ARTICLE (2) The copyright rights are as follows: —(i) the right to make copies of the computer program to distribute to the PUBLIC by sale, rental, lease, lending, or other transfer —(ii) the right to prepare DERIVATIVE computer programs based on the copyrighted program; —(iii) the right o make a public PERFORMANCE of the computer program; *or* —(iv) the right to publicly DISPLAY the computer program. (3) A "copyrighted article" includes a COPY of a computer program from which the work can be PERCEIVED, reproduced, or otherwise communicated . . . —either directly or with the help of a machine or device —the copy may be fixed in the magnetic medium of a floppy disk . . . OR in the main memory or hard drive of a computer, or ANY other medium

Reg. § 301.7701-3(c)

(1) —(i) An eligible entity can ELECT to be classified OTHER than as provided under paragraph (b) if it fills out a Form 8832 and includes all required information —(ii) Must attach a copy of Form 8832 to tax returns . . . or if no tax returns filed, email or mail it in, including within it the date the election was effective ——failure to file the form doesn't invalidate the election, but it can subject the entity to penalties —(iii) If the entity does make the election under (c)(1)(i), the effective date of the election is the one it specified on Form 8832 or, if not date is included, on the date of the filing ——but the date the entity specifies can't be more than 75 days before the filing. If it is more than that, the election will just be treated as effective on the 75th day. ——can't be more than 12 months AFTER the filing. If it is, the effective date is the 12 month after filing ——if a PURCHASING CORPORATION makes an election under § 338 regarding an acquired subsidiary, its (c)(1)(i) election date can be NO EARLIER than the day after acquisition —(iv) if an entity elects to change its classification, it can't make that election again in the following 60 months. ——the Secretary might allow an exception, though, if more than 50% of the stock now belongs to people who weren't owners at the time of the election ——when a newly formed entity makes its election, it is NOT deemed to be a change that would preclude the election for 60 months —(v) ——(A) An entity exempt from taxation under § 501(a) is treated as having elected to be an ASSOCIATION. This is effective on the FIRST DAY the exemption is claimed . . . ———Remains in effect until status is withdrawn or revoked ——(B) An eligible entity that files an election to be treated as a real estate investment trust is treated as an ASSOCIATION. Effective as of the first day it's treated as a REIT ——(C) Entities electing to be S Corporations are treated as ASSOCIATIONS, provided they meet the small business corporation requirements of 1361(b) (2) Authorized signatures —(i) The (c)(1)(i) election must be signed by ——(A) each member who is also an owner; *or* ——(B) any officer, manager, or member of the electing entity authorized TO MAKE the election —(ii) if the election is to be retroactive, even owners who are NO LONGER currently owners, but who were prior, must sign

954(c). Foreign Personal Holding Company Income

(1) "Foreign personal holding company income" means income from: —(A) Dividends, interest, royalties, rents, and annuities —(B) Excess of gain over loss from sale of property ——(i) which gives rise to income described in (A) . . . after application of 2(A) . . . other than property which gives rise to income not treated as foreign personal holding compnay income by reason of (h) or (i) ——(ii) which is an interest in a trust, partnership, or REMIC; *or* ——(iii) which does not give rise to any income G/L from the sale or exchange of any property which, in the hands of a CFC, is properly described under 1221(a)(1) is NOT taken into account under this subparagraph —(C) excess of gains over losses from transactions in commodities. But does NOT apply to G/L that ——(i) arise out of commodity hedging transactions ——(ii) are active business gains or losses from the sale of commodities . . . but ONLY IF substantially all of the CFC's commodities are property under 1221(a)(1), (2), or (8); *or* ——(iii) are foreign currency gains or losses (under 988(b)) attributable to any 988 transactions —(D) Excess of foreign currency gains over foreign currency losses ——but this doesn't apply to transactions directly related to business needs of a CFC —(E) any income equivalent to interest, including commitment fees for loans actually made —(F) *Income from notional principal contracts* ——(i) net income from notional principal contracts ——(ii) any item of income, gain, deduction, or loss from a notional principal contract entered into for purposes of hedging any item described in any preceding subparagraph shall NOT be taken into account for this paragraph —(G) payments in lieu of dividends pursuant to an agreement to which 1058 applies —(H) *Personal service contracts* ——(i) amounts received under a contract under which the corporation is to furnish personal services IF ———(I) some person OTHER than the corporation has the right to designate the individual who is to perform the services; *or* ———(II) the individual who is to perform the services is designated in the contract; *and* ——(ii) the amounts received from sale or other disposition of the contract This subparagraph applies to amounts received for services under a particular contract . . . ONLY IF at some time during the year . . . 25% or more of the value of the outstanding stock of the corporation is owned, directly or indirectly . . . by or for an individual who has performed, is to perform, or may be designated as the one to perform . . . such services (2) *Exceptions* —(A) foreign personal holding company income does NOT include rents and royalties . . . derived in the active conduct of a trade or business . . . and which are received from a person OTHER than a related person ——rents derived from leasing an aircraft in foreign commerce shall NOT fail to be treated as in active conduct . . . IF the active leasing expenses are not less than 10% of the profit on the lease —(B) does NOT include any interest derived in the conduct of BANKING and which is EXPORT FINANCING INTEREST (defined under 904(d)(2)(G)) —(C) For regular dealers of property . . . which gives rise to dividends, royalties, rents, etc . . . which is an interest in a trust, partnership, or REMIC .. .. or which does not give rise to income . .. and forward contracts, option contracts, or similar financial instruments . . . then FPHC income does not include ——(i) any tax item from any transaction entered into in the ordinary course of business; *and* ——(ii) if such dealer is a dealer in SECURITIES (under 475) . . . any interest or dividend or equivalent amount of (1)(E) or (G) from any transaction entered itno in the ordinary course of business . . . but ONLY IF the income from the transaction is attributable to actiities of the dealer in the country under the laws of which the dealer is created or organized . . . is attributable to activities of the unit in the country in which the unit both maintains its principal office and conducts substantial business activity. (3) *Certain income received from related persons* —(A) "Foreign personal holding income" does NOT include ——(i) DIVIDENDS and INTEREST received from a RELATED PERSON which ———(I) is a corporation created or organized under the laws of the same foreign country as the controlled foreign corporation; and ———(II) has a substantial part of its assets used in trade or business located in such same country; *and* ——(ii) RENTS and ROYALTIES received from a corporation that is a RELATED PERSON for the use of property in the same country under which the controlled foreign corporation is created or organized Payments made by a partnership with 1 or more corporate partners shall be treated as made by such corporate partners in proportion to their respective interests in the partnership —(B) But the above paragraph (A) does not apply in the case of any interest, rent, or royalty to the extent it reduces the payor's subpart F income . . . or creates (or increases) a deficit under which 952(c) may reduce subpart F income of the payor or another controlled foreign corporation —(C) Dividends attributable to EARNINGS and PROFITS of the distributing corporation . .. are not exempted under (A)(i) .from being FPHC income . . . if accumulated during any period where the person receiving the dividend did not hold the stock either directly or indirectly through a chain of subsidiaries which each meets the requirements of (A)(i) (4) *Look-thru rule for certain partnership sales* —(A) If a CFC sells an interest in a partnership . . . in which it is a 25% owner . . . it is treated as selling the proportionate share of the assets of the partnership attributable to such interest. —(B) "25% owner" means a CFC which owns directly 25% or more of the capital or profits interest in a partnership. ——if a CFC is a shareholder or partner . . . it shall be treated as owing directly its proportionate share of any capital or profits interest held directly or indirectly . . . by the corporation or partnership ——if a CFC is treated as constructively owning a capital or profits interest . .. the CFC shall be treated as owning it directly (5) *Definition and Special Rules relating to Commodity Transactions* —A) "Commodity hedging transaction" means any transaction on a commodity IF it ——(i) is a hedging transaction under 1221(b)(2) determined ———(I) without regard to (A)(ii) thereof ———(II) by applying (A)(i) of 1221 by substituting "ordinary . . . or 1231(b) property" for ordinary property; *and* ———(III) by substituting CFC for taxpayer; *and* ——(ii) is clearly identified as such according to 1221(a)(7) —(B) Commodities with respect to which G/L are not taken into account in computing a CFC's FPHC income (6) *Look-Thru Rule for Related Controlled Foreign Corporations* —(A) dividends, interest, rents, and royalties from a CFC that is a RELATED PERSON . . . are NOT treated as FPHC income . . . to the extent allocable to income of the related person that is neither subpart F income nor income that is effectively connected with a U.S. trade or business. ——interest includes factoring income treated as income equivalent to interest —(B) But the above doesn't apply to the extent the interest, rent, or royalty creates a deficit which under 952(c) may reduce the subpart F income of the payor or another CFC —(C) Applies between 2006 and 2013 . . . Not effective 2014 and after

Reg. § 301.7701-2(c). Business Entities

(1) "Partnership" means a business entity that is NOT a corporation and that has AT LEAST two members (2) —(i) A business entity with a SINGLE OWNER, which is NOT a corporation, is DISREGARDED —(ii) If the *single owner* of a business entity is a *bank*, then the rules for banks still apply as if it were a separate entity. —(iii)(A) An entity disregarded as separate from its owner for any purpose . . . is treated that way for: ——(1) federal tax purposes; ——(2) federal taxes for which the entity is liable; and ——(3) federal refunds or credits —(iv) ——(B) An entity disregarded as a separate entity . . . is treated as a corporation. —(v)(A) single-owner entities that are not corporations are NOT disregarded for purposes of . . . . ——(B) An entity disregarded for ANY reason is treated as a CORPORATION

Reg. § 1.861-4(b). Compensation for Labor/Services performed Partly Within and Partly Without

(1) *For labor/services done by OTHER than individuals* —(i) Compensation for labor/services performed partly within/without and by OTHER than an individual . . . the income from the portion performed WITHIN must be determined under the most accurate way according to the FACTS and circumstances. ——usually, TIME BASIS apportionment is fine (2) *For labor/services by individuals* —(i) For labor/services performed PARTLY within/without by individuals . . . determine the compensation that is U.S. source gross income through the most ACCURATE way under the facts and circumstances. TIME BASIS apportionment is acceptable in most cases. —(ii) ——(A) For compensation of labor/services done partly within/without by an individual acting as an EMPLOYEE, determine the U.S. source gross income portion of it on a TIME BASIS ——(B) For work by individuals as EMPLOYEES of partly within/without, SOURCE the income described in (b)(2)(ii)(D)(1) on a GEOGRAPHICAL basis ——(C) ———(1) *Alternative Basis* ————(i) An individual acting as an EMPLOYEE who did partly within/without work can determine the SOURCE of his compensation under an ALTERNATIVE BASIS if, under the facts, it's more accurate. Must provide DOCUMENTATION detailing why it was appropriate. ————(ii) the Commissioner may determine the source for employee doing partly within/without IF such compensation either is . . . NOT for a specific time period . . . OR constitutes a fringe benefit. But ONLY IF it is more reasonable in the circumstances ———(2) Commissioner may allow these individuals to determine under an alternative basis. Such individual is DEEMED to have proved it to Commissioner's satisfaction. ————he may also state WHEN he would require alternative basis of determination ——(D) For individual as EMPLOYEE doing partly within/without work, FRINGE BENEFITS are sourced on a GEOGRAPHICAL basis. Amount of compensation must be REASONABLE and SUBSTANTIATED by individual. "Principal place of work" means what it does under 217. ———(1) Housing fringe benefits are sourced based on individual's PRINCIPAL PLACE OF WORK ————a housing fringe benefit includes payments to or on behalf of the individual ONLY for rent, utilities (not telephone), real and personal property insurance, non-deductible occupancy taxes under 164 or 216, fees for a leasehold, rental furniture and accessories, household repairs, residential parking, and the FMV of housing. ————does not include payments for expenses under 1.911-4(b)(2). ———(2) Education fringe benefits for individual's dependents are sourced are determined by individual's PRINCIPAL PLACE OF WORK. ————Includes payments ONLY for qualified tuition and expenses of the type of 530(b)(4)(A)(i), and expenditures for room, board, and uniforms ———(3) Local transportation fringe benefits are SOURCED according to an individual's PRINCIPAL PLACE OF WORK. ————this fringe benefit is the AMOUNT the individuals receives for himself or his spouse/dependents at his principal place of work ————limited to actual expenses incurred for local transportation and the fair rental value of any vehicle provided by employer and used predominately by individual and his spouse/dependents ————does not include purchase of car by individual ———(4) FOREIGN TAX REIMBURSEMENT fringe is sourced according to jurisdiction that imposed the tax ———(5) HAZARDOUS DUTY fringe is sourced on location of the hazardous duty zone. ————"hazardous duty zone" is any foreign place either: designated by Secretary of State as a place were living conditions are extraordinarily difficult, notably unhealthy, or where excessive physical hardship exists . . . *OR* where a civil insurrection, civil war, terrorism, or wartime conditions threatens physical harm to the individual. ————only considered hazardous duty fringe if employer ONLY pays it to others in similar hazardous duty zones ————may not exceed maximum amount U.S. government would allow its officers or employees at the same location ———(6) MOVING EXPENSE REIMBURSEMENT is determined by individuals NEW principal place of work. ————determined by original principal place of work IF employee-individual can prove it more appropriate under the facts. Sufficient evidence of this would require an agreement or other writing between employer and employee-individual, stating employer will reimburse him for moving expenses . . . REGARDLESS of whether employee continues working for employer after returning. ——(E) When using the TIME BASIS APPORTIONMENT, the amount paid for services performed in the U.S. should bear the same proportion to the total payment as the NUMBER OF DAYS in the U.S. bears to the total number of days worked for the service. —a unit of less than a day might be appropriate —the time period is presumed to be within the calendar year the services are actually performed UNLESS the taxpayer establishes that another DISTINCT, SEPARATE, AND CONTINUOUS time period is more appropriate —for foreign postings that require short-term returns to the U.S. to perform services for the employer, such short-term returns would NOT be sufficient to establish DISTINCT, SEPARATE, AND CONTINUOUS time periods within the foreign posting time period ——(F) the source of MULTI-YEAR COMPENSATION is determined on a TIME BASIS. ———"Multi-year compensation" means compensation that is included in the income of an individual in ONE taxable year but that is attributable to a PERIOD that includes TWO or more taxable years. ———the period to which the income is attributable is based on all the facts and circumstances ———for stock options, the applicable period to which the compensation is attributable is the period BETWEEN the grant of an option and the DATE on which all employment-related conditions for its exercise have been satisfied

6013(g).

(1) A NRA is treated as a resident for: —(A) chapter 1; *and* —(B) chapter 24 for payments of wage made during the year. (2) This affects a person who was a NRA but, along with their citizen or resident spouse, made the election. (3) After this election is made, it applies to the election year and all subsequent years until terminated. —but the election doesn't count for the year if neither of them is a citizen or resident at any time during the year (4) This election terminates at the year following: —(A) after the taxpayer revokes it —(B) the death of either spouse —(C) legal separation (5) Secretary may terminate ability of couple to have joint return if he determines that either spouse has failed: —(A) to keep such books and records; —(B) to grant access to such books and records; *or* —(C) to supply other such information as may be reasonably necessary to ascertain tax liability for either spouse (6) If it is terminated, the couple may never make the election again.

871(b). Income connected with U.S business

(1) A NRA who engages in a trade or business within the U.S. is taxable under §§ 1 or 55 on income "effectively connected" with the conduct of trade or business in the U.S. (2) But this gross income only includes income "effectively connected" with a trade or business within the U.S.

Reg. § 1.861-18(b). Categories of Transactions

(1) A transaction involving the transfer of a computer . . . or the provision of services or of know-how with respect to a computer program . . . is treated as being SOLELY one of the following: —(i) a transfer of a copyright in the computer program; —(ii) a transfer of a copy of the computer program (a copyrighted article); —(iii) the provision of services for the development or modification of the computer program; *or* —(iv) the provision of know-how relating to computer programming techniques. (2) Any transaction that CONSISTS of MORE than one of these categories . . . shall be treated as SEPARATE transactions, with the appropriate provisions being applied to EACH transaction. —Any transaction that is DE MINIMIS is not treated as a separate transaction, but as a PART of another transaction

Reg. § 1.861-18(f). Further classifications of transfers involving copyrights and copyrighted articles.

(1) A transfer of a COPYRIGHT is a sale or exchange when there has been a transfer of ALL SUBSTANTIAL RIGHTS in the copyright. —if all substantial rights have NOT been transferred, then it is treated as a LICENSE generating royalty income. ——apply 1222 and 1235 if this is the case —income derived from the sale or exchange of a copyright will be SOURCED under 865(a), (c), (d), (e), or (h) as appropriate. —income derived from the licensing of a copyright will be sourced under 861(a)(4) or 862(a)(4) as appropriate (2) The transfer of a COPYRIGHTED ARTICLE is a sale or exchange if the BENEFITS AND BURDENS of ownership have also been transferred —in a transfer where the benefits and burdens have NOT been sufficiently transferred to constitute a sale, it is a LEASE generating rental income —if it is treated as a sale, it is SOURCED under 861(a)(6), 862(a)(6), 863, 865(a), (b), (c), or (e), as appropriate —if it is treated as a lease, then it is sourced under 861(a)(4) or 862(a)(4) (3) Consideration must be given to the SPECIAL CHARACTERISTICS of computer programs in a transaction that takes advantage of those characteristics —e.g., transaction requiring transferee to destroy the disk on which he received a copy is the same as requiring the disk be returned . . —e.g., if the program self-terminates, that's the same thing as returning it

Reg. § 1.871-13(a)

(1) An individual who is a citizen or resident at the beginning of the year, but a NRA at the end of the year . . . or vice versa . . . is taxable for the part of the year in which he was a resident/citizen. —but taxpayer must aggregate the income of both the resident and nonresident periods that is "effectively connected" with a trade or business in the U.S. (2) An individual is deemed to be a citizen or resident on the day in which he becomes a citizen or a resident, a nonresident on the day in which he abandons his U.S. residence, and an alien for the day on which he gives up his U.S. citizenship

Reg. § 1.861-18(g). Rules of Operation

(1) Neither the form adopted by the parties FOR the transaction . .. NOR its classification under copyright law . . . is determinative of its classification under this section (2) These rules apply regardless of the physical or electronic or other medium used to effectuate a transfer of a computer program (3) —(i) for (c)(2)(i), the right to distribute to the public, a TRANSFEREE of a computer program . . . shall NOT be considered to have the right to distribute copies to the public . . . IF it is permitted to distribute copies of the software to ONLY either a RELATED person, . . . or to IDENTIFIED persons who may be identified either by name or legal relationship to the transferee. ——a "related person" is a person who bears a relationship to the transferee specified in 267(b)(3), (10), (11), or (12) . . . or 707(b)(1)(B). ———when applying 267(b), 267(f), 707(b)(1)(B), or 1563(a) . . . use 10% INSTEAD of 50%

871(h)

(1) No 30% withholding tax on portfolio interest received by a NRA from U.S. sources See page 156 of the Code for definitions of portfolio interest. For the following, it's effective AFTER March 18, 2012: (2) "Portfolio interest" means any interest, INCLUDING original issue discount, that —(A) would be subject to the withholding tax but for this subsection —(B) is paid on an obligation that ——(i) is in registered form; *and* ——(ii) ———(I) the U.S. person who would otherwise have to deduct and withhold tax from that interest under 1441(a) receives a statement . .. that the beneficial owner is NOT a U.S. person, *or* ———(II) the Secretary has determined that such statement is not required (3) —(A) "Portfolio interest" does not include any interest received by a 10% shareholder —(B) "10% shareholder" means ——(i) for an obligation issued by a corporation, any person who owns 10% or more of the total combined voting power of all classes of stock entitled to vote; *or* ——(ii) for an obligation issued by a partnership, any person who owns 10% or more of the capital or profits interest in such partnership —(C) To determine ownership of stock, use the rules of 318(a) . . . except ——(i) 318(a)(2)(C) applies without regard to the 50% limitation therein; ——(ii) 318(a)(3)(C) applies ———(I) w/o regard to the 50% limitation therein; *and* ———(II) just read this in the book, it makes no sense; *and* ———(III) any stock the person is treated as owning under 318(a)(4) won't actually be treated as being owned by that person (4) —(A) "Portfolio interest" does not include ——(i) any interest, if its amount is determined by ———(I) receipts, sales, or cash flow of the debtor or a related person; ———(II) income or profits of the debtor or related person; ———(III) any change in value of any property of the debtor or a related person; *or* ———(IV) any dividend, partnership distributions, or similar payments by the debtor or a related person; *or ——(ii) any other type of contingent interest identified by the Secretary to prevent tax avoidance —(B) For this section, "related person" means what it does under 267(b), or any person who is a party to any arrangement undertaken to avoid this paragraph —(C) But the whole "portfolio interest doesn't include any amount determined by" section of (A)(i) doesn't apply to ——(i) any amount of interest just because the timing of any interest or principal payment is subject to a contingency; ——(ii) any interest just because it is paid on nonrecourse or limited recourse indebtedness; ——(iii) interest determined by reference to other interest not described in (A); ——(iv) any interest just because the debtor or a related person entered into a hedging transaction to manage interest rate or currency fluctuations; ——(v) any interest determined by reference to ———(I) changes in the value of actively traded property ———(II) yield on property, other than a debt instrument that pays interest or stock or other property representing a beneficial interest; ———(III) changes in any index of the value of property —(D) subparagraph (A) doesn't apply to any itnerest paid or accrued with respect to any indebtedness with a fixed term ——(i) issued on or before Apr. 7, 1993; *or* ——(ii) which was issued after such date pursuant to a written binding contract in effect on such date and at all times thereafter before such indebtedness was issued. (5) A STATEMENT required for this paragraph is OK if —(A) made by beneficial owner of the obligation; *or* —(B) made by a securities clearing organization, a bank, or other financial institution that holds onto customers' securities in the ordinary course of trade or business. (6) —(A) if the Secretary decides that communication between the U.S. and a foreign country is inadequate, it can make this subsection not apply during the period ——(i) beginning on the date specified by the Secretary; *and* ——(ii) ending on the date where communicated is deemed adequate again —(B) (A) doesn't apply to any obligation issued on or before the Secretary's determination (7) "Registered form" has the same meaning as under 163(f)

871(i). Tax Not to apply to Certain Interest and Dividends

(1) No tax shall apply to the following stated in (2) (2) —(A) Interest on deposits, if such interest is not effectively connected —(B) The active foreign business percentage of ——(i) any dividend paid by an existing 80/20 company, and ——(ii) any interest paid by an existing 80/20 company —(C) income derived by a foreign central bank of issue from bankers' acceptances —(D) Dividends paid by a foreign corporation that are treated as from WITHIN (3) "Deposit" means amounts that are —(A) deposits with persons in the banking business; —(B) deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations . . . BUT only to the extent amounts paid or credited on such deposits are deductible under 591 —(C) amounts held by an insurance company under agreement to pay interest thereon

884(e). Coordination with Income Tax Treaties on the Branch Profits Tax

(1) No treaty will exempt a foreign corporation from this tax UNLESS —(A) it is an income tax treaty; *and* —(B) the corporation is a QUALIFIED RESIDENT of the other country (2) If a foreign corporation is a QUALIFIED RESIDENT of a country that has an income tax treaty with the U.S. —(A) the rate of tax is the one specified in that treaty ——(i) on branch profits, if so specified; *or* ——(ii) if not specified, then on DIVIDENDS PAID by a domestic corporation to a corporation resident in the country where that corporation is wholly owned; *and* —(B) any other limitations imposed by the treaty under (a) apply (3) *Coordination with withholding tax* —(A) if a foreign corporation has to pay the branch profits tax, NO TAXES are due under 871, 881, 1441, or 1442 for any dividends the corporation pays out of its earnings and profits for that taxable year —(B) If ——(i) any dividend under 861(a)(2)(B) is received by a foreign corporation; *and* ——(ii) subparagraph (A) doesn't apply to it rules similar to (f)(3)(A) and (B) apply (4) *Qualified resident* —(A) "Qualified resident" means any foreign corporation which is a resident of the foreign country at issue UNLESS ——(i) 50% or more of its stock is owned by individuals who are NEITHER residents of that country NOR residents or citizens of the U.S.; *or* ——(ii) 50% or more of its income is used (directly or indirectly) to meet liabilities of persons who are NOT residents of that country or the U.S. as citizens or residents —(B) *Special rule for publicly traded corporations* A foreign corporation that is a resident of a foreign country is a qualified resident IF ——(i) that corporation's stock is PRIMARILY and REGULARLY traded on an established securities market in that foreign country; *or* ——(ii) that corporation is WHOLLY OWNED (either directly or indirectly) by another foreign corporation organized in that foreign country . . . and its stock is so traded —(C) *Special rule for publicly traded domestic corporations* A foreign corporation that is a resident of a foreign country is a qualified resident of that country if ——(i) that corporation is WHOLLY OWNED (either directly or indirectly) by a domestic corporation; *and* ——(ii) the stock of such domestic corporation is PRIMARILY AND REGULARLY traded on an established securities market in the U.S. —(D) The secretary may TREAT a foreign corporation as a QUALIFIED RESIDENT . . . IF that corporation can establish that it isn't using the tax treaty in a manner inconsistent with this paragraph (5) this section doesn't apply to international organizations under 7701(a)(18)

Reg. § 301.7701-2(d). Special rule for certain foreign business entities

(1) The per se corporations from other countries will NOT be treated as corporations if —(i) it existed on May 8, 1996 —(ii) the entity's classification was relevant on that day —(iii) no person treated the entity as a corporation on that day, via tax returns, documents, etc. —(iv) any change in its classification . . . 60 months before that day . . . occurred solely as a result of a change in the organizational documents of the entity . . . AND all its members recognized the tax CONSEQUENCES —(v) a REASONABLE BASIS existed on that day for treating it as anything OTHER than a corporation; *and* —(vi) neither the entity nor any of its members were notified on or before that day . . . that the classification was under examination (2) If a per se corporation from a foreign jurisdiction is formed AFTER May 8, 1996 . . . through a written, binding contract in effect ON that day . . . the previous paragraph still applies to that entity (3)(i) any entity not treated as a corporation by reason of the two previous paragraphs will be PERMANENTLY considered a corporation the earlier of: —(A) the effective date of an election under § 301.7701-3; —(B) a termination of the partnership under § 708(b)(1)(B); —(C) a division of a partnership under 708(b)(2)(B); OR —(D) the date any person(s) who were NOT owners as of Nov. 29, 1999 . . . own in aggregate a 50% or greater interest in the entity 3(ii) But terminating a partnership under 3(i)(B) doesn't apply if the sale or exchange . . . is to a RELATED PERSON *and* occurs no later than TWELVE MONTHS after the date the entity is formed

Reg. § 301.7701-3(b)

(1) Unless an entity elects otherwise, a "DOMESTIC ELIGIBLE ENTITY" is —(i) a partnership if it has TWO or more members, *or* —(ii) disregarded as an etity separate from its owner if it has a SINGLE owner (2) —(i) A "FOREIGN ELIGIBLE ENTITY" is ——(A) a partnership if it has TWO or more members and at LEAST ONE member does not have limited liability; ——(B) an association fi ALL members have limited liability; *or* ——(C) DISREGARDED as an entity if it has a single owner that does NOT have limited liability —(ii) A member of an entity has LIMITED LIABILITY if . . . the member has NO PERSONAL liability for the debts or claims against the entity by way of ANOTHER member. ——a member has personal liability IF the creditors of the entity may seek satisfaction of all or any portion of the debts or claims against the entity form the member as such. ——he has personal liability for this paragraph EVEN IF he makes an agreement under which another person assumes liability or agrees to indemnify him for that liability (3) —(i) Unless otherwise elected . . . an eligible entity that exists prior to this section will have the SAME classification claimed under 301.7701-1 to 301.7701-3. ——EXCEPT, if a single-owner entity claimed to be a partnership, the entity will be DISREGARDED —(ii) a foreign eligible entity is treated as existing PRIOR to this section's effective date ONLY IF its classification was RELEVANT . . . in the 60 months prior to the effective date. ——but IF the entity's classification was RELEVANT and its tax returns do NOT indicate its classification . . . then use the rules PRIOR to this rule to figure it out

881(c). Repeal of Tax on Interest of Foreign Corporations From Certain Portfolio Interest

(1) for *portfolio interest* received by a foreign corporation from sources within the U.S., NO 30% TAX imposed. See this section for varying definitions of portfolio interest . . . and when these definitions would apply. But for obligations issued AFTER March 18, 2012: (2) "Portfolio interest" means any interest that —(A) would be subject to tax under (a), *and* —(B) is paid on an obligation ——(i) which is in registered form; *and* ——(ii) which ———(I) the person who would otherwise be required to deduct and withhold tax from such interest receives a statement that . . . the beneficial owner is NOT a U.S. person; *or* ———(II) the Secretary says the statement isn't required (3) "Portfolio interest" does NOT include —(A) any interest received by a bank on an extension of credit pursuant to a loan obligation within the ordinary course of business; —(B) any interest received by a 10% shareholder; *or* —(C) interest received by a controlled foreign corporation from a related person (4) "Portfolio interest" does NOT include any interest which is treated as NOT portfolio interest under 871(h)(4) (5) —(A) For interest received by a foreign controlled corporation (6)

7701(b)(3). Substantial Presence Test

(3) Substantial Presence Test —(A) A person passes the substantial presence test *if* ——(i) he was present at least 31 days the current year; *and* ——(ii) over this year and the last two years, he was here: (# days this year) + (# days last year)(1/3) + (# days 2 years ago)(1/6) >= 183 —(B) But a person is treated as *NOT PASSING* the substantial presence test if: ——(i) he is present LESS THAN 183 days this year; *and* ——(ii) he has a TAX HOME in a foreign country . . . *and* a CLOSER CONNECTION to that country —(C) But the above exception doesn't apply if: ——(i) he had an application for adjust of status pending; *or* ——(ii) he took other steps to apply for LPR status —(D) A person is treated as NOT PRESENT *if* ——(i) he is an exempt individual for that day; *or* ——(ii) he was UNABLE to leave because of a MEDICAL CONDITION that arose *while* he was present (can't be a long-term condition that just acted up . . . think car accident).

7701(b)(8)-(10)

(8) the Secretary can require an individual who doesn't meet the substantial presence test because of being here less than 183 days or a medical condition to submit an annual statement explaining why (9) —(A) An alien who hasn't established a taxable year is on a calendar taxable year —(B) An individual is treated as a resident for any portion of a calendar year If ——(i) an individual is a resident for the calendar year; *and* ——(ii) has a taxable year OTHER than a calendar year (10) If —(A) an alien was treated as a resident during any period over at least 3 consecutive calendar years; *and* —(B) he ceases to be a resident, but becomes a resident again before the close of the 3rd year . . . he is taxable for the period after the close of the initial residency period and before the day on which he became a resident again

7701(b)(5) Exempt Individual Defined

(A) A person is exempt if he is: —(i) a foreign government-related individual; —(ii) a teacher or trainee; —(iii) a student; *or* —(iv) a professional athlete in the U.S. to temporarily compete in a charitable sports event (B) "Foreign government-related individual" means any individual temporarily present in the U.S. by way of: —(i) diplomatic status; —(ii) being a full-time member of an international organization; *or* —(iii) being a member of the immediate family of either of them (C) "Teacher or trainee" means any individual —(i) who is temporarily present under subparagraph J or Q of Immigration Act § 101(15) *and* —(ii) substantially complies with his requirements for being present (D) "Student" means any individual who: —(i) is temporarily present ——(I) under subparagraph F or M of § 101(15) of the Immigration Act, *or* ——(II) as a student under J or Q; *AND* —(ii) who substantially complies with the requirements (E) Special Rules for Teachers, Trainees, and Students —(i) For TEACHERS and TRAINEES, An individual is treated as NOT exempt for the current year if, *for any 2* years of the preceding 6 years, he was already exempt. ——But if that individual receives compensation from foreign employer, then he is not exempt if he was already exempt for *4 years* of the preceding 6. —(ii) For STUDENTS, an individual is not exempt for any year after the 5th year in which he was exempt. ——*unless* he can show he does NOT intend to permanently reside here *and* substantially complies with his requirements

7701(b)(7). Presence in the U.S.

(A) An individual is treated as present if he is physically present in the U.S. at any time during that day (B) If an individual regularly commutes to employment in the U.S. from his residence in Canada or Mexico, he is treated as NOT present during any commuting day (C) If an individual, who is in transit between 2 points outside the U.S., is physically present in the U.S. for less than 24 hours, he is treated as NOT present —i.e., lay-overs that are here for a few hours (D) A individual who is temporarily present as a regular member of a foreign vessel's crew and engaged in transportation between the U.S. and a foreign country or a U.S. possession is treated as NOT present —*unless* he engages in any trade or business in the U.S. on that day

1.865-2. Loss with respect to stock

(a) —(1) *Allocation against gain.* Loss recognized with respect to stock . . . shall be allocated to the class of gross income . . . and, if necessary, apportioned between the statutory groupings and the residual groupings of gross income . . . with respect to which gain from the sale of that stock would give rise in the hands of the seller ——loss recognized by a U.S. resident on the sale of stock generally is allocated to reduce U.S. source income (b) —(1) *Dividend recapture exception* ——(i) If a taxpayer recognizes a loss on stock . . . and the taxpayer included in income a dividend recapture amount . . . then to the extent of that amount, the loss shall be allocated and apportioned on a proportionate basis . . . to the class of gross income or the statutory or residual grouping or groupings . . . to which the recapture was assigned ——(ii) But this doesn't apply to a loss recognized by a taxpayer on the disposition of stock . . . if the sum of all dividend recapture amounts . . . included in income . . . with respect to that stock . . . is less than 10% of the recognized loss ——(iii) *Exception for passive limitation dividends.* (b)(1)(i) doesn't apply to the extent of a dividend recapture amount that is treated as income in the separate category for PASSIVE INCOME in 904(d)(2)(A) ————but this doesn't apply to any dividend recapture amount that is treated as income in the separate category for finaincial services income described in 904(d)(2)(C). (d) —(2) *Dividend Recapture Amount.* A "dividend recapture amount" is a dividend (except as under 78), an inclusion under 951(a)(1)(A)(i) included in the earnings of a controlled foreign corporation that is included in foreign personal holding company income under 954(c)(1)(A) . . . and an inclusion under 951(a)(1)(B). —(3) *Recapture Period.* A "recapture period" is the 24-month period ending on the date on which a taxpayer recognized a loss with respect to stock. ——it's increased by any period of time in which the taxpayer has diminished its risk of loss in a manner described in 264(c)(4) . . . and by any period in which the assets of the corporation are hedged against risk of loss with a principal purpose of enabling the taxpayer to hold stock without significant risk of loss until the recapture period has expired ——in the case of a loss recognized after a dividend is declared but before such dividend is paid, the recapture period is extend through the date on which the dividend is paid

318. Constructive Ownership of Stock

(a) —(1) *Members of family* ——(A) An individual shall be considered as owning the stock owned, directly or indirectly, by or for ———(i) his spouse ———(ii) his children, grandchildren, and parents —(2) *Partnerships, estates, trusts, and corporations* ——(A) Stock owned directly or indirectly by a partnership or estate is considered as owned proportionately by its partners or beneficiaries ——(B) ———(i) stock owned directly or indirectly by or for a trust shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries. ———(ii) stock owed directly or indirectly by a trust of which a person is considered owning shall be considered owned by that person ——(C) if 50% or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation in that proportion which the value of the stock which such person owns bears to the value of all stock in the corporation —(3) ——(A) Stock owned directly or indirectly by or for a partner or beneficiary shall be considered as owned by the PARTNERSHIP or ESTATE ——(C) If 50% or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person . . . such corporation shall be considered as owning the stock owned by the person

Reg. § 301.7701-1. Classification of Organizations for federal tax purposes.

(a) —(1) the IRC prescribes classifications for tax purposes. The IRC's classification is controlling, even if it conflicts with local law. —(2) A joint venture might create a separately taxable entity if the participants carry on a trade, business, financial operation, or venture . . . and divide its profits. —merely having a joint undertaking to share expenses doesn't create a separate entity —just co-owning property that is maintained, kept in repair, and rented or leased doesn't constitute a separate entity either —(3) An entity formed under local law isn't always a separate entity (e.g., state entities or Native American tribes) —(4) Certain organizations that only have a SINGLE OWNER can choose to be recognized or disregarded as separate entities (b) Trusts generally do not have associates or carry on business for profit. (c) Cost-sharing arrangements are not recognized as separate entities

Reg. § 1.863-3. Allocation and apportionment of income from certain sales of inventory

(a) —(1) this section applies when determining the SOURCE of income . . . from the SALE of INVENTORY property . . . produced WITHIN the U.S. and sold WITHOUT . . . *or* produced WITHOUT the U.S. and sold WITHIN. ——when the taxpayer produces property in a part of any ocean or body of water that is NOT part of any country's jurisdiction . . . or is SOLD in such a place . . . 1.863-8 applies ——taxpayer must divide gross income from 863-sales between PRODUCTION activity and SALES activity using one of the methods from paragraph (b) ——the SOURCE of this gross income from either production or sales must then be determined under paragraph (c) ——determine taxable income from 863-sales under paragraph (d) (b) *Methods to determine income attributable to production activity and sales activity* —(1) *50-50 method* ——(i) gross income from 863-sales is apportioned between production and sales under the 50-50 method ———under this method, 1/2 of the gross income will be attributed to sales, and the other 1/2 to production ———determine the source of production and sales income separately under (c)(1) and (c)(2) ———Instead of the 50-50 method, taxpayer can use the IFP method —(2) *IFP Method* ——(i) Taxpayer can elect to allocate income between production and sales using the INDEPENDENT FACTORY PRICE (IFP) method . . . *if* an IFP is fairly established. ———an IFP is fairly established based on a sale by the taxpayer . . . ONLY IF the taxpayer regularly sells part of its output to wholly independent distributors or other selling concerns in such a way as to reasonably reflect the income earned from production activity. ———a sale will NOT be considered to fairly establish an IFP . . . if sales activity by the taxpayer with respect to that sale is significant in relation to all of the activities with respect to that product ——(ii) under the IFP method, the amount of GROSS SALES PRICE equal to the IFP will be treated as attributable to production activity . . . and the excess (if there is any) of gross sales price over IFP will be attributable to sales activity ———if IFP method applied, it must be applied to all 863-sales that are substantially similar in physical characteristics and function . . . and sold at a similar level of distribution . . . as the inventory sold in the sale fairly establishing an IFP. ———IFP only applied to sales reasonably contemporaneous with the establishing sale ———IFP can't be applied to sales in other geographic markets . . . IF the markets are substantially different ———if IFP method selected, the rules of this paragraph also apply to determine division of gross receipts between production and sales in an 863-establishing sale ———if IFP method selected, it must be applied to ALL sales for which an IFP may be fairly established and applied for that taxable year and each subsequent taxable year ———50-50 method or books and records method applies to any sale for which an IFP can't be established ——(iii) determine a taxpayer's gross income from PRODUCTION ACTIVITY by reducing the amount of GROSS RECEIPTS from production . . . by the COST OF GOODS SOLD attributable to the production. ———the amount of gross income from SALES is determined by reducing the amount of GROSS RECEIPTS from sales activity . . . by the COST OF GOODS SOLD attributable to sales activity. ———determine the source of gross income from production activity under (c)(1), and for sales under (c)(2) (c)*Determination of the source of gross income from production activity and sales activity* —(1) *Income attributable to production activity* ——(i) *Production only within the U.S. or only within a foreign country* ———(A) "Production activity" means an activity that creates, fabricates, manufactures, extracts, processes cures, or ages inventory. But only the taxpayer's direct activities are taken into account ————where the taxpayer's production assets are located only within the U.S. or only without, the income attributable to production activity is SOURCED where the taxpayer's production assets are LOCATED —(2) *Income attributable to sales activity* ——determined under 1.861-7(c). ——the place of sale will be presumed to be the U.S. . . . IF personal property is wholly produced in the U.S. and the property is sold for use, consumption, or disposition in the U.S. ——1.864-6(b)(3)(ii) determines the country of use, consumption, or disposition ——property will be treated as wholly produced in the U.S. . . IF it is subject to no more than packaging, repackaging, labeling, or other minor assembly operations outside the U.S.

7701(a). Definitions

(a) —(4) "Domestic" means created or organized in the U.S. —(5) "Foreign" means a corporation or partnership which is not domestic ...... —(30) "United States person" means ——(A) a citizen or resident, ——(B) a domestic partnership, ——(C) a domestic corporation, ——(D) any estate (other than a foreign estate), *and* ——(F) any trust, if ———(i) a U.S. court can exercise primary supervision over it, AND ———(ii) one or more U.S. persons can control all substantial decisions for the trust —(31) "Foreign Estate" means an estate that gets its income from sources without the U.S. and which is NOT effectively connected to a U.S. trade or business