1958, section 403(a) (2) and are considered to be gains from the sale or exchange of capital assets. Thus, the tax applies to gain recognized on certain distributions by an exempt employees' trust where the total distributions, with respect to any employee, are paid to the distributee within one taxable year; to the gain recognized on certain payments under annuity contracts purchased by an employer for an employee under certain qualified annuity plans where the total payments are paid to the payee within one taxable year; to gain recognized under specified circumstances on the disposal of timber, coal, and domestic iron ore and considered in accordance with section 1231 to be gain from the sale or exchange of a capital asset; and to gain recognized on certain transfers of patent rights by an individual.

(ii) Ninety-day rule not applicable. The provisions of section 871 (a) (2) do not apply to the gains described in this subparagraph; as a consequence, the taxpayer receiving these gains during a taxable year is subject to the tax of 30 percent thereon without regard to the 90-day rule of that section and even though he has not been present in the United States at any time during the taxable year.

(iii) Recognized gain fully taxable. The tax of 30 percent imposed upon the gains described in this subparagraph shall apply (a) to the full amount of gain recognized upon the transaction, (b) without regard to the alternative tax imposed by section 1201 upon the excess of the net long-term capital gain over the net short-term capital loss, and (c) without regard to the deduction allowed by section 1202 in respect of capital gains.

(iv) Losses. In computing the gain subject to tax under this subparagraph no deduction shall be allowed for any loss sustained during the taxable year, even though the loss is taken into account under section 1231 in determining whether the gain is considered to be gain from the sale or exchange of a capital asset.

(4) Capital gains and losses-(i) Items subject to tax. The tax of 30 percent also applies, pursuant to the provisions of section 871 (a) (2), to the excess of capital gains derived from sources within the United States over capital losses allocable to such sources, determined under the provisions of part I (section 861 and following), subchapter N, chapter 1 of

the Code, and the regulations thereunder, and in accordance with the provisions of this subparagraph.

(ii) Present less than 90 days. If he has been present in the United States for a period or periods aggregating less than 90 days during the taxable year, a nonresident alien individual not engaged in trade or business within the United States at any time during the taxable year is liable to a tax of 30 percent upon the amount by which his gains, derived from sources within the United States, from sales or exchanges of capital assets effected during his presence in the United States exceed his losses, allocable to sources within the United States, from such sales or exchanges effected during such presence. Gains and losses from sales or exchanges of capital assets effected during the taxable year at times other than during such presence in the United States are not to be taken into account for this purpose.

(iii) Present 90 days or more. If he has been present in the United States for a period or periods aggregating 90 days or more during the taxable year, a nonresident alien individual not engaged in trade or business within the United States at any time during the taxable year is liable to a tax of 30 percent upon the amount by which his gains, derived from sources within the United States, from sales or exchanges of capital assets effected at any time during that year exceed his losses, allocable to sources within the United States, from sales or exchanges effected at any time during that year. Gains and losses from sales or exchanges effected at any time during the taxable year are to be taken into account for this purpose even though the alien individual is not present in the United States at the time the sales or exchanges are effected.

(iv) Separate periods to be aggregated. In computing the total period of presence in the United States for a taxable year, all separate periods of presence in the United States during the taxable year are to be aggregated.

For

(v) Other provisions applicable. the purpose of the computation of the excess of capital gains over capital losses subject to tax under this subparagraph, gains and losses shall, subject to the 90-day rule of section 871 (a) (2), be taken into account only if, and to the extent that, they would be recognized and taken into account if the nonresident alien individual were engaged in

trade or business within the United States, except that the gains and losses shall be computed without regard to the provisions of section 1202, relating to the deduction for capital gains, and the losses shall be determined without the benefits of the capital loss carryover provided in section 1212. For example, any amount (other than the gains specified in subparagraph (3) of this paragraph) which, under the provisions of subtitle A of the Code, is considered to be gain or loss from the sale or exchange of a capital asset shall be taken into account but only in accordance with this subdivision and subject to the provisions of section 873 and the regulations thereunder. Thus, an amount described in section 631(b) or (c) which is considered to be loss from the sale or exchange of a capital asset would be taken into account in such manner. Also, for example, no deduction shall be allowed, pursuant to the provisions of section 267, for losses from sales or exchanges of property between related taxpayers.

(vi) Alternative tax. The tax shall be computed under this subparagraph without regard to the alternative tax imposed by section 1201 upon the excess of the net long-term capital gain over the net short-term capital loss.

(vii) Allowance of losses. In computing the tax under this subparagraph losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from sales or exchanges of capital assets.

(viii) Gains not included. The provisions of this subparagraph do not apply to amounts described in section 402 (a)(2), section 403 (a) (2) for taxable years ending after September 2, 1958, section 631 (b) and (c), and section 1235, which are considered to be gains from the sale or exchange of capital assets. See subparagraph (3) of this paragraph.

(5) Deductions allowable. For the allowance of deductions in computing the tax under this paragraph, see paragraph (b) (1) of § 1.873-1.

(6) Credits against tax. The credits allowed by section 31 (relating to tax withheld on wages), by section 32 (relating to tax withheld at source on nonresident aliens), and for taxable years beginning before January 1, 1958, by section 35 (relating to partially tax-exempt interest) shall be allowed against the tax computed in accordance with this paragraph.

(c) No United States business; gross income of more than $15,400-(1) Imposition of tax. Except as otherwise provided by paragraph (e) of this section and subparagraph (4) of this paragraph, a nonresident alien individual within class 2 is, in accordance with the provisions of section 871 (b), subject to tax under section 1 or, in the alternative, under section 1201 (b) upon the income computed in accordance with this paragraph and received during the taxable year from sources within the United States. In computing the alternative tax under section 1201 (b) for this purpose, all amounts constituting, or considered to be, gains and losses from the sale or exchange of capital assets, whether described in paragraph (b) (3) or (4) of this section, shall be taken into account to the extent prescribed by subparagraphs (2) and (3) of this paragraph.

(2) Gross income. For the purposes of subparagraph (1) of this paragraph, the gross income shall include only those items of gains, profits, and income which would be taken into account if the tax were being determined in accordance with paragraph (b) of this section, that is, the gross amount of fixed or determinable annual or periodical income determined in accordance with paragraph (b) (2) of this section, the full amount of any gain taxable in accordance with paragraph (b) (3) of this section, and all other gains (computed without regard to any losses) which are to be taken into account in determining the tax under paragraph (b) (4) of this section. For such purposes, all such gains derived from the sale or exchange of capital assets, whether taken into account under paragraph (b) (3) or (4) of this section, shall be included to the same extent as provided by subchapter P (section 1201 and following), chapter 1 of the Code, and the regulations thereunder.

(3) Deductions. In computing, for purposes of subparagraph (1) of this paragraph, the income subject to tax under section 1 or section 1201 (b), there shall be allowed as deductions

(i) Capital losses. Any loss, allocable to sources within the United States, from the sale or exchange of a capital asset which would be taken into account if the tax were being determined in accordance with paragraph (b) (4) of this section, except that such loss shall be allowed only to the extent provided by

subchapter P (section 1201 and following), chapter 1 of the Code, and the regulations thereunder, but without the benefit of the capital loss carryover provided by section 1212;

(ii) Charitable contributions. The deduction for charitable contributions and gifts to the extent allowed by section 170, whether or not connected with income from sources within the United States, but (in accordance with section 873 (c)) only as to contributions or gifts made to domestic corporations, or to community chests, funds, or foundations, created in the United States; and

(iii) Other deductions. Any other deduction (including the deduction allowed by section 1202 in respect of capital gains) allowed by section 873, but only if, and to the extent that, they are properly allocable to the gross income specified in subparagraph (2) of this paragraph. See also § 1.873-1.

(4) Minimum tax-(1) Taxable years beginning before January 1, 1958. Notwithstanding the provisions of subparagraph (1) of this paragraph, and except as otherwise provided by paragraph (e) of this section, the tax for a taxable year beginning before January 1, 1958, of a nonresident alien individual within class 2 shall in no case be less than 30 percent of the aggregate of the amounts determined under paragraph (b) (2), (3), and (4) of this section and received during the taxable year from sources within the United States.

(ii) Taxable years beginning after December 31, 1957. Notwithstanding the provisions of subparagraph (1) of this paragraph, and except as otherwise provided by paragraph (e) of this section, if the tax for a taxable year beginning after December 31, 1957, of a nonresident alien individual within class 2 minus the sum of the credits under sections 34 and 35 would be an amount which is less than 30 percent of the aggregate of the amounts determined under paragraph (b) (2) (determined without regard to the section 116 exclusion), (3), and (4) of this section and received during the taxable year from sources within the United States, then this paragraph shall not apply but paragraph (b) of this section shall apply. The provisions of this subdivision may be illustrated by the following example:

Example. A nonresident alien individual during the taxable year 1959 receives from sources within the United States a total in

come consisting of $15,450 in dividends from a domestic corporation not disqualified by sections 34 (c) and 116(b). He is not engaged in trade or business within the United States during the taxable year, and the United States has no tax convention with the country of which he is a resident. His tax for the taxable year is $4,635 computed as follows:

Gross income (for purposes of de-
termining whether section 871(b)
applies)

Less: Section 116(a) exclusion---.
Gross income (for purposes of deter-
mining tax under section 1)-
Less: Deduction for personal
exemption

Taxable income_

Tax computed under section 1-----
Less: Dividends-received cred-

it under section 34, that
is, the smallest of the
following:

4 percent of dividends
included in gross income
($15,400 x 4 percent).
The tax for the taxable
year

$15, 450

50

15, 400

600

14,800

4,636

8616

4,636

(5) Credits against tax. The credits allowed by section 31 (relating to tax withheld on wages), section 32 (relating to tax withheld at source on nonresident aliens), section 34 (relating to dividends received by individuals), and section 35 (relating to partially tax-exempt interest) shall be allowed against the tax computed in accordance with this paragraph, even though, for taxable years beginning before January 1, 1958, such tax is computed in accordance with subparagraph (4) (i) of this paragraph. For taxable years beginning after December 31, 1957, if, by reason of subparagraph (4) (ii) of this paragraph, paragraph (b) of this section applies, the credits under sections 34 and 35 are not allowed.

(d) United States business-(1) Imposition of tax. Except as otherwise provided by paragraph (e) of this section, a nonresident alien individual within class 3 is, in accordance with the pro

wise advertises its services. Shares of foreign corporation X are sold to nonresident aliens and foreign corporations who are customers of the United States brokerage firms unrelated to domestic corporation Y or foreign corporation X. The principal functions performed for foreign corporation X by domestic corporation Y are the rendering of investment advice and the effecting of transactions in the United States in stocks or securities for the account of foreign corporation X. Moreover, domestic corporation Y occasionally communicates with prospective foreign investors in foreign corporation X (through speaking engagements abroad by management of domestic corporation Y, and otherwise) for the purpose of explaining the investment techniques and policies used by domestic corporation Y in investing the funds of foreign corporation X. However, domestic corporation Y does not participate in the day-to-day conduct of other business activities of foreign corporation X.

(c) Foreign corporation X maintains a general business office or offices outside the United States in which its management is permanently located and from which it carries on, except to the extent noted heretofore, the functions enumerated in (b) (1) through (10) of this subdivision. The management of foreign corporation X at all times retains the independent power to cancel the investment advisory contract with domestic corporation Y subject to the contractual limitations contained therein and is in all other respects independent of the management of domestic corporation Y. The managing personnel of foreign corporation X communicate on a regular basis with domestic corporation Y, and periodically visit the offices of domestic corporation Y, in connection with the business activities of foreign corporation X.

(d) The principal office of foreign corporation X will not be considered to be in the United States; and, therefore, foreign corporation X is not engaged in trade or business within the United States solely by reason of its relationship with domestic corporation Y.

Example (2). The facts are the same as in example (1) except that, in lieu of having the investment advisory contract with domestic corporation Y, foreign corporation X has an office in the United States in which its employees perform the same functions as are performed by domestic corporation Y in example (1). Foreign corporation X is not engaged in trade or business within the United States during the taxable year solely because the employees located in its United States office effect transactions in the United States in stocks or securities for the account of that corporation.

(iv) Definition of dealer in stocks or securities-(a) In general. For purposes of this subparagraph, a dealer in stocks

or securities is a merchant of stocks securities, with an established plac of business, regularly engaged as merchant in purchasing stocks or 59 curities and selling them to customer with a view to the gains and profit that may be derived therefrom. Per sons who buy and sell, or hold, stock or securities for investment or specula. tion, irrespective of whether such buying or selling constitutes the carrying on a trade or business, and officers of corpe rations, members of partnerships, fiduciaries, who in their individual ca pacities buy and sell, or hold, stocks securities for investment or speculatio are not dealers in stocks or securit within the meaning of this subparagra solely by reason of that activity. In d termining under this subdivision whethe a person is a dealer in stocks or securitie such person's transactions in stocks o securities effected both in and outside the United States shall be taken into account.

(b) Underwriting syndicates and dealers trading for others. A foreign person who otherwise may be considered a dealer in stocks or securities under (a) of this subdivision shall not be consid ered a dealer in stocks or securities for purposes of this subparagraph—

(1) Solely because he acts as an underwriter, or as a selling group member, for the purpose of making a distribution of stocks or securities of a domestic issuer to foreign purchasers of such stocks or securities, irrespective of whether other members of the selling group distribute the stocks or securities of the domestic issuer to domestic purchasers,

or

(2) Solely because of transactions effected in the United States in stocks or securities pursuant to his grant of discretionary authority to make decisions in effecting those transactions, if he can demonstrate to the satisfaction of the Commissioner that the broker, commission agent, custodian, or other agent through whom the transactions were effected acted pursuant to his written representation that the funds in respect of which such discretion was granted were the funds of a customer who is neither a dealer in stocks or securities, a partnership described in subdivision (ii) (b) of this subparagraph, or a foreign corporation described in subdivision (iii) (b) of this subparagraph.

estab

chant or purposes of this (b), a foreign person cludes a nonresident alien individual, foreign corporation, or a partnership eng gstly member of which is a nonresident 7 to lien individual or a foreign corporation. Is this (b) shall apply only if the foreign ereterson at no time during the taxable hear has an office or other fixed place of business in the United States through which, or by the direction of which, the Transactions in stocks or securities are ffected.

(c) Illustrations. The application of his subdivision may be illustrated by che following examples:

Example (1). Foreign corporation X is a member of an underwriting syndicate organized to distribute stock issued by domestic corporation Y. Foreign corporation X distributes the stock of domestic corporation Y to foreign purchasers only. Domestic corpoSration M is syndicate manager of the underJwriting syndicate and, pursuant to the terms tor of the underwriting agreement, reserves the right to sell certain quantities of the underwritten stock on behalf of all the members of the syndicate so as to engage in stabilizing CON transactions and to take certain other actions which may result in the realization of profit be by all members of the underwriting syndicura cate. Foreign corporation X is not engaged in trade or business within the United States カー solely by reason of its participation as a member of such underwriting syndicate for the purpose of distributing the stock of dodistri mestic corporation Y to foreign purchasers or omet by reason of the exercise by M corporation of Such its discretionary authority as manager of such syndicate.

Example (2). Foreign corporation Y, a calendar year taxpayer, is a bank which trades in stocks or securities both for its own account and for the account of others. During 1967 foreign corporation Y authorizes domestic corporation M, a broker, to exercise its discretion in effecting transactions in the United States in stocks or securities for the account of B, a nonresident alien individual who has a trading account with foreign corporation Y. Foreign corporation Y furnishes a written representation to domestic corporation M to the effect that the funds in respect of which foreign corporation Y has authorized domestic corporation M to use its discretion in trading in the United States in stocks or securities are not funds in respect of which foreign corporation Y is trading for its own account but are the funds of one of its customers who is neither a dealer in stocks or securities, a partnership described in subdivision (ii) (b) of this subparagraph, or a foreign corporation described in subdivision (iii) (b) of this subparagraph.

Pursuant to the discretionary authority so granted, domestic corporation M effects transactions in the United States during 1967 in stocks or securities for the account of the customer of foreign corporation Y. At no time during 1967 does foreign corporation Y have an office or other fixed place of business in the United States through which, or by the direction of which, such transactions in stocks or securities are effected by domestic corporation M. During 1967 foreign corporation Y is not engaged in trade or business within the United States solely by reason of such trading in stocks or securities during such year by domestic corporation M for the account of the customer of foreign corporation Y. Copies of the written representations furnished to domestic corporation M should be retained by foreign corporation Y for inspection by the Commissioner, if inspection is requested.

(d) Trading in commodities. For purposes of paragraph (a) of this section

(1) In general. The term “engaged in trade or business within the United States" does not include the effecting of transactions in the United States in commodities (including hedging transactions) 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, such as a grain futures or a cotton futures market, (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 United States through which, or by the direction of which, the transactions in commodities are effected. The volume of commodity transactions effected during the taxable year shall not be taken into account in determining under this subparagraph whether the taxpayer is engaged in trade or business in the United States.

(2) Trading for taxpayer's own account (i) In general. The term "engaged in trade or business within the United States" does not include the effecting of transactions in the United States in commodities (including hedging transactions) for the taxpayer's own account if the commodities are of a kind customarily dealt in on an organized commodity exchange and if the transaction is of a kind customarily consummated at such place. This rule shall apply