*** the taxable year sinited States is not

which is engagem.

foreign corporation which

States at any time during the taxable source-(a) In general. A foreign (ii) Beneficiaries of estates or year is required to file a return on corporation which at no time during trusts. A foreign corporation which is Form 1120-F even though (a) it has the taxable year is engaged in a trade a beneficiary of an estate or trust no income which is effectively con- or business in the United States is not which is engaged in trade or businected with the conduct of a trade or required to make a return for the ness in the United States is not rebusiness in the United States, (b) it taxable year if its tax liability for the quired to make a return for the taxhas no income from sources within taxable year is fully satisfied by the able year merely because it is deemed the United States, or (c) its income withholding of tax at source under to be engaged in trade or business is exempt from income tax by reason chapter 3 of the Code. For purposes within the United States under secof an income tax convention or any of this subdivision, some of the items tion 875(2). However, such foreign section of the Code. However, if the of income from sources within the corporation will be required to make foreign corporation has no gross in- United States upon which the tax a return if it otherwise satisfies the come for the taxable year, it is not liability will not have been fully satis- conditions of subparagraph (1)(i) of required to complete the return sched fied by the withholding of tax at this paragraph for making a return. ules but must attach a statement to source under chapter 3 of the Code (iii) Special returns and schedules. the return indicating the nature of are:

The provisions of paragraphs (b) any exclusions claimed and the (1) Interest upon so-called tax-free through (f) of this section shall apply amount of such exclusions to the convenant bonds upon which, in ac

bonds upon which, in ac. to a foreign corporation except that a extent such amounts are readily de- cordance with section 1451 and § foreign corporation which is an interminable.

1.1451-1, a tax of only 2 percent is surance company to which paragraph (ii) Treaty income. If the gross in- required to be withheld at source,

(c)(3) of this section applies shall come of a foreign corporation includes

(2) In the case of bonds or other

e of bonds or other make a return on Form 1120-F and treaty income, as defined in paragraph

evidence of indebtedness issued after not on Form 1120. If a foreign corpo(b) (1) of $ 1.871-12, a statement September 25, 1965, amounts de

ration which is an insurance company shall be attached to the return on scribed in section 881(a)(3),

to which paragraph (c)(1) or (2) Form 1120-F showing with respect to (3) Accrued interest received in

of this section applies has income for that income

connection with the sale of bonds be- the taxable year from sources within (a) The amounts of tax withheld,

tween interest dates, which, in ac- the United States which is not effec(6) The names and post office

cordance with paragraph (h) of s tively connected for that year with

1.1441-4, is not subject to withholding addresses of withholding agents, and

the conduct of a trade or business in (c) Such other information as may of tax at source.

the United States by that corporation,

(6) Corporations not included. be required by the return form or by

the corporation shall attach to its reThis subdivision (i) shall not apply the instructions issued with respect to

turn on Form 1120L or 1120M, as the form, to show the taxpayer's en

(1) To a foreign corporation which the case may be, a separate schedule titlement to the reduced rate of tax

has income for the taxable year which showing the nature and amount of under the tax convention.

is treated under section 882(d) or the items of such income, the rate of (iii) Balance sheet and reconcilia

(e) and § 1.882-2 as income which tax applicable thereto, and the amount tion of income. At the election of the is effectively connected for

is effectively connected for the taxable of tax withheld therefrom under chaptaxpayer, the balance sheets and rec

year with the conduct of a trade or ter 3 of the Code. onciliation of income, as shown on

business in the United States by that (3) Representative or agent for Form 1120-F, may be limited to corporation,

foreign corporation—(i) Cases where (a) The assets of the corporation (2) To a foreign corporation mak- power of attorney is not required. The located in the United States and to ing a claim under $ 301.6402-3 of

responsible representative or agent its other assets used in the trade or this chapter (Procedure and Adminis- within the United States of a foreign business conducted in the United tration Regulations) for the refund of corporation shall make on behalf of States, and

an overpayment of tax for the taxable his principal a return of, and shall (6) Its income effectively connect year, or

pay the tax on, all income coming ed with the conduct of a trade or (3) To a foreign corporation de- within his control as representative or business in the United States and its scribed in paragraph (c)(2)(i) of agent which is subject to the income other income from sources within the $ 1.532-1 whose accumulated taxable tax under subtitle A of the Code. The United States.

income for the taxable year is de- agency appointment will determine (2) Exceptions—(i) Return not re- termined under paragraph (b)(2) how completely the agent is substiquired when tax is fully paid at of § 1.535-1.

tuted for the principal for tax pur

с масе.

(1) Certain foreign corporations. taxpayer shall also submit such evi. Rev. Rul. 73-350 For purposes of this section and sec- dence as may be required to show that

Advice has been requested whether tion 6655, in the case of a foreign the taxpayer is the beneficial owner

the exclusion from gross income under corporation subject to taxation under of the income. In no case may a claim

section 883 of the Internal Revenue section 11 or 1201(a), or under sub for refund of overwithheld tax be

Code of 1954 is applicable under the chapter L of chapter 1, the tax im- made by a nonresident alien indi

circumstances described below. posed by section 881 shall be treated vidual or foreign corporation if the as a tax imposed by section 11. taxpayer has received a repayment or

Situation (1). A foreign corpora

tion organized in foreign Country X (g) Cross reference. For provisions reimbursement of such tax in accord

operates ships documented only under relating to the number of amend ance with paragraph (a) of § 1.1461-4

of this chapter (Income Tax Regulaments which must be filed, see section

the laws of Country X. The foreign

corporation has earnings during the tions). See also § 1.1464-1 of this 6074(b). chapter.

taxable year from sources within the [Sec. 6016 as amended by sec. 122(d), Rev.

United States derived from the operaAct 1964 (78 Stat. 29); sec. 104(1),

(This Treasury decision is issued

tion of such ships. Country X exempts Foreign Investors Tax Act 1966 (80 under the authority contained in sec

from taxation the income of a corpoStat. 1563); as in effect before repeal by tion 7805 of the Internal Revenue sec. 103(a), Revenue and Expenditure

ration organized in the United States Code of 1954 (68A Stat. 917; 26 Control Act 1968 (82 Stat. 260)] U.S.C. 7805).)

and of a citizen of the United States

nonresident in Country X as consists Par. 34. Section 301.6402-3 is

Donald C. ALEXANDER, of earnings derived from the operaamended by adding a new paragraph (e) to read as follows:

tion of a ship or ships documented Commissioner of

Internal Revenue. under the laws of the United States. $ 301.6402-3 Special rules applica

Situation (2). A foreign corporable to income tax. Approved November 21, 1973.

tion organized in foreign Country Y FREDERIC W. HICKMAN,

operates ships documented under the Assistant Secretary

laws of foreign country X. The for(e) In the case of a nonresident

of the Treasury.

eign corporation has earnings during alien individual or a foreign corpora

the taxable year from sources within (Filed by the Office of the Federal Register tion the claim for refund must show

on November 27, 1973, 8:45 a.m., and

the United States derived from the the taxpayer's entire income subject published in the issue of the Federal operation of such ships. Country X to tax, whether or not the tax has

Register for November 28, 1973, 38 F.R.

exempts from taxation so much of the

32791) been fully satisfied at the source upon

income of a corporation organized in a portion of such income. If the over

the United States and of a citizen of payment has resulted from the with

the United States nonresident in holding of tax at source under chapter Section 883.-Exclusions from

Couuntry X as consists of earnings de3 of the Code, a statement shall be Gross Income

rived from the operation of a ship or attached to the claim for refund de

26 CFR 1.883-1: Exclusions from gross in ships documented under the laws of claring that the person making the come of foreign corporations.

the United States. claim is the beneficial owner of the

(Also Section 872; 1.872-2.)
(Also Section

In neither of the above situations is income and showing (1) the amounts Foreign ships or aircraft, equiva- a tax convention to which the United of tax withheld, with the names and lent exemption requirements. For States is a party in effect. post office addresses of withholding purposes of the exclusion from Section 883(a) (1) of the Code exagents, (2) the name in which the gross income of earnings derived empts from gross income the earnings tax was withheld if other than that from the operation of ships or airof the taxpayer, and, if applicable, (3) craft by foreign corporations or the operation of a ship or ships docufacts sufficient to show that, at the nonresident alien individuals, the mented under the laws of a foreign time the income was derived, the corporation must be organized in, country which grants an equivalent taxpayer was entitled to the benefit of or the individual must be a citizen exemption to citizens of the United a reduced rate of, or exemption from, of, the foreign country that grants States and to corporations organized tax with respect to that income un- an equivalent exemption to United in the United States. der the provisions of an income tax States corporations and individuals Section 1.883-1(a)(2)(i) of the Inconvention to which the United States and the ships must be documented come Tax Regulations states that: “A is a party. Upon request of the Din or the aircraft registered under the foreign country which either imposes rector of International Operations the laws of that country.

no income tax, or, in imposing that

be nonresident must be organizeitizen

exemptiand

tax, exempts from taxation so much of the income of a citizen of the United States nonresident in that foreign country and of a corporation orga

earnings derived from the operation of a ship or ships documented under the laws of the United States is con

is considered as granting an equivalent ex

Xemption for purposes of the exclusion from gross income of the earnings of a foreign ship or ships.”

Section 1.883-1 (a) (2) (i) of the regulations interprets section 883 of the Code, in reference to United States operators of ships, as requiring the meeting of the dual test of both nationality and documentation. Thus, section 1.883-1 (a) (2) (i) refers to the exemption from a foreign country's income tax imposed by that country on the earnings of a corporation or ganized in the United States derived from the operation of the corpora tion's ships flying the United States flag. The issue in the instant case is whether the dual test equally applies under section 883 in reference to a foreign operator of ships, i.e., in order for the United States to exempt from its income tax the earnings of a foreign corporation, whether the ships of the foreign corporation must fly the flag of the foreign country in which the foreign corporation is organized.

The purpose of section 883 of the Code (corresponding to section 213(b) (8) of the Revenue Act of 1921) was to encourage the international adoption of uniform tax laws affecting shipping companies, for the purpose of eleminating double taxation and to encourage the American Merchant Marine by securing for it an exemption from foreign income and excess profits taxation in return for a like exemption from taxation to foreign shipowners. Senate Report No. 275, 67th Cong., 1st Sess. (1921), 1939-1 (Part 2) C.B. 181, 191, and S. 1942, 67th Cong, 1st Sess. The word "equivalent” as used in section 883

connotes that the exemption be recip- tion in this situation is organized in rocal.

foreign Country Y and operates ships Equivalent application of the dual documented under the laws of Countest of nationality and documentation try X. The foreign corporation thereapplicable to a United States operator fore does not meet the dual test of of ships requires reciprocal treatment nationality and documentation and of a foreign operator of ships. Other therefore does not meet the equivalent wise, if only the single test of docu- exemption test. Accordingly, the inmentation were to apply to a foreign come from sources within the United operator it would produce an unequal States of the foreign corporation in result in that a foreign operator of a this situation derived from the operaforeign country which does not grant tion of its ships documented under the equivalent exemption to a United laws of Country X is not exempt from States operator would secure exemp

gross income under section 883 of the tion from the United States tax on Code even though Country X exempts earnings derived from earnings derived from flying the flag

flying the flag from taxation the income of a corpoof a foreign country that grants equiv- ration organized in the United States alent exemption in return for which as consists of earnings derived from the latter country would extend ex- the operation of ships documented emption from its tax only with respect under the laws of the United States. to earnings derived by a United States Section 872 (b) (1) of the Code prooperator from the operation of United vides the same substantive rule for States flag ships. Such an application nonresident alien individuals operatof section 883 of the Code is not sup- ing ships under a foreign flag as is ported by the terms of the statute. provided by section 883(a)(1) for The conclusions set forth below ap

foreign corporations. Sections ply the foregoing principles to the fac

872(b)(2) and 883(a)(2) exempt tual situations presented above.

from gross income the earnings of Situation (1). The foreign corpora

nonresident alien individuals and fortion in this situation is organized in

eign corporations derived from the foreign Country X and operates ships

operation of aircraft registered under documented only under the laws of

the laws of a foreign country which Country X. The foreign corporation

grants an equivalent exemption to cittherefore meets the dual test of na

izens of the United States and to cor

porations organized in tionality and documentation. Country

the United

States. The principles of this Revenue X exempts from taxation so much of

Ruling are equally applicable to the the income of a corporation organized

exemption provided under those proin the United States as consists of

visions of the Code.
earnings derived from the operation
of a ship or ships documented und
the laws of the United States. Accord-

Subpart C.-Miscellaneous Provisions
ingly, since Country X grants an
equivalent exemption to a corporation Section 894.-Income Affected by
organized in the United States, so Treaty
much of the income from sources

26 CER 1.894: Statutory provisions; inwithin the United States of the for- come affected by treaty. eign corporation in this situation as

Effect of United States treaties on nonconsists of earnings derived from the effectively connected income of nonresident operation of its ships documented

aliens or foreign corporations for purposes

of exemption or reduction in tax rate. See under the laws of Country X is ex

T.D. 7293, page 228.
empt from gross income under section
883 of the Code.

Treatment, under Article XI of the United States-Canada Income Tax Convention, of interest earned by a Canadian bank that is not effectively connected with its permanent establishment in the United States. See Rev. Rul. 73-562, page 434.

Section 895.-Income Derived by
a Foreign Central Bank of Issue
from Obligations of the United
States or from Bank Deposits
26 CFR 1.895-1: Income derived by a for-
eign central bank of issue from obligations
of the United States.

Whether obligations of the Student Loan Marketing Association constitute obligations of the United States or of an agency or instrumentality thereof within the meaning of section 895 of the Code. See Rev. Rul. 73-548, page 14.

Section 896.- Adjustment of Tax
on Nationals, Residents, and
Corporations of Certain Foreign
Countries
26 CFR 1.896: Statutory provisions; ad
justment of tax on nationals, residents, and
corporations of certain foreign countries.

Authority by the President in the case of countries which impose more burdensome taxes on United States citizens and corporations than the United States does on nonresident aliens and foreign corporations. See T.D. 7293, page 228.

TER A, PART 1.-INCOME claim a foreign tax credit for the
TAX; TAXABLE YEARS BE- taxable year involved. This provision
GINNING AFTER DECEMBER has been amended to make clear that
31, 1953

no computation schedule is required

unless the foreign tax credit is claimed Special rules for reduction of creditable foreign taxes in the case of section 901

for the taxable year and the taxpayer (e) foreign mineral income

has foreign mineral income with reDEPARTMENT OF THE TREASURY,

spect to which the percentage depleOFFICE OF COMMISSIONER tion deduction under section 613 is OF INTERNAL REVENUE,

allowed. Washington, D.C. 20224.

Paragraphs (c) (2) and (g) (2) of To Officers and Employees of the

example (6) in § 1.901-3(d) were Internal Revenue Service and

inconsistent with paragraph (a) (2) Others Concerned:

(ii) (6) of $ 1.901-3, in that deducBy a notice of proposed rule making tions which were not allocable to forappearing in the Federal Register foreign mineral income were allowed to April 27, 1972 (37 F.R. 8453), reduce foreign mineral income from amendments to the Income Tax Reg. the foreign country involved for the ulations (26 CFR Part 1) were pro- purpose of determining the U.S. tax posed in order to conform the regula- on such income. In addition, exainple tions to changes made by section 506 (6) contained some technical errors. of the Tax Reform Act of 1969 (Pub. Example (6) in § 1.901-3(d) has L. 91-172, 83 Stat. 634) [1969-3 C.B. been amended to correct these prob10], which provides for a reduction of lems. foreign taxes on foreign mineral in

Adoption of amendments to the regucome for purposes of the foreign tax

lations
credit and provides for revocation of
the overall limitation for the tax-

On April 27, 1972, there was pubpayer's first taxable year beginning

lished in the Federal Register (37 after December 31, 1969. After con

F.R. 8453) a notice of proposed rule sideration of all such relevant matter

making with respect to the amendas was presented by interested persons

ment of the Income Tax Regulations regarding the rules proposed, certain (26 CFR Part 1) to conform such changes were made in the proposed

regulations to section 901(e) of the amendments of the regulations, which

Internal Revenue Code of 1954 (reas revised are adopted by this docu

lating to taxes on foreign mineral in

lating to taxes on foreign mine ment.

come), as added by section 506(a)

of the Tax Reform Act of 1969 (83 In the regulations as proposed, § 1.901-3(a) (2) (ii) contained some

Stat. 634), and to section 904(b) of misleading rules for the deduction of

such Code (relating to election of expenses, losses, and other deductions

overall limitation), as amended by

section 506(b) of such Act (83 Stat. properly allocable to foreign mineral

635). After consideration of all such income and for the disallowance of the deduction for personal exemp

relevant matter as was presented by tions. These rules have been revised

interested persons regarding the rules

proposed, the following amendments to achieve greater clarity.

of the regulations are hereby adopted: Proposed § 1.901-3(a) (3) (iv) re- Paragraph 1. Section 1.901 is quired the taxpayer to file a schedule amended to read as follows: showing the computation of the reduction of foreign taxes with respect § 1.901 Statutory provisions; taxes of to foreign mineral income; this rul foreign countries and of possessions could have been construed to apply of the United States. even though the taxpayer did not Sec. 901. Taxes of foreign countries

Part III.-Income From Sources Without the
United States
Subpart A.-Foreign Tax Credits

Section 901. - Taxes of Foreign
Countries and of Possessions of
United States

26 CFR 1.901: Statutory provisions; taxes
of foreign countries and of possessions of
the United States.
T.D. 7294 1

TITLE 26.-INTERNAL REVE.

NUE.—CHAPTER I, SUBCHAP1 The publication of this Treasury Decision in 38 F.R. 33073, dated November 30, 1973, contains (1) instructions for modifying the notice of proposed rule. making published in 37 F.R. 8453, dated April 27, 1972, and (2) the full context of the regulations with such modifications. As here published, the Treasury Decision reflects the full context of such regulations, with modifications. The individual instructions have been omitted.