26 CFR 404.7701-1: Questions and answers relating to the definition of income tax return preparer. Questions and answers with respect to certain requirements and penalties for preparers of income tax returns. See T.D. 7475, page 401. recognizes ordinary income upon the lapse of such warrants in an amount equal to the fair market value of the consideration it received in exchange for the warrants. See Rev. Rul. 77-40, page 248. and gas well to a specified depth at a designated location on a leased tractor parcel of land, a taxpayer receives from the lessee the assignment of the entire working interest in the drill site and an undivided fraction of the working interest in the portion of the tract or parcel of land poplusive of the drill site. See Rev. Rul. 77-176, page 77. Chapter 80.-General Rules 26 CFR 301.7805-1: Rules and regulations. Whether taxpayers operating farms, nurseries, and florist shops using an accrual method of accounting will be required to inventory growing crops, trees, and plants, respectively, for all open taxable years for which they have filed a Federal income tax return. See Rev. Rul. 77-64, page 136. Section 7805.-Rules and Regulations 26 CFR 301.7805-1: Rules and regulations. The revocation of Rev. Rul. 69-377, Rev. Rul. 69-501, Rev. Rul. 70-645, Rev. Rul. 72-337, Rev. Rul. 72-416, and Rev. Rul. 73-110 will not affect debt obligations or preferred stock issued prior to August 27, 1974 under financing arrangements that met the requirements set forth in the revoked Revenue Rulings. See Rev. Rul. 77178, page 43. 26 CFR 301.7805-1: Rules and regulations. Prospective application of a Revenue Ruling relating to all mining corporations operating as cost companies. See Rev. Rul. 77-1, page 161. 26 CFR 301.7805-1: Rules and regulations. Federal income tax treatment of invest. ment annuity arrangements involving a custodial account. See Rev. Rul. 77-85, page 12. 26 CFR 301.7805-1: Rules and regulations. 26 CFR 301.7805-1: Rules and regulations. Nonretroactive application of that portion of Rev. Rul. 72-198 pertaining to whether a corporation that has issued warrants for the purchase of its stock 26 CFR 301.7805-1: Rules and regulations. Treatment of an arrangement wherein, in consideration of the drilling of an oil Retroactive application of ruling relating to Federal communications tax on amounts paid for dual use accessorial equipment used with PBX, Centrex, and similar systems. See Rev. Rul. 77-189, page 342. CONTENTS Subpart A.—Tax Conventions Convention (Rev. Rul, 77-45) 413 Convention (Rev. Rul. 77-174) 414 United States-France Income Tax Convention (Rev, Rul. 77-62) 414 United States-Japan Income Tax Convention (Rev. Rul. 77-175) 415 Convention 416 427 Subpart B.-Legislation and Senate Report No. 95-67 441 Conference Report No. 95-158 448 Public Law 95-30 (H.R. 3477) 451 Senate Report No. 95-66 469 House Report No. 95-27, Part I 501 Conference Report No. 95-263 519 Subpart A.—Tax Conventions Canadian corporation; permanent establishment. A Canadian consulting engineering corporation engaged in the planning and design of a manufacturing plant in the U.S. for a U.S. client and performing the preponderance of its services in Canada is not maintaining a permanent establishment in the the U.S., under Article 1 of the U.S.Canada Income Tax Convention and Protocol, by virtue of the presence, in work space provided by the client at the construction site of the plant, of its employees who inspect contractor work performance and quality of materials, make minor changes in plans, check contractor billings, keep account of job progress, and prepare reports for the home office. Rev. Rul. 77-45 Advice has been requested whether a Canadian corporation that performs engineering services in the United States is subject to Federal income tax with respect to such activities in accordance with the provisions of the United States-Canada Income Tax Convention and Protocol, T.D. 5206, 1943 C.B. 526, under the circumstances described below. M, a corporation organized under the laws of Canada, is a consulting engineering firm engaged in the planning and design of manufacturing plants. M contracted to plan and design a plant located in the United States. The preponderance of M's services on the plant is accomplished in Canada, including significant modi. fications of design resulting from reevaluation of on-site conditions. Although the plant is constructed by a general contractor under contract with M's United States client, M has employees at the United States con struction site who inspect contractor work performance and the quality of materials, make minor changes in plans and specifications, check contractor billings, keep account of job progress, and prepare reports for the home office. The on-site employees of M are not authorized to make major decisions that would affect: basic plan design or result in significant departures from the construction contract. These employees are under the supervision of and in continual contact with higher level project managers in Canada. The on-site employees work in a construction shed or an area inside a warehouse or workshop provided by the client who also provides office furniture and equipment. Neither the work space nor furniture and equipment is the subject of separately bargained for consideration by M. M has only one project in progress in the United States during the taxable year, and the duration of the project will not exceed 1 year. Article I of the Convention provides that industrial and commercial profits of enterprises of the contracting States are mutually exempted from taxation, except in respect of such profits allocable to a permanent establishment. Section 3(f) of the Protocol to the Convention states, that: The term “permanent establishment” in. cludes branches, mines, and oil wells, farms, timber lands, plantations, factories, workshops, warehouses, offices, agencies, and other fixed places of business of an enterprise but does not include a subsidiary cor ubsidiary cor. poration. # # # When an enterprise of one of the contracting States carries on business in the other contracting State through an employee or agent established there, who has general authority to contract for his employer or principal or has a stock of mer. chandise from which he regularly fills orders which he receives, such enterprise shall be deemed to have a permanent establishment in the latter State. The fact that an enterprise of one of the contracting States has business dealings in the other contracting State through a commission agent, broker, or other independent agent or maintains therein an office used solely for the purchase of merchandise shall The specific question is whether M has a permanent establishment in the United States within the meaning of section 3(6) of the Protocol to the Convention. The definition of "permanent establishment” in section 3(f) of the Protocol does not specifically include a construction site. It is the view of the Internal Revenue Service that, in the absence of specific treaty language to the contrary, a construction site of any significant duration is generally considered to constitute a permanent establishment even if a treaty's permanent establishment article is silent as to such site. It is also the view of the Service that planning and supervision carried on by a building contractor are part of the activity allocable to its construction site permanent establishment. Planning and supervision of construction work do not of themselves, however, make a construction site a construction site of the enterprise that plans and supervises construction. Thus, since M's activities are restricted to supervision and planning, whether they constitute a permanent establishment must be considered without regard to determinations applicable to construction sites. In the instant case, the activities of M and its employees consist primarily of planning and supervision of the construction activities. M's employees in the United States are not authorized to make major decisions concerning basic plan design. In addition, M's employees use a building and furniture provided by M's client without separately bargained for consideration; and the duration of the project will not exceed 1 year. Thus, the presence and activities of M's employees do not constitute the maintenance of a permanent establishment by M in the United States within the meaning of section 3() of the Protocol to the Convention. for only the taxable year the election is made. Also, the election may be made by reflecting on the Federal income tax return the following: Return of resident of France electing to file as if engaged in business in the United States pursuant to Article 5(3) of the United States-France Income Tax Convention. United States-France Income Tax 1968-2 C.B. 691 Federal income tax with respect to Convention: income attributable to engineering "Article I (i) adds a new article XIIIservices performed by its employees at A which adopts a principle similar to that the construction site in the United included in most other income tax conStates pursuant to Article I of the ventions* * *. It provides (in effect on a reciprocal basis) that a resident or corConvention. poration of Canada deriving rentals from real property from United States sources Subpart A.–Tax Conventions may elect for the taxable year to be sub ject to United States tax on a net basis. United States—Canada Income As to income from sources in Canada, the option is applicable only to rentals from Tax Convention real property. As to income from sources in the United States, the option gives the T.D. 5206, 1943 C.B. 526, 1955-1 C.B. taxpayer the privilege of filing a return and 624, 1957-2 C.B. 1014, and 1968-1 C.B. computing income from United States 628. sources on a net basis as if he were engaged (Also United States-France Income Tax in trade or business therein with respect to Convention, 1968-2 C.B. 691). all his income from United States sources. Canada and France; election to However, in order to avail himself of this privilege the taxpayer must derive some treat rentals on net basis. The elec rentals from real property in the United tion by a resident of Canada or States. See Senate Floor Debate and Ac tion, 82nd Cong., 1st Sess (1951) 97 France to treat rentals of real prop op. Cong. Rec. 11442 (1951). erty from U.S. sources on a net basis, as if it was income from a The language of the report subtrade or business, under Article mitted on Article XIII A (1) of the XIIL A (1) of the U.S.-Canada In Canadian Convention indicates that come Tax Convention or Article 5 an election under that Article is effec(3) of the U.S.-France Income Tax tive for only "the taxable year the Convention is an annual election. election is made. Rev, Rul. 77-174 Accordingly, an election under Ar ticle XIII A (1) of the Canadian Advice has been requested whether Convention is effective only for each Convention is effective only for each an election made under Article XIII taxable year that such an election is A (1) of the United States-Canada properly made. This election may be made by reflecting on the Federal indian Convention), T.D. 5206, 1943 come tax return the following: C.B. 526, and the Supplemental Con Return of resident of Canada electing ventions, 1955-1 C.B. 624, 1957-2 C.B. to file on a net basis pursuant to Article 1014, and 1968-1 C.B. 628, and Article XIII A (1) of the United States-Canada 5(3) of the United States-France In- Income Tax Convention. come Tax Convention (the French Article 5(3) of the French Convenconventon), 1300-4 WD: 091, is an tion provides, in part, that a resident annual election or a one time election. one of one of the Contracting States sub of Article XIII A (1) of the Canadian ject to tax in the other Contracting Convention provides, in part, that a State on income from real property resident of Canada deriving rentals may elect for any taxable year to be from real property from sources within subject to such other State's tax on the United States may elect for any such income as if such resident were taxable year to be subject to the tax engaged in business in the other Conimposed by the United States on a net tracting State. basis as if such resident were engaged Accordingly, inasmuch as the proin trade or business within the United vision of Article 5(3) of the French States through a permanent establish- Convention is similar to that of Artiment therein during the taxable year. cle XIII A (1) of the Canadian Con The United States Senate Commit- vention, the provisions of this Revenue tee on Foreign Relations submitted Ruling also apply to an election made the following report with respect to under Article 5(3) of the French Con France; insurance companies; "reinsurance premiums"; investment income. The phrase "reinsurance premiums", as used in Article 4 of the Exchange of Notes between the U.S. and France dated July 28, 1967, includes investment income derived in connection with the conduct of a reinsurance business in one of the Contracting States by an insurance company that is a resident of the other Contracting State and is exempt from tax in the former Contracting State, whether or not the insurance company maintains a permanent establishment therein. Rev. Rul. 77-62 Advice has been requested concerning the interpretation of Article 4 of the Exchange of Notes between the United States and France (the Note) dated July 28, 1967. 119681 19 U.S.T. 5366, T.I.A.S. No. 6518, which answers certain questions that arose with respect to the United StatesFrance Income Tax Convention (the Convention). 1968-2 C.B. 691. Article 4 of the Note is as follows: It is understood that when an insurance company of one of the Contracting States has a permanent establishment in the other Contracting State the reinsurance premiums received shall be taken into account for the determination of taxable profits only in the Contracting State of which the company is a resident. The specific question is whether the phrase "reinsurance premiums” in |