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$1.864–5, if the office or other fixed (d) Limitations on application of rules place of business either actively par- on banking, financing, or similar busiticipates in soliciting, negotiating, or ness—(1) Trading for taxpayer's own acperforming other activities required to count. The provisions of (6) of this subarrange, the issue, acquisition, sale, or division (ii) apply for purposes of deterexchange, of the asset from which such mining when certain income, gain, or income, gain, or loss is derived or per- loss from stocks or securities is effecforms significant services incident to tively connected with the active consuch issue, acquisition, sale, or duct of a banking, financing, or similar change. An office or other fixed place business in the United States. Any of business in the United States shall dividends, interest, gain, or loss from not be considered to be a material fac- sources without the United States tor in the realization of income, gain, which by reason of the application of or loss for purposes of this subdivision (6) of this subdivision (ii) is not effecmerely because the office or other fixed tively connected with the active conplace of business conducts one or more duct by a foreign corporation of a of the following activities: (1) Collects banking, financing, or similar business or accounts for the dividends, interest, in the United States may be effectively gains, or losses, (2) exercises general connected for the taxable year, under supervision over the activities of the (a) of this subdivision (ii), with the persons directly responsible for car- conduct by such taxpayer of a trade or rying on the activities or services de- business in the United States which scribed in the immediately preceding consists of trading in stocks or securisentence, (3) performs merely clerical ties for the taxpayer's own account. functions incident to the issue, acquisi- (2) Other income. For rules relating to tion, sale, or exchange, or (4) exercises dividends or interest from sources final approval over the execution of the without the United States (other than issue, acquisition, sale, or exchange. dividends or interest from, or gain or

(6) Effective connection of income from loss from the sale or exchange of, stocks or securities with active conduct of stocks or securities referred to in (b) of a banking, financing, or similar business. this subdivision (ii)) derived in the acNotwithstanding (a) of this subdivision tive conduct of a banking, financing, or (ii), the determination as to whether similar business in the United States, any dividends or interest from stocks see (a) of this subdivision (ii). or securities, or gain or loss from the (iii) Sale of goods or merchandise sale or exchange of stocks or securities through U.S. office. Income, gain, or which are capital assets, which is from loss from sales of goods or merchandise sources without the United States and specified in paragraph (b)(3) of $1.864-5, derived by a nonresident alien indi- if the office or other fixed place of busividual or a foreign corporation in the ness actively participates in soliciting active conduct during the taxable year the order, negotiating the contract of of a banking, financing, or similar sale, or performing other significant business in the United States, shall be services necessary for the consummatreated as effectively connected for tion of the sale which are not the subsuch year with the active conduct of ject of a separate agreement between that business shall be made by apply- the seller and the buyer. The office or ing the principles of paragraph (c)(5)(ii) other fixed place of business in the of $1.864–4 for determining whether in- United States shall be considered a macome, gain, or loss of such type from terial factor in the realization of insources within the United States is ef- come, gain, or loss from a sale made as fectively connected for such year with a result of a sales order received in the active conduct of that business. such office or other fixed place of busi

(c) Security defined. For purposes of ness except where the sales order is rethis subdivision (ii), a security is any ceived unsolicited and that office or bill, note, bond, debenture, or other other fixed place of business is not held evidence of indebtedness, or any evi- out to potential customers as the place dence of an interest in, or right to sub- to which such sales orders should be scribe or to purchase, any of the fore- sent. The income, gain, or loss must be going items.

realized in the ordinary course of the trade or business carried on through outside the United States and an office the office or other fixed place of busi- or other fixed place of business, as deness in the United States. Thus, if a fined in $1.864-7, which such nonforeign corporation is engaged solely in resident alien individual or foreign cora manufacturing business in the United poration has outside the United States States, the income derived by its office participates materially in the sale. For in the United States as a result of an this purpose an office or other fixed occasional sale outside the United

place of business which the taxpayer States is not attributable to the U.S.

has outside the United States shall be office if the sales office of the manufac

considered to have participated materituring business is located outside the

ally in a sale made through the office United States. On the other hand, if a

or other fixed place of business in the foreign corporation establishes a sales

United States if the office or other office in the United States to sell for

fixed place of business outside the consumption in the Western Hemi

United States actively participates in sphere merchandise which the corpora

soliciting the order resulting in the tion produces in Africa, the income de

sale, negotiating the contract of sale, rived by the sales office in the United

or performing other significant servStates as a result of an occasional sale

ices necessary for the consummation of made by it in Europe shall be attrib

the sale which are not the subject of a utable to the U.S. sales office. An office

separate agreement between the seller or other fixed place of business in the

and buyer. An office or other fixed United States shall not be considered to be a material factor in the realiza

place of business which the taxpayer tion of income, gain, or loss for pur

has outside the United States shall not

be considered to have participated maposes of this subdivision merely because of one or more of the following

terially in a sale merely because of one activities: (a) The sale is made subject

or more of the following activities: (a) to the final approval of such office or

The sale is made subject to the final other fixed place of business, (b) the

approval of such office or other fixed property sold is held in, and distributed

place of business, (b) the property sold from, such office or other fixed place of

is held in, and distributed from, such business, (c) samples of the property

office or other fixed place of business, sold are displayed (but not otherwise

(c) samples of the property sold are dispromoted or sold) in such office or

played (but not otherwise promoted or other fixed place of business, or (d)

sold) in such office or other fixed place such office or other fixed place of busi

of business, (d) such office or other ness performs merely clerical functions

fixed place of business is used for purincident to the sale. Activities carried poses of having title to the property on by employees of an office or other

pass outside the United States, or (e) fixed place of business constitute ac

such office or other fixed place of busitivities of that office or other fixed ness performs merely clerical functions place of business.

incident to the sale. (3) Limitation where foreign office is a

(ii) Rules for determining country of material factor in realization of income- use, consumption, or disposition—(a) In (i) Goods of merchandise destined for for- general. As a general rule, personal eign use, consumption, or disposition. property which is sold to an unrelated Notwithstanding subparagraphs (1) and person shall be presumed for purposes (2) of this paragraph, an office or other of this subparagraph to have been sold fixed place of business which a non- for use, consumption, or disposition in resident alien individual or a foreign the country of destination of the propcorporation has in the United States erty sold; for such purpose, the occurshall not be considered, for purposes of rence in a country of a temporary paragraph (a) of this section, to be a interruption in shipment of property material factor in the realization of in- shall not cause that country to be concome, gain, or loss from sales of goods sidered the country of destination. or merchandise specified in paragraph However, if at the time of a sale of per(b)(3) of $1.864-5 if the property is sold sonal property to an unrelated person for use, consumption, or disposition the taxpayer knew, or should have

known from the facts and circumstances surrounding the transaction, that the property probably would not be used, consumed, or disposed of in the country of destination, the taxpayer must determine the country of ultimate use, consumption, or disposition of the property or the property shall be presumed to have been sold for use, consumption, or disposition in the United States. A taxpayer who sells personal property to a related person shall be presumed to have sold the property for use, consumption, or disposition in the United States unless the taxpayer establishes the use made of the property by the related person; once he has established that the related person has disposed of the property, the rules in the two immediately preceding sentences relating to sales to an unrelated person shall apply at the first stage in the chain of distribution at which a sale is made by a related person to an unrelated person. Notwithstanding the preceding provisions of this subdivision (a), a taxpayer who sells personal property to any person whose principal business consists of selling from inventory to retail customers at retail outlets outside the United States may assume at the time of the sale to that person that the property will be used, consumed, or disposed of outside the United States. For purposes of this (a), a person is related to another person if either person owns or controls directly or indirectly the other, or if any third person or persons own or control directly or indirectly both. For this purpose, the term “control” includes any kind of control, whether or not legally enforceable, and however, exercised or exercisable. For illustrations of the principles of this subdivision, see paragraph (a)(3)(iv) of $1.954 3.

(6) Fungible goods. For purposes of this subparagraph, a taxpayer who sells to a purchaser personal property which because of its fungible nature cannot reasonably be specifically traced to other purchasers and to the countries of ultimate use, consumption, or disposition shall, unless the taxpayer establishes different disposition as being proper, treat that property as being sold, for ultimate use, consumption, or disposition in those countries,

and to those other purchasers, in the same proportions in which property from the fungible mass of the first purchaser is sold in the ordinary course of business by such first purchaser. No apportionment is required to be made, however, on the basis of sporadic sales by the first purchaser. This (0) shall apply only in a case where the taxpayer knew, or should have known from the facts and circumstances surrounding the transaction, the manner in which the first purchaser disposes of property from the fungible mass.

(iii) Ilustration. The application of this subparagraph may be illustrated by the following example:

Erample. Foreign corporation M has a sales office in the United States during the taxable year through which it sells outside the United States for use in foreign countries industrial electrical generators which such corporation manufactures in a foreign country. M is not a controlled foreign corporation within the meaning of section 957 and the regulations thereunder, and, by reason of its activities in the United States, is engaged in business in the United States during the taxable year. The generators require specialized installation and continuous adjustment and maintenance services. M has an office in foreign country X which is the only organization qualified to perform these installation, adjustment, and maintenance services. During the taxable year M sells several generators through its U.S. office for use in foreign country Y under sales contracts which also provide for installation, adjustment, and maintenance by its office in country X. The generators are installed in country Y by employees of M's office in country X, who also are responsible for the servicing of the equipment. Since the office of M in country X performs significant services incident to these sales which are necessary for their consummation and are not the subject of a separate agreement between M and the purchaser, the U.S. office of M is not considered to be a material factor in the realization of the income from the sales and, for purposes of paragraph (a) of this section, such income is not attributable to the U.S. office of that corporation.

(c) Amount of income, gain, or loss allocable to U.S. office—(1) In general. If, in accordance with paragraph (b) of this section, an office or other fixed place of business which a nonresident alien individual or a foreign corporation has in the United States at some time during the taxable year is a material factor in the realization for that year of an item

а

of income, gain, or loss specified in paragraph (b) of $1.864-5, such item of income, gain, or loss shall be considered to be allocable in its entirety to that office or other fixed place of business. In no case may any income, gain, or loss for the taxable year from sources without the United States, or part thereof, be allocable under this paragraph to an office or other fixed place of business which a nonresident alien individual or a foreign corporation has in the United States if the taxpayer is at no time during the taxable year engaged in a trade or business in the United States.

(2) Special limitation in case of sales of goods or merchandise through U.S. office. Notwithstanding subparagraph (1) of this paragraph, in the case of a sale of goods or merchandise specified in paragraph (b)(3) of $1.864-5, which is not a sale to which paragraph (b)(3)(i) of this section applies, the amount of income which shall be considered to be allocable to the office or other fixed place of business which the nonresident alien individual or foreign corporation has in the United States shall not exceed the amount which would be treated as income from sources within the United States if the taxpayer had sold the goods or merchandise in the United States. See, for example, section 863(b)(2) and paragraph (b) of $1.863–3, which prescribes, as available methods for determining the income from sources within the United States, the independent factory production price method, the gross sales and property apportionment method, and any other method regularly employed by the taxpayer which more clearly reflects taxable income

from such sources than those specifically authorized.

(3) Nlustrations. The application of this paragraph may be illustrated by the following examples:

Erample 1. Foreign corporation M, which is not a controlled foreign corporation within the meaning of section 957 and the regulations thereunder, manufactures machinery in a foreign country and sells the machinery outside the United States through its sales office in the United States for use in foreign countries. Title to the property which is sold is transferred to the foreign purchaser outside the United States, but no office or other fixed place of business of M in a foreign

country participates materially in the sale made through its U.S. office. During the taxable year M derives a total taxable income (determined as though M were a domestic corporation) of $250,000 from these sales. If the sales made through the U.S. office for the taxable year had been made in the United States and the property had been sold for use in the United States, the taxable income from sources within the United States from such sales would have been $100,000, determined as provided in section 863 and 882(c) and the regulations thereunder. The taxable income which is allocable to M's U.S. sales office pursuant to this paragraph and which is effectively connected for the taxable year with the conduct of a trade or business within the United States by that corporation is $100,000.

Example 2. Foreign corporation N, which is not a controlled foreign corporation within the meaning of section 957 and the regulations thereunder, has an office in a foreign country which purchases merchandise and sells it through its sales office in the United States for use in various foreign countries, such sales being made outside the United States and title to the property passing outside the United States. No other office of N participates materially in these sales made through its U.S. office. By reason of its sales activities in the United States, N is engaged in business in the United States during the taxable year. During the taxable year N derives taxable income (determined as though N were a domestic corporation) of $300,000 from these sales made through its U.S. sales office. If the sales made through the U.S. office for the taxable year had been made in the United States and the property had been sold for use in the United States, the taxable income from sources within the United States from such sales would also have been $300,000, determined as provided in sections 861 and 882(C) and the regulations thereunder. The taxable income which is allocable to N's U.S. sales office pursuant to this paragraph and which is effectively connected for the taxable year with the conduct of a trade or business in the United States by that corporation is $300,000.

Example 3. The facts are the same as in example 2, except that N has an office in a foreign country which participates materially in the sales which are made through its U.S. office. The taxable income which is allocable to N's U.S. sales office is not effectively connected for the taxable year with the conduct of a trade or business in the United States by that corporation. (T.D. 7216, 37 FR 23431, Nov. 3, 1972)

or

$ 1.864–7 Definition of office or other

fixed place of business. (a) In general. (1) This section applies for purposes of determining whether a nonresident alien individual or a foreign corporation that is engaged in a trade or business in the United States at some time during a taxable year beginning after December 31, 1966, has an office or other fixed place of business in the United States for purposes of applying section 864(c)(4)(B) and $1. 864-6 to income, gain, or loss specified in paragraph (b) of $1.864–5 from sources without the United States or has an office or other fixed place of business outside the United States for purposes of applying section 864(c)(4)(B)(iii) and paragraph (b)(3)(i) of $1.864-6 to sales of goods or merchandise for use, consumption, or disposition outside the United States.

(2) In making a determination under this section due regard shall be given to the facts and circumstances of each case, particularly to the nature of the taxpayer's trade or business and the physical facilities actually required by the taxpayer in the ordinary course of the conduct of his trade or business.

(3) The law of a foreign country shall not be controlling in determining whether a nonresident alien individual or a foreign corporation has an office or other fixed place of business.

(b) Fired facilities—(1) In general. As a general rule, an office or other fixed place of business is a fixed facility, that is, a place, site, structure, or other similar facility, through which a nonresident alien individual or a foreign corporation engages in a trade or business. For this purpose an office or other fixed place of business shall include, but shall not be limited to, a factory; a store or other sales outlet; a workshop; or a mine, quarry, or other place of extraction of natural resources. A fixed facility may be considered an office or other fixed place of business whether or not the facility is continuously used by a nonresident alien individual or foreign corporation.

(2) Use of another person's office or other fired place of business. A nonresident alien individual or a foreign corporation shall not be considered to have an office or other fixed place of business merely because such alien individual or foreign corporation uses another person's office or other fixed place of business, whether or not the office or place of business of a related

person, through which to transact a trade or business, if the trade or business activities of the alien individua. or foreign corporation in that office or other fixed place of business are relatively sporadic or infrequent, taking into account the overall needs and conduct of that trade or business.

(c) Management activity. A foreign corporation shall not be considered to have an office or other fixed place of business merely because a person controlling that corporation has an office or other fixed place of business from which general supervision and control over the policies of the foreign corporation are exercised. The fact that top management decisions affecting the foreign corporation are made in a country shall not of itself mean that the foreign corporation has an office or other fixed place of business in that country. For example, a foreign sales corporation which is a wholly owned subsidiary of a domestic corporation shall not be considered to have an office or other fixed place of business in the United States merely because of the presence in the United States of officers of the domestic parent corporation who are generally responsible only for the policy decisions affecting the foreign sales corporation, provided that the foreign corporation has a chief executive officer, whether or not he is also an officer of the domestic parent corporation, who conducts the day-today trade or business of the foreign corporation from a foreign office. The result in this example would be the

even if the executive officer should (1) regularly confer with the oificers of the domestic parent corporation, (2) occasionally visit the U.S. office of the domestic parent corporation, and (3) during such visits to the United States temporarily conduct the business of the foreign subsidiary corporation out of the domestic parent corporation's office in the United States.

(d) Agent activity-(1) Dependent agents-(i) In general. In determining whether a nonresident alien individual or a foreign corporation has an office or other fixed place of business, the office or other fixed place of business of an agent who is not an independent agent, as defined in subparagraph (3) of

same

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