[Federal Register Volume 70, Number 68 (Monday, April 11, 2005)]
[Proposed Rules]
[Pages 18949-18952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-7088]



  Federal Register / Vol. 70, No. 68 / Monday, April 11, 2005 / 
Proposed Rules  

[[Page 18949]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-159243-03]
RIN 1545-BC86


Residence and Source Rules Involving U.S. Possessions and Other 
Conforming Changes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking, notice of proposed rulemaking by 
cross-reference to temporary regulations, and notice of public hearing.

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SUMMARY: In the Rules and Regulations section of this issue of the 
Federal Register, the IRS is issuing temporary regulations that provide 
rules under section 937(a) of the Internal Revenue Code (Code) for 
determining whether an individual is a bona fide resident of the 
following U.S. possessions: American Samoa, Guam, the Northern Mariana 
Islands, Puerto Rico, and the United States Virgin Islands. The 
temporary regulations also provide rules under section 937(b) for 
determining whether income is derived from sources within a U.S. 
possession and whether income is effectively connected with the conduct 
of a trade or business within a U.S. possession. Section 937 was added 
to the Code by section 908 of the American Jobs Creation Act of 2004 
(2004 Act).
    The temporary regulations also provide updated guidance under 
sections 1, 876, 881, 884, 931, 932, 933, 934, 935, 957, and 6688 of 
the Code to reflect amendments made by the Tax Reform Act of 1986 (1986 
Act) and the 2004 Act. Conforming changes are also made to regulations 
under sections 170A, 861, 871, 901, 1402, 6038, 6046, and 7701 of the 
Code. The text of the temporary regulations on this subject in this 
issue of the Federal Register also generally serves as the text of 
these proposed regulations set forth in this cross-referenced notice of 
proposed rulemaking.
    This notice of proposed rulemaking also contains proposed 
regulations that are in addition to the text of the temporary 
regulations. These provisions that are issued only as proposed 
regulations contain additional conforming changes to the regulations 
under sections 1, 861, 871, and 7701.

DATES: Written or electronic comments must be received by July 11, 
2005. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for July 21, 2005, at 10 a.m., must be 
received by June 30, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-159243-03) room 5203, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered between the 
hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-159243-03), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., 
Washington, DC, or sent electronically, via the IRS Internet site at 
www.irs.gov/regs or via the Federal eRulemaking Portal at 
www.regulations.gov (IRS and REG-159243-03).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
J. David Varley at (202) 435-5165; concerning submissions, Treena 
Garrett at (202) 622-3401 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by July 11, 2005. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in the proposed and temporary 
regulations is in Sec.  1.937-1T. Section 937(a) of the Code provides 
rules for determining whether an individual is a bona fide resident of 
Guam, Puerto Rico, American Samoa, the USVI, or the Northern Mariana 
Islands. Section 937(c) requires an individual who claims to become, or 
cease to be, a resident of a U.S. possession to file notice of such 
claim in such manner as the Secretary prescribes.
    Accordingly, Sec.  1.937-1T(g) requires individuals claiming to 
become, or cease to be, a resident of a U.S. possession to file notice 
of such claim with the Internal Revenue Service in accordance with 
section 937(c) of the Code. Individuals subject to this reporting 
requirement must retain information to establish their residency as 
required by section 937(c) of the Code and 1.937-1T.
    The collection of information is mandatory. The likely respondents 
are individuals who become (or cease to be) bona fide residents of a 
U.S. possession.
    Estimated total annual reporting burden: 75,000 hours.
    Estimated average annual burden hours per respondent: 1.5 hours.
    Estimated number of respondents: 50,000.
    Estimated annual frequency of responses: annually.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

Background and Explanation of Provisions

    Temporary regulations in the Rules and Regulations section of this 
issue of the Federal Register amend 26 CFR parts 1, 301, and 602. The 
temporary regulations provide rules concerning issues relating to U.S. 
possessions, including rules for determining whether an individual is a 
bona fide resident of a U.S. possession under section 937(a). The 
temporary regulations also provide rules under section 937(b) for 
determining whether income is derived from sources within a U.S. 
possession and whether income is effectively connected with the conduct 
of a trade or business in a U.S. possession and rules under section 
937(c) pertaining to certain reporting requirements for individuals who 
become (or cease to be) bona fide residents of a U.S. possession. 
Further, a number of sections in the Code relating to possessions were 
substantially revised by the 1986 Act. The temporary regulations amend

[[Page 18950]]

regulations under affected and related sections to conform them to 
statutory revisions enacted by the 1986 Act and to other legislative 
amendments. Except as otherwise specified in this notice of proposed 
rulemaking, the text of the temporary regulations also serves as the 
text of these proposed regulations. This notice of proposed rulemaking 
also contains proposed regulations that are in addition to the text of 
the temporary regulations. These provisions that are issued only as 
proposed regulations contain additional conforming changes. The 
preamble to the temporary regulations explains the temporary 
regulations and these proposed regulations.

Proposed Effective Date

    These regulations are generally proposed to apply for taxable years 
ending after October 22, 2004. For specific applicability dates, see 
the temporary regulations in the Rules and Regulations section of this 
issue of the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866.
    Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing has been scheduled for July 21, 2005, at 10 a.m. in the 
auditorium of the Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC. Due to building security procedures, visitors must 
enter at the Constitution Avenue entrance. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic (signed original and eight (8) 
copies) by June 30, 2005. A period of 10 minutes will be allotted to 
each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.
    Comments are requested on all aspects of the proposed regulations, 
including those aspects for which specific requests for comments are 
set forth above.

Drafting Information

    The principal authors of these regulations are W. Edward Williams 
and J. David Varley, Office of the Associate Chief Counsel 
(International), IRS. However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.931-1 also issued under 26 U.S.C. 7654(e).
    Section 1.932-1 also issued under 26 U.S.C. 7654(e).
    Section 1.935-1 also issued under 26 U.S.C. 7654(e). * * *
    Section 1.937-1 also issued under 26 U.S.C. 937(a).
    Section 1.937-2 also issued under 26 U.S.C. 937(b).
    Section 1.937-3 also issued under 26 U.S.C. 937(b). * * *
    Section 1.957-3 also issued under 26 U.S.C. 957(c). * * *

     Par. 2. In Sec.  1.1-1, the second sentence of paragraph (b) is 
revised to read as follows:


Sec.  1.1-1  Income tax on individuals.

* * * * *
    (b) * * * Pursuant to section 876, a nonresident alien individual 
who is a bona fide resident of a section 931 possession (as defined in 
Sec.  1.931-1T(c)(1) of this chapter) or Puerto Rico during the entire 
taxable year is, except as provided in section 931 or 933 with respect 
to income from sources within such possessions, subject to taxation in 
the same manner as a resident alien individual. * * *
* * * * *
    Par. 3. In Sec.  1.170A-1, paragraph (j)(9) is revised to read as 
follows:


Sec.  1.170A-1  Charitable, etc., contributions and gifts; allowance of 
deduction.

* * * * *
    (j) * * *
    (9) [The text of the proposed amendment to Sec.  1.170A-1(j)(9) is 
the same as the text of Sec.  1.170-1T(j)(9) published elsewhere in 
this issue of the Federal Register].
    Par. 4. In Sec.  1.861-3, paragraph (a)(2) is revised to read as 
follows:


Sec.  1.861-3  Dividends.

* * * * *
    (a) * * *
    (2) [The text of the proposed amendment to Sec.  1.861-3 is the 
same as the text of Sec.  1.861-3T(a)(2) published elsewhere in this 
issue of the Federal Register].
    Par. 5. In Sec.  1.861-8, paragraphs (f)(1)(vi)(E), (F) and (H) are 
revised to read as follows:


Sec.  1.861-8  Computation of taxable income from sources within the 
United States and from other sources and activities.

* * * * *
    (f) * * *
    (1) * * *
    (vi) * * *
    (E) The tax base for individuals entitled to the benefits of 
section 931 and the section 936 tax credit of a domestic corporation 
which has an election in effect under section 936;
    (F) The exclusion for income from Puerto Rico for bona fide 
residents of Puerto Rico under section 933;
* * * * *

[[Page 18951]]

    (H) The income derived from the U.S. Virgin Islands or from a 
section 935 possession (as defined in Sec.  1.935-1T(a)(3)(i)).
* * * * *
    Par. 6. Section 1.871-1 is amended as follows:
    1. Revise paragraph (b)(1)(iii).
    2. Revise the last two sentences of the undesignated paragraph 
following paragraph (b)(1)(iii).
    The revisions are as follows:


Sec.  1.871-1  Classification and manner of taxing alien individuals.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Nonresident alien individuals who are bona fide residents of 
a section 931 possession (as defined in Sec.  1.931-1T(c)(1) of this 
chapter) or Puerto Rico during the entire taxable year.
    * * * The provisions of subpart A do not apply to individuals 
described in paragraph (b)(1)(iii) of this section, but such 
individuals, except as provided in section 931 or 933, are subject to 
the tax imposed by section 1 or 55. See Sec.  1.876-1.
    Par. 7. Section 1.876-1 is revised to read as follows:


Sec.  1.876-1  Alien residents of Puerto Rico, Guam, American Samoa, or 
the Northern Mariana Islands.

    [The text of the proposed amendment to Sec.  1.876-1 is the same as 
the text of Sec.  1.876-1T published elsewhere in this issue of the 
Federal Register].
    Par. 8. Section 1.881-5 is added to read as follows:


Sec.  1.881-5  Exception for certain possessions corporations.

    [The text of the proposed Sec.  1.881-5 is the same as the text of 
Sec.  1.881-5T published elsewhere in this issue of the Federal 
Register].
    Par. 9. In Sec.  1.884-0, paragraph (b) is redesignated as 
paragraph (c), and a new paragraph (b) is added to read as follows:


Sec.  1.884-0  Overview of regulation provisions for section 884.

* * * * *
    (b) [The text of the proposed amendment to Sec.  1.884-0 is the 
same as the text of Sec.  1.884-0T published elsewhere in this issue of 
the Federal Register].
    Par. 10. In Sec.  1.901-1, paragraph (g) is revised to read as 
follows:


Sec.  1.901-1  Allowance of credit for taxes.

    (g) [The text of the proposed amendment to Sec.  1.901-1(g) is the 
same as the text of Sec.  1.901-1T(g) published elsewhere in this issue 
of the Federal Register].
    Par. 11. Section 1.931-1 is revised to read as follows:


Sec.  1.931-1  Exclusion of certain income from sources within Guam, 
American Samoa, or the Northern Mariana Islands.

    [The text of the proposed amendment to Sec.  1.931-1 is the same as 
the text of Sec.  1.931-1T published elsewhere in this issue of the 
Federal Register].
    Par. 12. Section 1.932-1 is revised to read as follows:


Sec.  1.932-1  Coordination of United States and Virgin Islands income 
taxes.

    [The text of the proposed amendment to Sec.  1.932-1 is the same as 
the text of Sec.  1.932-1T published elsewhere in this issue of the 
Federal Register].
    Par. 13. Section 1.933-1 is amended by revising paragraphs (a) and 
(c) and adding paragraphs (d) and (e) to read as follows:


Sec.  1.933-1  Exclusion of certain income from sources within Puerto 
Rico.

    (a) [The text of the proposed amendment to Sec.  1.933-1(a) is the 
same as the text of Sec.  1.933-1T(a) published elsewhere in this issue 
of the Federal Register].
* * * * *
    (c) [The text of the proposed amendment to Sec.  1.933-1(c) is the 
same as the text of Sec.  1.933-1T(c) published elsewhere in this issue 
of the Federal Register].
    (d) [The text of the proposed amendment to Sec.  1.933-1(d) is the 
same as the text of Sec.  1.933-1T(d) published elsewhere in this issue 
of the Federal Register].
    (e) [The text of the proposed amendment to Sec.  1.933-1(e) is the 
same as the text of Sec.  1.933-1T(e) published elsewhere in this issue 
of the Federal Register].
    Par. 14. Section 1.934-1 is revised to read as follows:


Sec.  1.934-1  Limitation on reduction in income tax liability incurred 
to the Virgin Islands.

    [The text of the proposed amendment to Sec.  1.934-1 is the same as 
the text of Sec.  1.934-1T published elsewhere in this issue of the 
Federal Register].
     Par. 15. Section 1.935-1 is amended is amended as follows:
    1. Revise paragraphs (a)(1) through (a)(3).
    2. Revise paragraphs (b)(1) and (b)(3), and add paragraphs (b)(5) 
through (b)(7).
    3. Revise paragraphs (c) through (f).
    4. Add paragraph (g).
    The revisions and additions are as follows:


Sec.  1.935-1  Coordination of individual income taxes with Guam and 
the Northern Mariana Islands.

    (a)(1) through (a)(3) [The text of the proposed amendment to Sec.  
1.935-1(a)(1) through (3) is the same as the text of Sec.  1.935-
1T(a)(1) through (a)(3) published elsewhere in this issue of the 
Federal Register].
    (b)(1) [The text of the proposed amendment to Sec.  1.935-1(b)(1) 
is the same as the text of Sec.  1.935-1T(b)(1) published elsewhere in 
this issue of the Federal Register].
* * * * *
    (b)(3) [The text of the proposed amendment to Sec.  1.935-1(b)(3) 
is the same as the text of Sec.  1.935-1T(b)(3) published elsewhere in 
this issue of the Federal Register].
* * * * *
    (b)(5) through (b)(7) [The text of the proposed Sec.  1.935-1(b)(5) 
through (b)(7) is the same as the text of Sec.  1.935-1T(b)(5) through 
(b)(7) published elsewhere in this issue of the Federal Register].
    (c) [The text of the proposed amendment to Sec.  1.935-1(c) is the 
same as the text of Sec.  1.935-1T(c) published elsewhere in this issue 
of the Federal Register].
    (d) [The text of the proposed amendment to Sec.  1.935-1(d) is the 
same as the text of Sec.  1.935-1T(d) published elsewhere in this issue 
of the Federal Register].
    (e) [The text of the proposed amendment to Sec.  1.935-1(e) is the 
same as the text of Sec.  1.935-1T(e) published elsewhere in this issue 
of the Federal Register].
    (f) [The text of the proposed amendment to Sec.  1.935-1(f) is the 
same as the text of Sec.  1.935-1T(f) published elsewhere in this issue 
of the Federal Register].
    (g) [The text of the proposed Sec.  1.935-1(g) is the same as the 
text of Sec.  1.935-1T(g) published elsewhere in this issue of the 
Federal Register].
     Par. 16. Section 1.937-1 is added to read as follows:


Sec.  1.937-1  Bona fide residency in a possession.

    [The text of the proposed Sec.  1.937-1 is the same as the text of 
Sec.  1.937-1T published elsewhere in this issue of the Federal 
Register].
    Par. 17. Section 1.937-2 is added as follows:


Sec.  1.937-2  Income from sources within a possession.

    [The text of the proposed Sec.  1.937-2 is the same as the text of 
Sec.  1.937-2T published elsewhere in this issue of the Federal 
Register].

[[Page 18952]]

    Par. 18. Section 1.937-3 is added to read as follows:


Sec.  1.937-3  Income effectively connected with the conduct of a trade 
or business in a possession.

    [The text of the proposed Sec.  1.937-3 is the same as the text of 
Sec.  1.937-3T published elsewhere in this issue of the Federal 
Register].
    Par. 19. Section 1.957-3 is revised to read as follows:


Sec.  1.957-3  United States person defined.

    [The text of the proposed amendment to Sec.  1.957-3 is the same as 
the text of Sec.  1.957-3T published elsewhere in this issue of the 
Federal Register].
    Par. 20. Section 1.1402(a)-12 is revised to read as follows:


Sec.  1.1402(a)-12  Continental shelf and possessions of the United 
States.

    [The text of the proposed amendment to Sec.  1.1402(a)-12 is the 
same as the text of Sec.  1.1402(a)-12T published elsewhere in this 
issue of the Federal Register].
    Par. 21. In Sec.  1.6038-2, paragraph (d) is revised to read as 
follows:


Sec.  1.6038-2  Information returns required of United States persons 
with respect to annual accounting periods of certain foreign 
corporations.

* * * * *
    (d) [The text of the proposed amendment to Sec.  1.6038-2(d) is the 
same as the text of Sec.  1.6038-2T(d) published elsewhere in this 
issue of the Federal Register].
    Par. 22. In Sec.  1.6046-1, paragraph (f)(3) is revised to read as 
follows:


Sec.  1.6046-1  Returns as to organization or reorganization of foreign 
corporations and as to acquisitions of their stock.

* * * * *
    (f) * * *
    (3) [The text of the proposed amendment to Sec.  1.6046-1(f)(3) is 
the same as the text of Sec.  1.6046-1T(f)(3) published elsewhere in 
this issue of the Federal Register].

PART 301--PROCEDURE AND ADMINISTRATION

     Par. 23. The authority citation for part 301 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 24. Section 301.6688-1 is revised to read as follows:


Sec.  301.6688-1  Assessable penalties with respect to information 
required to be furnished with respect to possessions.

    [The text of the proposed amendment to Sec.  301.6688-1 is the same 
as the text of Sec.  301.6688-1T published elsewhere in this issue of 
the Federal Register].
    Par. 25. In Sec.  301.7701-3, paragraph (c)(1)(i) is amended by 
adding a final sentence to read as follows:


Sec.  301.7701-3  Classification of certain business entities.

* * * * *
    (c) * * *
    (1) * * *
    (i) * * * For entity status consistency rules with respect to 
certain possessions of the United States, see Sec. Sec.  1.932-1T(h) 
and 1.935-1T(e).
* * * * *
    Par. 26. In Sec.  301.7701(b)-1, paragraph (d) is revised to read 
as follows:


Sec.  301.7701(b)-1  Resident alien.

* * * * *
    (d) [The text of the proposed amendment to Sec.  301.7701(b)-1(d) 
is the same as the text of Sec.  301.7701(b)-1T(d) published elsewhere 
in this issue of the Federal Register].

Linda M. Kroening,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-7088 Filed 4-6-05; 11:05 am]
BILLING CODE 4830-01-P