Internal Revenue Bulletin 2008-20 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
8-20
May 19, 2008
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9391, page 945.
Final regulations under section 937(b) of the Code provide
rules for determining whether income is considered to be from
sources within the U.S. territories of American Samoa, Guam,
the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Is-
lands, and whether income is considered effectively connected
with the conduct of a trade or business within a territory. The
regulations also provide operative rules for taxation of income
applicable tobona fideresidents and other persons with in-
come from a territory under related provisions of the Code,
particularly sections 931 through 935. Rev. Rul. 56–127 ob-
soleted.
T.D. 9393, page 975.
Final regulations under section 4980G of the Code provide
guidance on employer comparable contributions to Health Sav-
ings Accounts (HSAs) in instances where an employee has not
established an HSA by December 31st and in instances where
an employer accelerates contributions for the calender year for
employees who have incurred qualified medical expenses.
EMPLOYEE PLANS
Announcement 2008–44, page 982.
Economic stimulus payment; direct deposit; tax favored
account.This announcement provides that individuals who
have payments made by direct deposit under the Economic
Stimulus Act of 2008 to their IRAs or certain other accounts
afforded special tax benefits under the Code may remove the
payments without incurring any adverse tax consequences.
EXEMPT ORGANIZATIONS
Notice 2008–49, page 979.
This notice modifies Notice 2007–45, 2007–22 I.R.B. 1320,
and provides additional interim guidance with respect to the
requirement, under section 6104 of the Code, that section
501(c)(3) organizations make Forms 990–T available for public
inspection. Notice 2007–45 modified.
Announcement 2008–45, page 982.
The IRS has revoked its determination that Lahaina Arts Society
of Lahaina, HI; Coastal Adult Daycare, Inc., of Wilmington, NC;
Sea of Sound Productions, Inc., of Midlothian, VA; Recovery of
Outreach, Inc., of Riviera Beach, FL; National Housing Founda-
tion, Inc., of Beloit, WI; Agape Economic Development of Yorba
Linda, CA; Homeward Foundation, Inc., of Miami, FL; Scott and
Barbara Smith Foundation of South Jordan, UT; Kimberly Credit
Counseling, Inc., of West Palm Beach, FL; Friends of Kohsiung
Medical University of Staten Island, NY; Bergen County Career
Advancement Training, Inc., of Garfield, NJ; Credit Counselors
of North America, Inc., of Oakland Park, FL; Affordable Housing
Concepts of Valrico, FL; Wick Charitable Family Foundation of
Santa Monica, CA; Family Life Financial Services of Lubbock,
TX; Polish American Citizens Club, Inc., of Monson, MA; Milen-
nial Charities and Philanthropy of Salt Lake City, UT; and The
Amicus Curiae Foundation of Windsor, CA, qualify as organi-
zations described in sections 501(c)(3) and 170(c)(2) of the
Code.
(Continued on the next page)
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 983.
Finding Lists begin on page ii.

ADMINISTRATIVE
Rev. Proc. 2008–20, page 980.
This procedure provides guidance relating to the obligation of
material advisors to prepare and maintain lists with respect
to reportable transactions under section 6112 of the Code
and provides that material advisors may use the Form 13976,
Itemized Statement Component of Advisee List(or successor
form), to maintain the itemized statement component of the
list. The use of the form is optional. The form is available on
the IRS website.
Announcement 2008–46, page 983.
This document contains a correction to a misstated citation in
Rev. Rul. 2008–22, 2008–16 I.R.B. 796. Rev. Rul. 2008–22
provided guidance regarding whether the corpus of aninter
vivostrust is includible in the grantor’s gross estate under sec-
tion 2036 or 2038 of the Code if the grantor retained the
power, exercisable in a nonfiduciary capacity, to acquire prop-
erty held in the trust by substituting other property of equivalent
value. Rev. Rul. 2008–22 modified.
Announcement 2008–47, page 983.
This document provides notice of public hearing on proposed
regulations (REG–104946–07, 2008–11 I.R.B. 596) providing
guidance relating to sections 411(a)(13) and 411(b)(5) of the
Code concerning certain hybrid defined benefit plans. A public
hearing is scheduled for June 6, 2008.
May 19, 20082008–20 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2008–20 I.R.B.May 19, 2008

May 19, 20082008–20 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 937.—Residence
and Source Rules Involving
Possessions
26 CFR 1.937–1: Bona fide residency in a posses-
sion.
T.D. 9391
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Source Rules Involving U.S.
Possessions and Other
Conforming Changes
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations that provide rules under
section 937(b) of the Internal Revenue
Code (Code) for determining whether in-
come is derived from sources within a
U.S. possession or territory specified in
section 937(a)(1) (generally referred to in
this preamble as a “territory”) and whether
income is effectively connected with the
conduct of a trade or business within a
territory. The final regulations also pro-
vide guidance under sections 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,
Public Law 99–514 (100 Stat. 2085) (the
1986 Act) and the American Jobs Creation
Act of 2004, Public Law 108–357 (118
Stat. 1418) (the 2004 Act). Conforming
changes are also made to regulations un-
der sections 1, 170A, 861, 871, 901, 1402,
6038, 6046, and 7701 of the Code.
DATES:Effective Date:These regulations
are effective on April 9, 2008.
Applicability Date:For dates
of applicability, see §§1.1–1(d),
1.170A–1(k), 1.861–3(d), 1.861–8(h),
1.871–1(c), 1.876–1(f), 1.881–1(f),
1.881–5(i), 1.884–0(b), 1.901–1(j),
1.931–1(d), 1.932–1(j), 1.933–1(e),
1.934–1(e), 1.935–1(g), 1.937–2(l),
1.937–3(f), 1.957–3(d), 1.1402(a)–12(c),
1.6038–2(m), 1.6046–1(l), 301.6688–
1(d), 301.7701(b)–9(b)(5).
FOR FURTHER INFORMATION
CONTACT: J. David Varley, (202)
435–5262 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On April 11, 2005, the Treasury Depart-
ment and the IRS published in theFed-
eral Registertemporary regulations (T.D.
9194, 2005–1 C.B. 1016 [70 FR 18920], as
corrected at 70 FR 32589–01), which pro-
vided rules to implement section 937 and
to conform existing regulations to other
legislative changes with respect to the ter-
ritories. A notice of proposed rulemaking
(REG–159243–03, 2005–1 C.B. 1075 [70
FR 18949]) cross-referencing the tempo-
rary regulations was published in theFed-
eral Registeron the same day. Written
comments were received in response to
the notice of proposed rulemaking and a
public hearing on the proposed regulations
was held on July 21, 2005.
After consideration of the comments,
the Treasury Department and the IRS
on January 31, 2006, published in the
Federal Registerfinal regulations (T.D.
9248, 2006–1 C.B. 524 [71 FR 4996],
as corrected at 71 FR 14099) under sec-
tion 937(a) concerning the determination
ofbona fideresidency in the territories.
Following further comments and consid-
eration, the Treasury Department and the
IRS on November 14, 2006, published
in theFederal Registerfinal regulations
(T.D. 9297, 2006–2 C.B. 1089 [71 FR
66232], as corrected at 71 FR 75882) un-
der section 937(a) providing additional
rules for determiningbona fideresidency
in the territories.
The proposed regulations relating to
source and effectively connected income
with respect to the territories (specifically,
§§1.937–2 and 1.937–3) as well as the
other rules concerningthe territories are
adopted as amended by this Treasury de-
cision, and the corresponding temporary
regulations are removed.
Explanation of Provisions and
Summary of Comments
The final regulations under Code sec-
tion 937(b) provide rules for determining
whether income is from sources within a
territory and whether income is effectively
connected with the conduct of a trade or
business within a territory (territory ECI).
Section 937(b)(1) provides that, except as
provided in regulations, rules similar to the
rules for determining whether income is
from sources within the United States or
is effectively connected with the conduct
of a trade or business within the United
States will apply for purposes of deter-
mining whether income is from sources
within a specified territory or effectively
connected with the conduct of a trade or
business in any such territory. Section
937(b)(2) provides that, except as provided
in regulations, any U.S. source income or
U.S. effectively connected income will not
be treated as territory source income or as
territory ECI.
The U.S. tax consequences of classify-
ing income as being from sources within
a territory or as being territory ECI vary
from territory to territory. The final reg-
ulations under Code sections 931 through
935 contain rules implementing the opera-
tive substantive and procedural provisions
of U.S. income tax law specifically appli-
cable to each territory,including the rules
regarding the filing requirements and the
determination of the income tax liability of
bona fideresidents and other persons with
territory source income. In addition to the
rules under Code sections 937(b) and 931
through 935, the final regulations provide
conforming changes to rules under related
provisions of the Code.
The Treasury Department and the IRS
recognize that the interaction of section
937 and other sections of the Code relat-
ing to the territories requires a balance be-
tween implementing the policies Congress
intended in section 937(b) while recogniz-
ing the territories’ efforts to retain and at-
tract workers and businesses. As discussed
in more detail in this preamble, the final
regulations seek to achieve this balance.
For example, the final regulations allow
an individual to elect, under the special
2008–20 I.R.B.945May 19, 2008

gain rule that applies to property owned
by an individual before the individual be-
came abona fideresident of the territory,
to treat as territory source the portion of the
gain that accrued whilethe individual was
abona fideresident of the territory. The
Treasury Department and the IRS will con-
tinue to consider comments received and
anticipate that additional changes to the fi-
nal regulations may be made.
I.Territory Source Income and Territory
ECI
A.Territory source income
Section 937(b)(1) expressly grants the
Treasury Department and the IRS the reg-
ulatory authority to provide exceptions to
the general territory source rule, which
otherwise applies sourcing principles sim-
ilar to those of the U.S. source rules. The
legislative history to section 937 indicates
that Congress intended that the Treasury
Department and the IRS use this authority
to provide exceptions to the general rules
regarding territory source income and ter-
ritory ECI as appropriate. H.R. Conf. Rep.
108–755, at 795 (2004). The legislative
history indicates that Congress anticipated
that the regulatory authority would be used
to continue the existing treatment of in-
come from the sale of goods manufactured
in a territory and to prevent abuse, such as
acquiring residence in a territory just prior
to the disposition of appreciated property
in order to avoid U.S. tax on such disposi-
tion.Id.
Under the temporary and proposed reg-
ulations, except as otherwise specifically
provided, the principles of sections 861
through 865 and the regulations under
those provisions generally apply for pur-
poses of determining the gross and taxable
income from sources within and without
a territory. The temporary and proposed
regulations further state that in the appli-
cation of such principles, the name of the
relevant territory will be used instead of
the term “United States”; the term “bona
fideresident of” followed by the name of
the relevant territory will be used instead
of the term “United States resident”; and
the term “domestic” will be construed to
mean created or organized in the relevant
territory.
The temporary and proposed regula-
tions also provide exceptions to the general
rule for determining whether income is
from sources within a territory. In accor-
dance with the legislative history to the
2004 Act, the temporary and proposed reg-
ulations preserve the manufacturing-sales
income rules in §1.863–3(f). In addition,
the temporary and proposed regulations
provide special rules preventing dividends
and interest paid by certain closely held
territory corporations from being territory
source income. Similarly, the temporary
and proposed regulations provide that
gains from dispositions of appreciated
property owned by an individual prior to
becoming a resident is not territory source
income under a special 10-year look-back
rule, and there are special rules regarding
compensation for military service. As
discussedinmoredetailinpartI.C.,the
temporary and proposed regulations also
reflect section 937(b)(2), which is the
statutory exception to the general territory
source rule.
1.General territory source rule
In response to the temporary and
proposed regulations, commentators re-
quested further guidance regarding the
application of the general rule for deter-
mining whether income is from sources
within a territory. In particular, commen-
tators questioned whether, in applying the
principles of sections 861 through 865,
the only permissible modifications to the
U.S. source rules were the substitutions
described in §1.937–2T(b).
The Treasury Department and the IRS
agree that the general rule for determin-
ing whether income is from sources within
a territory should be modified to provide
greater flexibility in applying the princi-
ples of sections 861 through 865 as well as
to prevent abuse. Consequently, the final
regulations provide that it generally will be
sufficient to make certain specified substi-
tutions described in §1.937–2(b) when de-
termining whether income is from within
or without a territory. However, the final
regulations provide that additional substi-
tutions may be necessary to accomplish the
intent of section 937(b).
The final regulations also provide a nec-
essary limitation and rule of application to
reflect the Congressional intent in enacting
the rules of section 937(b)(1). Under this
limiting rule, in no event will abona fide
resident of a territory or other person have,
as a result of the application of the princi-
ples of the U.S. source rules, more income
from sources within the relevant territory
than the amount of income from sources
within the United States that a similarly sit-
uated U.S. person who is not abona fide
resident of a territory would have under the
U.S. source rules.
Conforming amendments are made
to the territory ECI rules to reflect these
amendments to the territory source rules.
See part I.B. Taxpayers may choose to ap-
ply the amendments to the territory source
and ECI rules retroactively to open taxable
years ending after October 22, 2004.
2.Space and ocean income and
international communications income
Section 863(d) provides that income
derived from space or ocean activity is
sourced within the United States if it is
derived by a U.S. person and is sourced
without the United States if derived by
a foreign person. Section 863(e) gener-
ally provides that income derived from
international telecommunications activity
by a U.S. person is treated as one-half
from sources within the United States and
one-half from sources without the United
States. Commentators specifically re-
quested greater clarity regarding how the
principles of section 863(d) and (e) were
to be applied to determine whether income
from space and ocean activity and inter-
national communications is from sources
within a territory.
The Treasury Department and the IRS
agree that the kinds of further modifica-
tions to the general rule that are discussed
in part I.A.1. would be specifically war-
ranted with respect to applying the prin-
ciples of the space and ocean and interna-
tional communications source rules in the
territories. Consequently, the final regu-
lations provide that in applying the prin-
ciples of section 863(d) and (e) to deter-
mine whether abona fideresident’s in-
come is within or without a territory, the
term “bona fideresident of a possession”
will be used instead of the term “United
States person.”
3.Transportation income
Under section 863(c)(1), transportation
income is treated as U.S. source if it is
attributable to transportation beginning
May 19, 20089462008–20 I.R.B.

andendingintheUnitedStates. How-
ever, section 863(c)(2) provides that if
the transportation begins or ends in the
United States but is not described in sec-
tion 863(c)(1), then one-half of the income
is U.S. source (the 50–50 source rule).
Section 863(c)(2) provides an exception to
the 50–50 source rule in the case of trans-
portation income derived from personal
services of a taxpayer, unless such income
is attributable to transportation that begins
(or ends) in the United States and ends (or
begins) in a territory. In the case of trans-
portation income derived in connection
with a vessel, the rules of section 863(c)(2)
apply only in the case of taxpayers who
are citizens or resident aliens.
Commentators argued that the rules of
section 863(c)(2) should not apply to trans-
portation income derived from personal
services ofbona fideresidents of the U.S.
Virgin Islands. These commentators ar-
gued that the application of these rules
to abona fideresident of the U.S. Vir-
gin Islands is contrary to Congressional in-
tent in enacting section 934(b), as inter-
preted by the commentators. Accordingly,
they maintained, the Treasury Department
and the IRS should exercise their regula-
tory authority under section 937(b)(1) to
provide that transportation income that is
derived from personal services of abona
fideresident of the U.S. Virgin Islands
and that otherwise would be sourced un-
der the 50–50 source rule principles of sec-
tion 863(c)(2), should be sourced entirely
within the U.S. Virgin Islands, regardless
of the beginning or endpoint of the trans-
portation to which the income is attribut-
able.
The Treasury Department and the IRS
believe that their regulatory authority un-
der section 937(b)(1) does not extend to
deviating from the source rules of section
863(c)(2). Congress clearly contemplated
territorial tax issues when enacting sec-
tion 863(c) as it provided special source
rules in the case of transportation income
derived from transportation between the
United States and the territories. See H.R.
Conf. Rep. 98–861, at 1622 (1984). Con-
gress intended that these rules also would
apply for purposes of determining the
source of income in territories that mirror
theU.S.incometax.Id. When section
863(c)(2) was amended by the 1986 Act,
the same legislation that enacted sections
932 and 934(b) applicable to the U.S.
Virgin Islands, Congress preserved the
special 50–50 source rule applicable to
transportation between the United States
andaterritoryandspecifically applied the
rule to such income that is derived from
personal services. See H.R. Conf. Rep.
99–841, at II–599 (1986).
Furthermore, the commentators
premised their argument for changing the
source of transportation income on sec-
tion 934, which only applies to the U.S.
Virgin Islands. In the 2004 Act, Congress
sought to rationalize the source of income
rules applicable to the territories. See H.R.
Conf. Rep. 108–755, at 794 (2004). Thus,
the rules set forth in section 937 for de-
terminingbona fideresidency and source
of income are intended to apply uniformly
to the territories rather than to provide tai-
lored exceptions applicable to only certain
territories such as the U.S. Virgin Islands.
Consequently, §1.937–2 does not in-
corporate special rules with respect to
transportation income between the United
States and the U.S. Virgin Islands.
4.De minimis rule
Section 861(a)(3) generally provides
that compensation for labor or personal
services performed in the United States is
U.S. source income. Under the principles
of section 861(a)(3), income from ser-
vices performed in a territory is treated as
territory source income. However, while
section 861(a)(3) provides ade minimis
exception to this general rule for services
performed by nonresident aliens in the
United States for minimal compensation
over a short period of time, the temporary
and proposed regulations specifically pro-
vide that thede minimisexception does
not apply for determining whether income
from services is from sources within a
territory. Consequently, a U.S. citizen
or resident alien who is not abona fide
resident of the U.S. Virgin Islands, for
example, may have to file an income tax
return with and pay tax to the U.S. Virgin
Islands under section 932(a) even if the
individual is engaged in onlyde minimis
personal services in the territory. In this
regard, the temporary and proposed reg-
ulations carry over the pre-existing rules
in former §1.863–6 for determining in-
come within and without a territory. See
§1.863–6 (2004).
Several commentators requested ade
minimisexception to the general rules for
the sourcing of income from personal ser-
vices in a territory. The Treasury Depart-
ment and the IRS agree that such a rule re-
duces taxpayer burden and promotes effi-
cient tax administration. Accordingly, the
final regulations eliminate the rule in the
temporary and proposed regulations that
specifically providesthat in applying the
principles of section 861(a)(3), thede min-
imisexception does not apply. An exam-
ple in the final regulations illustrates that a
U.S. citizen or resident who is not abona
fideresident of a territory but who per-
forms services in a territory temporarily
fornomorethan90daysduringthetax-
able year and for no more than $3,000 (in
the aggregate) generally will not have in-
come from sources within the territory.
5.Gains from certain dispositions of
personal property
The temporary and proposed regula-
tions provide a special rule for gains from
dispositions of certain property held by a
U.S. person prior to becoming a resident
of a territory. See §1.937–2T(f)(1). Under
this rule, gains from dispositions of such
property within 10 years after becoming a
territory resident generally are treated as
income from sources outside of the terri-
tory. The special gain rule supplements,
and does not supersede, the similar special
gain rule of section 1277(e) of the 1986
Act, which applies to individuals who
become residents of American Samoa,
Guam, or the Northern Mariana Islands
(NMI) (collectively,the Pacific territo-
ries).
Commentators noted that the special
gain rule characterizes all gain from prop-
erty of former U.S. residents as non-ter-
ritory source income, including any gain
attributable to appreciation that occurs
while the individual is abona fideresident
of the relevant territory. For example, if
a U.S. citizen and lifelong resident of a
territory who owns stock in a corporation
moves to the United States for a few years
and then re-establishesbona fideresidence
in the territory and sells the stock within
10 years, most of the appreciation in the
stock may be attributable to the period
in which the individual was abona fide
resident of the territory. However, under
the special gain rule, because of the period
2008–20 I.R.B.947May 19, 2008

of U.S. residence, none of the gain would
qualify as territory source income.
The Treasury Department and the IRS
agree that the special gain rule should be
modified to target more precisely gain at-
tributable to appreciation occurring dur-
ing the time that an individual was not
abona fideresident of the relevant ter-
ritory. Accordingly, the final regulations
provide that an individual may elect to
split the source of gains from the sale or
other disposition of appreciated property
subject to the special gain rule by using
a mark-to-market allocation in the case of
marketable securities and a time-based al-
location rule in the case of other personal
property. This election will more accu-
rately target the abuse that the special gain
rule was intended to address. The elec-
tion also operates tomodify the special
gain rule of the 1986 Act, as authorized
therein. Individuals may retroactively ap-
ply the election to dispositions made after
April 11, 2005.
B.Territory ECI
Section 937(b)(1) provides that rules
similar to those for determining whether
income is effectively connected with the
conduct of a trade or business within the
United States should also apply in deter-
mining whether income is territory ECI,
except as provided in regulations. Accord-
ingly, the temporary and proposed regula-
tions generally provide that the principles
of section 864(c)(4) apply for purposes
of determining whether any income from
sources without a territory (U.S. source
or other non-territory source income) is
treated as territory ECI.
Section 864(c)(4) limits the types of
income from foreign sources that can be
effectively connected income to certain
rents or royalties; dividends or interest
connected with the conduct of a bank-
ing or financial business; gain from the
sale or exchange of inventory; and insur-
ance company income. Personal services
income that is foreign source cannot be ef-
fectively connected income under section
864(c)(4).
Commentators requested that, instead
of applying the principles of section
864(c)(4), the final regulations adopt the
principles of section 864(c)(2) and (c)(5)
for purposes of determining whether in-
come from sources without a territory is
territory ECI. This would expand the types
of non-territory source income that could
be treated as territory ECI and particu-
larly would include income from personal
services. For territories such as the U.S.
Virgin Islands this would mean that addi-
tional types of non-territory source income
may be eligible for reductions of terri-
torial income tax because section 934(b)
allows the U.S. Virgin Islands to reduce
its territorial income tax on income that
is effectively connected with the conduct
of a trade or business in the U.S. Virgin
Islands. These commentators believe that
Congress intended for section 934 (and
similar provisions applicable to other ter-
ritories) to promoteeconomic activity in
the territories and that the section 937
regulations should better reflect the policy
choices that these commentators believe
were made in section 934(b).
Congress provided in section 937(b)(1)
that rules similar to those for determining
whether income is effectively connected
with the conduct of a trade or business
within the United States should also apply
in determining whether income is territory
ECI, except as provided in regulations.
The legislative history to section 937 indi-
cates that Congress was concerned about
U.S. citizens and residents claiming to be
exempt from U.S. tax on their worldwide
income and claiming reductions from ter-
ritorial income tax when they did not live
and work in the territories. H.R. Conf.
Rep. 108–755, at 793–94. Adopting the
principles of section864(c)(2) and (c)(5)
to determine whether income is territory
ECI would allow personal services income
derived from sources outside a territory
(for example, U.S. source income) to
be treated as territory ECI, contrary to
Congressional intent. The Treasury De-
partment and the IRS do not believe their
regulatory authority extends to prescrib-
ing the use of the principles of section
864(c)(2) and (c)(5) for purposes of de-
termining whether income from sources
without a territory is territory ECI.
Furthermore, section 934 does not pro-
vide a basis for interpreting the regulatory
authority under section 937(b) in such a
liberal manner. In enacting section 937,
Congress amended the rules related to the
territories notwithstanding section 934.
Moreover, the legislative history to section
934 does not reflect these commentators’
view of Congressional intent in enacting
section 934. Even while recognizing the
goal of encouraging economic develop-
ment in the U.S Virgin Islands through
appropriate territorial income tax reduc-
tions, the legislative history of section 934
indicates that the statute was enacted in
part because of concerns that certain ter-
ritorial income tax programs, which were
intended to provide incentives to corpo-
rations and residents of the U.S. Virgin
Islands that made new investments in the
U.S. Virgin Islands, were having the effect
of reducing the tax liability attributable
to not only income from sources within
the territory but also income from sources
within the United States. S. Rep. No.
1767, 86th Cong. 2nd Sess. 4 (1960); see
also H.R. Rep. No. 99–426, at 485–486
(1985); and S. Rep. No. 99–313, at 479
(1986). The legislative history to section
934 indicates that economic development
in the U.S. Virgin Islands should not be
attained by granting tax reductions to
taxpayers (other than certain U.S. Vir-
gin Islands corporations) with respect to
income derived from investments from
sources outside of the territory.Id.
Other commentators suggested that
U.S. source services income should be
treated differently from other non-terri-
tory source services income. Specifically,
they suggested that the rules of section
864(c)(4) should apply to U.S. source per-
sonal services incomewhile the principles
of section 864(c)(2) and (c)(5) should ap-
ply to other non-territory source personal
services income. The Treasury Depart-
ment and the IRS note that the legislative
history to section 937 indicates that Con-
gress was concerned about U.S. citizens
and residents claiming reduced rates of
territorial income taxation on personal
services income by individuals that were
not living and working in the territories.
H.R. Conf. Rep. 108–755, at 793–94.
Congress also expressed concern about
possible opportunities for erosion of the
U.S. tax base associated with the territory
ECI rule.Id.
For these reasons, the Treasury Depart-
ment and the IRS have not adopted the
commentators’ suggestions regarding the
determination of whether income is ef-
fectively connectedwith the conduct of a
trade or business in a territory under sec-
tion 937(b)(1). Accordingly, the general
rule in the temporary and proposed reg-
ulations for determining territory ECI is
May 19, 20089482008–20 I.R.B.

adopted in the final regulations with minor
modifications.
Similar to the modifications made to the
general rule for determining whether in-
come is from sources within a territory,
the final regulations amend the general ter-
ritory ECI rule to provide that additional
substitutions beyond the routine substitu-
tion of the name of the relevant territory
for the term “United States” may be neces-
sary in some cases to accomplish the intent
of section 937(b)(1). The final regulations
also adopt a limitation similar to its coun-
terpart in the general territory source rule,
precluding any application of the princi-
ples of section 864(c) from resulting in a
greater amount of territory ECI than the
amount of U.S. effectively connected in-
come that a similarly situated U.S. person
who is not abona fideresident of a ter-
ritory would have under U.S. rules. Tax-
payers may choose to apply these rules in
§1.937–3(b) retroactivelytoopentaxable
years ending after October 22, 2004.
C.U.S. income rule
Section 937(b)(2) provides that
notwithstanding the general territory
source rule, any income from sources
within the United States or effectively
connected with the conduct of a trade or
business within the United States is not
treated as income from sources within
a territory or as territory ECI (the U.S.
income rule). The legislative history to
section 937(b)(2) indicates that Congress
wanted the Treasury Department and the
IRS to create regulatory exceptions to
the general rules for determining territory
source and territory ECI and to the U.S.
income rule “as appropriate.” H.R. Conf.
Rep. 108–755, at 794. Congress antici-
pated that these exceptions would be used
“to prevent abuse.”Id. at 795. Congress
was “concerned that the general rules for
determining whether income is effectively
connected with the conduct of a trade or
business in a [territory] present numerous
opportunities for erosion of the U.S. tax
base.”Id. at 794.
The temporary and proposed regula-
tions generally adopt the U.S. income rule
without exception. However, the tempo-
raryandproposedregulations tighten the
provision by adding an anti-conduit rule to
prevent the avoidance of the U.S. income
rule.
In response to the temporary and
proposed regulations, commentators re-
quested that the Treasury Department and
the IRS exercise their regulatory authority
to provide additional exceptions to the
U.S. income rule.
1.Scope of the U.S. income rule
Numerous commentators argued that
the scope of the U.S. income rule should
be narrowed. The commentators argued
that without additional regulatory excep-
tions, the U.S. income rule will hamper
efforts to promote private sector economic
development in the territories because
it does not permit a territory to provide
tax reductions for U.S. source business
income even if all of the activity gener-
ating that income occurs in the territory.
In addition, these commentators argued
that Congress intended to encourage the
economic development of the territories
by allowing, for example, the U.S. Virgin
Islands to provide territory tax incentives
under section 934 with respect to income
effectively connected with the conduct
of a trade or business in the U.S. Virgin
Islands, even where that income is from
U.S. sources.
Commentators proposed various
amendments to the general scope of the
U.S. income rule. For example, one com-
mentator essentially suggested that the
U.S. income rule should not apply to in-
come that is already treated as territory
ECI under the general rule of section
937(b)(1), which applies the principles
of section 864(c)(4) to income from U.S.
sources. Thus, under this suggestion, the
U.S. income rule would have no applica-
tion to the determination of whether U.S.
source income may be treated as terri-
tory ECI. The commentator further argued
that Congress was only concerned about
U.S. source personal services income be-
ing treated as territory ECI and that such
income is already prevented from being
treated as territory ECI if the principles of
section 864(c)(4) apply under the general
rule.
This purportedly limited purpose for
enacting section 937(b)(2) is difficult to
reconcile with the statute’s breadth, as a
broad application to U.S. source income
appears to be the most significant effect
of the U.S. income rule. If adopted, such
a rule would render the U.S. income rule
largely unnecessary. The legislative his-
tory to section 937 indicates that Congress
clearly intended that the U.S. income rule
would apply to prevent U.S. source in-
come from being treated as territory ECI.
The legislative history also indicates that
Congressional concern about the erosion
of the U.S. tax base through the source and
effectively connected income rules was a
more general concern and not limited to
personal services income. Consequently,
the Treasury Department and the IRS do
not believe that their regulatory authority
under section 937(b)(2) extends to pro-
viding such a broad exception to the U.S.
income rule.
Other commentators suggested that the
U.S. income rule should apply only when
an item of income is U.S. source or at-
tributable to a U.S. permanent establish-
ment, as determined under the U.S. model
treaty rules, as opposed to income effec-
tively connected with the conduct of a U.S.
trade or business. In the case of territory
source income or territory ECI, this sug-
gested change would essentially limit the
application of the U.S. income rule to in-
come that is attributable to a fixed place of
business in the United States.
This suggestion would permit a trade
or business to carry on significant activi-
ties in the United States as long as it does
not do so through a fixed physical loca-
tion, such as an office, branch, factory, or
place of management, or as long as it main-
tains a facility in the U.S. that is used for
certain permissible activities such as stor-
ing, displaying, or delivering goods, pur-
chasing or collecting information, or other
activities of a preparatory or auxiliary na-
ture, such as advertising or supplying in-
formation. See U.S. Treasury Department,
Model Income Tax Treaty art. 5 (2006). A
territory business could also utilize inde-
pendent agents to carry on business in the
United States without triggering the U.S.
income rule.Id.
If the U.S. income rule did not apply, in-
come attributable to these activities could
be eligible for territory tax incentives, a re-
sult that potentially could lead to an ero-
sion of the U.S. tax base with respect to
income that is from U.S. sources or effec-
tively connected with the conduct of a U.S.
trade or business. In light of the Congres-
sional concerns with U.S. base erosion and
the consequent lack of authority to provide
such a broad regulatory exception, the fi-
2008–20 I.R.B.949May 19, 2008

nal regulations do not adopt a permanent
establishment standard as part of the U.S.
income rule.
Some commentators similarly sug-
gested that the U.S. income rule should
applyonlywhenanitemofincomeis
both U.S. source and attributable to a U.S.
office or fixed place of business. Thus,
any U.S. source income not effectively
connected with a trade or business in the
United States could be treated as territory
ECI and therefore qualify for tax incen-
tives in certain territories. This suggested
change also would render the U.S. income
rule inapplicable to all territory source
income that is effectively connected with
the conduct of a U.S. trade or business.
The legislative history to section 937 does
not suggest that Congress intended the
Treasury Department to exercise its regu-
latory authority to allow income earned by
a U.S. trade or business to receive territory
tax benefits. Therefore, the Treasury De-
partment and the IRS do not believe there
is adequate regulatory authority to adopt
this suggestion.
Other commentators requested excep-
tions to the U.S. income rule for certain
classes of non-territory source income that
may otherwise be territory ECI. For ex-
ample, commentators requested that insur-
ance income from insuring U.S. risks, in-
terest income from U.S. payors to finance
centers, or rents and royalties from the use
of intangible property in the United States
be excepted from the scope of the U.S. in-
come rule to the extent income is territory
ECI. These commentators asserted that,
notwithstanding that such income is gen-
erally U.S. source, the economic activity
that gives rise to the income occurs in the
territories. Accordingly, these commenta-
tors argued, this income does not provide
the opportunities to erode the U.S. tax base
that the U.S. income rule was intended to
prevent.
Even though the activities giving rise to
these classes of income may result from
sufficient economic activity in the territory
sothattheincomeotherwisewouldcon-
stitute territory ECI, the Treasury Depart-
ment and the IRS note that these classes of
income often arise in part from U.S.-based
activities such as marketing. Thus, the
Treasury Department and the IRS do not
believe that their regulatory authority ex-
tends to removing income derived from the
specified activities from the express cov-
erage of the U.S. income rule under sec-
tion 937(b)(2). However, the final regula-
tions do provide additional examples illus-
trating that income from personal services
that, for example, lead to the development
of intangible property is not subject to the
U.S. income rule if such services income
is from territory sources. See part I.C.2.
2.Examples illustrating the U.S. income
rule
Although the proposed and temporary
regulations include several examples ap-
plying section 937(b) and temporary regu-
lations §§1.937–2T and –3T, comments re-
ceived by the Treasury Department and the
IRS indicated a need for additional exam-
ples illustrating the operation of the U.S.
income rule. In Notice 2006–76, 2006–2
C.B. 459 (see §601.601(d)(2)(ii)(b)), the
Treasury Department and the IRS provided
two additional examples in response to this
concern and explained that taxpayers may
treat the examples set forth in the notice
as illustrative of the rules in the temporary
regulations. The Treasury Department and
the IRS also signaled in the notice that
these two additional examples, or substan-
tially similar examples, would be included
in the final regulations.
Commentators responded positively to
the publication of the examples in No-
tice 2006–76, and the Treasury Depart-
ment and the IRS did not receive any sub-
stantive questions orcomments. Accord-
ingly, the examples in Notice 2006–76 are
included in the final regulations.
The final regulations also provide a new
example with respect to the provision of
contingent-payment contractual terms for
services performed in a territory. This ex-
ample clarifies that compensation income
received for providing personal services
that lead to the development of intangi-
ble property for the service recipient is not
subject to the U.S. income rule to the ex-
tent that the compensation income is from
sources within the territory.
II.Operative Provisions
A.American Samoa
Under section 931(a), income from
sources in a section 931 possession gen-
erally is excluded from the gross income
of abona fideresident of a section 931
possession. (American Samoa currently is
the only section 931 possession because
it is the only territory that has entered
into an implementing agreement under
sections 1271(b) and 1277(b) of the 1986
Act.) However, under section 931(d),
the exclusion does not apply to amounts
received for services performed as an em-
ployee of the United States or any agency
thereof. The final regulations clarify that
for this purpose under current law, an
employee of the government of a sec-
tion 931 possession is not an employee
of the United States or of an agency of
the United States. Thus, compensation
received as an employee of the territorial
government of a section 931 possession
is properly excluded from U.S. gross in-
come. A conforming clarification with
respect to Puerto Rico is included in the
final regulations under section 933.
The effect of this rule change will be
mainly administrative. Employees of the
territorial government now will report
their compensation as gross income on
only the territorial income tax return and
thus, depending on their other income,
may be spared a U.S. filing obligation, and
all tax on such compensation will be paid
directly to the territorial government rather
than potentially through a cover-over
mechanism under section 7654. The Trea-
sury Department and the IRS believe that
this change will reduce overall taxpayer
burden and enhance the efficiency of Fed-
eral tax administration, while also more
fully reflecting the independent operation
of the territorial taxing authority.
Rev. Rul. 56–127, 1956–1 C.B. 323
(see §601.601(d)(2)(ii)(b)), which held un-
der prior law that employees of the gov-
ernment of American Samoa are consid-
ered employees of the United States or an
agency thereof, is no longer determinative
and is obsoleted by this Treasury decision.
B.Guam and the Northern Mariana
Islands
Although section 935 was repealed by
the 1986 Act, neither Guam nor the NMI
has agreed to the entry into force of the im-
plementing agreement required under sec-
tions 1271(b) and 1277(b) of the 1986 Act,
and therefore neither of those territories
is a section 931 possession as defined in
§1.931–1(c)(1). Rather, section 935 re-
mains in effect with respect tobona fide
May 19, 20089502008–20 I.R.B.

residents of Guam and the NMI. The fi-
nal regulations under section 935 gener-
ally retain the provisions of the temporary
and proposed regulations without modifi-
cation.
C.Puerto Rico
The final regulations generally retain
the provisions of the temporary and pro-
posed regulations under section 933 with-
out modification. However, the final regu-
lations explicitly provide that for purposes
of the section 933 exclusion, employees
of the Puerto Rico territorial government
are not treated as employees of the United
States or of a Federal agency. This lan-
guage, which comports with the consis-
tent historical understanding that the com-
pensation of such employees is exclud-
able from Federal gross income, is added
only for conformity with the revision being
made to the final section 931 regulations to
address certain obsolete guidance with re-
spect to American Samoa, as explained in
part II.A.
D.United States Virgin Islands
Section 932(c) generally provides that
an individual (whether a U.S. citizen or
alien) who is abona fideresident of the
U.S. Virgin Islands must file an income
taxreturnwiththeU.S.VirginIslandstax
authorities. If the individual properly re-
ports income from all sources identifying
the source of each item of income on this
return and pays all tax properly due with
respect to such income, then such income
is excluded from gross income for Federal
income tax purposes. Consequently, such
individuals have a Federal income tax re-
turn filing obligation if they fail to report
or properly identify the source of any of
their income on their U.S. Virgin Islands
income tax return or if they fail to pay all
of the tax properly due with respect to their
income. The temporary and proposed reg-
ulations reflect this statutory filing regime.
Commentators asked for additional
guidance with respect to the U.S. filing
obligations of individuals who take the
position that they arebona fideresidents
of the U.S. Virgin Islands and file their
income tax returns with the U.S. Virgin
Islands under section 932(c). In particular,
commentators asked forclarification with
respect to correcting inadvertent errors on
U.S. Virgin Islands income tax returns,
determining the amount of any residual
Federal income tax liability for individuals
who fail to pay all the tax properly due to
the U.S. Virgin Islands, and clarification
of the application of the statute of limi-
tations on assessments of Federal income
taxbytheIRS.
Although the final regulations gen-
erally continue to reflect the statutory
regime under 932(c) as set forth in the
temporary and proposed regulations, the
Treasury Department and the IRS agree
that additional guidance with respect to
the Federal filing requirements and obli-
gations under section 932(c) is warranted.
The final regulations provide an example
illustrating that abona fideresident of the
U.S. Virgin Islands will not be subject to
any U.S. filing requirement if, in order to
correct a return previously filed with the
U.S. Virgin Islands, that individual timely
files an amended return with the U.S. Vir-
gin Islands. The Treasury Department and
the IRS believe that individuals generally
should first avail themselves of similar ad-
ministrative remedies that the U.S. Virgin
Islands may provide.
The final regulations also provide a new
rule for purposes of determining the resid-
ual Federal income tax liability, if any, of
individuals who arebona fideresidents of
the U.S. Virgin Islands. Under this new
rule, such individuals are allowed a credit
for amounts already paid to the U.S. Vir-
gin Islands. Thus, their residual Federal
income tax liability should equal the dif-
ference between their entire income tax li-
ability and the amount of income tax al-
readypaidtotheU.S.VirginIslands.
Section 932(b) provides a similar credit
for U.S. citizens and resident aliens who
are notbona fideresidents of the U.S.
Virgin Islands. If such individuals have
income from sources within the U.S. Vir-
gin Islands or income that is effectively
connected with the conduct of a trade or
business in the U.S. Virgin Islands, then
sections 932(a) and (b) generally require
such individuals to file an income tax re-
turn with both the IRS and the U.S. Virgin
Islands tax authorities, paying an appli-
cable percentage of taxes attributable to
such income to the U.S. Virgin Islands.
The individual may claim a credit for the
taxrequiredtobepaidtotheU.S.Virgin
Islands, so that only the balance is due
to the United States. Like the temporary
and proposed regulations, the final reg-
ulations reflect these statutory rules. In
the event that an individual who is not
abona fideresident pays more tax to
the U.S. Virgin Islands than is required,
Rev. Proc. 2006–23, 2006–1 C.B. 900,
(see §601.601(d)(2)(ii)(b)) provides pro-
cedures for requesting U.S. competent
authority assistance for resolving incon-
sistent tax treatment with respect to such
payments by the IRS and the U.S. Virgin
Islands tax authorities.
With respect to the Federal statute of
limitations, the final regulations incorpo-
rate the interim rules announced in Notice
2007–31, 2007–16 I.R.B. 971, under the
authority of section 7654(e). Accordingly,
the final regulations under section 932(c)
provide that the Federal statute of limita-
tions under section 6501(a) for a U.S. cit-
izen or resident alien who claims to be a
bona fideresident of the U.S. Virgin Is-
lands generally will start running upon the
filing of an income tax return with the U.S.
Virgin Islands. This general rule applies
as long as the IRS and U.S. Virgin Islands
have in place an agreement for the au-
tomatic exchange of information satisfy-
ing the requirements of the Commissioner
of the IRS. Because the working arrange-
ment announced in Notice 2007–31 sat-
isfies this condition, this general rule ap-
plies to years ending on or after Decem-
ber 31, 2006. In the event that the work-
ing arrangement is terminated and in the
absence of a successor agreement, an in-
dividual claiming to be abona fideresi-
dent of the U.S. Virgin Islands generally
must file an income tax return with the
IRS in order to start the Federal statute of
limitations period. In such circumstances,
however, the Commissioner may by ad-
ministrative pronouncement specify other
rules for this purpose. For years ending
before December 31, 2006, the U.S. filing
requirements provided in Notice 2007–19,
2007–11 I.R.B. 689, continue to apply. See
§601.601(d)(2)(ii)(b).
The temporary and proposed regula-
tions amend the regulations under section
6688 (concerning assessable penalties
with respect to information reporting un-
der section 7654) to conform to changes
made by the 2004 Act. The temporary
and proposed regulations provide that the
penalty applies to individuals who are sub-
ject to reporting requirements promulgated
under the authority of section 937(c) (con-
cerning individuals who become or cease
2008–20 I.R.B.951May 19, 2008

to bebona fideresidents of a territory) or
section 7654 (concerning the coordination
of United States and territorial income
taxes). This information reporting in-
cludes the requirement to file Form 8689,
“Allocation of Individual Income Tax to
the U.S. Virgin Islands,” and the require-
ment to file Form 8898, “Statement for
Individuals Who Begin or End Bona Fide
Residence in a U.S. Possession.”
One commentator noted that section
6688 applies only to “individuals de-
scribed in section 7654(a)” and therefore
should not extend to Form 8689, which
is required of only U.S. citizens or res-
idents (other thanbona fideresidents of
the U.S. Virgin Islands) who have income
derived from sources within the U.S. Vir-
gin Islands or effectively connected with
the conduct of a trade or business in the
U.S. Virgin Islands, or spouses who file
joint returns with such individuals. The
Treasury Department and the IRS agree
that such individuals are not described in
section 7654(a), which generally applies
only tobona fideresidents of an applica-
ble territory. The final regulations under
section 6688 are amended accordingly.
E.Application of subpart F to bona fide
residents of a territory
In general, corporations created or or-
ganized in a territory are treated as for-
eign corporations for Federal income tax
purposes, including the subpart F provi-
sions relating to controlled foreign corpo-
rations. Section 957(c), however, provides
a significant exception forbona fideresi-
dentsofPuertoRicoandsection931pos-
sessions. In cases where the exception ap-
plies, such an individual is not treated as a
U.S. person for purposes of subpart F. Con-
sequently, such an individual is not treated
as a U.S. shareholder under section 951(b),
and where such individuals own more than
50 percent of the vote or value of a corpo-
ration created or organized under the laws
of Puerto Rico (a Puerto Rico corporation)
or a section 931 possession (a section 931
corporation), as the case may be, such a
corporation is not treated as a controlled
foreign corporation under section 957(a).
In the case of abona fideresident of
Puerto Rico, the exception applies under
section 957(c)(1) with respect to a Puerto
Rico corporation if a dividend received
by such individual during the taxable year
from such corporation would, for purposes
of section 933(1), be treated as income
derived from sources within Puerto Rico.
With respect tobona fideresidents of a
section 931 possession, the exception ap-
plies under section 957(c)(2) with respect
to a corporation organized or created in
thesection931possessionif: (1)80per-
cent or more of the gross income of the
corporation during thethree-year testing
period ending at the close of the taxable
year (or applicable part) was derived from
sources within such territory or was ef-
fectively connected with the conduct of a
trade or business in such a territory; and
(2) 50 percent of more of the gross income
of the corporation for such period (or part)
was derived from the active conduct of a
trade or business within such territory (the
80/50 conditions).
For purposes of determining whether
income is from sources within Puerto Rico,
the temporary and proposed regulations
generally apply the territory source rules
in §1.937–2T, including the special rules
for determining whether dividends to in-
dividuals who own more than 10 percent
of the total voting stock of a territory cor-
poration are from sources within the rele-
vant territory. Those dividend source rules
treat only a ratable portion of any divi-
dend paid or accrued by a territory cor-
poration to such a shareholder as terri-
tory source income unless the corporation
meets the same 80/50 conditions as those
applied under section 957(c)(2). Conse-
quently, under the temporary and proposed
regulations, unless a Puerto Rico corpo-
ration’s gross income is derived entirely
from sources within Puerto Rico, the cor-
poration must meet the same 80/50 condi-
tions applicable to a section 931 corpora-
tion in order for section 957(c)(1) to apply.
Commentators from Puerto Rico ob-
jected to the effect of the temporary and
proposed regulations with respect to the
application of section 957(c)(1). The
commentators noted that since 1986, all
dividends from Puerto Rico corporations
were treated as income from sources
within Puerto Rico, and therefore such
corporations were not treated as controlled
foreign corporations for 10 percent share-
holders who werebona fideresidents of
Puerto Rico. Commentators noted that the
legislative history to neither the 2004 Act
nor the 1986 Act, which amended section
957(c) by applying the 80/50 conditions
with respect to section 931 corporations
but did not specifically apply those condi-
tions to Puerto Rico corporations, makes
any reference to Congressional intent to
apply the 80/50 conditions to Puerto Rico
corporations.
The Treasury Department and the IRS
believe that given the distinct statutory
tests under section 957(c)(1) and (c)(2),
the 80/50 conditions should apply only to
section 931 corporations. Therefore, the
final regulations provide that the special
dividend source rules of §1.937–2(g)(1)
(including the 80/50 conditions) will not
apply when determining, for purposes of
section 957(c)(1), whether a dividend re-
ceived by the Puerto Rico corporation dur-
ing the taxable year would be treated under
section 933(1) as derived from sources
within Puerto Rico. Rather, the principles
of section 861(a)(2)(A) under the gen-
eral territory source rules will apply, and
consequently dividends from Puerto Rico
corporations generally will be treated as
income from sources within Puerto Rico
for purposes of applying section 957(c)(1)
unless the U.S. income rule prevents the
dividends from being sourced to Puerto
Rico because, for example, the dividends
are from sources within the United States
under section 861(a)(2)(B).
The temporary and proposed regula-
tions contain relatedrules under sections
6038 and 6046 with respect to information
reporting requirements concerning certain
foreign corporations owned by a United
States person who is abona fideresident
of Puerto Rico or a section 931 posses-
sion. Under the temporary regulations,
the special definition of United States
person under section 957(c) also applies
for purposes of sections 6038 and 6046.
However, because the final regulations
no longer apply the 80/50 conditions to
bona fideresidents of Puerto Rico (for
purposes of subpart F), the Treasury De-
partment and the IRS are concerned that
such individuals may no longer have to
provide information concerning their con-
trolled foreign corporations, including
those formed in Puerto Rico.
The Treasury Department and the IRS
believe that the information required un-
der sections 6038 and 6046 is necessary
for purposes of determining whether such
individuals have a Federal income tax
liability. Thus, the final regulations con-
tinue to apply the 80/50 conditions of
May 19, 20089522008–20 I.R.B.

§1.937–2(g)(1) when defining United
States person for purposes of the informa-
tion reporting requirements under sections
6038 and 6046.
With respect tobona fideresidents of
a section 931 possession, the final regula-
tions continue to apply the same exception
(with the 80/50 conditions) for purposes of
section 957(c) and sections 6038 and 6046.
F.Entity status
With respect to section 935 possessions
and the U.S. Virgin Islands (mirror code
territories), the temporary and proposed
regulations contain special rules requiring
consistent treatment of certain business
entities for U.S. and mirror code tax pur-
poses. The rules generally apply to elec-
tions under section 1362(a) (subchapter
S corporations), §301.7701–3(c) (eligible
entities), and other similar elections. The
rules provide, among other things, that if
an entity files an election with the IRS but
not with the relevant mirror code territory,
then the appropriate tax authority of the
mirror code territory may, at its discretion,
deem the election also to have been made
for mirror code tax purposes. Similarly, if
anysuchelectionisfiledinamirrorcode
territory but not with the IRS, the Com-
missioner may, at his or her discretion,
deem the election to have been made for
U.S. Federal income tax purposes.
The Treasury Department and the IRS
specifically requested comments relating
to elections that should be specifically
mentioned or excluded from the entity
status election rules. Commentators re-
quested two limited exceptions to the
requirement for making consistent elec-
tions in the case of a U.S. entity that files
an election with the IRS but not with the
relevant mirror coder territory.
The first comment related to a U.S. en-
tity that elects to be treated as a real es-
tate mortgage investment conduit under
section 860D(b) (a REMIC) for U.S. tax
purposes. The commentator noted that a
REMIC would be classified as a foreign
corporation for mirror code tax purposes
unless it either files an election in the mir-
ror code territory or the appropriate tax au-
thority of the relevant mirror code territory
exercises his or her discretion to treat the
entity as if an election had been made. The
commentator requested that the entity con-
sistency rules be restricted so as not to ap-
ply to a publicly traded REMIC unless five
percent or more of the REMIC’s owner-
ship is held by abona fideresident of the
relevant territory or a corporation created
or organized in the relevant territory.
The second comment similarly re-
quested an exception to the consistent
election requirement in the case of a U.S.
corporation that, prior to the temporary
and proposed regulations, made an elec-
tion with the IRS under section 1362(a) to
be an S corporation but had a shareholder
who was abona fideresident of a mirror
code territory who treated the entity as a
foreign C corporation for purposes of the
individual’s taxation in the territory. The
commentator requested that such individ-
uals be allowed under these circumstances
to make a one-time election in the mirror
code territory to treat the U.S. entity for
purposes of mirror code taxation as either
a domestic S corporation or a foreign C
corporation (as it would be in the absence
of an affirmative election under section
1362(a)bytheentityor a deemed election
by the mirror code tax authority).
The Treasury Department and the IRS
are concerned about the possibility of in-
appropriate tax results from inconsistent
treatment of entities in the United States
and mirror code jurisdictions and believe
that this problem exists even in circum-
stances in which the owners of the entity
hold less than five percent of the interests
in the entity. Furthermore, the Treasury
Department and the IRS believe that treat-
ing the entity consistently in the territory
and the United States should not impose
an undue burden on the entity. Thus, the
Treasury Department and the IRS do not
believe that a special exception in the en-
tity consistency rules is necessary in either
case.
As provided in the temporary and pro-
posed regulations, which are finalized
here without change, the ability of the tax
authority in a mirror code jurisdiction to
deem an election to have been made for
territorial tax purposes is discretionary.
The Treasury Department and the IRS
anticipate that, to the extent the entity
status rules apply, this discretion will be
exercised in situations where taxpayers
treat a business entity in an inconsistent
manner with the result that it reduces
their overall tax liability below what oth-
erwise would be due in the absence of
the mirror system. In addition, and as a
general matter, the Treasury Department
and the IRS encourage taxpayers to take
consistent positions in both jurisdictions
or, if this is not possible, to seek avail-
able administrative assistance from the
relevant jurisdiction including, for ex-
ample, requesting a pre-filing or similar
agreement with respect to an entity’s clas-
sification as well as requesting competent
authority assistance concerning any in-
consistent positions taken by the IRS and
a territory with respect to the entity clas-
sification of an entity. See, for example,
Rev. Proc. 2007–17, 2007–4 I.R.B. 368,
(IRS pre-filing agreement procedures)
and Rev. Proc. 2006–23, 2006–1 C.B.
900, (U.S. competent authority assistance
procedures with respect to the territories).
See §601.601(d)(2)(ii)(b).
III.Miscellaneous Changes
The final regulations also reflect var-
ious nonsubstantive stylistic edits to the
proposed and temporary regulations to en-
hance clarity and readability.
Effect on Other Documents
Rev. Rul. 56–127, 1956–1 C.B. 323, is
obsolete as of April 9, 2008.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory 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. Because the
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking preceding these reg-
ulations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of these regula-
tions is J. David Varley, Office of the As-
sociate Chief Counsel (International), IRS.
However, other personnel from the IRS
2008–20 I.R.B.953May 19, 2008

and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical 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 1.934–1 also issued under 26
U.S.C. 934(b)(4). * * *
Section 1.935–1 also issued under 26
U.S.C. 7654(e). * * *
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. Section 1.1–1 is amended by
revising the second sentence of paragraph
(b) and adding a new paragraph (d) to read
as follows:
§1.1–1 Income tax on individuals.
*****
(b)***Pursuanttosection876,anon-
resident alien individual who is abona fide
resident of a section 931 possession (as de-
fined in §1.931–1(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.
***
*****
(d)Effective/applicability date.The
second sentence of paragraph (b) of this
section applies to taxable years ending
after April 9, 2008.
Par. 3. Section 1.170A–1 is amended
by revising paragraph (j)(9) and the head-
ing for paragraph (k) and adding a new
sentence at the end of paragraph (k) to read
as follows:
§1.170A–1 Charitable, etc., contributions
and gifts; allowance of deduction.
*****
(j)(9) Charitable contributions paid by
bona fideresidents of a section 931 posses-
sion as defined in §1.931–1(c)(1) or Puerto
Rico are deductible only to the extent allo-
cable to income that is not excluded under
section 931 or 933. For the rules for al-
locating deductions for charitable contri-
butions, see the regulations under section
861.
*****
(k)Effective/applicability date.***
Paragraph (j)(9) of this section is applica-
ble for taxable years ending after April 9,
2008.
§1.170A–1T [Removed]
Par. 4. Section 1.170A–1T is removed.
Par. 5. Section 1.861–3 is amended
by revising paragraph (a)(2) and revising
the heading for paragraph (d) and adding a
new sentence at the end of paragraph (d) to
read as follows:
§1.861–3 Dividends.
*****
(a) * * *
(2)Dividend from a domestic corpora-
tion. A dividend described in this para-
graph (a)(2) is a dividend from a domestic
corporation other than a corporation that
has an election in effect under section 936.
See paragraph (a)(5) of this section for
the treatment of certain dividends from a
DISC or former DISC.
*****
(d)Effective/applicability date.***
Paragraph (a)(2) of this section applies to
taxable years ending after April 9, 2008.
§1.861–3T [Removed]
Par. 6. Section 1.861–3T is removed.
Par. 7. Section 1.861–8 is amended
by adding paragraphs (f)(1)(vi)(E),
(f)(1)(vi)(F), (f)(1)(vi)(H), and (h) to read
as follows:
§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 sec-
tion 936 tax credit of a domestic corpora-
tion that has an election in effect under sec-
tion 936;
(F) The exclusion for income from
Puerto Rico forbona fideresidents of
Puerto Rico under section 933;
*****
(H) The income derived from the U.S.
Virgin Islands or from a section 935 pos-
session (as defined in §1.935–1(a)(3)(i)).
*****
(h)Effective/applicability date. Para-
graphs (f)(1)(vi)(E), (f)(1)(vi)(F), and
(f)(1)(vi)(H) of this section apply to tax-
able years ending after April 9, 2008.
Par. 8. Section 1.871–1 is amended by
revising paragraph (b)(1)(iii) and revising
the heading for paragraph (c) and adding a
new sentence at the end of paragraph (c) to
read as follows:
§1.871–1 Classification and manner of
taxing alien individuals.
*****
(b)***(1)***
(iii) Nonresident alien individuals who
arebona fideresidents of a section 931
possession (as defined in §1.931–1(c)(1)
of this chapter) or Puerto Rico during
the entire taxable year. An individual
described in paragraph (b)(1)(i) or (ii)
of this section is subject to tax pursuant
to the provisions of subpart A (section
871 and following), part II, subchapter N,
chapter 1 of the Code, and the regulations
under those provisions. The provisions
of subpart A do not apply to individuals
described in this paragraph (b)(1)(iii), but
such individuals, except as provided in
section 931 or 933, are subject to the tax
imposed by section 1 or 55. See §1.876–1.
*****
(c)Effective/applicability date.***
Paragraph (b)(1)(iii) of this section applies
to taxable years ending after April 9, 2008.
Par. 9. Section 1.876–1 is revised to
read as follows:
§1.876–1 Alien residents of Puerto Rico,
Guam, American Samoa, or the Northern
Mariana Islands.
(a)Scope. Section 876 and this section
apply to any nonresident alien individual
May 19, 20089542008–20 I.R.B.

who is abona fideresident of Puerto Rico
or of a section 931 possession during the
entire taxable year.
(b)In general. An individual to whom
this section applies is, in accordance with
the provisions of section 876, subject to
tax under sections 1 and 55 in generally
the same manner as an alien resident of
the United States. See §§1.1–1(b) and
1.871–1. The tax generally is imposed
upon the taxable income of such individ-
ual, determined in accordance with section
63(a) and the regulations under that sec-
tion, from sources both within and without
the United States, except for amounts ex-
cluded from gross income under the provi-
sions of section 931 or 933. For determin-
ing the form of return to be used by such an
individual, see section 6012 and the regu-
lations under that section.
(c)Exceptions. Though subject to the
tax imposed by section 1, an individual to
whom this section applies will neverthe-
less be treated as a nonresident alien in-
dividual for the purpose of many provi-
sions of the Internal Revenue Code (Code)
relating to nonresident alien individuals.
Thus, for example, such an individual is
not allowed the standard deduction (sec-
tion 63(c)(6)); is subject to withholding
of tax at source under chapter 3 of the
Code (for example, section 1441(e)); is
generally excepted from the collection of
income tax at source on wages for ser-
vices performed in the possession (sec-
tion 3401(a)(6)); is not allowed to make
a joint return (section 6013(a)(1)); and, if
describedinsection6072(c),mustpayhis
first installment of estimated income tax
on or before the 15th day of the 6th month
of the taxable year (section 6654(j) and
(k)) and must pay his income tax on or be-
fore the 15th day of the 6th month follow-
ing the close of the taxable year (sections
6072(c) and 6151(a)). In addition, under
section 152(b)(3), an individual is not al-
lowed a deduction for a dependent who is
a resident of the relevant possession unless
the dependent is a citizen or national of the
United States.
(d)Credits against tax.(1)Certain
credits under the Internal Revenue Code
are available to any taxpayer subject to the
tax imposed by section 1, including indi-
viduals to whom this section applies. For
example, except as otherwise provided un-
der section 931 or 933, the credits pro-
vided by the following sections are allow-
able to the extent provided under such sec-
tions against the tax determined in accor-
dance with this section—
(i) Section 23 (relating to the credit for
adoption expenses);
(ii) Section 31 (relating to the credit for
tax withheld on wages);
(iii) Section 33 (relating to the credit
for tax withheld at source on nonresident
aliens); and
(iv) Section 34 (relating to the credit for
certain uses of gasoline and special fuels).
(2) Certain credits under the Internal
Revenue Code are not available to non-
resident aliens or are subject to limitations
based on such factors as principal place of
abode in the United States. For example,
the credits provided by the following sec-
tions are not allowable against the tax de-
termined in accordance with this section
except to the extent otherwise provided un-
der such sections—
(i) Section 22 (relating to the credit for
the elderly and disabled);
(ii) Section 25A (relating to the Hope
Scholarship and Lifetime Learning Cred-
its); and
(iii) Section 32 (relating to the earned
income credit).
(e)Definitions. For purposes of this
section—
(1) “Bona fideresident” is defined in
§1.937–1; and
(2) “Section 931 possession” is defined
in §1.931–1(c)(1).
(f)Effective/applicability date.This
section applies to taxable years ending af-
ter April 9, 2008.
§1.876–1T [Removed]
Par. 10. Section 1.876–1T is removed.
Par. 11. Section 1.881–1 is amended by
revising the last sentence of paragraph (c)
and the heading of paragraph (f) to read as
follows:
§1.881–1 Manner of taxing foreign
corporations.
*****
(c)***However,forspecialrulesre-
lating to possessions of the United States,
see §1.881–5.
*****
(f)Effective/applicability date.***
Par. 12. Section 1.881–5 is amended as
follows:
1. Revise paragraphs (a), (b), (c), (d),
(e), (f), (f)(1), (f)(2), (f)(3), (f)(5), (f)(6),
(f)(7), (g), (h), and (i).
2. Remove paragraph (f)(8).
The revisions read as follows:
§1.881–5 Exception for certain
possessions corporations.
(a)Scope.Section 881(b) and this sec-
tion provide special rules for the applica-
tion of sections 881 and 884 to certain cor-
porations created or organized in posses-
sions of the United States. Paragraph (g)
of this section provides special rules for
the application of sections 881 and 884 to
corporations created or organized in the
United States for purposes of determin-
ing tax liability incurred to certain pos-
sessions that administer income tax laws
that are identical (except for the substitu-
tion of the name of the possession for the
term “United States” where appropriate) to
those in force in the United States. See
§1.884–0(b) for special rules relating to the
application of section 884 with respect to
possessions of the United States.
(b)Operative rules. (1) Corporations
described in paragraphs (c) and (d) of this
section are not treated as foreign corpora-
tions for purposes of section 881. Accord-
ingly, they are exempt from the tax im-
posed by section 881(a).
(2) For corporations described in para-
graph (e) of this section, the rate of tax
imposed by section 881(a) on U.S. source
dividends received is 10 percent (rather
than the generally applicable 30 percent).
(c)U.S. Virgin Islands and section 931
possessions. A corporation created or or-
ganized in, or under the law of, the U.S.
Virgin Islands or a section 931 possession
is described in this paragraph (c) for a tax-
able year when the following conditions
are satisfied—
(1) At all times during such taxable
year, less than 25 percent in value of the
stock of such corporation is beneficially
owned (directly or indirectly) by foreign
persons;
(2) At least 65 percent of the gross in-
come of such corporation is shown to the
satisfaction of the Commissioner upon ex-
amination to be effectively connected with
the conduct of a trade or business in such
a possession or the United States for the
3-year period ending with the close of the
taxable year of such corporation (or for
2008–20 I.R.B.955May 19, 2008

such part of such period as the corporation
or any predecessor has been in existence);
and
(3) No substantial part of the income
of such corporation for the taxable year
is used (directly or indirectly) to satisfy
obligations to persons who are notbona
fideresidents of such a possession or the
United States.
(d)Section 935 possessions.Acorpo-
ration created or organized in, or under
the law of, a section 935 possession is de-
scribed in this paragraph (d) for a taxable
year when the following conditions are sat-
isfied—
(1) At all times during such taxable
year, less than 25 percent in value of the
stock of such corporation is owned (di-
rectly or indirectly) by foreign persons;
and
(2) At least 20 percent of the gross
income of such corporation is shown to
the satisfaction of the Commissioner upon
examination to have been derived from
sources within such possession for the
3-year period ending with the close of the
preceding taxable year of such corpora-
tion (or for such part of such period as the
corporation has been in existence).
(e)Puerto Rico. A corporation created
or organized in, or under the law of, Puerto
Rico is described in this paragraph (e) for
a taxable year when the conditions of para-
graphs (c)(1) through (c)(3) of this section
are satisfied (using the language “Puerto
Rico” instead of “such a possession”).
(f)Definitions and other rules.For pur-
posesofthissection—
(1) “Section 931 possession” is defined
in §1.931–1(c)(1); and
(2) “Section 935 possession” is defined
in §1.935–1(a)(3)(i).
(3)Foreign personmeans any person
other than—
(i) A United States person (as defined
in section 7701(a)(30) and the regulations
under that section); or
(ii) A person who would be a United
States person if references to the United
States in section 7701 included references
to a possession of the United States.
*****
(5)Source. The rules of §1.937–2 will
apply for determining whether income is
from sources within a possession.
(6)Effectively connected income.The
rules of §1.937–3 (other than paragraph (c)
of that section) will apply for determining
whether income is effectively connected
with the conduct of a trade or business in a
possession.
(7)Indirect ownership.Therulesof
section 318(a)(2) will apply except that the
language “5 percent” will be used instead
of “50 percent” in section 318(a)(2)(C).
(g)Mirror code jurisdictions. For pur-
poses of applying mirrored section 881 to
determine tax liability incurred to a sec-
tion 935 possession or the U.S. Virgin Is-
lands—
(1) The rules of paragraphs (b) through
(d) of this section will not apply; and
(2) A corporation created or organized
in, or under the law of, such possession or
the United States will not be considered a
foreign corporation.
(h)Example. The principles of this sec-
tion are illustrated by the following exam-
ple:
Example. X is a corporation organized under the
law of the U.S. Virgin Islands with a branch located
in State F. At least 65 percent of the gross income
of X is effectively connected with the conduct of a
trade or business in the U.S. Virgin Islands and no
substantial part of the income of X for the taxable year
is used to satisfy obligations to persons who are not
bona fideresidents of the United States or the U.S.
Virgin Islands. Seventy-four percent of the stock of
X is owned by unrelated individuals who are residents
of the United States or the U.S. Virgin Islands. Y, a
corporation organized under the law of State D, and
Z, a partnership organized under the law of State F,
each own 13 percent of the stock of X. A, an unrelated
foreign individual, owns 100 percent of the stock of
corporation Y. B and C, unrelated foreign individuals,
each own a 50 percent interest in partnership Z. Thus,
the condition of paragraph (c)(1) of this section is not
satisfied, because 26 percent of X is owned indirectly
by foreign persons (A, B, and C). Accordingly, X is
treated as a foreign corporation for purposes of sec-
tion 881.
(i)Effective/applicability dates. Except
as otherwise provided in this paragraph (i),
this section applies to payments made in
taxable years ending after April 9, 2008.
If, on or after April 9, 2008, there takes
effect an increase in the Commonwealth
of Puerto Rico’s withholding tax gener-
ally applicable to dividends paid to United
States corporations not engaged in a trade
or business in the Commonwealth to a rate
greater than 10 percent, the rules of para-
graphs (b)(2) and (e) ofthis section will not
apply to dividends received on or after the
effective date of the increase. Paragraph
(f)(4) of this section applies to payments
made after January 31, 2006. Taxpayers
may choose to apply paragraph (f)(4) of
this section to payments made after Octo-
ber 22, 2004.
Par. 13. Section 1.884–0 is amended by
revising paragraph (b) to read as follows:
§1.884–0 Overview of regulation
provisions for section 884.
*****
(b)Special rules for U.S. possessions.
(1) Section 884 does not apply to a cor-
poration created or organized in, or under
the law of, American Samoa, Guam, the
Northern Mariana Islands, or the U.S. Vir-
gin Islands, provided that the conditions of
§1.881–5(c)(1) through (c)(3) are satisfied
with respect to such corporation. The pre-
ceding sentence applies for taxable years
ending after April 9, 2008.
(2) Section 884 does not apply for pur-
poses of determining tax liability incurred
to a section 935 possession or the U.S. Vir-
gin Islands by a corporation created or or-
ganized in, or under the law of, such pos-
session or the United States. The preced-
ing sentence applies for taxable years end-
ing after April 9, 2008.
*****
§1.884–0T
[Removed]
Par. 14. Section 1.884–0T is removed.
Par. 15. Section 1.901–1 is amended
by revising paragraph (g) and adding new
paragraph (j) to read as follows:
§1.901–1 A
llowance of credit for taxes.
*****
(g)Taxpayers to whom credit not al-
lowed. Among those to whom the credit
for taxes is not allowed are the following:
(1) Except as provided in section 906, a
foreign corporation.
(2) Except as provided in section 906, a
nonresident alien individual who is not de-
scribed in section 876 (see sections 874(c)
and 901(b)(4)).
(3) A nonresident alien individual de-
scribed in section 876 other than abona
fideresident (as defined in section 937(a)
and the regulations under that section) of
Puerto Rico during the entire taxable year
(see sections 901(b)(3) and (4)).
(4) A U.S. citizen or resident alien in-
dividual who is abona fideresident of
a section 931 possession (as defined in
§1.931–1(c)(1)), the U.S. Virgin Islands,
May 19, 20089562008–20 I.R.B.

or Puerto Rico, and who excludes certain
income from U.S. gross income to the ex-
tent of taxes allocable to the income so ex-
cluded (see sections 931(b)(2), 933(1), and
932(c)(4)).
*****
(j)Effective/applicability date. Para-
graph (g) of this section applies to taxable
years ending after April 9, 2008.
§1.901–1T [Removed]
Par. 16. Section 1.901–1T is removed.
Par. 17. Section 1.931–1 is revised to
read as follows:
§1.931–1 Exclusion of certain income
from sources within Guam, American
Samoa, or the Northern Mariana Islands.
(a)General rule. (1) An individual
(whether a United States citizen or an
alien), who is abona fideresident of a
section 931 possession during the entire
taxable year, will exclude from gross in-
come the income derived from sources
within any section 931 possession and
the income effectively connected with the
conduct of a trade or business by such
individual within any section 931 posses-
sion, except amounts received for services
performed as an employee of the United
States or any agency thereof. For pur-
poses of section 931(d) and this section, an
employee of the government of a section
931 possession will not be considered an
employee of the United States or of an
agency of the United States.
(2) The following example illustrates
the application of the general rule in para-
graph (a)(1) of this section:
Example. D, a United States citizen, files returns
on a calendar year basis. In April 2008, D moves to
American Samoa, where he purchases a house and ac-
cepts a permanent position with a local employer. For
the remainder of the year and for the following three
taxable years, D continues to live and work in Amer-
ican Samoa and has a closer connection to Ameri-
can Samoa than to the United States or any foreign
country. Assuming that D otherwise meets the re-
quirements under section 937(a) and §1.937–1(b) and
(f)(1) (year-of-move exception), D is considered a
bona fideresident of American Samoa for 2008. Ac-
cordingly, under section 931 and paragraph (a)(1) of
this section, D should exclude from his 2008 Federal
gross income any income from sources within Amer-
ican Samoa and any income that is effectively con-
nected with the conduct of a trade or business within
American Samoa, as determined under section 937(b)
and §§1.937–2 and 1.937–3, as applicable.
(b)Deductions and credits.Inany
case in which any amount otherwise con-
stituting gross income is excluded from
gross income under the provisions of sec-
tion 931, there will not be allowed as a
deduction from gross income any items
of expenses or losses or other deductions
(except the deduction under section 151,
relating to personal exemptions), or any
credit, properly allocable to, or chargeable
against, the amounts so excluded from
gross income. For purposes of the pre-
ceding sentence, the rules of §1.861–8
will apply (with creditable expenditures
treated in the same manner as deductible
expenditures).
(c)Definitions. For purposes of this
section—
(1) The termsection 931 possession
means a possession that is a specified pos-
session and that has entered into an imple-
menting agreement, as described in section
1271(b) of the Tax Reform Act of 1986,
Public Law 99–514 (100 Stat. 2085), with
the United States that is in effect for the en-
tire taxable year;
(2) The termspecified possession
means Guam, American Samoa, or the
Northern Mariana Islands;
(3) The rules of §1.937–1 will apply
for determining whether an individual is a
bona fideresident of a section 931 posses-
sion;
(4) The rules of §1.937–2 will apply
for determining whether income is from
sources within a section 931 possession;
and
(5) The rules of §1.937–3 will apply for
determining whether income is effectively
connected with the conduct of a trade or
business within a section 931 possession.
(d)Effective/applicability date.This
section applies to taxable years ending af-
ter April 9, 2008.
§1.931–1T [Removed]
Par. 18. Section 1.931–1T is removed.
Par. 19. Section 1.932–1 is revised to
read as follows:
§1.932–1 Coordination of United States
and Virgin Islands income taxes.
(a)Scope—(1)In general. Section 932
and this section set forth the special rules
relating to the filing of income tax returns
and income tax liabilities of individuals
described in paragraph (a)(2) of this sec-
tion. Paragraph (h) of this section also
provides special rules requiring consistent
treatment of business entities in the United
States and in the United States Virgin Is-
lands (Virgin Islands).
(2)Individuals covered. This section
will apply to any individual who—
(i) Is abona fideresident of the Virgin
Islands during the entire taxable year;
(ii)(A) Is a citizen or resident of the
United States (other than abona fideres-
ident of the Virgin Islands) during the en-
tire taxable year; and
(B) Has income derived from sources
within the Virgin Islands, or effectively
connected with the conduct of a trade or
business within the Virgin Islands, for the
taxable year; or
(iii) Files a joint return for the taxable
year with any individual described in para-
graph (a)(2)(i) or (ii) of this section.
(3)Definitions. For purposes of this
section—
(i) The rules of §1.937–1 will apply
for determining whether an individual is a
bona fideresident of the Virgin Islands;
(ii) The rules of §1.937–2 will apply
for determining whether income is from
sources within the Virgin Islands; and
(iii) The rules of §1.937–3 will apply
for determining whether income is effec-
tively connected with the conduct of a
trade or business within the Virgin Islands.
(b)U.S. individuals with Virgin Islands
income—(1)Dual filing requirement.
Subject to paragraph (d) of this section, an
individual described in paragraph (a)(2)(ii)
of this section must make an income tax
return for the taxable year to the United
States and file a copy of such return with
the Virgin Islands. Such individuals must
also attach Form 8689, “Allocation of
Individual Income Tax to the U.S. Virgin
Islands,”totheU.S.incometaxreturn
andtotheincometaxreturnfiledwiththe
Virgin Islands.
(2)Tax payments. (i) Each individual
to whom this paragraph (b) applies for the
taxable year must pay the applicable per-
centage of the taxes imposed by this chap-
ter for such taxable year (determined with-
out regard to paragraph (b)(2)(ii) of this
section) to the Virgin Islands.
(ii) A credit against the tax imposed by
this chapter for the taxable year will be al-
lowed in an amount equal to the taxes that
arerequiredtobepaidtotheVirginIs-
2008–20 I.R.B.957May 19, 2008

lands under paragraph (b)(2)(i) of this sec-
tion and are so paid. Such taxes will be
considered creditable in the same manner
as taxes paid to the United States (for ex-
ample, under section 31) and not as taxes
paid to a foreign government (for example,
under sections 27 and 901).
(iii) For purposes of this paragraph
(b)(2)—
(A) The termapplicable percentage
means the percentage that Virgin Islands
adjusted gross income bears to adjusted
gross income;
(B) The termVirgin Islands adjusted
gross incomemeans adjusted gross income
determined by taking into account only in-
come derived from sources within the Vir-
gin Islands and deductions properly appor-
tioned or allocable to such income. For
purposes of the preceding sentence, the
rules of §1.861–8 will apply; and
(C) Pursuant to §1.937–2(a), the rules
of §1.937–2(c)(1)(ii) and (c)(2) do not ap-
ply.
(c)Bona fide residents of the Virgin Is-
lands.Subject to paragraph (d) of this sec-
tion, an individual described in paragraph
(a)(2)(i) of this section will be subject to
the following income tax return filing re-
quirements:
(1)Virgin Islands filing requirements.
An individual to whom this paragraph (c)
applies must file an income tax return for
the taxable year with the Virgin Islands.
On this return, the individual must report
income from all sources and identify the
source of each item of income shown on
the return.
(2)U.S. filing requirements. (i) For pur-
poses of calculating the income tax liabil-
ity to the United States of an individual to
whom this paragraph (c) applies, gross in-
come will not include any amount included
in gross income on the return filed with the
Virgin Islands pursuant to paragraph (c)(1)
of this section, and deductions and credits
allocable to such income will not be taken
into account, provided that—
(A) The individual fully satisfied the
reporting requirements of paragraph (c)(1)
of this section; and
(B) The individual fully paid the tax
liability referred to in section 934(a) to the
Virgin Islands with respect to such income.
(ii) For purposes of the U.S. statute of
limitations under section 6501(a), an in-
come tax return filed with the Virgin Is-
lands by an individual who takes the posi-
tion that he or she is abona fideresident
of the Virgin Islands described in para-
graph (a)(2)(i) of thissection (or an indi-
vidual who files a joint return with such
an individual under paragraph (d) of this
section) will be deemed to be a U.S. in-
come tax return, provided that the United
States and the Virgin Islands have entered
into an agreement for the routine exchange
of income tax information satisfying the
requirements of the Commissioner. The
working arrangement announced in No-
tice 2007–31 satisfies the condition of the
preceding sentence. See Notice 2007–31,
2007–16 I.R.B. 971, (applicable to tax-
able years ending on or after December 31,
2006, unless and untilarrangement termi-
nates). In the absence of such an agree-
ment, individuals to whom this paragraph
(c) applies generally must file an income
tax return for the taxable year with the
United States to begin the period of limi-
tations for Federal income tax purposes as
provided in section 6501(a), and in such
circumstances the Commissioner may by
revenue procedure, notice, or other ad-
ministrative pronouncement specify U.S.
filing and other information reporting re-
quirements for such individuals. For tax-
able years ending before December 31,
2006, the rules provided in section 3 of No-
tice 2007–19, 2007–11 I.R.B. 689, will ap-
ply. See §601.601(d)(2)(ii)(b).
(3)U.S. tax payments. In the case of
an individual who is required to file an
incometaxreturnwiththeUnitedStates
as a consequence of failing to satisfy the
requirements of paragraphs (c)(2)(i)(A) or
(B) of this section, there will be allowed
as a credit against the tax imposed by this
chapter for the taxable year an amount
equal to the amount of the tax liability re-
ferred to in section 934(a) to the extent
paid to the Virgin Islands. Such taxes shall
be considered creditable in the same man-
ner as taxes paid to the United States (for
example, under section 31) and not as taxes
paid to a foreign government (for example,
under sections 27 and 901).
(d)Joint returns. In the case of married
persons, if one or both spouses is an indi-
vidual described in paragraph (a)(2) of this
section and they file a joint return of in-
come tax, the spouses must file their joint
return with, and pay the tax due on such
return to, the jurisdiction (or jurisdictions)
where the spouse who has the greater ad-
justed gross income for the taxable year
would be required under paragraph (b) or
(c) of this section to file a return if sep-
arate returns were filed and all of their
income were the income of such spouse.
For this purpose, adjusted gross income of
each spouse is determined under section
62 and the regulations under that section
but without regard to community property
laws; and, if one of the spouses dies, the
taxable year of the surviving spouse will be
treated as ending on the date of such death.
(e)Place for filing returns—(1)U.S. re-
turns. Except as otherwise provided for re-
turns filed under paragraph (c)(4) of this
section, a return required under the rules of
paragraphs (b) and (c) of this section to be
filed with the United States must be filed
as directed in the applicable forms and in-
structions.
(2)Virgin Islands returns. A return re-
quired under the rules of paragraphs (b)
and(c)ofthissectiontobefiledwiththe
Virgin Islands must be filed as directed in
the applicable forms and instructions.
(f)Tax accounting standards—(1)In
general.A dual filing taxpayer must use
the same tax accounting standards on the
returns filed with the United States and
the Virgin Islands. A taxpayer who has
filed a return only with the United States
or only with the Virgin Islands as a sin-
gle filing taxpayer for a prior taxable year
andisrequiredtofileareturnonlywith
the other jurisdiction as a single filing tax-
payer for a later taxable year may not, for
such later taxable year, use different tax
accounting standards unless the second ju-
risdiction consents to such change. How-
ever, such change will not be effective for
returns filed thereafter with the first ju-
risdiction unless before such later date of
filing the taxpayer also obtains the con-
sent of the first jurisdiction to make such
change. Any request for consent to make a
change pursuant to this paragraph (f) must
be made to the office where the return is
required to be filed under paragraph (e) of
this section and in sufficient time to permit
a copy of the consent to be attached to the
return for the taxable year.
(2)Definitions. For purposes of this
paragraph (f), the terms—
(i)Dual filing taxpayermeans a tax-
payer who is required to file returns with
the United States and the Virgin Islands for
the same taxable year under the rules of
paragraph (b) or (c) of this section;
May 19, 20089582008–20 I.R.B.

(ii)Single filing taxpayermeans a tax-
payer who is required to file a return only
with the United States (because the indi-
vidual is not describedin paragraph (a)(2)
of this section) or only with the Virgin Is-
lands (because the individual is described
in paragraph (a)(2)(i) of this section and
satisfies the conditions of paragraphs
(c)(2)(i) and (ii) of this section) for the
taxable year; and
(iii)Tax accounting standardsincludes
the taxpayer’s accounting period, methods
of accounting, and any election to which
the taxpayer is bound with respect to the
reporting of taxable income.
(g)Extension of territory—(1)Section
932(a) taxpayers—(i)General rule.With
respect to an individual to whom section
932(a) applies for a taxable year, for pur-
poses of taxes imposed by Chapter 1 of the
Internal Revenue Code (Code), the United
States generally will be treated, in a geo-
graphical and governmental sense, as in-
cluding the Virgin Islands. The purpose of
this rule is to facilitate the coordination of
the tax systems of the United States and the
Virgin Islands. Accordingly, the rule will
have no effect where it is manifestly inap-
plicable or its application would be incom-
patible with the intent of any provision of
the Code.
(ii)Application of general rule.Con-
texts in which the general rule of paragraph
(g)(1)(i) of this section apply include—
(A) The characterization of taxes paid
to the Virgin Islands. An individual to
whom section 932(a) applies may take in-
cometaxrequiredtobepaidtotheVirgin
Islands under section 932(b) into account
under sections 31, 6315, and 6402(b) as
payments to the United States. Taxes paid
to the Virgin Islands and otherwise satisfy-
ing the requirements of section 164(a) will
be allowed as a deduction under that sec-
tion, but income taxes required to be paid
to the Virgin Islands under section 932(b)
will be disallowed as a deduction under
section 275(a);
(B) The determination of the source
of income for purposes of the foreign tax
credit (for example, sections 901 through
904). Thus, for example, after an indi-
vidual to whom section 932(a) applies
determines which items of income consti-
tute income from sources within the Virgin
Islands under the rules of section 937(b),
such income will be treated as income
from sources within the United States for
purposes of section 904;
(C) The eligibility of a corporation to
make a subchapter S election (sections
1361 through 1379). Thus, for example,
for purposes of determining whether a
corporation created or organized in the
Virgin Islands may make an election under
section 1362(a) to be a subchapter S cor-
poration, it will be treated as a domestic
corporation and a shareholder to whom
section 932(a) applies will not be treated
as a nonresident alien individual with re-
spect to such corporation. While such
an election is in effect, the corporation
will be treated as a domestic corporation
for all purposes of the Internal Revenue
Code. For the consistency requirement
with respect to entity status elections, see
paragraph (h) of this section;
(D) The treatment of items carried over
from other taxable years. Thus, for ex-
ample, if an individual to whom section
932(a) applies has for a taxable year a net
operating loss carryback or carryover un-
der section 172, a foreign tax credit car-
ryback or carryover under section 904, a
business credit carryback or carryover un-
der section 39, a capital loss carryover un-
der section 1212, or a charitable contribu-
tions carryover under section 170, the car-
ryback or carryover will be reported on the
return filed in accordance with paragraph
(b)(1) of this section, even though the re-
turn of the taxpayer for the taxable year
giving rise to the carryback or carryover
wasrequiredtobefiledwiththeVirginIs-
lands under section 932(c); and
(E) The treatment of property ex-
changed for property of a like kind (section
1031). Thus, for example, if an individual
to whom section 932(a) applies exchanges
real property located in the United States
for real property located in the Virgin Is-
lands, notwithstanding the provisions of
section 1031(h), such exchange may qual-
ify as a like-kind exchange under section
1031 (provided that all the other require-
ments of section 1031 are satisfied).
(iii)Nonapplication of general rule.
Contexts in which the general rule of para-
graph (g)(1)(i) of this section does not
apply include—
(A) The application of any rules or
regulations that explicitly treat the United
States and any (or all) of its possessions as
separate jurisdictions (for example, sec-
tions 931 through 937, 7651, and 7654).
(B) The determination of any aspect
of an individual’s residency (for example,
sections 937(a) and 7701(b)). Thus, for ex-
ample, an individualwhose principal place
of abode is in the Virgin Islands is not con-
sidered to have a principal place of abode
in the United States for purposes of section
32(c);
(C) The characterization of a corpo-
ration for purposes other than subchap-
ter S (for example, sections 367, 951
through 964, 1291 through 1298, 6038,
and 6038B). Thus, for example, if an in-
dividual to whom section 932(a) applies
transfers appreciatedtangible property to
a corporation created or organized in the
Virgin Islands in a transaction described in
section 351, he or she must recognize gain
unless an exception under section 367(a)
applies. Also, if a corporation created or
organized in the Virgin Islands qualifies as
a passive foreign investment company un-
der sections 1297 and 1298 with respect to
an individual to whom section 932(a) ap-
plies, a dividend paid to such shareholder
does not constitute qualified dividend in-
come under section 1(h)(11)(B).
(2)Section 932(c) taxpayers—(i)Gen-
eral rule. With respect to an individual to
whom section 932(c) applies for a taxable
year, for purposes of the territorial income
tax of the Virgin Islands (that is, mirrored
sections of the Code), the Virgin Islands
generally will be treated, in a geographi-
cal and governmental sense, as including
the United States. The purpose of this rule
is to facilitate the coordination of the tax
systems of the United States and the Virgin
Islands. Accordingly, the rule will have no
effect where it is manifestly inapplicable or
its application would be incompatible with
the intent of any provision of the Code.
(ii)Application of general rule. Con-
texts in which the general rule of paragraph
(g)(2)(i) of this section apply include—
(A) The characterization of taxes paid
to the United States. A taxpayer described
in section 932(c)(1) may take income tax
paid to the United States into account
under mirrored sections 31, 6315, and
6402(b) as payments to the Virgin Islands;
(B) The determination of the source of
income for purposes of the foreign tax
credit (for example, mirrored sections 901
through 904). Thus, for example, any item
of income that constitutes income from
sources within the United States under the
rules of sections 861 through 865 will be
2008–20 I.R.B.959May 19, 2008

treated as income from sources within the
Virgin Islands for purposes of mirrored
section 904;
(C) The eligibility of a corporation to
make a subchapter S election (mirrored
sections 1361 through 1379). Thus, for
example, for purposes of determining
whether a corporation created or orga-
nized in the United States may make an
election under mirrored section 1362(a)
to be a subchapter S corporation, it will
be treated as a domestic corporation and
a shareholder to whom section 932(c)
applies will not be treated as a nonresi-
dent alien individual with respect to such
corporation. While such an election is in
effect, the corporation will be treated as a
domestic corporation for all purposes of
the territorial income tax. For the consis-
tency requirement with respect to entity
status elections, see paragraph (h) of this
section;
(D) The treatment of items carried over
from other taxable years. Thus, for ex-
ample, if an individual to whom section
932(c) applies has for a taxable year a net
operating loss carryback or carryover un-
der mirrored section 172, a foreign tax
credit carryback or carryover under mir-
rored section 904, a business credit carry-
back or carryover under mirrored section
39, a capital loss carryover under mirrored
section 1212, or a charitable contributions
carryover under mirrored section 170, the
carryback or carryover will be reported on
the return filed in accordance with para-
graph (c)(1) of this section, even though
the return of the taxpayer for the taxable
year giving rise to the carryback or car-
ryoverwasrequiredtobefiledwiththe
United States; and
(E) The treatment of property ex-
changed for property of a like kind (mir-
rored section 1031). Thus, for example,
if an individual to whom section 932(c)
applies exchanges real property located in
the United States for real property located
in the Virgin Islands, notwithstanding the
provisions of mirrored section 1031(h),
such exchange may qualify as a like-kind
exchange under mirrored section 1031
(provided that all the other requirements
of mirrored section 1031 are satisfied).
(iii)Nonapplication of general rule.
Contexts in which the general rule of para-
graph (g)(2)(i) of this section does not
apply include—
(A) The determination of any aspect
of an individual’s residency (for example,
mirrored section 7701(b)). Thus, for ex-
ample, an individual whose principal place
of abode is in the United States is not con-
sidered to have a principal place of abode
in the Virgin Islands for purposes of mir-
rored section 32(c).
(B) The determination of the source of
income for purposes other than the foreign
tax credit (for example, sections 932(a)
and (b), 934(b), and 937). Thus, for exam-
ple, compensation for services performed
in the United States and rentals or royalties
from property located in the United States
do not constitute income from sources
within the Virgin Islands for purposes of
section 934(b); and
(C) The definition of wages (mirrored
section 3401). Thus, for example, ser-
vicesperformedbyanemployeeforan
employer in the United States do not con-
stitute services performed in the Virgin Is-
lands under mirrored section 3401(a)(8).
(h)Entity status consistency require-
ment—(1)In general. Taxpayers should
make consistent entity status elections (as
defined in paragraph (h)(3) of this section),
where applicable, in both the United States
and the Virgin Islands. In the case of a
business entity to which this paragraph (h)
applies—
(i) If an entity status election is filed
with the Internal Revenue Service (IRS)
but not with the Virgin Islands Bureau of
Internal Revenue (BIR), the Director of the
BIR or his delegate, at his discretion, may
deem the election also to have been made
for Virgin Islands tax purposes;
(ii) If an entity status election is filed
with the BIR but not with the IRS, the
Commissioner, at his discretion, may
deem the election also to have been made
for Federal tax purposes; and
(iii)Ifinconsistent entity status elec-
tions are filed with the BIR and the IRS,
both the Commissioner and the Director
of the BIR or his delegate may, at their
individual discretion, treat the elections
they each received as invalid and may
deem the election filed in the other ju-
risdiction to have been made also for tax
purposes in their own jurisdiction. See
Rev. Proc. 2006–23, 2006–1 C.B. 900,
(see §601.601(d)(2)(ii)(b) of this chapter)
for procedures for requesting the assis-
tance of the IRS when a taxpayer is or may
be subject to inconsistent tax treatment by
the IRS and a U.S. possession tax agency.
(2)Scope. This paragraph (h) applies to
the following business entities:
(i) A business entity (as defined in
§301.7701–2(a) of this chapter) that is
domestic (as defined in §301.7701–5 of
this chapter), or otherwise treated as do-
mestic for purposes of the Code, and that
is owned in whole or in part by any person
who is either abona fideresident of the
Virgin Islands or a business entity created
or organized in the Virgin Islands.
(ii) A business entity that is created or
organized in the Virgin Islands and that
is owned in whole or in part by any U.S.
person (other than abona fideresident of
the Virgin Islands).
(3)Definition. For purposes of this
section, the termentity status electionin-
cludes an election under §301.7701–3(c)
of this chapter, an election under section
1362(a), and any other similar elections.
(4)Default status. Solely for the pur-
pose of determining classification of an el-
igible entity under §301.7701–3(b) of this
chapter and under that section as mirrored
in the Virgin Islands, an eligible entity sub-
ject to this paragraph (h) will be classified
for both Federal and Virgin Islands tax pur-
poses using the rule that applies to domes-
tic eligible entities.
(5)Transition rules—(i) In the case of
an election filed prior to April 11, 2005,
except as provided in paragraph (h)(5)(ii)
of this section, the rules of paragraph (h)(1)
of this section will apply as of the first
day of the first taxable year of the entity
beginning after April 11, 2005.
(ii) In the unlikely circumstance that in-
consistent elections described in paragraph
(h)(1)(iii) of this section are filed prior
to April 11, 2005, and the entity cannot
change its classification to achieve consis-
tency because of the sixty-month limita-
tion described in §301.7701–3(c)(1)(iv) of
this chapter, then the entity may neverthe-
less request permission from the Commis-
sioner or the Director of the BIR or his del-
egatetochangesuchelectiontoavoidin-
consistent treatment by the Commissioner
and the Director of the BIR or his delegate.
(iii) Except as provided in paragraphs
(h)(5)(i) and (h)(5)(ii) of this section, in the
case of an election filed with respect to an
entity before it became an entity described
in paragraph (h)(2) of this section, the rules
of paragraph (h)(1) of this section will ap-
May 19, 20089602008–20 I.R.B.

ply as of the first day that such entity is de-
scribed in paragraph (h)(2) of this section.
(iv) In the case of an entity created or or-
ganized prior to April 11, 2005, paragraph
(h)(4) of this section will take effect for
Federal income tax purposes (or Virgin Is-
lands income tax purposes, as the case may
be) as of the first day of the first taxable
year of the entity beginning after April 11,
2005.
(i)Examples. The rules of this section
are illustrated by the following examples:
Example 1. (i) A is a U.S. citizen who resides
in State R. For 2008, A files with the IRS a Form
1040, “U.S. Individual Income Tax Return,” reporting
adjusted gross income of $90x, which includes $30x
from sources in the Virgin Islands. The income tax
liability reported on A’s Form 1040 is $18x. A files
a copy of his Form 1040 with the Virgin Islands as
required by section 932(a)(2) and paragraph (b)(1) of
this section. A pays to the Virgin Islands the appli-
cable percentage of his Federal income tax liability
as required by section 932(b) and paragraph (b)(2) of
this section, computed as follows:
$30x / $90x × $18x = $6x income tax liability to the Virgin Islands
(ii) A claims a credit in the amount of $6x against
his Federal income tax liability reported on his Form
1040. A attaches a Form 8689, “Allocation of Indi-
vidual Income Tax to the U.S. Virgin Islands,” to the
Form 1040 filed with the IRS and to the copy filed
with the Virgin Islands.
Example 2. (i) B, a U.S. citizen, files returns on a
calendar year basis. In November 2008, B moves to
the Virgin Islands, purchases a house, and accepts a
permanent position with a local employer. For the re-
mainder of the year and throughout 2009, B continues
to live and work in the Virgin Islands and has a closer
connection to the Virgin Islands than to the United
States or any foreign country. As a consequence of
his employment in the Virgin Islands, B earns income
from the performance of services in the Virgin Islands
during 2008 and 2009.
(ii) For 2008, B does not qualify as abona fide
resident under section 937(a) and §1.937–1(b) and
(f)(1). Therefore, B is subject to the rules of sec-
tions 932(a) and (b) and paragraph (b) of this sec-
tion for 2008 because he has income derived from
sources within the Virgin Islands as determined un-
der the rules of section 937(b) and §1.937–2.
(iii) For 2009, assuming that B otherwise satisfies
the requirements of section 937(a) and §1.937–1(b),
B qualifies as abona fideresident of the Virgin Is-
lands. Therefore, section 932(c) and paragraph (c) of
this section apply to B for 2009, and he must file his
income tax return with the Virgin Islands under para-
graph (c)(1) of this section. Provided that B fully sat-
isfies the reporting requirements of paragraph (c)(1)
of this section and fully pays the tax liability referred
to in section 934(a), B will have no Federal income
tax filing requirement or liability under paragraphs
(c)(2) and (3) of this section.
Example 3. H and W are U.S. citizens. H resides
in State T and W is abona fideresident of the Virgin
Islands. For 2008, H and W prepare a joint Form
1040, “U.S. Individual Income Tax Return,” reporting
total adjusted gross income of $75x, of which $40x
is attributable to compensation that W received for
services performed in the Virgin Islands and $35x to
compensation that H received for services performed
in State T. Pursuant to section 932(d) and paragraph
(d) of this section, because W would have the greater
adjusted gross income if computed separately, H and
W must file their joint Form 1040 with the Virgin
Islands as required by section 932(c) and paragraph
(c)(1) of this section. H and W may claim a tax credit
on such return for income tax withheld during 2008
andpaidtotheIRS.
Example 4. (i) The facts are the same as inEx-
ample 3, except that H also earns $25x for services
performed in the Virgin Islands, so that H and W’s
total adjusted gross income is $100x, and their total
income tax liability is $20x.
(ii) Pursuant to section 932(d) and paragraph (d)
of this section, because H would have the greater ad-
justed gross income if computed separately, H and W
must file their joint Form 1040 with the IRS and must
file a copy of that joint Form 1040 with the Virgin Is-
lands as required by section 932(a)(2) and paragraph
(b)(1) of this section. H and W must pay the applica-
ble percentage of their Federal income tax liability to
theVirginIslandsasrequiredbysection932(b)and
paragraph (b)(2) of this section, computed as follows:
$65x / $100x × $20x = $13x income tax liability to the Virgin Islands
(iii) H and W claim a credit against their Federal
income tax liability reported on their joint Form 1040
i
n the amount of $13x, the portion of their Federal
income tax liability required to be paid to the Virgin
Islands. H and W attach a Form 8689, “Allocation of
Individual Income Tax to the U.S. Virgin Islands,” to
their joint Form 1040 filed with the IRS and to the
copy filed with the Virgin Islands.
Example 5. N, a U.S. citizen and calendar year
taxpayer, takes the position that he is abona fideres-
ident of the Virgin Islands for the 2007 taxable year.
On April 15, 2008, N files a Form 1040, “U.S. Indi-
vidual Income Tax Return,” with the Virgin Islands
for his 2007 taxable year. N does not file a Form
1040 with the IRS. Because there is an agreement
in force between the United States and the Virgin
Islands for the routine exchange of income tax in-
formation, under paragraph (c)(2)(ii) of this section,
the Federal 3-year period of limitations under section
6501(a) will expire on April 15, 2011, and the IRS
will make no further assessment of income tax after
that date for N’s 2007 taxable year except as other-
wise authorized by section 6501.
Example6. (i) J is a U.S. citizen and abona fide
resident of the Virgin Islands. In 2008, J receives
compensation for services performed as an employee
in the Virgin Islands in the amount of $40x. J files
with the Virgin Islands a Form 1040, “U.S. Individual
Income Tax Return,” reporting gross income of only
$30x. Based on these facts, J has not satisfied the
c
onditions of section 932(c)(4) and paragraph (c) of
this section for an exclusion from gross income for
Federal income tax purposes.
(
ii) The facts are the same as in paragraph (i)
of thisExample 6except that on or before the last
day prescribed for filing an income tax return for J’s
2008 taxable year, J files with the Virgin Islands an
amended Form 1040 for 2008, correctly reporting the
full $40x of compensation. Provided that J otherwise
fully satisfies the reporting requirements of paragraph
(c)(1) of this section and fully pays the tax liability
referred to in section 934(a), J will have no Federal
income tax filing requirement or liability under para-
graphs (c)(2) and (3) of this section.
Example 7. (i) N is a U.S. citizen and abona fide
resident of the Virgin Islands. In 2008, N receives
compensation for services performed in Country M.
N files with the Virgin Islands a Form 1040, “U.S. In-
dividual Income Tax Return,” reporting the compen-
sation as income effectively connected with the con-
duct of a trade or business in the Virgin Islands. N
claims a special credit against the tax on this compen-
sation pursuant to a Virgin Islands law enacted within
the limits of its authority under section 934.
(ii) Under the principles of section 864(c)(4)
as applied pursuant to section 937(b)(1) and
§1.937–3(b), compensation for services performed
outside the Virgin Islands may not be treated as
i
ncome effectively connected with the conduct of a
trade or business in the Virgin Islands for purposes
of section 934(b). Consequently, N is not entitled
to claim the special credit under Virgin Islands law
with respect to N’s income from services performed
in Country M. Because N has not fully paid his tax
liability referred to in section 934(a), he has not
satisfied the conditions of section 932(c)(4) and para-
graph (c) of this section for an exclusion from gross
income for Federalincome tax purposes. Therefore,
income reported on the Form 1040 as filed with the
Virgin Islands must be included in N’s Federal gross
income. Under paragraph (c)(3)ofthissection,the
amount of tax paid to the Virgin Islands on such in-
come will be allowed as a credit against N’s Federal
income tax liability.
(j)Effective/applicability date. Except
as otherwise provided in this paragraph (j),
this section applies to taxable years ending
after April 9, 2008. Taxpayers may choose
to apply paragraph (c)(2)(ii) of this section
to open taxable years ending on or after
December 31, 2006.
2008–20 I.R.B.961May 19, 2008

§1.932–1T [Removed]
Par. 20. Section 1.932–1T is removed.
Par. 21. Section 1.933–1 is amended by
revising paragraphs (a), (c), (d), and (e) to
read as follows:
§1.933–1 Exclusion of certain income
from sources within Puerto Rico.
(a)General rule. (1) An individual
(whether a United States citizen or an
alien), who is abona fideresident of
Puerto Rico during the entire taxable year,
will exclude from gross income the in-
come derived from sources within Puerto
Rico, except amounts received for ser-
vices performed as an employee of the
United States or any agency thereof. For
purposes of section 933 and this section,
an employee of the government of Puerto
Rico will not be considered an employee
oftheUnitedStatesorofanagencyofthe
United States.
(2) The following example illustrates
the application of the general rule in para-
graph (a)(1) of this section:
Example. E, a United States citizen, files returns
on a calendar year basis. In April 2008, E moves to
Puerto Rico, where he purchases a house and accepts
a permanent position with a local employer. For the
remainder of the year and for the following three tax-
able years, E continues to live and work in Puerto
Rico and has a closer connection to Puerto Rico than
to the United States or any foreign country. Assuming
that E otherwise meets the requirements under sec-
tion 937(a) and §1.937–1(b) and (f)(1) (year-of-move
exception), E is considered abona fideresident of
Puerto Rico for 2008. Accordingly, under section
933(1) and paragraph (a)(1) of this section, E should
exclude from his 2008 Federal gross income any in-
come from sources within Puerto Rico, as determined
under section 937(b) and §1.937–2.
*****
(c)Deductions and credits. In any case
in which any amount otherwise constitut-
ing gross income is excluded from gross
income under the provisions of section
933, there will not be allowed as a de-
duction from gross income any items of
expenses or losses or other deductions
(except the deduction under section 151,
relating to personal exemptions), or any
credit, properly allocable to, or chargeable
against, the amounts so excluded from
gross income. For purposes of the pre-
ceding sentence, the rules of §1.861–8
will apply (with creditable expenditures
treated in the same manner as deductible
expenditures).
(d)Definitions. For purposes of this
section—
(1) The rules of §1.937–1 will apply
for determining whether an individual is a
bona fideresident of Puerto Rico; and
(2) The rules of §1.937–2 will apply
for determining whether income is from
sources within Puerto Rico.
(e)Effective/applicability date. Para-
graphs (a), (c), (d), and (e) of this section
apply to taxable years ending after April 9,
2008.
§1.933–1T [Removed]
Par. 22. Section 1.933–1T is removed.
Par. 23. Section 1.934–1 is revised to
read as follows:
§1.934–1 Limitation on reduction in
income tax liability incurred to the Virgin
Islands.
(a)General rule. Section 934(a) pro-
vides that tax liability incurred to the
United States Virgin Islands (Virgin Is-
lands) must not be reduced or remitted in
any way, directly or indirectly, whether by
grant, subsidy, or other similar payment,
by any law enacted in the Virgin Islands,
except to the extent provided in section
934(b). For purposes of the preceding
sentence, the term “tax liability” means
the liability incurred to the Virgin Islands
pursuant to subtitle A of the Internal Rev-
enue Code (Code), as made applicable
in the Virgin Islands by the Act of July
12, 1921 (48 U.S.C. 1397), or pursuant to
section 28(a) of the Revised Organic Act
of the Virgin Islands (48 U.S.C. 1642), as
modified by section 7651(5)(B).
(b)Exception for Virgin Islands in-
come—(1)In general. Section 934(b)(1)
provides an exceptionto the application of
section 934(a). Under this exception, sec-
tion 934(a) does not apply with respect to
tax liability incurred to the Virgin Islands
to the extent that such tax liability is at-
tributable to income derived from sources
within the Virgin Islands or income ef-
fectively connected with the conduct of a
trade or business within the Virgin Islands.
(2)Limitation. Section 934(b)(2) lim-
its the scope of the exception provided by
section 934(b)(1). Pursuant to this limita-
tion, the exception does not apply with re-
spect to an individual who is a citizen or
resident of the United States (other than a
bona fideresident of the Virgin Islands).
For the rules for determining tax liability
incurred to the Virgin Islands by such an
individual, see section 932(a) and the reg-
ulations under that section.
(3)Computation rule—(i)Operative
rule. For purposes of section 934(b)(1)
and this paragraph (b), tax liability in-
curred to the Virgin Islands for the tax-
able year attributable to income derived
from sources within the Virgin Islands
or income effectively connected with the
conduct of a trade or business within the
Virgin Islands will be computed as fol-
lows:
(A) Add to the income tax liability
incurred to the Virgin Islands any credit
against the tax allowed under mirrored
section 901(a).
(B) Multiply by taxable income from
sources within the Virgin Islands and in-
come effectively connected with the con-
duct of a trade or business within the Vir-
gin Islands (applying the rules of §1.861–8
to determine deductions allocable to such
income).
(C) Divide by total taxable income.
(D) Subtract the portion of any credit
allowed under mirrored section 901 (other
than credits for taxes paid to the United
States) determined by multiplying the
amount of taxable income from sources
outside the Virgin Islands or the United
States that is effectively connected to the
conduct of a trade or business in the Vir-
gin Islands divided by the total amount of
taxable income from such sources.
(ii)Limitation. Tax liability incurred to
the Virgin Islands attributable to income
derived from sources within the Virgin Is-
lands or income effectively connected with
the conduct of a trade or business within
the Virgin Islands, as computed in this
paragraph (b)(3), however, will not exceed
the total amount of income tax liability ac-
tually incurred.
(4)Definitions. For purposes of this
section—
(i)Bona fide resident.Therulesof
§1.937–1 will apply for determining
whether an individual is abona fideresi-
dent of the Virgin Islands;
(ii)Source. The rules of §1.937–2 will
apply for determining whether income is
from sources within the Virgin Islands; and
(iii)Effectively connected income.The
rules of §1.937–3 will apply for deter-
mining whether income is effectively
May 19, 20089622008–20 I.R.B.

connected with the conduct of a trade or
business in the Virgin Islands.
(c)Exception for qualified foreign
corporations—(1)In general. Section
934(b)(3) provides an exception to the
application of section 934(a). Under this
exception, section 934(a) does not apply
with respect to tax liability incurred to the
Virgin Islands by a qualified foreign cor-
poration to the extent that such tax liability
is attributable to income that is derived
from sources outside the United States and
that is not effectively connected with the
conduct of a trade or business within the
United States.
(2)Qualified foreign corporation.For
purposes of paragraph (c)(1) of this sec-
tion, the termqualified foreign corpora-
tionmeans any foreign corporation if one
or more United States persons own or are
treated as owning (within the meaning of
section 958) less than 10 percent of—
(i) The total voting power of the stock
of such corporation; and
(ii) The total value of the stock of such
corporation.
(3)Computation rule—(i)Operative
rule. For purposes of section 934(b)(3)
and this paragraph (c), tax liability in-
curred to the Virgin Islands for the taxable
year attributable to income that is derived
from sources outside the United States and
that is not effectively connected with the
conduct of a trade or business within the
United States will becomputed as follows:
(A) Add to the income tax liability
incurred to the Virgin Islands any credit
against the tax allowed under mirrored
section 901(a).
(B) Multiply by taxable income that is
derived from sources outside the United
States and that is not effectively connected
with the conduct of a trade or business
within the United States (applying the
rules of §1.861–8 to determine deductions
allocable to such income).
(C) Divide by total taxable income.
(D) Subtract any credit allowed under
mirrored section 901 (other than credits for
taxes paid to the United States or taxes
for which a credit is allowable for Federal
income tax purposes under section 906 of
the Code).
(ii)Limitation. Tax liability incurred to
the Virgin Islands attributable to income
that is derived from sources outside the
United States and that is not effectively
connected with the conduct of a trade or
business within the United States, as com-
puted in this paragraph (c)(3), however,
will not exceed the total amount of income
tax liability actually incurred.
(4)U.S. income—(i)In general.For
purposes of this section, except as pro-
vided in paragraph (c)(4)(ii) of this section,
the rules of sections 861 through 865 and
the regulations under those provisions will
apply for determining whether income is
from sources outside the United States or
effectively connectedwith the conduct of a
trade or business within the United States.
(ii)Conduit arrangements.Incomewill
be considered to be from sources within
the United States for purposes of para-
graph (c)(1) of this section if, pursuant to
a plan or arrangement—
(A) The income is received in exchange
for consideration provided to another per-
son; and
(B) Such person (or another person)
provides the same consideration (or con-
sideration of a like kind) to a third person
in exchange for one or more payments con-
stituting income from sources within the
United States.
(d)Examples. The rules of this section
are illustrated by the following examples:
Example 1. (i) S is a U.S. citizen and abona fide
resident of the Virgin Islands. For 2008, S files a
Form 1040INFO, “Non-Virgin Islands Source Income
of Virgin Islands Residents,” with the Virgin Islands
on which S reports total gross income as follows:
CompensationforservicesperformedintheVirginIslands ........................................................
$50,000
CompensationforservicesperformedintheUnitedStates......................................................... 40,000
CompensationforservicesperformedinMexico ................................................................ 30,000
IncomefrominventorysalesinLatinAmericaattributabletoVirginIslandsoffice...................................... 20,000
InterestonaU.S.bankaccount..............................................................................6,000
InterestonaV.I.bankaccount...............................................................................
5,000
DividendsfromaU.S.corporation ...........................................................................4,000
(ii) Accordingly, S has total gross income of
$155,000, comprising income from sources within
the Virgin Islands or effectively connected to the
conduct of a trade or business in the Virgin Is-
lands (Virgin Islands ECI) of $75,000, income from
sources within the United States of $50,000, and in-
come from other sources (not Virgin Islands ECI) of
$30,000. After taking intoaccount allowable deduc-
tions, S’s total taxable income is $120,000, of which
$45,000 is taxable income from sources within the
Virgin Islands, $15,000 is taxable income from other
sources that is Virgin Islands ECI under the rules
of section 937(b) and §§1.937–2 and 1.937–3, and
$22,500 is taxable income from sources outside the
Virgin Islands (and outside the United States) that is
not Virgin Islands ECI. S’s tax liability incurred to the
Virgin Islands pursuant to the Internal Revenue Code
as applicable in the Virgin Islands (mirror code) is
$30,000. S is entitled to claim a credit under section
901 of the mirror code in the amount of $10,000 for
income tax paid to Mexico and other Latin American
countries, for a net income tax liability of $20,000.
(iii) Pursuant to a Virgin Islands law that was duly
enacted within the limits of its authority under sec-
tion 934, S may claim a special deduction relating
to his business activities in the Virgin Islands. How-
ever, under section 934(b), S’s ability to claim this
special deduction is limited. Specifically, the maxi-
mum amount of the reduction in S’s mirror code tax
liability that may result from claiming this deduction,
computed in accordance withparagraph (b)(3) of this
section, is as follows:
[($20,000 + $10,000) × (($45,000 + $15,000) / $120,000)] - [$10,000 × ($15,000 / ($15,000 + $22,500))] = [$30,000 × ($60,000 /
$120,000)] - [$10,000 × ($15,000 / $37,500)] = ($30,000 × 0.5) - ($10,000 × 0.4) = $15,000 - $4,000 = $11,000
(iv) Accordingly, S’s net tax liability incurred to
the Virgin Islands must be at least $19,000 ($30,000 -
$11,000), prior to taking into account any foreign tax
credit.
Example 2.ThefactsarethesameasExample
1, except that S is a U.S. citizen who resides in the
United States. As required by section 932(a) and (b),
S files with the Virgin Islands a copy of his Federal
income tax return and pays to the Virgin Islands the
portion of his Federal income tax liability that his
Virgin Islands adjusted gross income bears to his ad-
justed gross income. Under section 934(b)(2), S may
not claim the special deduction offered under Virgin
Islands law relating to business activities like his in
2008–20 I.R.B.963May 19, 2008

the Virgin Islands to reduce any of his tax liability
payable to the Virgin Islands under section 932(b).
Example 3. (i) Z is a nonresident alien who re-
sides in Country FC. In 2008, Z receives dividends
from a corporation organized under the law of the Vir-
gin Islands in the amount of $90x. Z’s tax liability in-
curred to the Virgin Islands pursuant to section 871(a)
of the Code as applicable in the Virgin Islands (mirror
code) is $27x.
(ii) Pursuant to a Virgin Islands law that was duly
enacted within the limits of its authority under section
934, Z may claim a special exemption for income re-
lating to his investment in the Virgin Islands. The
maximum amount of the reduction in Z’s mirror code
tax liability that may result from claiming this exemp-
tion, computed in accordance with paragraph (b)(3)
of this section, is as follows:
$27x × ($90x / $90x) = $27x
(iii) Accordingly, depending on the terms of the
exemption as provided under Virgin Islands law, Z’s
net tax liability incurred to the Virgin Islands may be
reduced or eliminated entirely.
Example 4. (i) A Corp is organized under the laws
of the Virgin Islands and is engaged in a trade or busi-
ness in the United States through an office in State N.
All of A Corp’s outstanding stock is owned by U.S.
citizens who arebona fideresidents of the Virgin Is-
lands. During 2008, A Corp had $50x in gross in-
come from sources within the Virgin Islands (as de-
termined under section 937(b) and §1.937–2) that is
not effectively connectedwith the conduct of a trade
or business in the United States; $20x in gross in-
come from sources in Country H that is effectively
connected with the conduct of A Corp’s trade or busi-
ness in the United States; and $10x in gross income
from sources in Country R that is not effectively con-
nected with the conduct of A Corp’s trade or business
in the United States.
(ii) Section 934(b)(3) permits the Virgin Islands
to reduce or remit the income tax liability of a qual-
ified foreign corporation arising under the Code as
applicable in the Virgin Islands (mirror code) with re-
spect to income that is derived from sources outside
the United States and that is not effectively connected
with the conduct of a trade or business in the United
States. A foreign corporation constitutes a “quali-
fied foreign corporation” under section 934(b)(3)(B)
if less than 10 percent of the total voting power and
value of the stock of the corporation is owned or
treated as owned (within the meaning of section 958)
by one or more United States persons. A U.S. cit-
izen is a “United States person” as defined in sec-
tion 7701(a)(30)(A). Given that 10 percent or more of
the voting power and value of its stock is owned by
U.S. citizens, A Corp does not constitute a “qualified
foreign corporation” under section 934(b)(3)(B). Ac-
cordingly, the Virgin Islands may only reduce or re-
mit A Corp’s mirror code income tax liability with re-
spect to its $50x in gross income from sources within
the Virgin Islands.
Example 5. (i) The facts are the same as inExam-
ple 4, except that the outstanding stock of A Corp is
owned by the following individuals:
U.S. citizens who arebona fideresidentsoftheVirginIslands......................................................
5%
U.S. citizens who are notbona fideresidentsoftheVirginIslands................................................... 3%
Nonresident aliens who arebona fideresidentsoftheVirginIslands................................................. 42%
Nonresident aliens who are notbona fideresidentsoftheVirginIslands .............................................
50%
(ii) Given that less than 10 percent of the vot-
ing power and value of its stock is owned by United
St
ates persons, A Corp constitutes a qualified foreign
corporation under section 934(b)(3)(B). Accordingly,
the Virgin Islands may reduce or remit A Corp’s mir-
r
or code income tax liability with respect to its $50x
in gross income from sources within the Virgin Is-
lands and its $10x in gross income from sources in
C
ountry R that is not effectively connected with the
conduct of A Corp’s trade or business in the United
States.Innoevent,however,maytheVirginIslands
reduce or remit A Corp’s mirror code income tax lia-
bility with respect to its $20x in gross income from
sources in Country H that is effectively connected
with the conduct of A Corp’s trade or business in the
United States.
(e)Effective/applicability date.This
section applies for taxable years ending af-
ter April 9, 2008.
§1.934–1T [Removed]
Par. 24. Section 1.934–1T is removed.
Par. 25. Section 1.935–1 is amended
by revising paragraphs (a), (b)(1), (b)(3),
(b)(5), (b)(6), (b)(7), (c), (d), (e), (f), and
(g) to read as follows:
§1.935–1 Coordination of individual
income taxes with Guam and the Northern
Mariana Islands.
(a)Application of section—(1)Scope.
Section 935 and this section set forth the
special rules relating to the filing of in-
come tax returns, income tax liabilities,
and estimated income tax of individuals
described in paragraph (a)(2) of this sec-
tion. Paragraph (e) of this section also
provides special rules requiring consistent
treatment of business entities in the United
States and in section 935 possessions.
(2)Individuals covered. This section
applies to any individual who—
(i) Is abona fideresident of a sec-
tion 935 possession during the entire
taxable year, whether or not such indi-
vidual is a citizen of the United States
or a resident alien (as defined in section
7701(b)(1)(A));
(ii) Is a citizen of a section 935 pos-
session but not otherwise a citizen of the
United States;
(iii) Has income from sources within
a section 935 possession for the taxable
year, is a citizen of the United States or
a resident alien (as defined in section
7701(b)(1)(A)) and is not abona fideres-
ident of a section 935 possession during
the entire taxable year; or
(iv) Files a joint return for the taxable
year with any individual described in para-
graph (a)(2)(i), (ii),or(iii)ofthissection.
(3)Definitions. For purposes of this
section, the following definitions apply:
(i) The termsection 935 possession
means Guam or the Northern Mariana
Islands, unless such possession has en-
tered into an implementing agreement, as
described in section 1271(b) of the Tax
Reform Act of 1986, Public Law 99–514
(100 Stat. 2085), with the United States
that is in effect for theentire taxable year.
(ii) The termrelevant possession
means—
(A) With respect to an individual de-
scribed in paragraph (a)(2)(i) of this sec-
tion, the section 935 possession of which
such individual is abona fideresident;
(B) With respect to an individual de-
scribed in paragraph (a)(2)(ii) of this sec-
tion, the section 935 possession of which
such individual is a citizen; and
(C) With respect to an individual de-
scribed in paragraph (a)(2)(iii) of this
section, the section 935 possession from
which such individual derives income.
(iii) The rules of §1.937–1 will apply
for determining whether an individual is a
bona fideresident of a section 935 posses-
sion.
(iv) The rules of §1.937–2 generally
will apply for determining whether income
is from sources within a section 935 pos-
session. Pursuant to §1.937–2(a), how-
ever, the rules of §1.937–2(c)(1)(ii) and
(c)(2) do not apply for purposes of section
935(a)(3) (as in effect before the effective
date of its repeal) and paragraph (a)(2)(iii)
of this section.
(v) The termcitizen of the United States
means any individual who is a citizen
May 19, 20089642008–20 I.R.B.

within the meaning of §1.1–1(c), except
that the term does not include an indi-
vidual who is a citizen of a section 935
possession but not otherwise a citizen of
the United States. The termcitizen of a
section 935 possession but not otherwise
a citizen of the United Statesmeans any
individual who has become a citizen of the
United States by birth or naturalization in
the section 935 possession.
(vi) With respect to the United States,
the termresidentmeans an individual who
is a citizen (as defined in §1.1–1(c)) or res-
ident alien (as definedin section 7701(b))
and who does not have a tax home (as
definedinsection911(d)(3))inaforeign
country during the entire taxable year. The
term does not include an individual who is
abona fideresident of a section 935 pos-
session.
(vii) The termU.S. taxpayermeans an
individual described in paragraph (b)(1)(i)
or (iii)(B) of this section.
(b)Filing requirement—(1)Tax juris-
diction. An individual described in para-
graph (a)(2) of this section must file an in-
come tax return for the taxable year—
(i) With the United States if such indi-
vidual is a resident of the United States;
(ii) With the relevant possession if
such individual is described in paragraph
(a)(2)(i) of this section; or
(iii) If neither paragraph (b)(1)(i) nor
paragraph (b)(1)(ii) of this section ap-
plies—
(A) With the relevant possession if
such individual is described in paragraph
(a)(2)(ii) of this section; or
(B) With the United States if such indi-
vidual is a citizen of the United States, as
defined in paragraph (a)(3) of this section.
*****
(3)Place for filing returns—(i)U.S. re-
turns. A return required under this para-
graph (b) to be filed with the United States
must be filed as directed in the applicable
forms and instructions.
(ii)Guam returns. A return required
under this paragraph (b) to be filed with
Guam must be filed as directed in the ap-
plicable forms and instructions.
(iii)NMI returns. A return required un-
der this paragraph (b) to be filed with the
Northern Mariana Islands must be filed as
directed in the applicable forms and in-
structions.
*****
(5)Tax payments. The tax shown on
thereturnmustbepaidtothejurisdiction
withwhichsuchreturnisrequiredtobe
filed and must be determined by taking
into account any credit under section 31
for tax withheld by the relevant possession
or the United States on wages, any credit
under section 6402(b) for an overpayment
of income tax to the relevant possession or
the United States, and any payments under
section 6315 of estimated income tax paid
to the relevant possession or the United
States.
(6)Liability to other jurisdiction—(i)
Filing with the relevant possession.Inthe
case of an individual who is required un-
der paragraph (b)(1) of this section to file
a return with the relevant possession for
a taxable year, if such individual properly
files such return and fully pays his or her
income tax liability to the relevant posses-
sion, such individual is relieved of liability
to file an income tax return with, and to pay
an income tax to, the United States for the
taxable year.
(ii)Filing with the United States.Inthe
case of an individual who is required under
paragraph(b)(1)ofthissectiontofilea
return with the United States for a taxable
year, such individual is relieved of liability
to file an income tax return with, and to pay
an income tax to, the relevant possession
for the taxable year.
(7) [Reserved].
(c)Extension of territory—(1)U.S. tax-
payers—(i)General rule. With respect to
a U.S. taxpayer, for purposes of taxes im-
posed by Chapter 1 of the Internal Rev-
enue Code (Code), the United States gen-
erally will be treated, in a geographical and
governmental sense, as including the rele-
vant possession. The purpose of this rule
is to facilitate the coordination of the tax
systems of the United States and the rele-
vant possession. Accordingly, the rule will
have no effect where it is manifestly inap-
plicable or its application would be incom-
patible with the intent of any provision of
the Code.
(ii)Application of general rule.Con-
texts in which the general rule of paragraph
(c)(1)(i) of this section apply include—
(A) The characterization of taxes paid
to the relevant possession. Income tax
paid to the relevant possession may be
taken into account under sections 31, 6315,
and 6402(b) as payments to the United
States. Taxes paid to the relevant posses-
sion and otherwise satisfying the require-
ments of section 164(a) will be allowed as
a deduction under that section, but income
taxes paid to the relevant possession will
be disallowed as a deduction under section
275(a);
(B) The determination of the source of
income for purposes of the foreign tax
credit (for example, sections 901 through
904). Thus, for example, after a U.S. tax-
payer determines which items of income
constitute income from sources within the
relevant possession under the rules of sec-
tion 937(b), such income will be treated
as income from sources within the United
States for purposes of section 904;
(C) The eligibility of a corporation to
make a subchapter S election (sections
1361 through 1379). Thus, for example,
for purposes of determining whether a
corporation created or organized in the
relevant possession may make an election
under section 1362(a) to be a subchapter
S corporation, it will be treated as a do-
mestic corporation and a U.S. taxpayer
shareholder will not be treated as a nonres-
ident alien individual with respect to such
corporation. While such an election is in
effect, the corporation will be treated as a
domestic corporation for all purposes of
the Code. For the consistency requirement
with respect to entity status elections, see
paragraph (e) of this section;
(D) The treatment of items carried over
from other taxable years. Thus, for ex-
ample, if a U.S. taxpayer has for a tax-
able year a net operating loss carryback or
carryover under section 172, a foreign tax
credit carryback or carryover under section
904, a business credit carryback or carry-
over under section 39, a capital loss car-
ryover under section 1212, or a charitable
contributions carryover under section 170,
the carryback or carryover will be reported
on the return filed with the United States
in accordance with paragraph (b)(1)(i) or
(b)(1)(iii)(B) of this section, even though
the return of the taxpayer for the taxable
year giving rise to the carryback or carry-
over was required to be filed with a section
935 possession; and
(E) The treatment of property ex-
changed for property of a like kind (section
1031). Thus for example, if a U.S. tax-
payer exchanges real property located in
the United States for real property located
in the relevant possession, notwithstand-
ing the provisions of section 1031(h), such
2008–20 I.R.B.965May 19, 2008

exchange may qualify as a like-kind ex-
change under section 1031 (provided that
all the other requirements of section 1031
are satisfied).
(iii)Nonapplication of general rule.
Contexts in which the general rule of para-
graph (c)(1)(i) of this section does not
apply include—
(A) The application of any rules or
regulations that explicitly treat the United
States and any (or all) of its possessions as
separate jurisdictions (for example, sec-
tions 931 through 937, 7651, and 7654);
(B) The determination of any aspect
of an individual’s residency (for example,
sections 937(a) and 7701(b)). Thus, for ex-
ample, an individual whose principal place
of abode is in the relevant possession is
not considered to have a principal place of
abode in the United States for purposes of
section 32(c);
(C) The determination of the source of
income for purposes other than the foreign
tax credit (for example, sections 935, 937,
and 7654). Thus, for example, income
determined to be derived from sources
within the relevant possession under sec-
tion 937(b) will not be considered income
from sources within the United States for
purposes of Form 5074, “Allocation of
Individual Income Tax to Guam or the
Commonwealth of the Northern Mariana
Islands (CNMI)”;
(D) The definition of wages (section
3401). Thus, for example, services per-
formed by an employee for an employer
in the relevant possession do not constitute
services performed in the United States un-
der section 3401(a)(8); and
(E) The characterization of a corpo-
ration for purposes other than subchap-
ter S (for example, sections 367, 951
through 964, 1291 through 1298, 6038,
and 6038B). Thus, for example, if a U.S.
taxpayer transfers appreciated tangible
property to a corporation created or or-
ganized in the relevant possession in a
transaction described in section 351, he
or she must recognize gain unless an
exception under section 367(a) applies.
Also, if a corporation created or orga-
nized in the relevant possession qualifies
as a passive foreign investment company
under sections 1297 and 1298 with re-
spect to a U.S. taxpayer, a dividend paid
to such shareholder does not constitute
qualified dividend income under section
1(h)(11)(B).
(2)Application in relevant possession.
In applying the territorial income tax of the
relevant possession, such possession gen-
erally will be treated, in a geographical
and governmental sense, as including the
United States. Thus, for example, income
tax paid to the United States may be taken
into account under sections 31, 6315, and
6402(b) as payments to the relevant pos-
session. Moreover, a citizen of the United
States (as defined in paragraph (a)(3) of
this section) not a resident of the relevant
possession will not be treated as a nonres-
ident alien individual for purposes of the
territorial income tax of the relevant pos-
session. Thus, for example, a citizen of the
United States (as so defined), or a resident
of the United States, will not be treated as
a nonresident alien individual for purposes
of section 1361(b)(1)(C) of the Guam ter-
ritorial income tax.
(d)Special rules for estimated income
tax—(1)In general. An individual must
make each payment of estimated income
tax (and any amendment to the estimated
tax payment) to the jurisdiction with which
the individual reasonably believes, as of
the date of that payment (or amendment),
that he or she will be required to file a re-
turn for the taxable year under paragraph
(b)(1) of this section. In determining the
amount of such estimated income tax, in-
come tax paid to the relevant possession
may be taken into account under sections
31 and 6402(b) as payments to the United
States, andvice versa. For other rules re-
lating to estimated income tax, see section
6654.
(2)Joint estimated income tax.Inthe
case of married persons making a joint
payment of estimated income tax, the tax-
payers must make each payment of esti-
mated income tax (and any amendment
to the estimated tax payment) to the ju-
risdiction where the spouse who has the
greater estimated adjusted gross income
for the taxable year would be required un-
der paragraph (d)(1) of this section to pay
estimated income tax if separate payments
were made. For this purpose, estimated ad-
justed gross income of each spouse for the
taxable year is determined without regard
to community property laws.
(3)Erroneous payment. If the individ-
ual or spouses erroneously pay estimated
income tax to the United States instead of
the relevant possession orvice versa, only
subsequent payments or amendments of
thepaymentsarerequiredtobemadepur-
suant to paragraph (d)(1) or (d)(2) of this
section with the other jurisdiction.
(4)Place for payment. Estimated in-
come tax required under this paragraph (d)
to be paid to Guam or the Northern Mari-
ana Islands must be paid as directed in the
applicable forms and instructions issued
by the relevant possession. Estimated in-
come tax required under paragraph (d)(1)
of this section to be paid to the United
States must be paid as directed in the ap-
plicable forms and instructions.
(5)Liability to other jurisdiction—(i)
Filing with Guam or the Northern Mari-
ana Islands. Subject to paragraph (d)(6) of
this section, an individual required under
this paragraph (d) to pay estimated income
tax (and amendments thereof) to Guam or
the Northern Mariana Islands is relieved of
liability to pay estimated income tax (and
amendments thereof) to the United States.
(ii)Filing with the United States. Sub-
ject to paragraph (d)(6) of this section,
an individual required under this para-
graph (d) to pay estimated income tax (and
amendments thereof) to the United States
is relieved of liability to pay estimated
income tax (and amendments thereof) to
the relevant possession.
(6)Underpayments. The liability of
an individual described in paragraph (a)(2)
of this section for underpayments of esti-
mated income tax for a taxable year, as de-
termined under section 6654, will be to the
jurisdiction with which the individual is re-
quired under paragraph (b) of this section
to file his or her return for the taxable year.
(e)Entity status consistency require-
ment—(1)In general. Taxpayers should
make consistent entity status elections (as
defined in paragraph (e)(3)(ii) of this sec-
tion), when applicable, in both the United
States and section 935 possessions. In the
case of a business entity to which this para-
graph (e) applies—
(i) If an entity status election is filed
with the Internal Revenue Service (IRS)
but not with the relevant possession, the
appropriate tax authority of the relevant
possession, at his discretion, may deem the
election also to have been made for the
relevant possession tax purposes;
(ii) If an entity status election filed with
the relevant possession but not with the
IRS, the Commissioner, at his discretion,
may deem the election also to have been
made for Federal tax purposes; and
May 19, 20089662008–20 I.R.B.

(iii) If inconsistent entity status elec-
tions are filed with the relevant possession
and the IRS, both the Commissioner and
the appropriate tax authority of the rele-
vant possession may, at their individual
discretion, treat the elections they each
received as invalid and may deem the
election filed in the other jurisdiction
to have been made also for tax pur-
poses in their own jurisdiction. See Rev.
Proc. 2006–23, 2006–1 C.B. 900, (see
§601.601(d)(2)(ii)(b) of this chapter) for
procedures for requesting the assistance
of the IRS when a taxpayer is or may be
subject to inconsistent tax treatment by the
IRS and a U.S. possession tax agency.)
(2)Scope. This paragraph (e) applies to
the following business entities:
(i) A business entity (as defined in
§301.7701–2(a) of this chapter) that is do-
mestic (as defined in §301.7701–5 of this
chapter), or otherwise treated as domestic
for purposes of the Code, and that is owned
in whole or in part by any person who is
either abona fideresident of a section 935
possession or a business entity created or
organized in a section 935 possession.
(ii) A business entity that is created or
organized in a section 935 possession and
that is owned in whole or in part by any
U.S. person (other than abona fideresident
of such possession).
(3)Definitions. For purposes of this
section—
(i) The termappropriate tax authority
of the relevant possessionmeans the indi-
vidual responsible for tax administration in
such possession or his delegate; and
(ii) The termentity status electionin-
cludes an election under §301.7701–3(c)
of this chapter, an election under section
1362(a), and any other similar elections.
(4)Default status. Solely for the pur-
pose of determining classification of an el-
igible entity under §301.7701–3(b) of this
chapter and under that section as mirrored
in the relevant possession, an eligible en-
tity subject to this paragraph (e) will be
classified for both Federal and the relevant
possession tax purposes using the rule that
applies to domestic eligible entities.
(5)Transition rules—(i) In the case of
an election filed prior to April 11, 2005,
except as provided in paragraph (e)(5)(ii)
of this section, the rules of paragraph (e)(1)
of this section will apply as of the first
day of the first taxable year of the entity
beginning after April 11, 2005.
(ii) In the unlikely circumstance that in-
consistent elections described in paragraph
(e)(1)(iii) of this section are filed prior
to April 11, 2005, and the entity cannot
change its classification to achieve consis-
tency because of the sixty-month limita-
tion described in §301.7701–3(c)(1)(iv) of
this chapter, then the entity may neverthe-
less request permission from the Commis-
sioner or appropriate tax authority of the
relevant possession to change such elec-
tion to avoid inconsistent treatment by the
Commissioner and the appropriate tax au-
thority of the relevant possession.
(iii) Except as provided in paragraphs
(e)(5)(i) and (e)(5)(ii)of this section, in the
case of an election filed with respect to an
entity before it became an entity described
in paragraph (e)(2) of this section, the rules
of paragraph (e)(1) of this section will ap-
ply as of the first day that such entity is de-
scribed in paragraph (e)(2) of this section.
(iv) In the case of an entity created or or-
ganized prior to April 11, 2005, paragraph
(e)(4) of this section will take effect for
Federal income tax purposes (or the rel-
evant possession income tax purposes, as
the case may be) as of the first day of the
first taxable year of the entity beginning af-
ter April 11, 2005.
(f)Examples. The application of this
section is illustratedby the following ex-
amples:
Example 1. (i) B, a United States citizen, files re-
turns on a calendar year basis. In November 2008, B
moves to Possession G, a section 935 possession; pur-
chases a house; and accepts a permanent position with
a local employer. For the remainder of the year and
throughout 2009, B continues to live and work in Pos-
session G and has a closer connection to Possession
G than to the United States or any foreign country.
As a consequence of his employment in Possession
G, B earns income from the performance of services
in Possession G during 2008 and 2009.
(ii) For 2008, B does not qualify as abona fide
resident of Possession G under section 937(a) and
§1.937–1(b) and (f)(1). Therefore, B is subject to
the rules applicable to individuals described in para-
graph (a)(2)(iii) of this section for 2008 because he
has income derived from sources within Possession
G as determined under the rules of section 937(b) and
§1.937–2.
(iii) For 2009, assuming that B otherwise satisfies
the requirements of section 937(a) and §1.937–1(b),
B qualifies as abona fideresident of Possession
G. Therefore, section 935(b)(1)(B) and paragraph
(b)(1)(ii) of this section apply to B for 2009, and he
must file his income tax return with Possession G
under paragraph (b)(1) of this section. Provided that
B properly files such return and pays his income tax
liability to Possession G, B is relieved of liability to
file an income tax return with, and to pay an income
tax to, the United States for 2009 under paragraph
(b)(6) of this section.
Example 2. (i) The facts are the same as inExam-
ple 1except that B’s employment terminates in June
2011. B properly pays his April 2008 estimated tax to
the United States, continues to pay estimated tax for
the 2008 taxable year to the United States under para-
graph (d) of this section, and properly files his 2008
return with the United States.
(ii)(A) On the date of each payment of estimated
tax in 2009, B reasonably believes that he would be
required to file his return for 2009 with Possession G
under paragraph (b)(1) of this section.
(B) In August 2009, B determines that he has
overpaid tax for the previous year in the amount of
$1,000. B properly pays all estimated taxes to Posses-
sion G for 2009, subtracting the $1,000 overpayment
from his estimated tax payments pursuant to section
6402(b), and properly files his tax return with Posses-
sion G.
(iii) In April 2010, B reasonably believes that
he would be returning to the United States in the
Fall of 2010, and properly pays estimated tax to the
United States. By June 2010, B reasonably believes
that he would not be moving from Possession G and
would be abona fideresident of Possession G for
the entire taxable year. B makes his remaining es-
timated tax payments to Possession G. On his 2010
tax return filed with Possession G, pursuant to section
6315, B properly takes into account payments made
to both the United States and Possession G as esti-
mated taxes.
(iv) In April 2011, B reasonably believes that he
would be abona fideresident of Possession G for
the entire taxable year 2011 and properly pays esti-
mated taxes to Possession G. By the time B pays his
estimated taxes for June 2011, B’s employment ter-
minates and he moves to State H. B properly makes
his remaining estimated tax payments to the United
States. On his return for 2011, properly filed with the
United States, B determines that he has underpaid es-
timated taxes throughout 2011 in an amount subject to
penalty under section 6654. B owes the United States
an estimated tax penalty under section 6654.
(g)Effective/applicability date. Para-
graphs (a), (b)(1), (b)(3), (b)(5) through
(b)(7), and (c) through (f) of this section
apply to taxable years ending after April 9,
2008.
§1.935–1T [Removed]
Par. 26. Section 1.935–1T is removed.
Par. 27. Section 1.937–1 is amended by
revising paragraph (h)(3) and the heading
of paragraph (i) to read as follows:
§1.937–1 Bona fide residency in a
possession.
*****
(h)(3)Bona fideresidents of Puerto
Rico or a section 931 possession (as
defined in §1.931–1(c)(1)) who take a
position for U.S. tax reporting purposes
that they qualify asbona fideresidents
2008–20 I.R.B.967May 19, 2008

of that possession for a tax year subse-
quent to a tax year for which they were
required to file income tax returns asbona
fideresidents of the U.S. Virgin Islands
or a section 935 possession (as defined in
§1.935–1(a)(3)(i)).
(i)Effective/applicability date.***
Par. 28. Section 1.937–2 is added to
read as follows:
§1.937–2 Income from sources within a
possession.
(a)Scope. Section 937(b) and this sec-
tion set forth the rules for determining
whether income is considered to be from
sources within a particular possession (the
relevant possession) for purposes of the
Internal Revenue Code, including section
957(c) and Subpart D, Part III, Subchap-
ter N, Chapter 1 of the Internal Revenue
Code, as well as section 7654(a) of the
1954 Internal Revenue Code (until the
effective date of itsrepeal). Paragraphs
(c)(1)(ii) and (c)(2) of this section do not
apply, however, for purposes of sections
932(a) and (b) and 935(a)(3) (as in effect
before the effective date of its repeal).
In the case of a possession or territory
that administers income tax laws that are
identical (except for the substitution of the
name of the possession or territory for the
term “United States” where appropriate)
to those in force in the United States, these
rules do not apply for purposes of the ap-
plication of such laws. These rules also
do not affect the determination of whether
income is considered to be from sources
without the United States for purposes of
the Internal Revenue Code.
(b)In general. Except as provided in
paragraphs (c) through (i) of this section,
the principles of sections 861 through
865 and the regulations under those pro-
visions (relating to the determination of
the gross and the taxable income from
sources within and without the United
States) generally will be applied in deter-
mining the gross and the taxable income
from sources within and without the rel-
evant possession. In the application of
such principles, it generally will be suf-
ficient to substitute, where appropriate,
the name of the relevant possession for
the term “United States,” and to substi-
tute, where appropriate, the term “bona
fideresident of” followed by the name
of the relevant possession for the term
“United States resident.” Furthermore,
the termdomesticwill be construed to
mean created or organized in the relevant
possession. In applying these principles,
additional substitutions may be necessary
to accomplish the intent of section 937(b)
and this section. For example, in applying
the principles of sections 863(d) and (e) to
individuals under this paragraph (b), the
term “bona fideresident of a possession”
will be used instead of the term “United
States person.” In no case, however, will
abona fideresident or other person have,
as a result of the application of these prin-
ciples, more income from sources within
the relevant possession than the amount
of income from sources within the United
States that a similarly situated U.S. person
who is not abona fideresident would have
under sections 861 through 865.
(c)U.S. income—(1)In general.Ex-
cept as provided in paragraph (d) of this
section, income from sources within the
relevant possession will not include any
item of income determined under the rules
of sections 861 through 865 and the regu-
lations under those provisions to be—
(i) From sources within the United
States; or
(ii) Effectively connected with the con-
duct of a trade or business within the
United States.
(2)Conduit arrangements.Incomewill
be considered to be from sources within
the United States for purposes of para-
graph (c)(1) of this section if, pursuant to
a plan or arrangement—
(i) The income is received in exchange
for consideration provided to another per-
son; and
(ii) Such person (or another person)
provides the same consideration (or con-
sideration of a like kind) to a third person
in exchange for one or more payments
constituting income from sources within
the United States.
(d)Income from certain sales of in-
ventory property. For special rules that
apply to determine the source of income
from certain sales of inventory property,
see §1.863–3(f).
(e)ServiceintheArmedForces.Inthe
case of a member of the Armed Forces of
the United States, the following rules will
apply for determining the source of com-
pensation for services performed in com-
pliance with military orders:
(1) If the individual is abona fideresi-
dent of a possession and such services are
performed in the United States or in an-
other possession, the compensation consti-
tutes income from sources within the pos-
session of which the individual is abona
fideresident (and not from sources within
the United States or such other posses-
sion).
(2) If the individual is not abona fide
resident of a possession and such services
are performed in a possession, the com-
pensation constitutes income from sources
within the United States (and not from
sources within such possession).
(f)Gains from certain dispositions of
property—(1)Property of former U.S. res-
idents. (i) Except to the extent an elec-
tion is made under paragraph (f)(1)(vi) of
this section, income from sources within
the relevant possession will not include
gains from the disposition of property de-
scribed in paragraph (f)(1)(ii) of this sec-
tion by an individual described in para-
graph (f)(1)(iii) of this section. See also
section 1277(e) of the Tax Reform Act
of 1986, Public Law 99–514 (100 Stat.
2085) (providing that gains from the dis-
position of certain property by individuals
who acquired residency in certain posses-
sions will be considered to be from sources
within the United States).
(ii) Property is described in this para-
graph (f)(1)(ii) when the following condi-
tions are satisfied—
(A) The property is of a kind described
in section 731(c)(3)(C)(i) or 954(c)(1)(B);
and
(B) The property was owned by the in-
dividual before such individual became a
bona fideresident of the relevant posses-
sion.
(iii) An individual is described in this
paragraph (f)(1)(iii) when the following
conditions are satisfied—
(A) For the taxable year for which the
source of the gain must be determined, the
individual is abona fideresident of the
relevant possession; and
(B) For any of the 10 years preceding
such year, the individual was a citizen or
resident of the United States (other than a
bona fideresident of the relevant posses-
sion).
(iv) If an individual described in para-
graph (f)(1)(iii) of this section exchanges
property described in paragraph (f)(1)(ii)
of this section for other property in a trans-
May 19, 20089682008–20 I.R.B.

action in which gain or loss is not required
to be recognized (in whole or in part) un-
der U.S. income tax principles, such other
property will also be considered property
described in paragraph (f)(1)(ii) of this
section.
(v) If an individual described in para-
graph (f)(1)(iii) of this section owns, di-
rectly or indirectly, at least 10 percent (by
value) of any entity to which property de-
scribed in paragraph (f)(1)(ii) of this sec-
tion is transferred in a transaction in which
gain or loss is not required to be recognized
(in whole or in part) under U.S. income
tax principles, any gain recognized upon a
disposition of the property by such entity
will be treated as income from sources out-
side the relevant possession if any gain rec-
ognized upon a direct or indirect disposi-
tion of the individual’s interest in such en-
tity would have been so treated under para-
graph (f)(1)(iv) of this section.
(vi) Notwithstanding the general rule
of paragraph (f)(1)(i) of this section and
section 1277(e) of the Tax Reform Act
of 1986, Public Law 99–514 (100 Stat.
2085), an individual described in para-
graph (f)(1)(iii) of this section may elect
to treat as gain from sources within the
relevant possession the portion of the gain
attributable to the individual’s posses-
sion holding period. The election under
this paragraph (f)(1)(vi) will be consid-
ered made if the individual’s income tax
return for the year of disposition of the
property reports the portion of gain attrib-
utable to the taxpayer’s possession hold-
ing period as determined in accordance
with paragraph (f)(1)(vi)(A) or paragraph
(f)(1)(vi)(B) of this section, as the case
may be.
(A) In the case of marketable securities,
the portion of gain attributable to the pos-
session holding period will be determined
by reference to the fair market value of the
marketable security at the close of the mar-
ket on the first day of the individual’s pos-
session holding period. In the event that
the individual is abona fideresident of the
relevant possession for more than a single
continuous period, the portion of gain de-
scribed in this paragraph (f)(1)(vi)(A) will
be the aggregate of the portions of gain (or
offsetting loss) attributable to each posses-
sion holding period.
(B) In the case of property other than
marketable securities, the portion of gain
attributable to the possession holding pe-
riod in the relevant possession will be de-
termined by multiplying the total gain on
disposition of the property by a fraction,
the numerator of which is the number of
days in the possession holding period and
the denominator of which is the total num-
ber of days in the individual’s holding pe-
riod for the property. For purposes of the
preceding sentence, in the event that the
individual is abona fideresident of the
relevant possession for more than a single
continuous period, the number of days in
the numerator will be the aggregate of the
number of days in each possession hold-
ing period. For purposes of this paragraph
(f)(1)(vi)(B), the denominator will include
days that are required to be included in an
individual’s holding period under section
735(b), section 1223, and any other appli-
cable holding period rule in the Internal
Revenue Code.
(vii) For purposes of paragraph
(f)(1)(vi) of this section—
(A) The termmarketable securities
means property described in paragraph
(f)(1)(ii) of this section that is, through-
out the individual’s holding period, ac-
tively traded within the meaning of
§1.1092(d)–1(a); and
(B) The termpossession holding period
means the part of the individual’s holding
period for the property during which the
individual is abona fideresident of the rel-
evant possession. However, for this pur-
pose, the possession holding period will
be considered to commence in all cases on
thefirstdayduringsuchperiodthatthe
individual does not have a tax home out-
side the relevant possession. In the event
that the individual is abona fideresident
of the relevant possession for more than a
single continuous period, each possession
holding period prior to the one ending on
the date of sale or other disposition will be
considered to end on the first day that the
individual has a tax home outside the rele-
vant possession. With respect to the deter-
mination of tax home, see §1.937–1(d).
(2)Special rules under section 865 for
possessions—(i) Except as provided in
paragraph (f)(1) of this section—
(A) Gain that is considered to be de-
rived from sources outside of the United
States under section 865(g)(3) will be con-
sidered income from sources within Puerto
Rico; and
(B) Gain that is considered to be derived
from sources outside of the United States
under section 865(h)(2)(B) will be consid-
ered income from sources within the pos-
session in which the liquidating corpora-
tion is created or organized.
(ii) In applying the principles of section
865 and the regulations under that section
pursuant to paragraph (b) of this section,
the rules of section 865(g) will not apply,
but the special rule of section 865(h)(2)(B)
will apply with respect to gain recognized
upon the liquidation of corporations cre-
ated or organized in the United States.
(g)Dividends—(1)Dividends from cer-
tain possessions corporations—(i)In gen-
eral. Except as provided in paragraph
(g)(1)(ii) of this section, with respect to
any possessions shareholder, only the pos-
sessions source ratio of any dividend paid
or accrued by a corporation created or or-
ganized in a possession (possessions cor-
poration) will be treated as income from
sources within such possession. For pur-
poses of this paragraph (g)—
(A) Thepossessions source ratiowill be
a fraction, the numerator of which is the
gross income of the possessions corpora-
tion from sources within the possession in
which it is created or organized (applying
the rules of this section) for the testing pe-
riod and the denominator of which is the
total gross income of the corporation for
the testing period; and
(B) The termpossessions shareholder
means any individual who is abona fide
resident of the possession in which the cor-
poration is created or organized and who
owns, directly or indirectly, at least 10 per-
cent of the total voting stock of the corpo-
ration.
(ii)Dividends from corporations en-
gaged in the active conduct of a trade or
business in the relevant possession.The
entire amount of any dividend paid or
accrued by a possessions corporation will
be treated as income from sources within
the possession in which it is created or
organized when the following conditions
are met—
(A) 80 percent or more of the gross in-
come of the corporation for the testing pe-
riod was derived from sources within such
possession (applying the rules of this sec-
tion) or was effectively connected with the
conduct of a trade or business in such pos-
session (applying the rules of §1.937–3);
and
(B) 50 percent or more of the gross in-
come of the corporation for the testing pe-
2008–20 I.R.B.969May 19, 2008

riod was derived from the active conduct
of a trade or business within such posses-
sion.
(iii)Testing period. For purposes of this
paragraph (g)(1), the termtesting period
means the 3-year period ending with the
close of the taxable year of the payment
of the dividend (or for such part of such
period as the corporation has been in exis-
tence).
(iv)Subsidiary look-through rule.For
purposes of this paragraph (g)(1), if a pos-
sessions corporation owns (directly or in-
directly) at least 25 percent (by value) of
the stock of another corporation, such pos-
sessions corporation will be treated as if
it—
(A) Directly received its proportionate
share of the income of such other corpora-
tion; and
(B) Actively conducted any trade or
business actively conducted by such other
corporation.
(2)Dividends from other corporations.
In applying the principles of section 861
and the regulations under that section
pursuant to paragraph (b) of this section,
the special rules relating to dividends for
which deductions are allowable under sec-
tion 243 or 245 will not apply.
(h)Income inclusions. For purposes of
determining whether an amount described
in section 904(h)(1)(A) constitutes income
from sources within the relevant posses-
sion—
(1) If the individual owns (directly or
indirectly) at least 10 percent of the to-
tal voting stock of the corporation from
which such amount is derived, the princi-
ples of section 904(h)(2) will apply. In the
case of an individual who is not a posses-
sions shareholder (as defined in paragraph
(g)(1)(i)(B) of this section), the preceding
sentence will apply only if the corporation
qualifies as a “United States-owned for-
eign corporation” for purposes of section
904(h); and
(2) In all other cases, the amount will
be considered income from sources in the
jurisdiction in which the corporation is cre-
ated or organized.
(i)Interest—(1)Interest from certain
possessions corporations—(i)In general.
Except as provided in paragraph (i)(1)(ii)
of this section, with respect to any pos-
sessions shareholder (as defined in para-
graph (g)(1)(i)(B) of this section), interest
paid or accrued by a possessions corpora-
tion will be treated asincome from sources
within the possession in which it is cre-
ated or organized to the extent that such
interest is allocable to assets that gener-
ate, have generated, or could reasonably
have been expected to generate income
from sources within such possession (un-
der the rules of this section) or income ef-
fectively connected with the conduct of a
trade or business within such possession
(under the rules of §1.937–3). For pur-
poses of the preceding sentence, the prin-
ciples of §§1.861–9 through 1.861–12 will
apply.
(ii)Interest from corporations engaged
in the active conduct of a trade or busi-
ness in the relevant possession.Theentire
amount of any interest paid or accrued by a
possessions corporation will be treated as
income from sources within the possession
in which it is created or organized when
the conditions of paragraphs (g)(1)(ii)(A)
and (B) of this section are met (applying
the rules of paragraphs (g)(1)(iii) and (iv)
of this section).
(2)Interest from partnerships.Inter-
est paid or accrued by a partnership will
be treated as income from sources within
apossessiononlytotheextentthatsuch
interest is allocable to income effectively
connected with the conduct of a trade or
business in such possession. For purposes
of the preceding sentence, the principles
of §1.882–5 will apply (as if the partner-
ship were a foreign corporation and as if
the trade or business in the possession were
a trade or business in the United States).
(j)Indirect ownership. For purposes of
this section, the rules of section 318(a)(2)
will apply except that the language “5 per-
cent” will be used instead of “50 percent”
in section 318(a)(2)(C).
(k)Examples. The provisions of this
section may be illustrated by the following
examples:
Example 1. (i) X, a U.S. citizen, resides in State
N and acquires stock of Corporation C, a domestic
corporation, in 2008 for $10x. X moves to the North-
ern Mariana Islands (NMI) on March 1, 2009 and
changes his principal place of business to NMI on that
same date. Assume for purposes of this example that,
under §1.937–1(b) and (f)(1) (year-of-move excep-
tion), X is considered abona fideresident of NMI for
2009 through 2012. On March 1, 2009, the closing
value of X’s stock in Corporation C, a marketable se-
curity (within the meaning of paragraph (f)(1)(vii)(A)
of this section), is $20x. On January 3, 2012, X sells
all his Corporation C stock for $70x.
(ii) Pursuant to section 1277(e) of the Tax Reform
Act of 1986, and absent an election under paragraph
(f)(1)(vi) of this section, all of X’s gain ($60x) will
be treated as income from sources within the United
States for all purposes of the Internal Revenue Code
(including section 7654, as in effect with respect to
the NMI), and (under paragraph (f)(1)(i) of this sec-
tion) not as income from sources in the NMI. How-
ever, pursuant to paragraph (f)(1)(vi) of this section,
X may elect on his 2012 income tax return filed with
NMI to treat the portion of this gain attributable to
X’s possession holding period with respect to NMI as
gain from sources within NMI. X’s possession hold-
ing period with respect to NMI begins on March 1,
2009, the date his tax home changes to the NMI. Un-
der paragraph (f)(1)(vi)(A) of this section, the portion
of X’s gain attributable to this possession holding pe-
riod is $50x, the excess of the sale price of the stock
($70x) over its closing value ($20x) on the first day of
the possession holding period. By reporting $50x of
gain on his 2012 NMI return, X will elect under para-
graph (f)(1)(vi) of this section to treat that amount as
NMI source income.
Example 2. (i) R, a U.S. citizen, resides in State F
and acquires a 5 percent interest in Partnership P on
January 1, 2009. R moves to Puerto Rico on June 1,
2010 and changes her principal place of business to
Puerto Rico on that same date. Assume for purposes
of this example that under §1.937–1(b) and (f)(1)
(year-of-move exception), R is considered abona fide
resident of Puerto Rico for 2010 through 2012. On
June 1, 2010, R’s interest in Partnership P is not a
marketable security within the meaning of paragraph
(f)(1)(vii)(A) of this section. On December 31, 2012,
having owned the interest in Partnership P for a pe-
riod of 4 years (1461 days), R sells it, recognizing
gain of $100x.
(ii) Pursuant to paragraph (f)(1) of this section,
and absent an election under paragraph (f)(1)(vi) of
this section, the gain will not be treated as income
from sources within Puerto Rico for purposes of the
Internal Revenue Code (including section 933(1)).
However, pursuant to paragraph (f)(1)(vi) of this sec-
tion, R may elect on her 2012 return filed with the
IRS to treat the portion of this gain attributable to R’s
possession holding period with respect to Puerto Rico
as gain from sources withinPuerto Rico. R’s posses-
sion holding period with respect to Puerto Rico is the
945-day period from June 1, 2010, the date her tax
home changes to Puerto Rico, through December 31,
2012, the date of sale. Under paragraph (f)(1)(vi)(B)
of this section, the portion of R’s gain attributable to
this possession holding period is $64.68x, computed
as follows:
$100x gain × 9
45daysinpossessionholdingperiod
1461 days in total holding period
May 19, 20089702008–20 I.R.B.

(iii) By reporting $64.68x of gain on her 2012
Federal return, R will elect under paragraph (f)(1)(vi)
of this section to treat that amount as Puerto Rico
source income.
Example 3.X,abona fideresident of Pos-
session S, a section 931 possession (as defined in
§1.931–1(c)(1)), is engaged in a trade or business
in the United States through an office in State H.
In 2008, this office materially participates in the
sale of inventory property in Possession S, such that
the income from these inventory sales is considered
effectively connected to this trade or business in the
United States under section 864(c)(4)(B)(iii). This
income will not be treated as income from sources
within Possession S for purposes of section 931(a)(1)
pursuant to paragraph (c)(1)(ii) of this section, but
nonetheless will continue to be treated as income
from sources without the United States under section
862 (for example, for purposes of section 904).
Example 4.(i)X,abona fideresident of Posses-
sion I, owns 25 percent of the outstanding shares of
A Corp, a corporation organized under the laws of
Possession I. In 2010, X receives a dividend of $70x
from A Corp. During 2008 through 2010, A Corp has
gross income from the following sources:
P
ossessionISourcesSourcesOutsidePossessionI
2008
$10x$20x
200920x10x
2010
25x15x
(ii) A Corp owns 50 percent of the outstanding
shares of B Corp, a corporation organized under the
laws of Country FC. During 2008 through 2010, B
Corp has gross income from the following sources:
P
ossessionISourcesSourcesOutsidePossessionI
2008
$10x$6x
200914x8x
201010x4x
(iii) A Corp is treated as having received 50 per-
cent of the gross income of B Corp. Therefore, for
2008 through 2010, the gross income of A Corp is
from the following sources:
P
ossessionISourcesSourcesOutsidePossessionI
2008
$15x$23x
200927x14x
20103
0x17x
Totals
$72x$54x
(iv) Pursuant to paragraph (g) of this section, the
portion of the dividend of $70x that X receives from
Cor
p A in 2010 that is treated as income from sources
within Possession I is 72/126 of $70x, or $40x.
Example 5. X is a U.S. citizen and abona fide
re
sident of the Northern Mariana Islands (NMI).
In 2008, X receives compensation for services per-
formed as a member of the crew of a fishing boat.
Te
n percent of the services for which X receives
compensationareperformedintheNMI,and90
percent of X’s services are performed in international
wa
ters. Under the principles of section 861(a)(3)
as applied pursuant to paragraph (b) of this section,
the compensation that X receives for services per-
f
ormed in the NMI is treated as income from sources
within the NMI. Under the principles of section
863(d)(1)(A) as applied pursuant to paragraph (b)
o
f this section, the compensation that X receives for
services performed in international waters is treated
as income from sources within the NMI for purposes
of the Internal Revenue Code (including section
7654, as in effect with respect to the NMI). Thus,
all of X’s compensation for services during 2008 is
treated as income from sources within the NMI.
Example 6. X, a U.S. citizen, resides in State L
and receives $2,500 of compensation for services per-
formed in Possession J during 2008 for Y, X’s em-
ployer. X is temporarily present in Possession J in
2008 for a period (or periods) not exceeding a total
of 90 days. Y, a U.S. citizen, is not abona fideresi-
dent of Possession J and is not engaged in a trade or
business within Possession J. Under the principles of
section 861(a)(3) as applied pursuant to paragraph (b)
of this section, the compensation that X receives for
ser
vices performed in Possession J during 2008 is not
treated as income from sources within Possession J.
Example 7. (i) Company Y, a corporation orga-
ni
zed in State C, produces, markets, and distributes
music products. Y enters into a recording contract
with Z, a recording artist who is abona fideresident
of
the U.S. Virgin Islands (USVI). Pursuant to the
contract between Y and Z, Z agrees to perform ser-
vices as writer, musician, and vocalist on the record-
in
g of a new musical composition and related music
video. Under the contract, all songs, recordings and
related artwork, packaging copy, and liner notes, to-
g
ether with copyrights and other intellectual property
in those works, are the sole property of Y, and Z ob-
tains no proprietary rights in that property. As com-
p
ensation for Z’s services,all of which are performed
at a recording studio or other locations in the USVI,
Y agrees to pay amounts designated as the “writer’s
share” to Z based on a percentage of the music prod-
ucts sold. Y also agrees to make an upfront pay-
ment to Z as an advance against future portions of
Z’swriter’sshare.
(ii) To the extent that Z performs personal ser-
vices within the USVI, the compensation that Z re-
ceives for his services is sourced to the USVI under
the principles of section 861(a)(3) and §1.861–4 as
applied pursuant to §1.937–2(b). If all of Z’s services
are performed in the USVI, none of the writer’s share
is derived from sources within the United States un-
der section 861(a)(3) and §1.861–4, nor is it effec-
tively connected with the conduct of a trade or busi-
ness in the United States under section 864(c)(3). Ac-
cor
dingly, the U.S. income rule of section 937(b)(2)
and paragraph (c)(1) of this section would not oper-
ate to prevent Z’s services income from being USVI
so
urce or USVI effectively connected income within
the meaning of section 937(b)(1). If Z also performs
services in the United States, however, then the U.S.
in
come rule would apply to the part of Z’s compensa-
tion that is sourced to the United States under sec-
tion 861(a)(3) and §1.861–4. In the event that Y
a
nd Z are controlled taxpayers within the meaning of
§1.482–1(i)(5), section 482 and the regulations under
that section, including §1.482–9T(i), would apply to
e
valuate the arm’s length amount charged for Z’s con-
trolled services.
(l)Effective/applicability dates. Except
as otherwise provided in this paragraph (l),
this section applies to income earned in
taxable years ending after April 9, 2008.
Taxpayers may choose to apply paragraph
(b) of this section to income earned in
open taxable years ending after October
22, 2004. Taxpayers may choose to apply
paragraph (f)(1) of this section to disposi-
tions made after April 11, 2005.
§1.937–2T [Removed]
Par. 29. Section 1.937–2T is removed.
2008–20 I.R.B.971May 19, 2008

Par. 30. Section 1.937–3 is added to
read as follows:
§1.937–3 Income effectively connected
with the conduct of a trade or business in
a possession.
(a)Scope. Section 937(b) and this sec-
tion set forth the rules for determining
whether income is effectively connected
with the conduct of a trade or business
within a particular possession (the rel-
evant possession) for purposes of the
Internal Revenue Code, including sections
881(b) and 957(c) and Subpart D, Part III,
Subchapter N, Chapter 1 of the Internal
Revenue Code. Paragraph (c) of this sec-
tion does not apply, however, for purposes
of section 881(b). In the case of a posses-
sion or territory that administers income
tax laws that are identical (except for the
substitution of the name of the possession
or territory for the term “United States”
where appropriate) to those in force in the
United States, these rules do not apply for
purposes of the application of such laws.
(b)In general. Except as provided in
paragraphs (c) and (d) of this section, the
principles of section 864(c) and the regula-
tions under that section (relating to the de-
termination of income, gain or loss that is
effectively connected with the conduct of a
trade or business within the United States)
generally will be applied in determining
whether income is effectively connected
with the conduct of a trade or business
within the relevant possession, without re-
gard to whether the taxpayer qualifies as
a nonresident alien individual or a foreign
corporation with respect to such posses-
sion. Subject to the rules of this section,
the principles of section 864(c)(4) will ap-
ply for purposes of determining whether
income from sources without the relevant
possession is effectively connected with
the conduct of a trade or business in the
relevant possession. For purposes of the
preceding sentence, all income other than
income from sources within the relevant
possession (as determined under the rules
of §1.937–2) will be considered income
from sources without the relevant posses-
sion in the application of the principles of
section 864(c) under this paragraph (b), it
generally will be sufficient to substitute
the name of the relevant possession for the
term “United States” where appropriate,
but additional substitutions may be nec-
essary to accomplish the intent of section
937(b) and this section. In no case, how-
ever, will abona fideresident or other per-
son have, as a result of the application of
these principles, more income effectively
connected with the conduct of a trade or
business in the relevant possession than the
amount of U.S. effectively connected in-
come that a similarly situated U.S. person
who is not abona fideresident would have
under section 864(c).
(c)U.S. income—(1)In general.Ex-
cept as provided in paragraph (d) of this
section, income considered to be effec-
tively connected with the conduct of a
trade or business within the relevant pos-
session will not include any item of income
determined under the rules of sections
861 through 865 and the regulations under
those provisions to be—
(i) From sources within the United
States; or
(ii) Effectively connected with the con-
duct of a trade or business within the
United States.
(2)Conduit arrangements.Incomewill
be considered to be from sources within
the United States for purposes of para-
graph (c)(1) of this section if, pursuant to
a plan or arrangement—
(i) The income is received in exchange
for consideration provided to another per-
son; and
(ii) Such person (or another person)
provides the same consideration (or con-
sideration of a like kind) to a third person
in exchange for one or more payments
constituting income from sources within
the United States.
(d)Income from certain sales of inven-
tory property. Paragraph (c) of this section
will not apply to income from sales of in-
ventory property described in §1.863–3(f).
(e)Examples. The provisions of this
section may be illustrated by the following
examples:
Example 1.Xisabona fideresident of Pos-
session I, a section 931 possession (as defined in
§1.931–1(c)(1)). X has an office in Possession I
from which X conducts a business consisting of
the development and sale of specialized computer
software. A purchaser of software will frequently
pay X an additional amount to install the software
on the purchaser’s operating system and to ensure
that the software is functioning properly. X performs
the installation services at the purchaser’s place of
business, which may be in Possession I, in the United
States, or in another country. The provision of such
services is notde minimisand constitutes a separate
transaction under the rules of §1.861–18. Under the
principles of section 864(c)(4) as applied pursuant to
paragraph (b) of this section, the compensation that
X receives for personal services performed outside
of Possession I is not considered to be effectively
connected with the conduct of a trade or business in
Possession I for purposes of section 931(a)(2).
Example 2. (i) F Bank is organized under the
laws of Country FC and operates an active bank-
ing business from offices in the U.S. Virgin Islands
(USVI). In connection with this banking business, F
Bank makes loans to and receives interest payments
from borrowers who reside in the USVI, in the United
States, and in Country FC.
(ii) Under the principles of section 861(a)(1) as
applied pursuant to §1.937–2(b), interest payments
received by F Bank from borrowers who reside in
the United States or in Country FC constitute income
from sources outside of the USVI. Under the princi-
ples of section 864(c)(4) as applied pursuant to para-
graph (b) of this section, interest income from sources
outside of the USVI generally may constitute income
that is effectively connected with the conduct of a
trade or business within the USVI for purposes of the
Internal Revenue Code. However, interest payments
received by F Bank from borrowers who reside in the
United States constitute income from sources within
the United States under section 861(a)(1). Accord-
ingly, under paragraph (c)(1) of this section, such in-
terest income will not be treated as effectively con-
nected with the conduct of a trade or business in the
USVI for purposes of the Internal Revenue Code (for
example, for purposes of section 934(b)). Interest
payments received by F Bank from borrowers who re-
side in Country FC, however, may be treated as effec-
tively connected with the conduct of a trade or busi-
ness in the USVI for purposes of the Internal Revenue
Code (including section 934(b)).
(iii) To the extent that, as described in section
934(a), the USVI administers income tax laws that
are identical (except for the substitution of the name
of the USVI for the term “United States” where ap-
propriate) to those in force in the United States, in-
terest payments received by F Bank from borrowers
whoresideintheUnitedStatesorinCountryFCmay
be treated as income that is effectively connected with
the conduct of a trade or business in the USVI for pur-
poses of F Bank’s income tax liability to the USVI
under mirrored section 882.
Example 3. (i) G is a partnership that is organized
under the laws of, and that operates an active financ-
ing business from offices in, Possession I. Interests in
G are owned by D, abona fideresident of Possession
I, and N, an alien individual who resides in Country
FC. Pursuant to a pre-arrangement, G loans $x to T, a
business entity organized under the laws of Country
FC, and T in turn loans $y to E, a U.S. resident. In
accordance with the arrangement, E pays interest to
T,whichinturnpaysinteresttoG.
(ii) The arrangement constitutes a conduit ar-
rangement under paragraph (c)(2) of this section,
and the interest payments received by G are treated
as income from sources within the United States
for purposes of paragraph (c)(1) of this section.
Accordingly, the interest received by G will not be
treated as effectively connected with the conduct
of a trade or business in Possession I for purposes
of the Internal Revenue Code (including sections
931(a)(2) and 934(b), if applicable with respect to
D). Whether such interest constitutes income from
May 19, 20089722008–20 I.R.B.

sources within the United States for other purposes
of the Internal Revenue Code under generally appli-
cable conduit principles will depend on the facts and
circumstances. See, for example,Aiken Indus., Inc.
v. Commissioner, 56 T.C. 925 (1971).
(iii) If Possession I administers income tax laws
that are identical (except for the substitution of the
name of the possession for the term “United States”
where appropriate) to those in force in the United
States, the interest received by G may be treated as
income effectively connected with the conduct of a
trade or business in Possession I under mirrored sec-
tion 864(c)(4) for purposes of determining the Pos-
session I territorial income tax liability of N under
mirrored section 871.
Example 4.(i)CorporationA,acorporationorga-
nizedinPossessionX,isengagedinabusinesscon-
sisting of the development of computer software and
the sale of that software. Corporation A has its sole
place of business in Possession X and is not engaged
in the conduct of a trade or business in the United
States. Corporation A receives orders for its soft-
ware from customers in the United States and around
the world. After orders are accepted, Corporation
A’s software is either loaded onto compact discs at
Corporation A’s Possession X facility and shipped
via common carrier, or downloaded from Corporation
A’sserverinPossessionX.Thesalescontractpro-
vides that the rights, title, and interest in the product
will pass from Corporation A to the customer either
at Corporation A’s place of business in Possession X
(if shipped in compact disc form) or at Corporation
A’s server in Possession X (if electronically down-
loaded). Assume for purposes of this example that
each transaction is classified as a sale of a copyrighted
article under §1.861–18(c)(1)(ii) and (f)(2).
(ii) Under the principles of section 863(a), as ap-
plied pursuant to §1.937–2(b), because Corporation
A passes the rights, title, and interest to the copy-
righted articles in Possession X, Corporation A’s sales
income is sourced to Possession X. Corporation A’s
sales income is also effectively connected with the
conduct of a trade or business in Possession X, under
the principles of section 864(c)(3) as applied pursuant
to §1.937–3(b). Corporation A’s income is not from
sources within the United States, nor is it effectively
connected with the conduct of a trade or business in
the United States. Accordingly, the U.S. income rule
of section 937(b)(2), §1.937–2(c)(1), and paragraph
(c)(1) of this section does not operate to prevent Cor-
poration A’s sales income from being Possession X
source and Possession X effectively connected in-
come under section 937(b)(1).
Example 5. (i) Corporation B, a corporation orga-
nized in Possession X, has its sole place of business
in Possession X and is not engaged in the conduct of a
trade or business in the United States. Corporation B
employs a software business model generally referred
to as an application service provider. Employees of
Corporation B in Possession X develop software and
maintain it on Corporation B’s server in Possession X.
Corporation B’s customers in the United States and
around the world transmit detailed data about their
own customers to Corporation B’s server and elec-
tronic storage facility in Possession X. The customers
pay a monthly fee to Corporation B under a Subscrip-
tion Agreement, and they can use the software to gen-
erate reports analyzing the data at any time but do not
receive a copy of the software. Corporation B’s soft-
ware allows its customers to generate the reports from
their location and to keep track of their relationships
with their own customers. Assume for purposes of
this example that Corporation B’s income from these
transactions is derived from the provision of services.
(ii) Under the principles of section 861(a)(3) and
§1.861–4(a), as applied pursuant to §1.937–2(b),
because Corporation B performs personal services
wholly within Possession X, the compensation
Corporation B receives for services is sourced to
Possession X. Corporation B’s services income is
also effectively connectedwith the conduct of a trade
or business in Possession X, under the principles of
section 864(c)(3) as applied pursuant to §1.937–3(b).
Corporation B’s income is not from sources within
the United States, nor is it effectively connected
with the conduct of a trade or business in the United
States. Accordingly, the U.S. income rule of section
937(b)(2), §1.937–2(c)(1), and paragraph (c)(1) of
this section does not operate to prevent Corporation
B’s services income from being Possession X source
or Possession X effectively connected income within
the meaning of section 937(b)(1).
(f)Effective/applicability date. Except
as otherwise provided in this paragraph (f),
this section applies to income earned in
taxable years ending after April 9, 2008.
Taxpayers may choose to apply paragraph
(b)ofthissectiontoincomeearnedin
open taxable years ending after October
22, 2004.
§1.937–3T [Removed]
Par. 31. Section 1.937–3T is removed.
Par. 32. Section 1.957–3 is revised to
read as follows:
§1.957–3 United States person defined.
(a)Basic rule—(1)In general.The
termUnited States personhas the same
meaning for purposes of sections 951
through 965 that it has under section
7701(a)(30) and the regulations under that
section, except as provided in paragraphs
(b)and(c)ofthissection,whichprovide,
with respect to corporations organized
in possessions of the United States, that
certain residents of such possessions are
not United States persons. The effect of
determining that an individual is not a
United States person for such purposes is
to exclude such individual in determining
whether a foreign corporation created or
organized in, or under the laws of, a pos-
session of the United States is a controlled
foreign corporation. See §1.957–1 for the
definition of the term “controlled foreign
corporation.”
(2)Special provisions applicable to
possessions of the United States. For pur-
poses of this section—
(i) The termpossession of the United
Statesmeans the Puerto Rico or any sec-
tion 931 possession;
(ii) The termsection 931 possession
has the same meaning that it has under
§1.931–1(c)(1);
(iii) The rules of §1.937–1 will apply
for determining whether an individual is a
bona fideresident of a possession of the
United States;
(iv) Except as provided in paragraph
(b)(2) of this section, the rules of §1.937–2
will apply for determining whether income
is from sources within a possession of the
United States; and
(v) The rules of §1.937–3 will apply for
determining whether income is effectively
connected with the conduct of a trade or
business in a possession of the United
States.
(b)Puerto Rico corporation and resi-
dent. An individual (who, without regard
to this paragraph (b), is a United States per-
son) will not be considered a United States
person with respect to a foreign corpora-
tion created or organized in, or under the
laws of, Puerto Rico for the taxable year of
such corporation that ends with or within
the taxable year of such individual if—
(1) Such individual is abona fideresi-
dent of Puerto Rico during his entire tax-
able year in which or with which the tax-
able year of such foreign corporation ends;
and
(2) A dividend received by such indi-
vidual from such corporation during the
taxable year of such corporation would,
for purposes of section 933(1), be treated
as income derived from sources within
Puerto Rico. For purposes of this para-
graph (b)(2), the rules of §1.937–2(g)(1)
will not apply.
(c)Section 931 possession corporation
and resident. An individual (who, with-
out regard to this paragraph (c), is a United
States person) will not be considered a
United States person with respect to a for-
eign corporation created or organized in,
or under the laws of, a section 931 pos-
session for the taxable year of such corpo-
ration that ends with or within the taxable
year of such individual if—
(1) Such individual is abona fideres-
ident of such section 931 possession dur-
ing his entire taxable year in which or with
2008–20 I.R.B.973May 19, 2008

which the taxable year of such foreign cor-
poration ends; and
(2) Such corporation satisfies the fol-
lowing conditions—
(i)80percentormoreofitsgrossin-
come for the 3-year period ending at the
close of the taxable year (or for such part
of such period as such corporation or any
predecessor has been in existence) was de-
rived from sources within section 931 pos-
sessions or was effectively connected with
the conduct of a trade or business in sec-
tion 931 possessions; and
(ii) 50 percent or more of its gross in-
come for such period (or part) was derived
from the active conduct of a trade or busi-
ness within section 931 possessions.
(d)Effective/applicability date.This
section applies to taxable years ending af-
ter April 9, 2008.
§1.957–3T [Removed]
Par. 33. Section 1.957–3T is removed.
Par. 34. Section 1.1402(a)–12 is re-
vised to read as follows:
§1.1402(a)–12 Continental shelf and
certain possessions of the United States.
(a)Certain possessions. For purposes
of the tax on self-employment income, the
exclusion from gross income provided by
section 931 (relating tobona fideresidents
of certain possessions of the United States)
will not apply. Net earnings from self-em-
ployment are subject to the tax on self-em-
ployment income even if such amounts are
excluded from gross income under section
931.
(b)Continental shelf. For the defini-
tion of the term “United States” and for
other geographical definitions relating to
the continental shelf, see section 638 and
§1.638–1.
(c)Effective/applicability date.This
section applies to taxable years ending af-
ter April 9, 2008.
§1.1402(a)–12T [Removed]
Par. 35. Section 1.1402(a)–12T is re-
moved.
Par. 36. Section 1.6012–1 is amended
by revising paragraph (a)(1)(iii) to read as
follows:
§1.6012–1 Individuals required to make
returns of information.
(a)***(1)***
(iii) An alienbona fideresident of
Puerto Rico or any section 931 possession,
as defined in §1.931–1(c)(1), during the
entire taxable year.
*****
Par. 37. Section 1.6038–2 is amended
by revising paragraph (d) and adding a new
sentence at the end of paragraph (m) to
read as follows:
§1.6038–2 Information returns required
of United States persons with respect to
annual accounting periods of certain
foreign corporations.
*****
(d)U.S. person—(1)In general.For
purposes of section 6038 and this sec-
tion, the termUnited States personhas
the meaning assigned to it by section
7701(a)(30), except as provided in para-
graphs (d)(2) and (3) of this section.
(2)Special rule for individuals residing
in certain possessions.—(i) With respect to
an individual who is abona fideresident of
Puerto Rico, the term United States person
has the meaning assigned to it by §1.957–3
except that the rules of §1.937–2(g)(1) will
apply.
(ii) With respect to an individual who is
abona fideresident of any section 931 pos-
session, as defined in §1.931–1(c)(1), the
term United States person has the meaning
assigned to it by §1.957–3.
(3)Special rule for certain nonresident
aliens. An individual for whom an elec-
tion under section 6013(g) or (h) is in effect
will, subject to the exceptions contained in
paragraph (d)(2) of this section, be consid-
ered a United States person for purposes of
section 6038 and this section.
*****
(m) * * * Paragraph (d) of this section
applies to taxable years ending after April
9, 2008.
§1.6038–2T [Removed]
Par. 38. Section 1.6038–2T is removed.
Par. 39. Section 1.6046–1 is amended
by revising paragraph (f)(3) and adding a
new paragraph (l) to read as follows:
§1.6046–1 Returns as to organization or
reorganization of foreign corporations
and as to acquisitions of their stock.
*****
(f) * * *
(3)U.S. person—(i)In general.For
purposes of section 6046 and this sec-
tion, the termUnited States person
has
the meaning assigned to it by section
7701(a)(30), except as provided in para-
graphs (f)(3)(ii) and (iii) of this section.
(ii)Special rule for individuals resid-
ing in certain possessions.—(A) With re-
spect to an individual who is abona fide
resident of Puerto Rico, the term United
States person has the meaning assigned
to it by §1.957–3 except that the rules of
§1.937–2(g)(1) will apply.
(B) With respect to individuals who are
bona fideresidents of any section 931 pos-
session, as defined in §1.931–1(c)(1), the
term United States person has the meaning
assigned to it by §1.957–3.
(iii)Special rule for certain nonresident
aliens. An individual for whom an elec-
tion under section 6013(g) or (h) is in effect
will, subject to the exceptions contained in
paragraph (f)(3)(ii) of this section, be con-
sidered a United States person for purposes
of section 6046 and this section.
*****
(l)Effective/applicability date. Para-
graph (f)(3) of this section applies to tax-
able years ending after April 9, 2008.
§1.6046–1T [Removed]
Par. 40. Section 1.6046–1T is removed.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 41. The authority citation for part
301 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 42. Section 301.6688–1 is revised
to read as follows:
§301.6688–1 Assessable penalties with
respecttoinformationrequiredtobe
furnished with respect to possessions.
(a)In general. Each individual de-
scribed in section 7654(a) who is subject
to an information reporting requirement
promulgated under the authority of sec-
tion 937(c) or 7654 and who fails to fully
May 19, 20089742008–20 I.R.B.

satisfy such requirement within the time
prescribed for reporting such information
must, in addition to any criminal penalty
provided by law, pay a penalty of $1,000
for each such failure. Information report-
ing requirements promulgated under the
authority of sections 937(c) and 7654(e)
include the requirement for an individual
to file Form 8898, “Statement for Individu-
als who Begin or End Bona Fide Residence
inaU.S.Possession,” under §1.937–1(h)
of this chapter, to report that he or she be-
came or ceased to be abona fideresident
of a possession.
(b)Manner of payment. The penalty set
forth in paragraph (a) of this section must
be paid in the same manner as tax upon
the issuance of a notice and demand for the
penalty.
(c)Reasonable cause. The penalty set
forth in paragraph (a) of this section will
not apply if it is established to the satisfac-
tion of the Commissioner that the failure
to file the information return or furnish the
information within the prescribed time was
due to reasonable cause and not to will-
ful neglect. An individual who wishes to
avoid the penalty must make an affirma-
tive showing of all facts alleged as a rea-
sonable cause for failure to file the infor-
mation return on time, or furnish the in-
formation on time, in the form of a writ-
ten statement containing a declaration that
it is made under penalties of perjury. This
statement must be filed with the Internal
Revenue Service Center where Form 8898
must be filed. In determining whether
there was reasonable cause for failure to
furnish the required information, account
will be taken of the fact that the individual
was unable to furnish the required infor-
mation in spite of the exercise of ordinary
business care and prudence in his effort to
furnish the information. An individual will
be considered to have exercised ordinary
business care and prudence in his effort to
furnish the required information if he made
reasonable efforts to furnish the informa-
tion but was unable to do so because of a
lack of sufficient facts on which to make a
proper determination.
(d)Effective/applicability date.This
section applies to taxable years ending af-
ter April 9, 2008.
§301.6688–1T [Removed]
Par. 43. Section 301.6688–1T is re-
moved.
Par. 44. Section 301.7701(b)–1 is
amended by revising paragraph (d) to read
as follows:
§301.7701(b)–1 Resident alien.
*****
(d)Application of section 7701(b) to the
possessions and territories—(1)Applica-
tion to aliens for purposes of mirror sys-
tems. Section 7701(b) provides the basis
for determining whether an alien individ-
ual is a resident of a United States posses-
sion or territory that administers income
tax laws that are identical (except for the
substitution of the name of the possession
or territory for the term “United States”
where appropriate) to those in force in the
United States, for purposes of applying
such laws with respect to income tax lia-
bility incurred to such possession or terri-
tory.
(2)Non-application for bona fide res-
ident determination. Section 7701(b)
does not provide the basis for determin-
ing whether an individual (including an
alien individual) is abona fideresident
of a United States possession or territory
for Federal income tax purposes. For the
applicable rules for making this determi-
nation, see section 937(a) and §1.937–1 of
this chapter.
*****
§301.7701(b)–1T [Removed]
Par. 45. Section 301.7701(b)–1T is
removed.
Par. 46. Section 301.7701(b)–9 is
amended by revising the section heading
and adding new paragraph (b)(5) to read
as follows:
§301.7701(b)–9 Effective/applicability
dates of §§301.7701(b)–1 through
301.7701(b)–7.
*****
(b) * * *
(5)Possessions and territories.For
purposes of applying section 7701(b)
and the regulations under that section,
§301.7701(b)–1(d) applies to taxable years
ending after April 9, 2008.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved April 1, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on April 4, 2008,
8:45 a.m., and published in the issue of the Federal Register
for April 9, 2008, 73 F.R. 19349)
Section 4980G.—Failure
of Employer to Make
Comparable Health Savings
Account Contributions
26 CFR 54.4980G–4: Calculating comparable con-
tributions.
T.D. 9393
Department of the Treasury
Internal Revenue Service
26 CFR Part 54
Employer Comparable
Contributions to Health
SavingsAccountsUnder
Section 4980G
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations providing guidance on em-
ployer comparable contributions to Health
Savings Accounts (HSAs) under section
4980G in instances where an employee has
not established an HSA by December 31
st
and in instances where an employer accel-
erates contributions for the calendar year
for employees who have incurred quali-
fied medical expenses. These final regu-
lations affect employers that contribute to
employees’ HSAs and their employees.
DATES:Effective Date:These regulations
are effective on April 17, 2008.
Applicability Date:These regulations
apply to employer contributions made for
calendar years beginning on or after Jan-
uary 1, 2009.
2008–20 I.R.B.975May 19, 2008

FOR FURTHER INFORMATION
CONTACT: Mireille Khoury at (202)
622–6080.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–2090. The collection of information
in these final regulations is in Q & A–14.
This information is needed for purposes of
making HSA contributions to employees
who establish an HSA after the end of
the calendar year but before the last day
of February or who have not previously
notified their employer that they have es-
tablished an HSA.
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 Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains final Pension
Excise Tax Regulations (26 CFR part 54)
under section 4980G of the Internal Rev-
enue Code (Code). Under section 4980G,
an excise tax is imposed on an employer
that fails to make comparable contribu-
tions to the HSAs of its employees.
On August 26, 2005, proposed regu-
lations (REG–138647–04, 2005–2 C.B.
697) on the comparability rules of section
4980G were published in theFederal Reg-
ister(70 FR 50233). On July 31, 2006,
final regulations (REG–138647–04) on
the comparability rules were published in
theFederal Register(T.D. 9277, 2006–2
C.B. 226 [71 FR 43056]). The final reg-
ulations clarified and expanded upon the
guidance regarding the comparability
rules published in Notice 2004–2, 2004–1
C.B. 269, and in Notice 2004–50, 2004–2
C.B. 196, Q & A–46 through Q & A–54.
See §601.601(d)(2). Q & A–6(b) of the
final regulations reserved the issue of
employees who have not established an
HSA by the end of the calendar year.
On June 1, 2007, proposed regulations
(REG–143797–06, 2007–26 I.R.B. 1449),
were published in theFederal Register
(72 FR 30501) addressing the reserved
issue and one additional issue concerning
the acceleration of employer contribu-
tions. One written public comment on the
proposed regulations was received, which
supported the proposed regulations. These
final regulations adopt the provisions of
the proposed regulations without substan-
tive revision.
Explanation of Provisions and
Summary of Comments
Employee Has Not Established HSA by
December 31
The proposed and final regulations pro-
vide a means for employers to comply with
the comparability requirements with re-
spect to employees who have not estab-
lished an HSA by December 31, as well as
with respect to employees who may have
established an HSA but not notified the
employer of that fact. The proposed and
final regulations provide that, in order to
comply with the comparability rules for
a calendar year with respect to such em-
ployees, the employer must comply with
a notice requirement and a contribution re-
quirement. In order to comply with the no-
tice requirement, the employer must pro-
vide all such employees, by January 15 of
the following calendar year, written notice
that each eligible employee who, by the
last day of February, both establishes an
HSA and notifies the employer that he or
she has established the HSA will receive a
comparable contributiontotheHSA.For
each such eligible employee who estab-
lishes an HSA and so notifies the employer
by the end of February, the employer must
contribute to the HSA by April 15 com-
parable amounts (taking into account each
month that the employee was a compara-
ble participating employee) plus reason-
able interest. The notice may be delivered
electronically. The proposed and final reg-
ulations provide sample language that em-
ployers may use as a basis in preparing
their own notices. The only comment re-
ceived was in support of this new rule and
the model notice.
Acceleration of Employer Contributions
The proposed and final regulations also
address a second issue relating to acceler-
ation of contributions. They provide that,
for any calendar year, an employer may
accelerate part or all of its contributions
for the entire year to the HSAs of employ-
ees who have incurred during the calen-
dar year qualified medical expenses ex-
ceeding the employer’s cumulative HSA
contributions at that time. If an employer
accelerates contributions for this reason,
these contributions must be available on an
equal and uniform basis to all eligible em-
ployees throughout the calendar year and
employers must establish reasonable uni-
form methods and requirements for accel-
eration of contributions and the determi-
nation of medical expenses. An employer
is not required to contribute reasonable in-
terest on either accelerated or non-acceler-
ated HSA contributions. But see Q & A–6
and Q & A–12 in §54.4980G–4 for when
reasonable interest must be paid. The one
comment received supported this new pro-
vision allowing employers to accelerate
contributions.
Other issues
These final regulations concern only
section 4980G. Other statutes may impose
additional requirements (for example, the
Health Insurance Portability and Account-
ability Act of 1996 (HIPAA) (sections
9801–9803)).
Effective/Applicability Date
These regulations apply to employer
contributions made for calendar years
beginning on or after January 1, 2009.
However, employers may rely on this
guidance beginning on or after the date
of publication of these final regulations in
theFederal Register.
Special Analyses
It has been determined that these regu-
lations are not a significant regulatory ac-
tion 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 Pro-
cedure Act (5 U.S.C. chapter 5) does not
May 19, 20089762008–20 I.R.B.

apply to these regulations. It is hereby
certified that the collection of information
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certifica-
tion is based on the fact the estimated bur-
den associated with the information col-
lection averages 15 minutes per respon-
dent. Moreover, a model notice has been
provided for employers who are subject to
this collection of information. Therefore, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. Chap-
ter 6) is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these final reg-
ulations is Mireille Khoury, Office of Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, personnel from other offices of
the IRS and Treasury Department partici-
pated in their development.
*****
Adoption of Amendment to the
Regulations
Accordingly, 26 CFR part 54 is
amended as follows:
PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation for
part 54 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 54.4980G–0 is amended
by adding entries for Q & A–14, Q & A–15
and Q & A–16 to read as follows:
§54.4980G–0 Table of contents.
*****
§54.4980G–4 Calculating comparable
contributions.
*****
Q–14: How does an employer com-
ply with the comparability rules if an em-
ployee has not established an HSA by De-
cember 31st?
Q–15: For any calendar year, may an
employer accelerate part or all of its con-
tributions for the entire year to the HSAs of
employees who have incurred, during the
calendar year, qualified medical expenses
(as defined in section 223(d)(2)) exceeding
the employer’s cumulative HSA contribu-
tionsatthattime?
Q–16: What is the effective date for the
rules in Q & A–14 and Q & A–15 of this
section?
Par. 3. Section 54.4980G–4 is amended
by:
1. Removing paragraph (b) and redes-
ignating paragraph (c) as paragraph (b) in
Q & A–6.
2. Adding Q & A–14, Q & A–15 and
Q & A–16.
The additions read as follows:
§54.4980G–4 Calculating comparable
contributions.
*****
Q–14: Does an employer fail to satisfy
the comparability rules for a calendar year
if the employer fails to make contributions
with respect to eligible employees because
the employee has not established an HSA
or because the employer does not know
that the employee has established an HSA?
A–14: (a)In general. An employer will
not fail to satisfy the comparability rules
for a calendar year (Year 1) merely be-
cause the employer fails to make contribu-
tions with respect to an eligible employee
because the employee has not established
an HSA or because the employer does not
know that the employee has established an
HSA, if —
(1) The employer provides timely writ-
ten notice to all such eligible employees
that it will make comparable contributions
for Year 1 for eligible employees who, by
the last day of February of the following
calendar year (Year 2), both establish an
HSA and notify the employer (in accor-
dance with a procedure specified in the no-
tice) that they have established an HSA;
and
(2) For each such eligible employee
who establishes an HSA and so notifies the
employer on or before the last day of Feb-
ruary of Year 2, the employer contributes
to the HSA for Year 1 comparable amounts
(taking into account each month that the
employee was a comparable participat-
ing employee) plus reasonable interest by
April 15
th
of Year 2.
(b)Notice. The notice described in
paragraph (a) of this Q & A–14 must be
provided to each eligible employee who
has not established an HSA by December
31 of Year 1 or if the employer does not
know if the employee established an HSA.
The employer may provide the notice to
other employees as well. However, if an
employee has earlier notified the employer
that he or she has established an HSA, or
if the employer has previously made con-
tributions to that employee’s HSA, the em-
ployer may not condition making compa-
rable contributions on receipt of any ad-
ditional notice from that employee. For
each calendar year, a notice is deemed to
be timely if the employer provides the no-
tice no earlier than 90 days before the first
HSA employer contribution for that calen-
dar year and no later than January 15 of the
following calendar year.
(c)Model notice.Employersmayuse
the following sample language as a basis
in preparing their own notices.
Notice to Employees Regarding Em-
ployer Contributions to HSAs:
This notice explains how you may be
eligible to receivecontributions from
[employer] if you are covered by a High
Deductible Health Plan (HDHP). [Em-
ployer] provides contributions to the
Health Savings Account (HSA) of each
employee who is [insert employer’s
eligibility requirements for HSA con-
tributions] (“eligible employee”). If
you are an eligible employee, you must
do the following in order to receive an
employer contribution:
(1) establish an HSA on or before the
last day in February of [insert year after
the year for which the contribution is
being made] and;
(2) notify [insert name and contact
information for appropriate person to
be contacted] of your HSA account
information on or before the last day in
February of [insert year after year for
which the contribution is being made].
[Specify the HSA account information
that the employee must provide (e.g.,
account number, name and address
of trustee or custodian, etc.) and the
method by which the employee must
provide this account information (e.g.,
in writing, by e-mail, on a certain form,
etc.)].
2008–20 I.R.B.977May 19, 2008

If you establish your HSA on or be-
fore the last day of February in [in-
sert year after year for which the contri-
bution is being made] and notify [em-
ployer] of your HSA account informa-
tion, you will receive your HSA con-
tributions, plus reasonable interest, for
[insert year for which contribution is
being made] by April 15 of [insert year
after year for which contribution is be-
ingmade].If,however,youdonotes-
tablish your HSA or you do not notify
us of your HSA account information by
the deadline, then we are not required
to make any contributions to your HSA
for [insert applicable year]. You may
notify us that you have established an
HSA by sending an [e-mail or] a writ-
ten notice to [insert name, title and, if
applicable, e-mail address]. If you have
any questions about this notice, you can
contact [insert name and title] at [insert
telephone number or other contact in-
formation].
(e)Electronic delivery.Anemployer
may furnish the notice required under this
section electronically in accordance with
§1.401(a)–21 of this chapter.
(f)Examples. The following examples
illustrate the rules in this Q & A–14:
Example 1. In a calendar year, Employer Q con-
tributes to the HSAs of current employees who are el-
igible individuals covered under any HDHP. For the
2009 calendar year, Employer Q contributes $50 per
month on the first day of each month, beginning Jan-
uary 1
st
, to the HSA of each employee who is an el-
igible employee on that date. For the 2009 calendar
year, Employer Q provides written notice satisfying
the content requirements of this Q & A–14 on Oc-
tober 16, 2008 to all employees regarding the avail-
ability of HSA contributions for eligible employees.
For eligible employees who are hired after October
16, 2008, Employer Q provides such a notice no later
than January 15, 2010. Employer Q’s notice satisfies
the notice timing requirements in paragraph (a)(1) of
this Q & A–14.
Example 2. Employer R’s written cafeteria plan
permits employees to elect to make pre-tax salary
reduction contributions to their HSAs. Employees
making this election have the right to receive cash
or other taxable benefits in lieu of their HSA pre-tax
contribution. Employer R automatically contributes
a non-elective matching contribution to the HSA of
each employee who makes a pre-tax HSA contribu-
tion. Because Employer R’s HSA contributions are
made through the cafeteriaplan, the comparability
requirements do not apply to the HSA contributions
made by Employer R. Consequently, Employer R is
not required to provide written notice to its employ-
ees regarding the availability of this matching HSA
contribution. See Q & A–1 in §54.4980G–5 for treat-
ment of HSA contributions made through a cafeteria
plan.
Example 3. In a calendar year, Employer S main-
tains an HDHP and only contributes to the HSAs
of eligible employees who elect coverage under its
HDHP. For the 2009 calendar year, Employer S em-
ploys ten eligible employees and all ten employees
have elected coverage under Employer S’s HDHP
and have established HSAs. For the 2009 calendar
year, Employer S makes comparable contributions to
the HSAs of all ten employees. Employer S satisfies
the comparability rules. Thus, Employer S is not re-
quired to provide written notice to its employees re-
garding the availability of HSA contributions for eli-
gible employees.
Example 4. In a calendar year, Employer T con-
tributes to the HSAs of current full-time employees
with family coverage under any HDHP. For the 2009
calendar year, Employer T provides timely written
notice satisfying the content requirements of this sec-
tion to all employees regardless of HDHP coverage.
Employer T makes identical monthly contributions to
all eligible employees (meaning full time employees
with family HDHP coverage) that establish HSAs.
Employer T contributes comparable amounts (tak-
ing into account each month that the employee was a
comparable participating employee) plus reasonable
interest to the HSAs of the eligible employees that es-
tablish HSAs and provide the necessary information
after the end of the year but on or before the last day
of February, 2010. Employer T makes no contribu-
tion to the HSAs of employees that do not establish
an HSA or that do not provide the necessary infor-
mation on or before the last day of February, 2010.
Employer T satisfies the comparability requirements.
Example 5. For the 2009 calendar year, Employer
V contributes to the HSAs of current full time em-
ployees with family coverage under any HDHP. Em-
ployer V has 500 current full time employees. As of
the date for Employer V’s first HSA contribution for
the 2009 calendar year, 450 eligible employees have
established HSAs. Employer V provides timely writ-
ten notice satisfying the content requirements of this
section only to those 50 eligible employees who have
not established HSAs. Employer V makes identical
quarterly contributions to the 450 eligible employees
who established HSAs. By April 15, 2010, Employer
V contributes comparable amounts to the other eligi-
ble employees who establish HSAs and provide the
necessary information on or before the last day of
February, 2010. Employer V makes no contribution
to the HSAs of eligible employees that do not estab-
lish an HSA or that do not provide the necessary in-
formation on or before the last day of February, 2010.
Employer V satisfies the comparability rules.
Q–15: For any calendar year, may an
employer accelerate part or all of its con-
tributions for the entire year to the HSAs of
employees who have incurred, during the
calendar year, qualified medical expenses
(as defined in section 223(d)(2)) exceeding
the employer’s cumulative HSA contribu-
tionsatthattime?
A–15: (a)In general.Yes.Forany
calendar year, an employer may accelerate
part or all of its contributions for the en-
tire year to the HSAs of employees who
have incurred, during the calendar year,
qualified medical expenses exceeding the
employer’s cumulative HSA contributions
at that time. If an employer accelerates
contributions to the HSA of any such el-
igible employee, all accelerated contribu-
tions must be available throughout the cal-
endar year on an equal and uniform basis
to all such eligible employees. Employers
must establish reasonable uniform meth-
ods and requirementsfor accelerated con-
tributions and the determination of medi-
cal expenses.
(b)Satisfying comparability.Anem-
ployer that accelerates contributions to the
HSAs of its employees will not fail to sat-
isfy the comparability rules because em-
ployees who incur qualifying medical ex-
penses exceeding the employer’s cumula-
tive HSA contributions at that time have
received more contributions in a given pe-
riod than comparable employees who do
not incur such expenses, provided that all
comparable employees receive the same
amount or the same percentage for the cal-
endar year. Also, an employer that accel-
erates contributions to the HSAs of its em-
ployees will not fail to satisfy the compara-
bility rules because an employee who ter-
minates employment prior to the end of
the calendar year has received more con-
tributions on a monthly basis than employ-
ees who work the entire calendar year. An
employer is not required to contribute rea-
sonable interest on either accelerated or
non-accelerated HSA contributions. But
see Q & A–6 and Q & A–12 of this sec-
tion for when reasonable interest must be
paid.
Q–16: What is the effective date for the
rules in Q & A–14 and Q & A–15 of this
section?
A–16: These regulations apply to em-
ployer contributions made for calendar
years beginning on or after January 1,
2009.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved April 10, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on April 16, 2008,
8:45 a.m., and published in the issue of the Federal Register
for April 17, 2008, 73 F.R. 20794)
May 19, 20089782008–20 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Public Inspection of Form
990–T, Exempt Organization
Business Income Tax Return
Notice 2008–49
Section 1. Purpose
This notice modifies Notice 2007–45,
2007–22 I.R.B. 1320, and provides ad-
ditional interim guidance with respect to
the requirement under section 6104 of
the Internal Revenue Code (the Code)
that section 501(c)(3) organizations make
available for public inspection Forms
990–T,Exempt Organization Business
Income Tax Return (and proxy tax un-
der section 6033(e)). This notice reflects
the amendments to sections 6104(b) and
6104(d) of the Code contained in section
3(g) of the Tax Technical Corrections Act
of 2007, Pub. L. 110–172 (H.R. 4839)
(the Act). The amendments are effective
for Forms 990–T filed with the Internal
Revenue Service (IRS) after August 17,
2006.
Section 2. Background
Prior to the enactment of the Pension
Protection Act of 2006, Pub. L. 109–280
(the PPA), organizations exempt from Fed-
eral income tax under section 501(a) as
describedinsection501(c)oftheCode
were required to make available for pub-
lic inspection and copying only the annual
informationreturnsfiledbysuchorgani-
zations under section 6033 (Forms 990,
990–EZ, and 990–PF). The public inspec-
tion and copying requirement with respect
to these returns applies for the three-year
period beginning on the last day prescribed
for the filing of the returns.
The PPA amended section
6104(d)(1)(A)(ii) to require organizations
to make available for public inspection
and copying “any annual return filed
under section 6011 which relates to any
tax imposed by section 511 (relating to
imposition of tax on unrelated business in-
come of charitable, etc., organizations) by
such organization, but only if such organi-
zation is described in section 501(c)(3).”
Thus, for section 501(c)(3) organizations
(charities), the PPA extended the public
inspection and copying requirement to
Forms 990–T. The PPA was silent regard-
ing whether the public inspection and
copying requirement for Forms 990–T
applied only for the three-year period
beginning on the last day prescribed for
the filing of the returns.
The IRS issued Notice 2007–45 on May
29, 2007, to provide interim guidance on
the amended section 6104(d) pending the
issuance of revised regulations. Notice
2007–45 provides that Forms 990–T filed
with the IRS after August 17, 2006, must
be made available for public inspection
and copying by all charities, regardless
of whether the charity is otherwise sub-
ject to the disclosure requirements of sec-
tion 6104. Notice 2007–45 also provides
that Forms 990–T must be made available
for public inspection and copying in their
entirety as filed with the IRS, including
all schedules, attachments, and supporting
documents.
On December 29, 2007, the Presi-
dent signed the Act. Section 3(g) of
the Act revised the language of section
6104(d)(1)(A)(ii) to refer to: “any an-
nual return which is filed under section
6011 by an organization described in sec-
tion 501(c)(3)andwhich relates to any
tax imposed by section 511 (relating to
imposition of tax on unrelated business
income of charitable, etc., organizations).”
(Emphasis added.) As revised, section
6104(d)(1)(A)(ii) makes clear that char-
ities must make available for public in-
spection and copying only those returns
and attachments to the return that are both
filed under section 6011 and that relate to
the imposition of tax on unrelated busi-
ness income of charitable organizations.
Section 3(g) of the Act amended section
6104(d)(2) to require organizations to
make Forms 990–T available for public
inspection only for the three-year period
following the filing of the return. In addi-
tion, section 3(g) of the Act provided that
the IRS, and not just the organization, is
required to make Forms 990–T publicly
available pursuant to section 6104(b), and
that the IRS must treat Forms 990–T in
thesamemannerasForms990.See153
Cong. Rec. S16056–03 (Dec. 19, 2007).
Section 3. Modification of Interim
Guidance
This notice modifies Notice 2007–45
to incorporate the new provisions from
the Act for section 6104(d). Specifically,
Section 3 of Notice 2007–45 is hereby
modified as follows. The guidelines for
making annual returns available for pub-
lic inspection and copying set forth in
Treas. Reg. § 301.6104(d)–1 generally
apply except that the definition of “an-
nual information return” in Treas. Reg.
§ 301.6104(d)–1(b)(4)(i) includes an exact
copy of the Form 990–T filed by a charity
with the IRS after August 17, 2006, in-
cluding any schedules, attachments, and
supporting documents that relate to the
imposition of tax on the unrelated busi-
ness income of the charitable organization.
Schedules, attachments, and supporting
documents filed with Form 990–T that do
not relate to the imposition of unrelated
businessincometaxarenotrequiredtobe
made available for public inspection and
copying. Such schedules and attachments,
for example, include Form 5471,Informa-
tion Return of U.S. Persons With Respect
To Certain Foreign Corporations,Form
8886,Reportable Transaction Disclosure
Statement, and Form 8913,Credit for Fed-
eral Telephone Excise Tax Paid(generally
this form was used only for tax year 2006).
Further guidance with respect to schedules
or attachments that are not required to be
made available when attached to Form
990–T will be provided in forms, instruc-
tions and other public announcements.
Further, under the amended section
6104(d)(2), charities must make Forms
990–T available for public inspection and
copying only for the three-year period
beginning on the last day prescribed for
filing such return (determined with regard
to any extension of time for filing).
The IRS is now required to make Forms
990–T of section 501(c)(3) organizations
publicly available pursuant to section
6104(b). The procedures for requesting
public inspection or copying of Forms
990–T are set forth in Announcement
2008–21.
All remaining provisions of Notice
2007–45 shall continue in full force and
effect.
2008–20 I.R.B.979May 19, 2008

Section 4. Request for Comments
The IRS and the Treasury Department
invite comments on implementation of the
public inspection requirement of section
6104(d)(1)(A)(ii), including comments
with respect to those schedules or attach-
ments that should not be available for
public inspection when attached to Form
990–T. Comments should refer to Notice
2008–49 and be submitted to:
Internal Revenue Service
CC:PA:LPD:PR (Notice 2008–49)
Room 5203
P. O. Box 7604
Ben Franklin Station
Washington, DC 20044
Submissions may be hand delivered
Monday through Friday between the hours
of8a.m.and4p.m.to:
Courier’s Desk
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20224
Attn: CC:PA:LPD:PR
(Notice 2008–49)
Alternatively, taxpayers may submit
comments electronically tonotice.com-
ments@irscounsel.treas.gov. Please in-
clude “Notice 2008–49” in the subject line
of any electronic communications.
All comments will be available for pub-
lic inspection and copying.
Section 6. Drafting Information
The principal author of this notice is
Melinda Williams of the Exempt Organi-
zations, Tax Exempt and Government En-
tities Division. For further information re-
garding this notice,contact Ms. Williams
at 202–283–9467 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of
correct tax liability.
(Also: Part I, §§ 6011, 6111, 6112; 1.6011–4,
301.6111–3, 301.6112–1.)
Rev. Proc. 2008–20
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance relating to the obligation of material
advisors to prepare and maintain lists with
respect to reportable transactions under
§ 6112 of the Internal Revenue Code. In
particular, this revenue procedure allows
material advisors to use a form available
on the Internal Revenue Service website
for the purpose of maintaining the item-
ized statement component of the list under
§ 6112. See § 301.6112–1(b)(3)(i) of the
Procedure and Administration Regula-
tions. The form is not required to be used
by a material advisor in order for that
material advisor to comply with the re-
quirements of § 301.6112–1, but is offered
as an option for maintaining the list.
SECTION 2. BACKGROUND
Section 6112, as amended by the
American Jobs Creation Act of 2004,
P.L. 108–357, 188 Stat. 1418, requires
that each material advisor with respect
to any reportable transaction shall
maintain (in such manner as the Secretary
may by regulations prescribe) a list
identifying each person with respect to
whom the advisor acted as a material
advisor with respect to the transaction
and containing other information as the
Secretary may by regulations require.
Under § 301.6112–1(a), material advisors
are required to prepare and maintain a
list as described in the regulations and
are required to furnish the list to the
IRS upon written request by the IRS.
For reportable transactions for which a
material advisor makes a tax statement on
or after August 3, 2007 (and transactions
ofinterestenteredintobyataxpayeron
or after November 2, 2006, with respect
to which a material advisor makes a tax
statement on or after November 2, 2006),
the list must include three components: an
itemized statement, a detailed description
of the transaction, and copies of certain
documents. Section 301.6112–1(b)(3). If
any component of the list is not in a form
that enables the IRS to determine without
undue delay or difficulty the required
information, the material advisor will not
be considered to have complied with the
list maintenance provisions in § 6112 and
§ 301.6112–1. Section 301.6112–1(e)(1).
Section 6708(a) provides that if any person
who is required to maintain a list fails to
make the list available to the IRS within 20
business days after the date of the written
request, the person shall pay a penalty of
$10,000 for each day of the failure after
the expiration of the 20th business day.
Section 301.6112–1(b)(1) states that
the Commissioner in his discretion may
provide in published guidance a form or
method for maintaining and/or furnishing
the list. The IRS has received requests
to provide an optional format for the
itemized statement component of the list.
Consequently, under the authority of the
regulations, this revenue procedure allows
material advisors to use the form pub-
lished on the IRS website for the purpose
of maintaining the itemized statement.
The form should simplify the method of
list maintenance with respect to the item-
ized statement and reduce the burden on
material advisors trying to comply with
the regulations.
SECTION 3. SCOPE
This revenue procedure applies to mate-
rial advisors who are required to maintain
lists under § 6112.
SECTION 4. APPLICATION
.01In general.Each material advisor,
with respect to any reportable transaction,
is required to prepare and maintain sepa-
rate lists for each reportable transaction.
For reportable transactions for which a
material advisor makes a tax statement on
or after August 3, 2007 (and transactions
of interest entered into by a taxpayer on or
after November 2, 2006, with respect to
which a material advisor makes a tax state-
ment on or after November 2, 2006), each
list must include three components: an
itemized statement, a detailed description
of the transaction, and copies of certain
documents. Section 301.6112–1(b)(3).
The list must be furnished to the IRS upon
written request in a form that enables the
IRS to determine without undue delay
or difficulty the information required in
§ 301.6112–1(b). In order to be in a posi-
tion to timely produce the list required to
be maintained under § 301.6112–1, the list
should be maintained and updated on an
ongoing basis, rather than compiled after
the IRS makes a written request for the list.
Because the list must be furnished to the
IRS in a form that enables the IRS to de-
termine without undue delay or difficulty
the information required, the list should be
organized in a manner in which the three
May 19, 20089802008–20 I.R.B.

components of the listare maintained to-
gether in a coherent and logical manner.
Furthermore, the IRS may make targeted
list requests, for example, a request for a
list on a specific transaction only, in addi-
tion to general list requests which ask for
all the lists the material advisor is required
to maintain under § 301.6112–1.
.02Method of list preparation and
maintenance.
(1)In general. At the material advi-
sor’s discretion, the material advisor may
use the form associated with this rev-
enue procedure, Form 13976, “Itemized
Statement Component of Advisee List”
(or successor form), located through the
forms and publications resource page
on the IRS website or located through
http://www.irs.gov/businesses/corpora-
tions/article/0,,id=97384,00.html,forthe
purpose of preparing and maintaining the
itemized statement component of the list
with respect to a reportable transaction.
The form contains spaces for all of the el-
ements required by § 301.6112–1(b)(3)(i).
Instructions for the use of the form also are
available on the IRS website. A material
advisor may use the form as a template
for creating a similar form, including a
spreadsheet, on a software program used
by the material advisor.
(2)Use of the form is not required.Ma-
terial advisors are not required to use the
form associated with this revenue proce-
dure (or a similar form or spreadsheet) in
order to comply with § 6112.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective
May 1, 2008, the date this revenue proce-
dure was released to the public.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Charles D. Wien of the Office
of Associate Chief Counsel (Passthroughs
& Special Industries). For further infor-
mation regarding this revenue procedure,
contact Mr. Wien at (202) 622–3070 (not
a toll-free call).
2008–20 I.R.B.981May 19, 2008

Part IV. Items o
fGeneralInterest
Relief for Rec
ipients of
Certain Direc
t Deposits of
2008 Economic
Stimulus
Payments
Announcemen
t 2008–44
This announc
ement provides that indi-
viduals who h
ave payments made by direct
deposit unde
r the Economic Stimulus Act
of 2008, P.L.
No. 110–185, to their IRAs
or certain o
ther accounts afforded special
tax benefit
s under the Internal Revenue
Code may rem
ove the payments without
incurring a
ny adverse tax consequences.
Internal Re
venue Code (Code) § 6428,
as amended b
y § 101 of the Economic
Stimulus A
ct of 2008, provides for pay-
ments to be
made to eligible individuals
in an amoun
t determined under rules con-
tained in §
6428. These payments are gen-
erally kn
own as “Economic Stimulus Pay-
ments.” T
axpayers who indicated on their
2007 fede
ral income tax return that re-
fund amou
nts should be directly deposited
into one a
ccount specified on the return
will hav
e their Economic Stimulus Pay-
ment dir
ectly deposited to that same ac-
count. T
he account specified by the tax-
payer co
uld be a checking or saving ac-
count, o
r an account that is given favorable
tax tre
atment under the Code, such as an
IRA, a h
ealth savings account (HSA), an
Archer
MSA, a Coverdell education sav-
ings ac
count (CESA), or a qualified tu-
ition p
rogram account (QTP or section 529
progr
am). Distributions from these tax-fa-
vored
accounts are subject to rules and re-
stric
tions specified in the Code. The Eco-
nomic
Stimulus Payment for a taxpayer
who el
ected to directly deposit his or her
2007
refund into more than one account,
howe
ver, will be sent as a check and will
not b
e directly deposited into any of the
taxp
ayer’s accounts.
An in
dividual may withdraw from a
tax-
favored account an amount less than
or eq
ual to the amount of the Economic
Stim
ulus Payment directly deposited into
suc
h account, notwithstanding any restric-
tio
ns in the Code. To the extent that the
wit
hdrawal is made no later than the time
for
filing the taxpayer’s income tax return
for
2008, plus extensions (or in the case
of
a CESA, the later of May 31, 2009,
or the time for
filing the taxpayer’s in-
come tax retur
n for 2008, plus extensions),
the amount wit
hdrawn is treated as neither
contributed t
o nor distributed from the ac-
count. Thus, t
he amount withdrawn will
not be subjec
t to regular federal income tax
nor to any add
itional tax or penalty under
the Code.
The Service r
ecognizes that financial
institution
s may not be able to distinguish
these contri
butions and distributions from
others that
may occur. Therefore the finan-
cial instit
ution receiving the direct deposit
of the Econo
mic Stimulus Payment and
making the d
istribution should report the
deposit an
d distribution in the usual man-
ner. Taxpa
yers who choose to withdraw
their Econ
omic Stimulus Payments will re-
ceive inst
ructions in their Form 1040 pack-
age that wi
ll allow them to report the dis-
tributio
n on their individual income tax
return in
a manner that shows that the
amount wi
thdrawn is not subject to taxes
or penalt
ies.
Deletion
sFromCumulative
List of O
rganizations
Contrib
utions to Which
are Ded
uctible Under Section
170 of t
he Code
Announ
cement 2008–45
The Int
ernal Revenue Service has re-
voked i
ts determination that the organi-
zatio
ns listed below qualify as organiza-
tions
described in sections 501(c)(3) and
170(c
)(2) of the Internal Revenue Code of
1986.
Gener
ally, the Service will not disallow
deduc
tions for contributions made to a
liste
d organization on or before the date
of an
nouncement in the Internal Revenue
Bull
etin that an organization no longer
qual
ifies. However, the Service is not
prec
luded from disallowing a deduction
for a
ny contributions made after an or-
gan
ization ceases to qualify under section
170
(c)(2) if the organization has not timely
fil
ed a suit for declaratory judgment under
sec
tion 7428 and if the contributor (1) had
kno
wledge of the revocation of the ruling
or d
etermination letter, (2) was aware that
su
ch revocation was imminent, or (3) was
in part respon
sible for or was aware of the
activities or
omissions of the organization
that brought a
bout this revocation.
If on the other
hand a suit for declara-
tory judgment
has been timely filed, con-
tributions fr
om individuals and organiza-
tions describ
ed in section 170(c)(2) that
are otherwis
e allowable will continue to
be deductibl
e. Protection under section
7428(c) woul
d begin on May 19, 2008, and
would end on t
he date the court first deter-
mines that t
he organization is not described
in section 1
70(c)(2) as more particularly
set forth in
section 7428(c)(1). For indi-
vidual cont
ributors, the maximum deduc-
tion prote
cted is $1,000, with a husband
and wife tr
eated as one contributor. This
benefit is
not extended to any individual, in
whole or in
part, for the acts or omissions
of the orga
nization that were the basis for
revocati
on.
Lahaina A
rts Society
Lahaina,
HI
Coastal A
dult Daycare, Inc.
Wilmingt
on, NC
Sea of Sou
nd Productions, Inc.
Midlothi
an, VA
Recovery
of Outreach, Inc.
Riviera B
each, FL
National
Housing Foundation, Inc.
Beloit, W
I
Agape Eco
nomic Development
Yorba Lin
da, CA
Homeward
Foundation, Inc.
Miami, FL
Scott and
Barbara Smith Foundation
South Jor
dan, UT
Kimberly
Credit Counseling, Inc.
West Palm
Beach, FL
Friends o
f Kohsiung Medical University
Staten Is
land, NY
Bergen Co
unty Career Advancement
Training
,Inc.
Garfiel
d, NJ
Credit Co
unselors of North America, Inc.
Oakland
Park, Fl
Afforda
ble Housing Concepts
Valrico
,FL
Wick Cha
ritable Family Foundation
Santa Mo
nica, CA
Family L
ife Financial Services
Lubbock
,TX
Polish A
merican Citizens Club, Inc.
Monson,
MA
May 19, 20089822008–20 I.R.B.

Milennial Charities and Philanthropy
Salt Lake City, UT
The Amicus Curiae Foundation
Windsor, CA
Correction to Revenue Ruling
2008–22, 2008–16 I.R.B. 796
Announcement 2008–46
This document contains a correction to
Rev. Rul. 2008–22, 2008–16 I.R.B. 796,
which was published in the Internal Rev-
enue Bulletin on April 21, 2008.
BACKGROUND
The revenue ruling (Rev.Rul.
2008–22) that is the subject of this correc-
tion provided guidance regarding whether
the corpus of aninter vivostrust is in-
cludible in the grantor’s gross estate under
section 2036 or 2038 of the Code, if the
grantor retained the power, exercisable in
a nonfiduciary capacity, to acquire prop-
erty held in the trust by substituting other
property of equivalent value.
NEED FOR CORRECTION
As published, the revenue ruling (Rev.
Rul. 2008–22) contains a misstated cita-
tion to the Restatement (Third) of Trusts.
CORRECTION OF PUBLICATION
Accordingly, the publication of the rev-
enue ruling (Rev. Rul. 2008–22) is cor-
rected as follows:
On page 797 of Bulletin No. 2008–16,
column 3, in the paragraph starting with
“In general, a trustee has a fiduciary duty,”
fifteenth line of the paragraph, the lan-
guage “Restatement (Third) of Trusts
§§ 183 and 232 (2007);” is corrected to
read “Restatement (Third) of Trusts § 79
(2007);”.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 2008–22, 2008–16 I.R.B.
796 is modified.
DRAFTING INFORMATION
The principal author of this announce-
ment is Mayer Rubin Samuels of the Office
of Associate Chief Counsel (Passthroughs
& Special Industries). For further informa-
tion regarding this announcement, contact
Mayer Rubin Samuels at (202) 622–3090
(not a toll-free call).
Hybrid Retirement Plans;
Hearing
Announcement 2008–47
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of public hearing on pro-
posed rulemaking.
SUMMARY: This document provides no-
tice of public hearing on proposed regu-
lations (REG–104946–07, 2008–11 I.R.B.
596) providing guidance relating to sec-
tions 411(a)(13) and 411(b)(5) of the Inter-
nal Revenue Code concerning certain hy-
brid defined benefit plans.
DATES: The public hearing is being held
on Friday, June 6, 2008, at 10:00 a.m. The
IRS must receive outlines of the topics to
be discussed at the public hearing by Fri-
day, May 16, 2008.
ADDRESSES: The public hearing is being
held in the IRS Auditorium, Internal Rev-
enue Service Building, 1111 Constitution
Avenue, NW, Washington, DC 20224.
Send Submissions to CC:PA:LPD:PR
(REG–104946–07), room 5205, Internal
Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Mon-
day through Friday to CC:PA:LPD:PR
(REG–104946–07), Couriers Desk, In-
ternal Revenue Service, 1111 Constitu-
tion Avenue, NW, Washington, DC, or
sent electronically via the Federal erule-
making Portal atwww.regulations.gov
(IRS-REG–104946–07).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Lauson Green or Linda S.F. Marshall at
(202) 622–6090; concerning submissions
of comments, the hearing and/or to be
placed on the building access list to at-
tend the hearing Funmi Taylor at (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
The subject of the public hearing
is the notice of proposed rulemaking
(REG–104946–07) that was published in
theFederal Registeron Friday, Decem-
ber 28, 2007 (72 FR 73680).
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing that
submitted written comments by March 27,
2008, must submit an outline of the topics
to be addressed and the amount of time to
be denoted to each topic (signed original
and eight (8) copies).
A period of 10 minutes is allotted to
each person for presenting oral comments.
After the deadline for receiving out-
lines has passed, the IRS will prepare an
agenda containing the schedule of speak-
ers. Copies of the agenda will be made
available, free of charge, at the hearing or
in the Freedom of Information Reading
Room (FOIA RR) (Room 1621) which
is located at the 11
th
and Pennsylvania
Avenue, NW, entrance, 1111 Constitution
Avenue, NW, Washington, DC.
Because of access restrictions, the IRS
will not admit visitors beyond the imme-
diateentranceareamorethan30minutes
before the hearing starts. For informa-
tion about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFORMA-
TION CONTACT” section of this docu-
ment.
LaNita Van Dyke,
Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on May 1, 2008,
8:45 a.m., and published in the issue of the Federal Register
for May 2, 2008, 73 F.R. 24186)
Section 7428(c) Validation
of Certain Contributions
Made During Pendency
of Declaratory Judgment
Proceedings
Announcement 2008–48
This announcement serves notice to po-
tential donors that the organization listed
2008–20 I.R.B.983May 19, 2008

below has recently filed a timely declara-
tory judgment suit under section 7428 of
the Code, challenging revocation of its
status as an eligible donee under section
170(c)(2).
Protection under section 7428(c) of the
Code begins on the date that the notice
of revocation is published in the Internal
Revenue Bulletin and ends on the date
on which a court first determines that an
organization is not described in section
170(c)(2), as more particularly set forth in
section 7428(c)(1).
In the case of individual contributors,
the maximum amount of contributions
protected during this period is limited to
$1,000.00, with a husband and wife being
treated as one contributor. This protec-
tion is not extended to any individual who
was responsible, in whole or in part, for
the acts or omissions of the organization
that were the basis for the revocation.
This protection also applies (but without
limitation as to amount) to organizations
described in section 170(c)(2) which are
exempt from tax under section 501(a). If
the organization ultimately prevails in its
declaratory judgment suit, deductibility
of contributions would be subject to the
normal limitations set forth under section
170.
Newton Family Foundation
West Jordan, UT
Dowd Foundation
Wilkes-Barre, PA
May 19, 20089842008–20 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2008–20 I.R.B.iMay 19, 2008

Numerical Finding List
1
Bulletins 2008–1 through 2008–20
Announcements:
2008-1, 2008-1 I.R.B.246
2008-2, 2008-3 I.R.B.307
2008-3, 2008-2 I.R.B.269
2008-4, 2008-2 I.R.B.269
2008-5, 2008-4 I.R.B.333
2008-6, 2008-5 I.R.B.378
2008-7, 2008-5 I.R.B.379
2008-8, 2008-6 I.R.B.403
2008-9, 2008-7 I.R.B.444
2008-10, 2008-7 I.R.B.445
2008-11, 2008-7 I.R.B.445
2008-12, 2008-7 I.R.B.446
2008-13, 2008-8 I.R.B.480
2008-14, 2008-8 I.R.B.481
2008-15, 2008-9 I.R.B.511
2008-16, 2008-9 I.R.B.511
2008-17, 2008-9 I.R.B.512
2008-18, 2008-12 I.R.B.667
2008-19, 2008-11 I.R.B.624
2008-20, 2008-11 I.R.B.625
2008-21, 2008-13 I.R.B.691
2008-22, 2008-13 I.R.B.692
2008-23, 2008-14 I.R.B.731
2008-24, 2008-13 I.R.B.692
2008-25, 2008-14 I.R.B.732
2008-26, 2008-13 I.R.B.693
2008-27, 2008-15 I.R.B.751
2008-28, 2008-14 I.R.B.733
2008-29, 2008-15 I.R.B.786
2008-30, 2008-16 I.R.B.825
2008-31, 2008-15 I.R.B.787
2008-32, 2008-16 I.R.B.826
2008-33, 2008-16 I.R.B.826
2008-34, 2008-17 I.R.B.849
2008-35, 2008-17 I.R.B.849
2008-36, 2008-16 I.R.B.827
2008-37, 2008-17 I.R.B.850
2008-38, 2008-17 I.R.B.851
2008-39, 2008-18 I.R.B.867
2008-40, 2008-19 I.R.B.941
2008-41, 2008-19 I.R.B.943
2008-42, 2008-19 I.R.B.943
2008-43, 2008-19 I.R.B.944
2008-44, 2008-20 I.R.B.982
2008-45, 2008-20 I.R.B.982
2008-46, 2008-20 I.R.B.983
2008-47, 2008-20 I.R.B.983
2008-48, 2008-20 I.R.B.983
Court Decisions:
2085, 2008-17 I.R.B.828
Court Decisions— Continued:
2086, 2008-19 I.R.B.905
Notices:
2008-1, 2008-2 I.R.B.251
2008-2, 2008-2 I.R.B.252
2008-3, 2008-2 I.R.B.253
2008-4, 2008-2 I.R.B.253
2008-5, 2008-2 I.R.B.256
2008-6, 2008-3 I.R.B.275
2008-7, 2008-3 I.R.B.276
2008-8, 2008-3 I.R.B.276
2008-9, 2008-3 I.R.B.277
2008-10, 2008-3 I.R.B.277
2008-11, 2008-3 I.R.B.279
2008-12, 2008-3 I.R.B.280
2008-13, 2008-3 I.R.B.282
2008-14, 2008-4 I.R.B.310
2008-15, 2008-4 I.R.B.313
2008-16, 2008-4 I.R.B.315
2008-17, 2008-4 I.R.B.316
2008-18, 2008-5 I.R.B.363
2008-19, 2008-5 I.R.B.366
2008-20, 2008-6 I.R.B.406
2008-21, 2008-7 I.R.B.431
2008-22, 2008-8 I.R.B.465
2008-23, 2008-7 I.R.B.433
2008-24, 2008-8 I.R.B.466
2008-25, 2008-9 I.R.B.484
2008-26, 2008-9 I.R.B.487
2008-27, 2008-10 I.R.B.543
2008-28, 2008-10 I.R.B.546
2008-29, 2008-12 I.R.B.637
2008-30, 2008-12 I.R.B.638
2008-31, 2008-11 I.R.B.592
2008-32, 2008-11 I.R.B.593
2008-33, 2008-12 I.R.B.642
2008-34, 2008-12 I.R.B.645
2008-35, 2008-12 I.R.B.647
2008-36, 2008-12 I.R.B.650
2008-37, 2008-12 I.R.B.654
2008-38, 2008-13 I.R.B.683
2008-39, 2008-13 I.R.B.684
2008-40, 2008-14 I.R.B.725
2008-41, 2008-15 I.R.B.742
2008-42, 2008-15 I.R.B.747
2008-43, 2008-15 I.R.B.748
2008-44, 2008-16 I.R.B.799
2008-45, 2008-17 I.R.B.835
2008-46, 2008-18 I.R.B.868
2008-47, 2008-18 I.R.B.869
2008-49, 2008-20 I.R.B.979
Proposed Regulations:
REG-168745-03, 2008-18 I.R.B.871
REG-147290-05, 2008-10 I.R.B.576
Proposed Regulations— Continued:
REG-141998-06, 2008-19 I.R.B.911
REG-147775-06, 2008-19 I.R.B.916
REG-153589-06, 2008-14 I.R.B.730
REG-104713-07, 2008-6 I.R.B.409
REG-104946-07, 2008-11 I.R.B.596
REG-110136-07, 2008-17 I.R.B.838
REG-111583-07, 2008-4 I.R.B.319
REG-114126-07, 2008-6 I.R.B.410
REG-114942-07, 2008-18 I.R.B.901
REG-119518-07, 2008-17 I.R.B.844
REG-124590-07, 2008-16 I.R.B.801
REG-127391-07, 2008-13 I.R.B.689
REG-136701-07, 2008-11 I.R.B.616
REG-137573-07, 2008-15 I.R.B.750
REG-139236-07, 2008-9 I.R.B.491
REG-141399-07, 2008-8 I.R.B.470
REG-143468-07, 2008-17 I.R.B.848
REG-147832-07, 2008-8 I.R.B.472
REG-149475-07, 2008-9 I.R.B.510
REG-151135-07, 2008-16 I.R.B.815
REG-108508-08, 2008-19 I.R.B.923
Revenue Procedures:
2008-1, 2008-1 I.R.B.1
2008-2, 2008-1 I.R.B.90
2008-3, 2008-1 I.R.B.110
2008-4, 2008-1 I.R.B.121
2008-5, 2008-1 I.R.B.164
2008-6, 2008-1 I.R.B.192
2008-7, 2008-1 I.R.B.229
2008-8, 2008-1 I.R.B.233
2008-9, 2008-2 I.R.B.258
2008-10, 2008-3 I.R.B.290
2008-11, 2008-3 I.R.B.301
2008-12, 2008-5 I.R.B.368
2008-13, 2008-6 I.R.B.407
2008-14, 2008-7 I.R.B.435
2008-15, 2008-9 I.R.B.489
2008-16, 2008-10 I.R.B.547
2008-17, 2008-10 I.R.B.549
2008-18, 2008-10 I.R.B.573
2008-19, 2008-11 I.R.B.594
2008-20, 2008-20 I.R.B.980
2008-21, 2008-12 I.R.B.657
2008-22, 2008-12 I.R.B.658
2008-23, 2008-12 I.R.B.664
2008-24, 2008-13 I.R.B.684
2008-25, 2008-13 I.R.B.686
Revenue Rulings:
2008-1, 2008-2 I.R.B.248
2008-2, 2008-2 I.R.B.247
2008-3, 2008-2 I.R.B.249
2008-4, 2008-3 I.R.B.272
2008-5, 2008-3 I.R.B.271
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin
2007–52, dated December 26, 2007.
May 19, 2008ii2008–20 I.R.B.

Revenue Rulings— Continued:
2008-6, 2008-3 I.R.B.271
2008-7, 2008-7 I.R.B.419
2008-8, 2008-5 I.R.B.340
2008-9, 2008-5 I.R.B.342
2008-10, 2008-13 I.R.B.676
2008-11, 2008-10 I.R.B.541
2008-12, 2008-10 I.R.B.520
2008-13, 2008-10 I.R.B.518
2008-14, 2008-11 I.R.B.578
2008-15, 2008-12 I.R.B.633
2008-16, 2008-11 I.R.B.585
2008-17, 2008-12 I.R.B.626
2008-18, 2008-13 I.R.B.674
2008-19, 2008-13 I.R.B.669
2008-20, 2008-14 I.R.B.716
2008-21, 2008-15 I.R.B.734
2008-22, 2008-16 I.R.B.796
2008-23, 2008-18 I.R.B.852
2008-24, 2008-18 I.R.B.861
Tax Conventions:
2008-8, 2008-6 I.R.B.403
2008-39, 2008-18 I.R.B.867
Treasury Decisions:
9368, 2008-6 I.R.B.382
9369, 2008-6 I.R.B.394
9370, 2008-7 I.R.B.428
9371, 2008-8 I.R.B.447
9372, 2008-8 I.R.B.462
9373, 2008-8 I.R.B.463
9374, 2008-10 I.R.B.521
9375, 2008-5 I.R.B.344
9376, 2008-11 I.R.B.587
9377, 2008-11 I.R.B.578
9378, 2008-14 I.R.B.720
9379, 2008-14 I.R.B.715
9380, 2008-14 I.R.B.718
9381, 2008-14 I.R.B.694
9382, 2008-9 I.R.B.482
9383, 2008-15 I.R.B.738
9384, 2008-16 I.R.B.792
9385, 2008-15 I.R.B.735
9386, 2008-16 I.R.B.788
9387, 2008-16 I.R.B.789
9388, 2008-17 I.R.B.832
9389, 2008-18 I.R.B.863
9390, 2008-18 I.R.B.855
9391, 2008-20 I.R.B.945
9392, 2008-19 I.R.B.903
9393, 2008-20 I.R.B.975
2008–20 I.R.B.iiiMay 19, 2008

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–1 through 2008–20
Announcements:
2006-88
Clarified and superseded by
Notice 2008-35, 2008-12 I.R.B.647
Notice 2008-36, 2008-12 I.R.B.650
2008-6
Superseded by
Ann. 2008-19, 2008-11 I.R.B.624
Notices:
2001-16
Modified by
Notice 2008-20, 2008-6 I.R.B.406
2001-60
Modified and superseded by
Notice 2008-31, 2008-11 I.R.B.592
2002-44
Superseded by
Notice 2008-39, 2008-13 I.R.B.684
2003-51
Superseded by
Rev. Proc. 2008-24, 2008-13 I.R.B.684
2006-27
Clarified and superseded by
Notice 2008-35, 2008-12 I.R.B.647
2006-28
Clarified and superseded by
Notice 2008-36, 2008-12 I.R.B.650
2006-52
Clarified and amplified by
Notice 2008-40, 2008-14 I.R.B.725
2006-77
Clarified and amplified by
Notice 2008-25, 2008-9 I.R.B.484
2006-107
Modified by
Notice 2008-7, 2008-3 I.R.B.276
2007-30
Modified and superseded by
Notice 2008-14, 2008-4 I.R.B.310
2007-45
Modified by
Notice 2008-49, 2008-20 I.R.B.979
2007-54
Clarified by
Notice 2008-11, 2008-3 I.R.B.279
Notices— Continued:
2008-13
Supplemented by
Notice 2008-46, 2008-18 I.R.B.868
2008-27
Clarified, amended, supplemented, and
superseded by
Notice 2008-41, 2008-15 I.R.B.742
Proposed Regulations:
REG-209020-86
Corrected by
Ann. 2008-11, 2008-7 I.R.B.445
REG-107592-00
Partial withdrawal by
Ann. 2008-25, 2008-14 I.R.B.732
REG-149856-03
Hearing scheduled by
Ann. 2008-26, 2008-13 I.R.B.693
REG-147290-05
Hearing scheduled by
Ann. 2008-43, 2008-19 I.R.B.944
REG-109367-06
Withdrawn by
Ann. 2008-41, 2008-19 I.R.B.943
REG-104946-07
Hearing scheduled by
Ann. 2008-47, 2008-20 I.R.B.983
REG-113891-07
Hearing scheduled by
Ann. 2008-4, 2008-2 I.R.B.269
REG-114126-07
Corrected by
Ann. 2008-36, 2008-16 I.R.B.827
REG-127770-07
Hearing scheduled by
Ann. 2008-24, 2008-13 I.R.B.692
REG-133300-07
Hearing scheduled by
Ann. 2008-34, 2008-17 I.R.B.849
REG-139236-07
Hearing scheduled by
Ann. 2008-42, 2008-19 I.R.B.943
REG-141399-07
Hearing cancelled by
Ann. 2008-31, 2008-15 I.R.B.787
Revenue Procedures:
97-36
Modified by
Rev. Proc. 2008-23, 2008-12 I.R.B.664
Revenue Procedures— Continued:
2001-23
Modified by
Rev. Proc. 2008-23, 2008-12 I.R.B.664
2002-9
Modified by
Rev. Proc. 2008-18, 2008-10 I.R.B.573
Modified and amplified by
Rev. Proc. 2008-25, 2008-13 I.R.B.686
2007-1
Superseded by
Rev. Proc. 2008-1, 2008-1 I.R.B.1
2007-2
Superseded by
Rev. Proc. 2008-2, 2008-1 I.R.B.90
2007-3
Superseded by
Rev. Proc. 2008-3, 2008-1 I.R.B.110
2007-4
Superseded by
Rev. Proc. 2008-4, 2008-1 I.R.B.121
2007-5
Superseded by
Rev. Proc. 2008-5, 2008-1 I.R.B.164
2007-6
Superseded by
Rev. Proc. 2008-6, 2008-1 I.R.B.192
2007-7
Superseded by
Rev. Proc. 2008-7, 2008-1 I.R.B.229
2007-8
Superseded by
Rev. Proc. 2008-8, 2008-1 I.R.B.233
2007-26
Obsoleted in part by
Rev. Proc. 2008-17, 2008-10 I.R.B.549
2007-31
Obsoleted in part by
Rev. Proc. 2008-19, 2008-11 I.R.B.594
2007-39
Superseded by
Rev. Proc. 2008-3, 2008-1 I.R.B.110
2007-52
Superseded by
Rev. Proc. 2008-9, 2008-2 I.R.B.258
2008-13
Corrected by
Ann. 2008-15, 2008-9 I.R.B.511
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin 2007–52, dated December 26,
2007.
May 19, 2008iv2008–20 I.R.B.

Revenue Rulings:
56-127
Obsoleted by
T.D. 9391, 2008-20 I.R.B.945
58-612
Clarified and amplified by
Rev. Rul. 2008-15, 2008-12 I.R.B.633
64-250
Amplified by
Rev. Rul. 2008-18, 2008-13 I.R.B.674
89-42
Modified and superseded by
Rev. Rul. 2008-17, 2008-12 I.R.B.626
92-19
Supplemented in part by
Rev. Rul. 2008-19, 2008-13 I.R.B.669
97-31
Modified and superseded by
Rev. Rul. 2008-17, 2008-12 I.R.B.626
2001-48
Modified and superseded by
Rev. Rul. 2008-17, 2008-12 I.R.B.626
2007-4
Supplemented and superseded by
Rev. Rul. 2008-3, 2008-2 I.R.B.249
2008-22
Modified by
Ann. 2008-46, 2008-20 I.R.B.983
Treasury Decisions:
8697
Corrected by
Ann. 2008-38, 2008-17 I.R.B.851
9273
Corrected by
Ann. 2008-33, 2008-16 I.R.B.826
9362
Corrected by
Ann. 2008-9, 2008-7 I.R.B.444
Ann. 2008-12, 2008-7 I.R.B.446
9363
Corrected by
Ann. 2008-10, 2008-7 I.R.B.445
9368
Corrected by
Ann. 2008-29, 2008-15 I.R.B.786
Ann. 2008-30, 2008-16 I.R.B.825
9375
Corrected by
Ann. 2008-16, 2008-9 I.R.B.511
9386
Corrected by
Ann. 2008-35, 2008-17 I.R.B.849
2008–20 I.R.B.vMay 19, 2008

May 19, 20082008–20 I.R.B.

INTERNAL REVENUE BULLETIN
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