including brokerage statements, credit card bills, and bank advices. Z is not a bona fide resident of Possession V because he has a closer connection to the United States than to Possession V and therefore fails to satisfy the requirements of paragraphs (b)(1) and (e) of this section. (g) Information reporting requirement. The following individuals are required to file notice of their new tax status in such time and manner as the Commissioner may prescribe by notice, form, instructions, or other publication (see §601.601(d)(2) of this chapter): (1) Individuals who take the position for U.S. tax reporting purposes that they qualify as bona fide residents of a possession for a tax year subsequent to a tax year for which they were required to file Federal income tax returns as citizens or residents of the United States who did not so qualify. (2) Citizens and residents of the United States who take the position for U.S. tax reporting purposes that they do not qualify as bona fide residents of a possession for a tax year subsequent to a tax year for which they were required to file income tax returns (with the Internal Revenue Service, the tax authorities of a possession, or both) as individuals who did so qualify. (3) Bona fide residents of Puerto Rico or a section 931 possession (as defined in §1.931-1T(c)(1)) who take a position for U.S. tax reporting purposes that they qualify as bona fide residents of such possession for a tax year subsequent to a tax year for which they were required to file income tax returns as bona fide residents of the United States Virgin Islands or a section 935 possession (as defined in §1.935-1T(a)(3)(i)). (h) Effective date. Except as provided in this paragraph (h), this section shall apply to taxable years ending after October 22, 2004. Paragraph (g) of this 101 EFTA00577360

section also applies to the 3 taxable years preceding the first taxable year ending after October 22, 2004. Par. 30. Section 1.937-2T is added to read as follows: §1.937-2T Income from sources within a possession (temporary). (a) Scope. Section 937(b) and this section 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, Subchapter 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 its repeal). 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 application 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 thereunder (relating to the determination of the gross and the taxable income from sources within and without the United States) generally shall be applied in determining the gross and the taxable income from sources within and without 102 EFTA00577361

the relevant possession. In the application of such principles, the name of the relevant possession shall be used instead of the term United States the term bona fide resident of followed by the name of the relevant possession shall be used instead of the term United States resident, and the term domestic shall be construed to mean created or organized in such possession. (c) U.S. income-- (1) In general. Except as provided in paragraph (d) of this section, income from sources within the relevant possession shall not include any item of income determined under the rules of sections 861 through 865 and the regulations thereunder to be-- (i) From sources within the United States; or (ii) Effectively connected with the conduct of a trade or business within the United States. (2) Conduit arrangements. Income shall be considered to be from sources within the United States for purposes of paragraph (c)(1) of this section if, pursuant to a plan or arrangement-- (i) The income is received in exchange for consideration provided to another person; and (ii) Such person (or another person) provides the same consideration (or consideration 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 inventory property. For special rules that apply to determine the source of income from certain sales of inventory property, see §1.863-3(f). 103 EFTA00577362

(e) Income from services-- (1) No de minimis rule. In applying the principles of section 861 and the regulations thereunder pursuant to paragraph (b) of this section, the exception in section 861(a)(3) shall not apply. (2) Service in the Armed Forces. In the case of a member of the Armed Forces of the United States, the following rules shall apply for determining the source of compensation for services performed in compliance with military orders: (i) If the individual is a bona fide resident of a possession and such services are performed in the United States or in another possession, the compensation constitutes income from sources within the possession of which the individual is a bona fide resident (and not from sources within the United States or such other possession). (ii) If the individual is not a bona fide resident of a possession and such services are performed in a possession, the compensation 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. residents. (i) Income from sources within the relevant possession shall not include gains from the disposition of property described in paragraph (f)(1)(ii) of this section by an individual described in paragraph (f)(1)(iii) of this section. See also section 1277(e) of Public Law 99-514 (100 Stat. 2985) (providing that gains from the disposition of certain property by individuals who acquired residency in 104 EFTA00577363

certain possessions shall be considered to be from sources within the United States). (ii) Property is described in this paragraph (f)(1)(ii) when the following conditions 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 individual before such individual became a bona fide resident of the relevant possession. (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 a bona fide resident 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 fide resident of the relevant possession). (iv) If an individual described in paragraph (f)(1)(iii) of this section exchanges property described in paragraph (f)(1)(ii) of this section for other property 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, such other property shall also be considered property described in paragraph (f)(1)(ii) of this section. (v) If an individual described in paragraph (f)(1)(iii) of this section owns, directly or indirectly, at least 10 percent (by value) of any entity to which property described in paragraph (f)(1)(ii) of this section is transferred in a transaction in 105 EFTA00577364

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 shall be treated as income from sources outside the relevant possession if any gain recognized upon a direct or indirect disposition of the individual's interest in such entity would have been so treated under paragraph (f)(1)(iv) of this section. (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 derived from sources outside of the United States under section 865(g)(3) shall be considered 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) shall be considered income from sources within the possession in which the liquidating corporation is created or organized. (ii) In applying the principles of section 865 and the regulations thereunder pursuant to paragraph (b) of this section, the rules of section 865(g) shall not apply, but the special rule of section 865(h)(2)(B) shall apply with respect to gain recognized upon the liquidation of corporations created or organized in the United States. (g) Dividends-- (1) Dividends from certain possessions corporations-- (i) In general. Except as provided in paragraph (g)(1)(ii) of this section, with respect to any possessions shareholder, only the possessions source ratio of any dividend 106 EFTA00577365

paid or accrued by a corporation created or organized in a possession (possessions corporation) shall be treated as income from sources within such possession. For purposes of this paragraph (g)-- (A) The possessions source ratio shall be a fraction, the numerator of which equals the gross income of the possessions corporation from sources within the possession in which it is created or organized (applying the rules of this section) for the testing period, and the denominator of which equals the total gross income of the corporation for the testing period; and (B) The term possessions shareholder means any individual who is a bona fide resident of the possession in which the corporation is created or organized and who owns, directly or indirectly, at least 10 percent of the total voting stock of the corporation. (ii) Dividends from corporations engaged 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 shall 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 income of the corporation for the testing period was derived from sources within such possession (applying the rules of this section) or was effectively connected with the conduct of a trade or business in such possession (applying the rules of §1.937-3T); and 107 EFTA00577366

(B) 50 percent or more of the gross income of the corporation for the testing period was derived from the active conduct of a trade or business within such possession. (iii) Testing period. For purposes of this paragraph (g)(1), the term testing 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 existence). (iv) Subsidiary look-through rule. For purposes of this paragraph (g)(1), if a possessions corporation owns (directly or indirectly) at least 25 percent (by value) of the stock of another corporation, such possessions corporation shall be treated as if it-- (A) Directly received its proportionate share of the income of such other corporation; 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 thereunder pursuant to paragraph (b) of this section, the special rules relating to dividends for which deductions are allowable under section 243 or 245 shall 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 possession-- 108 EFTA00577367

(1) If the individual owns (directly or indirectly) at least 10 percent of the total voting stock of the corporation from which such amount is derived, the principles of section 904(h)(2) shall apply. In the case of an individual who is not a possessions shareholder (as defined in paragraph (g)(1)(i)(B) of this section), the preceding sentence shall apply only if the corporation qualifies as a United States-owned foreign corporation for purposes of section 904(h); and (2) In all other cases, the amount shall be considered income from sources in the jurisdiction in which the corporation is created 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 possessions shareholder (as defined in paragraph (g)(1)(i)(B) of this section), interest paid or accrued by a possessions corporation shall be treated as income from sources within the possession in which it is created or organized to the extent that such interest is allocable to assets that generate, have generated, or could reasonably have been expected to generate income from sources within such possession (under the rules of this section) or income effectively connected with the conduct of a trade or business within such possession (under the rules of §1.937-31). For purposes of the preceding sentence, the principles of §§1.861-9 through 1.861-12 shall apply. (ii) Interest from corporations engaged in the active conduct of a trade or business in the relevant possession. The entire amount of any interest paid or accrued by a possessions corporation shall be treated as income from sources within the possession in which it is created or organized when the conditions of 109 EFTA00577368

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. Interest paid or accrued by a partnership shall be treated as income from sources within a possession only to the extent that such 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 shall apply (as if the partnership 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) shall apply except that the language "5 percent" shall 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. X, a U.S. citizen, resides in State N and acquires the stock of Corporation C, a domestic corporation, in 2000. X moves to the Northern Mariana Islands (NMI) in 2003. In 2004, while a bona fide resident of the NMI, X recognizes gain on the sale of the Corporation C stock. Pursuant to section 1277(e) of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2085) (October 22, 1986), this gain is 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 not as income from sources in the NMI. Example 2. X a U.S. citizen, resides in State F and acquires a 5 percent interest in Partnership P in 2003. X moves to the U.S. Virgin Islands (USVI) in 2004. In 2006, while a bona fide resident of the USVI, X recognizes gain on the sale of the interest in Partnership P. Pursuant to paragraph (f)(1) of this section, the gain shall not be treated as income from sources within the USVI for purposes of the Internal Revenue Code (for example, for purposes of section 934(b)). 110 EFTA00577369

Example 3. X, a bona fide resident of Possession I, a section 931 possession (as defined in §1.931-1T(c)(1)), is engaged in a trade or business in the United States through an office in State H. In 2005, this office materially participates in the sale of inventory property in Possession I, 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 shall not be treated as income from sources within Possession I for purposes of section 931(a)(1) pursuant to paragraph (c)(1)(ii) of this section, but nonetheless shall 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, a bona fide resident of Possession I, owns 25 percent of the outstanding shares of A Corp, a corporation organized under the laws of Possession I. In 2006, X receives a dividend of $70x from A Corp. During 2004 through 2006, A Corp has gross income from the following sources: Possession I Sources Sources Outside Possession I 2004 $10x $20x 2005 20x 10x 2006 25x 15x (ii) A Corp owns 50 percent of the outstanding shares of B Corp, a corporation organized under the laws of Country FC. During 2004 through 2006, B Corp has gross income from the following sources: Possession I Sources Sources Outside Possession I 2004 $10x $6x 2005 14x 8x 2006 10x 4x (iii) A Corp is treated as having received 50 percent of the gross income of B Corp. Therefore, for 2004 through 2006, the gross income of A Corp is from the following sources: Possession I Sources Sources Outside Possession I 2004 $15x $23x 2005 27x 14x 2006 30x 17x Totals $72x $54x (iv) Pursuant to paragraph (g) of this section, the portion of the dividend of $70x that X receives from Corp A in 2006 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 a bona fide resident of the Northern Mariana Islands (NMI). In 2005, X receives compensation for services performed III EFTA00577370

as a member of the crew of a fishing boat. Ten percent of the services for which X receives compensation are performed in the NMI, and 90 percent of X's services are performed in international waters. X is a "United States person" as defined in section 7701(a)(30)(A). Accordingly, pursuant to section 863(d)(1)(A), the compensation that X receives for services performed in international waters is treated as income from sources within the United States for purposes of the Internal Revenue Code (including section 7654, as in effect with respect to the NMI). Under the principles of section 861(a)(3) as applied pursuant to paragraph (b) of this section, the compensation that X receives for services performed in the NMI is treated as income from sources within the NMI. (I) Effective date. Except as otherwise provided in this paragraph (I), this section applies to income earned in tax years ending after October 22, 2004. Paragraph (c)(1) of this section applies to income earned after December 31, 2004. Paragraph (f) of this section applies to dispositions after April 11, 2005. Paragraphs (c)(2), (g)(1), (h), and (i) of this section apply to amounts paid or accrued after April 11, 2005. Par. 31. Section 1.937-3T is added to read as follows: 1.937-3T Income effectively connected with the conduct of a trade or business in a possession (temporary). (a) Scope. Section 937(b) and this section set forth the rules for determining whether income is effectively connected with the conduct of a trade or business within a particular possession (the relevant 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 section does not apply, however, for purposes of section 881(b). 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 112 EFTA00577371

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 regulations thereunder (relating to the determination of income, gain or loss which is effectively connected with the conduct of a trade or business within the United States) shall generally be applied in determining whether income is effectively connected with the conduct of a trade or business within the relevant possession (except for the substitution of the name of the relevant possession for the term United States where appropriate), without regard to whether the taxpayer qualifies as a nonresident alien individual or a foreign corporation with respect to such possession. For purposes of the preceding sentence, all income other than income from sources within the relevant possession (as determined under the rules of 1.937-2T) shall be considered income from sources without the relevant possession, and subject to the rules of this section, the principles of section 864(c)(4) shall apply for purposes of determining whether such income constitutes income effectively connected with the conduct of a trade or business in the relevant possession. (c) U.S. income-- (1) In general. Except as provided in paragraph (d) of this section, income considered to be effectively connected with the conduct of a trade or business within the relevant possession shall not include any item of income determined under the rules of sections 861 through 865 and the regulations thereunder to be-- (i) From sources within the United States; or 113 EFTA00577372

(ii) Effectively connected with the conduct of a trade or business within the United States. (2) Conduit arrangements. Income shall be considered to be from sources within the United States for purposes of paragraph (c)(1) of this section if, pursuant to a plan or arrangement-- (i) The income is received in exchange for consideration provided to another person; and (ii) Such person (or another person) provides the same consideration (or consideration 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 inventory property. Paragraph (c) of this section shall not apply to income from sales of inventory property described in §1.863-3(f). (e) Examples. The provisions of this section may be illustrated by the following examples: Example 1. X is a bona fide resident of Possession I, a section 931 possession (as defined in §1.931-1T(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 not de minimis and 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 banking business from offices in the U.S. Virgin Islands 114 EFTA00577373

(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 §1.937-2T(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 principles of section 864(c)(4) as applied pursuant to paragraph (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). Accordingly, under paragraph (c)(1) of this section, such interest income shall not be treated as effectively connected 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 reside in Country FC, however, may be treated as effectively connected with the conduct of a trade or business 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 appropriate) to those in force in the United States, interest payments received by F Bank from borrowers who reside in the United States or in Country FC may be treated as income that is effectively connected with the conduct of a trade or business in the USVI for purposes 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 financing business from offices in, Possession I. Interests in G are owned by D, a bona fide resident 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, which in turn pays interest to G. (ii) The arrangement constitutes a conduit arrangement 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 shall 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 sources within the United States for other purposes of the Internal Revenue Code under generally applicable conduit principles will depend on the facts and 115 EFTA00577374

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 section 864(c)(4) for purposes of determining the Possession I territorial income tax liability of N under mirrored section 871. (f) Effective date. Except as otherwise provided in this paragraph (f), this section applies to income earned in taxable years ending after October 22, 2004. Paragraph (c)(1) of this section applies to income earned after December 31, 2004. Paragraph (c)(2) of this section applies to amounts paid or accrued after April 11, 2005. Par. 32. Section 1.957-3 is revised to read as follows: §1.957-3 United States person defined. [Reserved]. For further guidance, see §1.957-31. Par. 33. Section 1.957-3T is added to read as follows: 1.957-3T United States person defined (temporary). (a) Basic rule-- (1) In general. The term United States person has the same meaning for purposes of sections 951 through 965 which it has under section 7701(a)(30) and the regulations thereunder, except as provided in paragraphs (b) and (c) of this section which provide, 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 116 EFTA00577375

under the laws of, a possession 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 purposes of this section-- (i) The term possession of the United States means the Commonwealth of Puerto Rico (Puerto Rico) or any section 931 possession. (ii) The term section 931 possession has the same meaning which it has under §1.931-1T(c)(1). (iii) The rules of §1.937-1T shall apply for determining whether an individual is a bona fide resident of a possession of the United States. (iv) The rules of §1.937-2T shall apply for determining whether income is from sources within a possession of the United States. (v) The rules of §1.937-3T shall 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 resident. An individual (who, without regard to this paragraph (b), is a United States person) shall not be considered a United States person with respect to a foreign corporation created or organized in, or under the laws of, Puerto Rico for the taxable year of such corporation which ends with or within the taxable year of such individual if-- 117 EFTA00577376

(1) Such individual is a bona fide resident of Puerto Rico during his entire taxable year in which or with which the taxable year of such foreign corporation ends; and (2) A dividend received by such individual 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. (c) Section 931 possession corporation and resident. An individual (who, without regard to this paragraph (c), is a United States person) shall not be considered a United States person with respect to a foreign corporation created or organized in, or under the laws of, a section 931 possession for the taxable year of such corporation which ends with or within the taxable year of such individual if-- (1) Such individual is a bona fide resident of such section 931 possession during his entire taxable year in which or with which the taxable year of such foreign corporation ends; and (2) Such corporation satisfies the following conditions-- (i) 80 percent or more of its gross income 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 derived from sources within section 931 possessions or was effectively connected with the conduct of a trade or business in section 931 possessions; and 118 EFTA00577377

(ii) 50 percent or more of its gross income for such period (or part) was derived from the active conduct of a trade or business within section 931 possessions. (d) Effective date. This section shall apply for taxable years ending after October 22, 2004. §1.957-4 [Removed] Par. 34. Section 1.957-4 is removed. Par. 35. In §1.1402(a)-11, paragraph (b) is revised to read as follows: §1.1402(a)-11 Ministers and members of religious orders. (b) In employ of American employer. If a minister or member of a religious order engaged in a trade or business described in section 1402(c) and §1.1402(c)-5 is a citizen of the United States and performs service, in his capacity as a minister or member of a religious order, as an employee of an American employer, as defined in section 3121(h) and the regulations thereunder in Part 31 of this chapter (Employment Tax Regulations), his net earnings from self-employment derived from such service shall be computed as provided in paragraph (a) of this section but without regard to the exclusions from gross income provided in section 911, relating to earned income from sources without the United States, and section 931, relating to income from sources within certain possessions of the United States. Thus, even though all the income of the minister or member for service of the character to which this paragraph is applicable was derived from sources without the United States, or from sources 119 EFTA00577378

within certain possessions of the United States, and therefore may be excluded from gross income, such income is included in computing net earnings from self- employment. Par. 36. Section 1.1402(a)-12 is revised to read as follows: 1.1402(a)-12 Continental shelf and certain possessions of the United States. [Reserved]. For further guidance, see §1.1402(a)-12T. Par. 37. Section 1.1402(a)-12T is added to read as follows: §1.1402(a)-12T Continental shelf and certain possessions of the United States (temporary). (a) Certain possessions. For purposes of the tax on self-employment income, the exclusion from gross income provided by section 931 (relating to bona fide residents of certain possessions of the United States) shall not apply. Net earnings from self-employment are subject to the tax on self-employment income even if such amounts are excluded from gross income under section 931. (b) Continental shelf. For the definition of the term United States and for other geographical definitions relating to the continental shelf, see section 638 and §1.638-1. (c) Effective date. This section shall apply for taxable years ending after October 22, 2004. Par. 38. In §1.6038-2, paragraph (d) is revised to read as follows: §1.6038-2 Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations. 120 EFTA00577379

(d) [Reserved]. For further guidance, see §1.6038-21(d). Par. 39. Section 1.6038-2T is added to read as follows: §1.6038-21. Information returns required of United States persons with respect to annual accountinq periods of certain foreign corporations (temporary). (a) through (c) [Reserved]. For further guidance, see §1.6038-2(a) through (c). (d) U.S. person-- (1) In general. For purposes of section 6038 and this section, the term United States person has the meaning assigned to it by section 7701(a)(30), except as provided in paragraphs (d)(2) and (3) of this section. (2) Special rule for individuals residing in certain possessions. With respect to individuals who are bona fide residents of Puerto Rico or any section 931 possession, as defined in §1.931-1T(c)(1), the term United States person has the meaning assigned to it by §1.957-31. (3) Special rule for certain nonresident aliens. An individual for whom an election under section 6013(g) or (h) is in effect shall, subject to the exceptions contained in paragraph (d)(2) of this section, be considered a United States person for purposes of section 6038 and this section. (e) through (1)(2) [Reserved]. For further guidance, see §1.6038-2(e) through (0(2). (m) Effective date. This section shall apply for taxable years ending after October 22, 2004. 121 EFTA00577380

Par. 40. Section 1.6046-1 is amended as follows: 1. Revise the heading. 2. Revise paragraph (f)(3). 3. Remove the undesignated paragraph that follows paragraph (f)(3)(iii). The revisions are as follows: §1.6046-1 Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock. (f)(3) [Reserved]. For further guidance, see §1.6046-1T(f)(3). Par. 41. Section 1.6046-1T is added to read as follows: §1.6046-1T Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock (temporary]. (a) through (f)(2) [Reserved]. For further guidance, see §1.6046-1(a) through (0(2). (f)(3) U.S. person-- (i) In general. For purposes of section 6046 and this section, the term United States person has the meaning assigned to it by section 7701(a)(30), except as provided in paragraphs (f)(3)(ii) and (iii) of this section. (ii) Special rule for individuals residing in certain possessions. With respect to individuals who are bona fide residents of Puerto Rico or any section 931 possession, as defined in §1.931-1T(c)(1), the term United States person has the meaning assigned to it by §1.957-3T. 122 EFTA00577381

(iii) Special rule for certain nonresident aliens. An individual for whom an election under section 6013(g) or (h) is in effect shall, subject to the exceptions contained in paragraph (f)(3)(ii) of this section, be considered a United States person for purposes of section 6046 and this section. (f)(4) through (k) [Reserved]. For further guidance, see §1.6046-1(f)(4) through (k). (I) Effective date. This section shall apply for taxable years ending after October 22, 2004. PART 301 -- PROCEDURE AND ADMINISTRATION Par. 42. The authority citation for part 301 continues to read, in part, as follows: Authority: 26 U.S.C. 7805 * Par. 43. Section 301.6688-1 is revised to read as follows: §301.6688-1 Assessable penalties with respect to information required to be furnished with respect to possessions. [Reserved]. For further guidance, see §301.6688-1T. Par. 44. Section 301.6688-1T is added to read as follows: 301.6688-1T Assessable penalties with respect to information required to be furnished with respect to possessions (temporary). (a) In general. Each individual who is subject to an information reporting requirement promulgated under the authority of section 937(c) or 7654 and who fails to fully satisfy such requirement within the time prescribed for reporting such information shall, in addition to any criminal penalty provided by law, pay a 123 EFTA00577382

penalty of $1000 for each such failure. Information reporting requirements promulgated under the authority of sections 937(c) and 7654(e) include the following: (1) The requirement to file Form 8689, "Allocation of Individual Income Tax to the Virgin Islands," under §1.932-1T(b)(1) of this chapter, for certain individuals with income from sources within the United States Virgin Islands. (2) [Reserved]. (3) [Reserved]. (4) The requirement for individuals to report that they became or ceased to be a bona fide resident of a possession under §1.937-1T(g) of this chapter. (b) Manner of payment. The penalty set forth in paragraph (a) of this section shall be paid in the same manner as tax upon the issuance of a notice and demand therefor. (c) Reasonable cause-- (1) In general. The penalty set forth in paragraph (a) of this section shall not apply if it is established to the satisfaction of the appropriate tax authority (as defined in paragraph (c)(2) of this section) that the failure to file the information return or furnish the information within the prescribed time was due to reasonable cause and not to willful neglect. An individual who wishes to avoid the penalty must make an affirmative showing of all facts alleged as a reasonable cause for failure to file the information return on time, or furnish the information on time, in the form of a written statement containing a declaration that it is made under penalties of perjury. Such statement must be filed with the appropriate tax authority. In determining whether there was 124 EFTA00577383

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 information 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 information but was unable to do so because of a lack of sufficient facts on which to make a proper determination. (2) Appropriate tax authority. For purposes of this section, the appropriate tax authority is the person responsible for tax administration in the jurisdiction to which the information is required to be provided. Thus, in the case of information required under section 937(c) or under section 7654 to be provided to the Internal Revenue Service, the appropriate tax authority is the Commissioner. In the case of information required under section 7654 (as in effect with respect to section 935 possessions (as defined in §1.935-1T(a)(3)(i) of this chapter) to be provided to the tax authorities of a section 935 possession, the appropriate tax authority is the person responsible for tax administration in such possession or his delegate. See §1.935-1(b) of this chapter for the rules that specify where returns of income tax must be filed for the taxable year by individuals to whom section 935 applies. (d) Effective date. This section shall apply for taxable years ending after October 22, 2004. Par. 45. In §301.7701(b)-1, paragraph (d) is revised to read as follows: 125 EFTA00577384

§301.7701(b)-1 Resident alien. (d) [Reserved]. For further guidance, see §301.7701(b)-1T(d). Par. 46. Section 301.7701(b)-1T is added to read as follows: §301.7701(b)-1T Resident alien. (a) through (c) [Reserved]. For further guidance, see §301.7701(b)-1(a) through (c). (d) Application of section 7701(b) to the possessions and territories-- (1) Application to aliens for purposes of mirror systems. Section 7701(b) provides the basis for determining whether an alien individual is a resident of a United States 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, for purposes of applying such laws with respect to income tax liability incurred to such possession or territory. (2) Non-application for bona fide resident determination. Section 7701(b) does not provide the basis for determining whether an individual (including an alien individual) is a bona fide resident of a United States possession or territory for U.S. Federal income tax purposes. For the applicable rules for making this determination, see section 937(a) and the regulations thereunder. (e) [Reserved]. For further guidance, see §301.7701(b)-1(e). 126 EFTA00577385

(f) Effective date. This section shall apply for taxable years ending after October 22, 2004. PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 47. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 48. In §602.101, paragraph (b) is amended by adding an entry in numerical order to the table to read as follows: 127 EFTA00577386

§602.101 OMB Control numbers. CFR part or section where Current OMB identified and described control No. * * * * * 1.937-1T 1545-1930 * * * * * /s/ Linda M. Kroening Deputy Commissioner for Services and Enforcement. Approved: March 25, 2005 /s/ Eric Solomon Acting Deputy Assistant Secretary of the Treasury. EFTA00577387