[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.638-1]

[Page 551-554]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.638-1  Continental Shelf areas.

    (a) General rule. For purposes of applying any provision of chapter 
1, 2, 3, or 24 (including section 861(a)(3), 862(a)(3), 1441, 3402, or 
other provisions dealing with the performance of personal services), 
with respect to mines, oil and gas wells, and other natural deposits:
    (1) United States and possession of the United States. The terms 
United States and possession of the United States when used in a 
geographical sense include

[[Page 552]]

the seabed and subsoil of those submarine areas which are adjacent to 
the territorial waters of the United States or such possession and over 
which the United States has exclusive rights, in accordance with 
international law, with respect to the exploration for, and exploitation 
of, natural resources. The terms Continental Shelf of the United States 
and Continental Shelf of a possession of the United States, as used in 
this section, refer to the seabed and subsoil included, respectively, in 
the terms United States and possession of the United States, as provided 
in the preceding sentence.
    (2) Foreign country. The term foreign country when used in a 
geographical sense includes the seabed and subsoil of those submarine 
areas which are adjacent to the territorial waters of the foreign 
country and over which such foreign country has exclusive rights, in 
accordance with international law, with respect to the exploration for, 
and exploitation of, natural resources, but this sentence applies only 
if such foreign country exercises, directly or indirectly, taxing 
jurisdiction with respect to such exploration or exploitation. The term 
foreign continental shelf, as used in this section, refers to the seabed 
and subsoil described in the preceding sentence. A foreign country is 
not to be treated as a country contiguous to the United States by reason 
of the application of section 638 and this section.
    (b) Exercise of taxing jurisdiction. For purposes of paragraph 
(a)(2) of this section, the exercise, directly or indirectly, of taxing 
jurisdiction with respect to the exploration for, or exploitation of, 
natural resources is deemed to include (but is not limited to) those 
cases in which a foreign country:
    (1) Imposes a tax upon assets, equipment, or other property 
connected with or income derived from such exploration or exploitation, 
or
    (2) Requires natural resources referred to in paragraph (a)(2) of 
this section to be transported to points within its landward boundaries 
and then levies a tax upon such natural resources or upon the income 
derived from the sale thereof.

A foreign country which, for purposes of paragraph (a)(2) of this 
section, exercises taxing jurisdiction by the imposition of tax upon any 
person, property, or activity engaged in or related to the exploration 
for, or exploitation of, natural resources in the seabed or subsoil 
referred to in paragraph (a)(2) of this section, or the income therefrom 
of any taxpayer, is deemed to exercise taxing jurisdiction over all such 
persons, property, and activities and over all income therefrom of all 
such taxpayers; thus, for example, a foreign country which imposes tax 
upon a person engaged in exploitation of oil and gas wells in its seabed 
and subsoil referred to in paragraph (a)(2) of this section is deemed to 
exercise taxing jurisdiction over property related to exploration for 
other natural deposits in such seabed and subsoil. A foreign country is 
deemed to be imposing tax upon a person, property, activity, or income 
described in the preceding sentence if such foreign country exempts such 
person, property, activity, or income from tax for a period not in 
excess of 10 years from the commencement of such exploration or 
exploitation. Except in the case of a foreign country which is deemed 
under the preceding sentence to impose tax by virtue of an exemption for 
a period not in excess of 10 years, a foreign country which exempts all 
persons, property, and activities engaged in or related to the 
exploration for, or exploitation of, natural resources in the seabed or 
subsoil referred to in paragraph (a)(2) of this section and the income 
therefrom, from taxation is deemed not to be exercising, directly or 
indirectly, taxing jurisdiction for purposes of paragraph (a)(2) of this 
section. For purposes of paragraph (a)(2) of this section, the exercise 
of taxing jurisdiction with respect to any type of tax constitutes the 
exercise of taxing jurisdiction with respect to all types of taxes. 
However, a royalty or other charge (whether payable in a lump sum or 
over a period of time or in amounts dependent upon the volume of 
production of natural resources) for the right to explore for or exploit 
natural resources does not constitute a tax.
    (c) Scope. (1) For purposes of applying this section, persons, 
property, or activities which are engaged in or related to the 
exploration for, or exploitation

[[Page 553]]

of, mines, oil and gas wells, or other natural deposits need not be 
physically upon, connected, or attached to the seabed or subsoil 
referred to in subparagraph (1) or (2) of paragraph (a) of this section 
to be deemed to be within the United States, a possession of the United 
States, or a foreign country, as the case may be, to the extent provided 
in subparagraph (2) or (3) and subparagraph (4) of this paragraph.
    (2) Persons, property, or activities which are not in a foreign 
country (determined without regard to section 638 or this section), and 
which are engaged in or related to the exploration for, or exploitation 
of, mines, oil and gas wells, or other natural deposits of the seabed or 
subsoil referred to in paragraph (a)(1) of this section, are generally 
within the United States or a possession of the United States, as the 
case may be, unless such persons, property, or activities are solely 
involved in or constitute transportation to (or from) the site of 
exploration or exploitation from (or to) a foreign country, other than 
transportation on a regular basis from (or to) a base of operations.
    (3) Persons, property, or activities which are not in the United 
States or in a third country (determined in each case without regard to 
section 638 or this section), and which are engaged in or related to the 
exploration for, or exploitation of, mines, oil and gas wells, or other 
natural deposits of the seabed or subsoil of a foreign country referred 
to in paragraph (a)(2) of this section, are generally within such 
foreign country, unless such persons, property, or activities are solely 
involved in or constitute transportation to (or from) the site of 
exploration or exploitation from (or to) the United States or a 
possession of the United States or a third country, as the case may be, 
other than transportation on a regular basis from (or to) a base of 
operations.
    (4) Persons, property, or activities are within the United States, a 
possession of the United States, or a foreign country, as the case may 
be, pursuant to this paragraph, only to the extent such persons, 
property, or activities are engaged in or related to the exploration for 
or exploitation of, mines, oil and gas wells, or other natural deposits.
    (d) Natural deposits and natural resources. For purposes of this 
section, the terms natural deposits and natural resources mean nonliving 
resources to which section 611(a) applies. Such terms do not include 
sedentary species (organisms which, at the harvestable stage, either are 
immovable on or under the seabed or are unable to move except in 
constant physical contact with the seabed or subsoil), fish or other 
animal or plant life.
    (e) Rights under international law. Nothing in this section shall 
prejudice or affect the freedoms of the high seas and other rights under 
international law, or the exercise of such freedoms and rights by the 
United States or foreign countries.
    (f) Examples. The application of the provisions of section 638 and 
this section may be illustrated by the following examples:

    Example 1. A, a citizen of the United States employed as an 
engineer, is engaged in the exploitation of oil and is physically 
present on an offshore oil drilling platform operated by employees of L 
Corporation. Such platform is affixed to the foreign continental shelf 
of foreign country X. Assuming that foreign country X exercises taxing 
jurisdiction as provided in paragraph (b) of this section, A is to be 
treated as being employed in foreign country X with respect to 
compensation for his employment for purposes of chapters 1 and 24.
    Example 2. The facts are the same as in example 1 except that B, a 
citizen of the United States engaged in the private practice of law, is 
physically present on such platform for the sole purpose of interviewing 
his client, A, whom he represents in a domestic relations matter. Since 
B is not engaged in activities related to the exploration for, or 
exploitation of, natural deposits, he is not to be treated as being in 
foreign country X for purposes of chapters 1 and 2.
    Example 3. The facts are the same as in example 1 except that C, a 
citizen of the United States engaged in the private practice of 
medicine, is physically present on such platform for the purpose of 
making routine physical examinations of L Corporation's employees who 
are engaged in the exploitation of oil on the platform. C is paid by L 
Corporation to give such examinations on the platform at regular 
intervals in order to determine whether the state of any employee's 
health is such that he should not continue work on the platform. The 
balance of C's medical practice is conducted at his office on the U.S. 
mainland. Since C is engaged in activities related to the exploitation 
of oil, he

[[Page 554]]

is treated as being in foreign country X under section 638 and this 
section while making physical examinations on L Corporation's platform, 
provided that foreign country X exercise taxing jurisdiction as provided 
in paragraph (b) of this section. For purposes of chapters 1 and 2, 
amounts paid by L Corporation to C are treated as derived from sources 
within foreign country X.
    Example 4. C, a nonresident alien individual employed as an engineer 
in a foreign country, designs equipment for use on oil drilling 
platforms affixed to the continental shelf of the United States and 
engaged in the exploitation of oil. Although C's activities in this 
respect are related to the exploitation of oil, C is not treated as 
being in the United States under section 638 and this section by reason 
of such activities.
    Example 5. M Corporation, a domestic corporation, chartered a ship 
from N Corporation, also a domestic corporation, under a time charter 
under which N Corporation's personnel continued to navigate and manage 
the shop. M Corporation equipped the ship with special oil exploration 
equipment and furnished its personnel to operate the equipment. The ship 
then commenced to explore for oil in the foreign Continental Shelf of 
foreign country Y. Foreign country Y exercises taxing jurisdiction as 
provided in paragraph (b) of this section. The ship is treated as being 
within foreign country Y under section 638 and this section for the 
period it was engaged in the exploration for oil in such foreign 
Continental Shelf. Thus, the entire income derived during such period by 
N Corporation from the charter is income derived from sources within 
foreign country Y, since N Corporation had property and employees 
engaged in the exploration for oil in such foreign Continental Shelf.
    Example 6. The facts are the same as in example 5 except that C, a 
citizen of the United States, was employed by N Corporation as a cook 
and was physically present on the ship. C's sole duties consisted of 
cooking meals for personnel aboard such ship. In such case, as C's 
activities are related to the exploration for oil, C is to be treated as 
being in foreign country Y under section 638 and this section for the 
period he was aboard such ship while it was engaged in activities 
relating to the exploration for oil in the foreign Continental Shelf 
referred to in example 5. For purposes of chapters 1 and 24, C's 
compensation as a cook for such period is treated as derived from 
sources without the United States.
    Example 7. Z Corporation, a foreign corporation, entered into a 
contract with Y Corporation, a United States corporation, to engage in 
exploratory oil drilling activities on a leasehold held by Y 
Corporation. Such leasehold was located in the Continental Shelf of the 
United States. Since Z Corporation is engaged in and has property and 
activities which are engaged in the exploration for oil, such property 
and activities are to be treated as being in the United States under 
section 638 and this section for the period such property and activities 
were engaged in or related to the exploraton for oil in the Continental 
Shelf of the Unid States and were not in a foreign country. For purposes 
of chapters 1 and 3, amounts paid to Z Corporation pursuant to the 
contract are treated as derived from sources within the United States.
    Example 8. M Corporation is a controlled foreign corporation (within 
the meaning of section 957(b)) for its entire taxable year beginning in 
1972. During such taxable year, M Corporation issues a policy of 
insurance relating to fire damage to an offshore oil drilling platform, 
owned by N Corporation (a foreign corporation), which is attached to the 
Continental Shelf of the United States. The income attributable to the 
issuing of such policy would be taxed under subchapter L, chapter 1, 
subtitle A of the Code (as modified, for this purpose, by section 953(b) 
(1), (2), and (3)) if such income were the income of a domestic 
insurance corporation. Since N Corporation's oil drilling platform is 
located within the United States under section 638 and this section, M 
Corporation's income attributable to the issuing of the insurance in 
connection with such platform is income derived from the insurance of 
United States risks, within the meaning of section 953(a)(1)(A).

[T.D. 7277, 38 FR 12740, May 15, 1973]