[Code of Federal Regulations] [Title 26, Volume 10] [Revised as of April 1, 2004] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.934-1] [Page 131-135] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.934-1 Limitation on reduction in income tax liability incurred to the Virgin Islands. (a) General rule. Section 934(a) provides that tax liability incurred to the Virgin Islands shall 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) or (c). For purposes of the preceding sentence, the term ``tax liability'' means the liability incurred to the Virgin Islands pursuant to subtitle A of the 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). (b) Exception for certain domestic and Virgin Islands corporations-- (1) General rule. Section 934(b) 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 domestic or Virgin Islands corporation for any taxable year (or for such part of such year as may be applicable) to the extent that such tax liability is attributable to income derived from sources without the United States, if such corporation satisfies the conditions provided in section 934(b)(1) and (2), and if the information required by section 934(d) is supplied. These conditions are enumerated in the remainder of this paragraph, and the information requirement is set forth in paragraph (d) of this section. (2) Conditions to be satisfied for exception. A domestic or Virgin Islands corporation satisfies the conditions of section 934(b)(1) and (2) if-- (i) Eighty percent or more of the gross income of such corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within the Virgin Islands; and (ii) Fifty percent or more of the gross income of such corporation for such period (or such part thereof) was derived from the active conduct of a trade or business within the Virgin Islands. (3) Computation rule. Except as provided in subparagraph (5) of this paragraph, tax liability incurred to the Virgin Islands by a domestic or Virgin Islands corporation for the taxable year (or such part of such year as may be applicable) attributable to income derived from sources without the United States shall be computed as follows: (i) Add to the income tax liability incurred to the Virgin Islands any credit against the tax allowed under section 901(a); (ii) Multiply by taxable income from sources without the United States for the applicable period; (iii) Divide by total taxable income for the period; (iv) Subtract any credit against the tax allowed under section 901(a). Tax liability incurred to the Virgin Islands attributable to income derived from sources without the United States, as computed in this subparagraph, however, shall not exceed the total amount of income tax liability actually incurred. (4) Examples. The rule of the preceding subparagraph may be illustrated by the following examples: Example 1. Corporation X, which satisfies the requirements of section 934(b), incurs an income tax liability to the Virgin Islands for taxable year 1963 of $290, as follows: Taxable income from sources within the U.S.... $200 ........... Taxable income from sources without the U.S... 800 ........... ------------- Total taxable income....................................... $1,000 Credit allowed under section 901(a)........................ 10 Tax liability incurred to the Virgin Islands............... 290 The income tax liability incurred to the Virgin Islands attributable to income derived from sources without the United States is $230, computed as follows: (i) Tax liability incurred to the Virgin 290 ........... Islands.................................... [[Page 132]] Plus credit allowed under section 901(a).... 10 ........... ------------- ........... 300 (ii) Multiply by taxable income from sources 800 ........... without the U.S............................ ------------- ........... 240,000 (iii) Divide by total taxable income........ 1,000 ........... ------------- ........... 240 (iv) Subtract credit allowed under section 10 ........... 901(a)..................................... ------------- ........... 230 Example 2. Corporation Y, which satisfies the requirements of section 934(b), incurs an income tax liability to the Virgin Islands for taxable year 1963 of $140, as follows: Taxable income from sources within the U.S.... ($300 net ........... loss) Taxable income from sources without the U.S... 800 ........... ------------- Total taxable income....................................... $500 Credit allowed under section 901(a)........................ 10 Tax liability incurred to the Virgin Islands............... 140 The income tax liability incurred to the Virgin Islands attributable to income derived from sources without the United States is 140, computed as follows: (i) Tax liability incurred to the Virgin 140 ........... Islands.................................... Plus credit allowed under section 901(a).... 10 ........... ------------- ........... 150 (ii) Multiply by taxable income from sources 800 ........... without the U.S............................ ------------- ........... 120,000 (iii) Divide by total taxable income........ 500 ........... ------------- ........... 240 (iv) Subtract credit allowed under section 10 ........... 901(a)..................................... ------------- ........... 230 Since the $230 derived from the computation is in excess of the actual tax liability incurred, the income tax liability incurred to the Virgin Islands attributable to income derived from sources without the United States is limited to $140, the actual liability incurred. (5) Special computation rule for certain domestic corporations. For purposes of section 934(b) and this paragraph, tax liability incurred to the Virgin Islands by a domestic corporation which is required to file an income tax return with the United States for the taxable year (or such part of such year as may be applicable) attributable to income derived from sources without the United States shall be the actual income tax liability incurred to the Virgin Islands for such year. (6) Source of income. For purposes of section 934(b) and this paragraph, the income of a Virgin Islands corporation, and the sources from which the income of such corporation is derived, shall be determined as if such corporation were a domestic corporation. However, all amounts received by a corporation within the United States, whether derived from sources within or without the United States, shall be considered as being derived from sources within the United States. In determining the sources from which the income of a domestic or Virgin Islands corporation is derived, the principles of part 1 (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder shall apply. (c) Exception for certain residents of the Virgin Islands--(1) General rule. Section 934(c) provides another exception to the application of section 934(a). Under this exception, section 934(a) does not apply with respect to the tax liability incurred by an individual citizen of the United States to the Virgin Islands for any taxable year to the extent that such tax liability is attributable to income derived from sources within the Virgin Islands, if such individual is a bona fide resident of the Virgin Islands during the entire taxable year and if he supplies the information required under section 934(d). (2) Definition--bona fide resident and United States citizen. In determining whether a United States citizen is a bona fide resident of the Virgin Islands, the principles of Sec. Sec. 1.871-2, 1.871-3, 1.871-4, and 1.871-5, relating to the determination of residence and nonresidence in the United States, shall apply. Once a bona fide residence in the Virgin Islands is established by an individual, temporary absence therefrom will not necessarily deprive such individual of his status as a bona fide resident of the Virgin Islands. For purposes of section 934(c), a citizen of the United States includes any individual who is a citizen of the United States by reason of being a citizen of any possession of the United States. (3) Computation rule. For purposes of section 934(c) and this paragraph, tax [[Page 133]] liability incurred to the Virgin Islands for the taxable year attributable to income derived from sources within the Virgin Islands shall be computed as follows: (i) Add to the income tax liability incurred to the Virgin Islands any credit against the tax allowed under section 901(a); (ii) Multiply by taxable income from sources within the Virgin Islands; (iii) Divide by total taxable income. Tax liability incurred to the Virgin Islands attributable to income derived from sources within the Virgin Islands, as computed in this subparagraph, however, shall not exceed the total amount of income tax liability actually incurred. (4) Examples. The rule of the preceding subparagraph may be illustrated by the following examples: Example 1. A, an individual who satisfies the requirements of section 934(c), incurs an income tax liability to the Virgin Islands for taxable year 1963 of $380, as follows: Taxable income from sources within the Virgin $1,200 ......... Islands.......................................... Taxable income from sources without the Virgin 800 ......... Islands.......................................... ----------- Total taxable income......................................... $2,000 Credit allowed under section 901(a).......................... 20 Tax liability incurred to the Virgin Islands................. 380 The income tax liability incurred to the Virgin Islands attributable to income derived from sources within the Virgin Islands is $240, computed as follows: (i) Tax liability incurred to the Virgin Islands 380 ......... Plus credit allowed under section 901(a)........ 20 ......... ----------- ......... 400 (ii) Multiply by taxable income from sources 1,200 ......... within the Virgin Islands...................... ----------- 480,000 (iii) Divide by total taxable income....................... $2,000 ---------- ......... 240 Example 2. B, an individual who satisfies the requirements of section 934(c), incurs an income tax liability to the Virgin Islands for taxable year 1963 of $100, as follows: Taxable income from sources within the Virgin $800 ........... Islands...................................... Taxable income from sources without the Virgin (200 net ........... Islands...................................... loss) -------------- Total taxable income....................................... $600 Credit allowed under section 901(a)........................ 20 Tax liability incurred to the Virgin Islands............... 100 The income tax liability incurred to the Virgin Islands attributable to income derived from sources within the Virgin Islands is $100, computed as follows: (i) Tax liability incurred to the Virgin 100 ........... Islands.................................... Plus credit allowed under section 901(a).... 20 ........... ------------- ........... 120 (ii) Multiply by taxable income from sources 800 ........... within the Virgin Islands.................. ------------- ........... 96,000 (iii) Divide by total taxable income........ 600 ........... ------------- ........... 160 Since the $160 derived from the computation is in excess of the actual tax liability incurred, the income tax liability incurred to the Virgin Islands attributable to income derived from sources within the Virgin Islands is limited to $100, the actual liability incurred. (5) Source of income. For purposes of section 934(c) and this paragraph, in determining taxable income from sources within and without the Virgin Islands the principles of part 1 (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder shall apply, except that-- (i) Any deductions for personal exemptions allowable under section 151 shall be deducted in computing taxable income from sources within the Virgin Islands but shall not be deducted in computing taxable income from sources without the Virgin Islands; (ii) Amounts received for services performed as an employee of the United States or any agency thereof shall not be considered as income derived from sources within the Virgin Islands; (iii) Gain or loss from the sale or exchange of any security (as defined in section 165(g)(2)) shall not be treated as derived from sources within the Virgin Islands. (6) Definition--``taxable income'' on a joint return. In the case of a husband and wife making a joint return, the term ``taxable income'', as used in this paragraph, means the combined taxable income of both spouses. (d) Information required. Section 934(d) provides that the exceptions in section 934 (b) and (c) shall apply only in the case of persons who supply such information as the Secretary or his delegate [[Page 134]] may by regulations prescribe for purposes of determining the applicability of such exceptions. The following portions of this paragraph, together with paragraphs (e) and (f) of this section, prescribe the information which must be filed. Any person seeking to come within an exception must provide the following information: (1) The name and address of such person; (2) If such person is one of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests within the meaning of section 482 and the regulations thereunder-- (i) The name and address of each such organization, trade, or business; (ii) The relationship which each such organization, trade, or business bears to the other organizations, trades, or businesses in such group; (iii) The nature of the activity or activities conducted by each such organization, trade, or business. (3) Any person seeking to come within an exception must make available for inspection by the Director of International Operations such records, and underlying contracts and documents, as are necessary to determine the applicability of section 934(b) or (c). (e) Information required--corporations. Corporations seeking to come within the exception provided in section 934(b) shall, in addition to the information required by paragraph (d) of this section, submit the following information with respect to each taxable year: (1) The date and place of incorporation; (2) The name and address of any shareholder of record owning at any time during the taxable year 5 percent or more of the voting stock of any class or 5 percent or more of the value of any class of outstanding stock, and the nature and amount of the stock owned; (3) For the 3-year period immediately preceding the close of the corporation's taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable)-- (i) The total amount of its gross income; (ii) The amount of such gross income derived from the active conduct of a trade or business within the Virgin Islands; (iii) The amount of such gross income from sources within (a) the Virgin Islands, (b) the United States (including therein and specifically itemizing all amounts received within the United States), and (c) all other countries as a group; (iv) The ratio which gross income derived from sources within the Virgin Islands bears to total gross income; (v) The ratio which gross income derived from the active conduct of a trade or business within the Virgin Islands bears to total gross income. (f) Information required--individuals. Individuals seeking to come within the exception provided in section 934(c) shall, in addition to the information required by paragraph (d) of this section, submit the following information with respect to each taxable year: (1) The date on which such individual became a bona fide resident of the Virgin Islands; (2) If such individual maintains a place of abode for himself or his family in the United States or elsewhere outside the Virgin Islands, the location of such place of abode and the purpose for which such place is maintained; (3) The beginning and the ending dates of each period of absence from the Virgin Islands during such taxable year; (4) The amount of gross income for such taxable year from sources within the Virgin Islands, excluding-- (i) The amount of gain or loss from the sale or exchange of any security, as defined in section 165(g)(2); (ii) The amount of gross income received for services performed as an employee of the United States or any agency thereof. (5) Any amounts excluded from gross income from sources within the Virgin Islands under subparagraph (4)(i) and (ii) of this paragraph. (g) Time and place for filing statement. The statement, in duplicate, providing the information required under section 934(d) and paragraphs (d), (e), and (f) of [[Page 135]] this section shall be attached to the income tax return filed with the Government of the Virgin Islands for the taxable year with respect to which an exception is claimed under section 934 (b) or (c). If an exception is claimed with respect to any taxable year for which the time prescribed by law for filing the return expires prior to 30 days from the publication of these regulations, the required statement must be filed in duplicate on or before 90 days from the publication of these regulations. The return and statement must be available for examination by the Director of International Operations. (h) Effective date. The provisions of this section shall apply to taxable years beginning after December 31, 1959. [T.D. 6629, 27 FR 12791, Dec. 28, 1962]