[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: 26CFR1.957-3]

[Page 364-365]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.957-3  Corporations organized in United States possessions.

    (a) General rule. For purposes of sections 951 through 964, a 
corporation created or organized in a possession of the United States or 
under the laws of a possession of the United States shall not be treated 
as a controlled foreign corporation for any taxable year if--
    (1) 80 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 3-year period as such corporation was in existence 
or for such part of such 3-year period as occurs on and after the 
beginning of such corporation's first annual accounting period beginning 
after December 31, 1962, whichever period is shortest, was derived from 
sources within a possession of the United States; and
    (2) 50 percent or more of the gross income of such corporation for 
such period, or for such part of such period, was derived from the 
active conduct within a possession of the United States of one or more 
trades or businesses constituting--
    (i) The manufacture or processing of goods, wares, merchandise, or 
other tangible personal property;
    (ii) The processing of agricultural or horticultural products or 
commodities (including but not limited to livestock, poultry, or fur-
bearing animals);
    (iii) The catching or taking of any kind of fish, or any 
manufacturing or processing of any products or commodities obtained from 
such activities;
    (iv) The mining or extraction of natural resources, or any 
manufacturing or processing of any products or commodities obtained from 
such activities; or
    (v) The ownership or operation of hotels.
    (b) Special provisions. For purposes of section 957(c) and this 
section--
    (1) United States defined. The term ``United States'' includes only 
the States and the District of Columbia.
    (2) Possession of the United States defined. The term ``possession 
of the United States'' includes Guam, the Midway Islands, the Panama 
Canal Zone, the Commonwealth of Puerto Rico, American Samoa, the Virgin 
Islands, and Wake Island.
    (3) Determination of source of gross income. Whether gross income of 
a corporation referred to in paragraph (a) of this section is derived 
from sources within a possession of the United States shall be 
determined by the application of the provisions of Sec. 1.955-6 except 
that, for purposes of making such determination, the term ``produced'', 
as used in paragraph (d)(2) of Sec. 1.955-6, shall also include the 
activities described in paragraph (a)(2)(i) through (iv) of this section 
and the activities considered, under subparagraph (4) of this paragraph, 
to be qualifying trades or businesses.
    (4) Manufacturing or processing. The trades or businesses which 
qualify under the provisions of paragraph (a)(2) of this section shall 
include, but not be limited to, the manufacture of tabulating cards, 
paper tablets or pads, facial tissues, and paper napkins from rolls of 
paper; the manufacture of such household products as liquid starch by 
mixing quantities of the ingredients which are used to produce liquid 
starch; and the manufacture of juices and drinks from fruit 
concentrates. In the application of paragraph (a)(2) of this section, 
proper regard shall be given to the classification of a trade or 
business as a manufacturing or processing activity under the applicable 
economic incentive law of the possession involved. The fact that an 
activity of a corporation qualifies as a trade or business for purposes 
of paragraph (a)

[[Page 365]]

of this section does not necessarily mean that such activity constitutes 
a substantial transformation of property within the meaning of paragraph 
(a)(4) of Sec. 1.954-3 for purposes of determining any foreign base 
company income of such corporation.

[T.D. 6683, 28 FR 11184, Oct. 18, 1963]