[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: 26CFR1.989(a)-1]

[Page 634-636]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.989(a)-1  Definition of a qualified business unit.

    (a) Applicability--(1) In general. This section provides rules 
relating to the definition of the term ``qualified business unit'' (QBU) 
within the meaning of section 989.
    (2) Effective date. These rules shall apply to taxable years 
beginning after December 31, 1986. However, any person may apply on a 
consistent basis Sec. 1.989(a)-1T (c) of the Temporary Income Tax 
Regulations in lieu of Sec. 1.989(a)-1 (c) to all taxable years 
beginning after December 31, 1986, and on or before February 5, 1990. 
For the text of the temporary regulation, see 53 FR 20612 (June 8, 
1988).
    (b) Definition of a qualified business unit--(1) In general. A QBU 
is any separate and clearly identified unit of a trade or business of a 
taxpayer provided that separate books and records are maintained.
    (2) Application of the QBU definition--(i) Persons. A corporation is 
QBU. An individual is not a QBU. A partnership, trust, or estate is a 
QBU of a partner or beneficiary.
    (ii) Activities. Activities of a corporation, partnership, trust, 
estate, or individual qualify as a QBU if--
    (A) The activities constitute a trade or business; and
    (B) A separate set of books and records is maintained with respect 
to the activities.
    (3) Special rule. Any activity (wherever conducted and regardless of 
its frequency) that produces income or loss that is, or is treated as, 
effectively connected with the conduct of a trade or business within the 
United States shall be treated as a separate QBU, provided the books and 
records requirement of paragraph (d)(2) of this section is satisfied.
    (c) Trade or business. The determination as to whether activities 
constitute a trade or business is ultimately dependent upon an 
examination of all the facts and circumstances. Generally, a trade or 
business for purposes of section 989(a) is a specific unified group of 
activities that constitutes (or could

[[Page 635]]

constitute) an independent economic enterprise carried on for profit, 
the expenses related to which are deductible under section 162 or 212 
(other than that part of section 212 dealing with expenses incurred in 
connection with taxes). To constitute a trade or business, a group of 
activities must ordinarily include every operation which forms a part 
of, or a step in, a process by which an enterprise may earn income or 
profit. Such group of activities must ordinarily include the collection 
of income and the payment of expenses. It is not necessary that the 
activities carried out by a QBU constitute a different trade or business 
from those carried out by other QBUs of the taxpayer. A vertical, 
functional, or geographic division of the same trade or business may be 
a trade or business for this purpose provided that the activities 
otherwise qualify as trade or business under this paragraph (c). 
However, activities that are merely ancillary to a trade or business 
will not constitute a trade or business under this paragraph (c). 
Activities of an individual as an employee are not considered by 
themselves to constitute a trade or business under this paragraph (c).
    (d) Separate books and records--(1) General rule. Except as provided 
in paragraph (d)(2) of this section, a separate set of books and records 
shall include books of original entry and ledger accounts, both general 
and subsidiary, or similar records. For example, in the case of a 
taxpayer using the cash receipts and disbursements method of accounting, 
the books of original entry include a cash receipts and disbursements 
journal where each receipt and each disbursement is recorded. Similarly, 
in the case of a taxpayer using an accrual method of accounting, the 
books of original entry include a journal to record sales (accounts 
receivable) and a journal to record expenses incurred (accounts 
payable). In general, a journal represents a chronological account of 
all transactions entered into by an entity for an accounting period. A 
ledger account, on the other hand, chronicles the impact during an 
accounting period of the specific transactions recorded in the journal 
for that period upon the various items shown on the entity's balance 
sheet (i.e., assets, liabilities, and capital accounts) and income 
statement (i.e., revenues and expenses).
    (2) Special rule. For purposes of paragraph (b)(3) of this section, 
books and records include books and records used to determine income or 
loss that is, or is treated as, effectively connected with the conduct 
of a trade or business within the United States.
    (e) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. Corporation X is a domestic corporation. Corporation X 
manufactures widgets in the U.S. for export. Corporation X sells widgets 
in the United Kingdom through a branch office in London. The London 
office has its own employees and solicits and processes orders. 
Corporation X maintains in the U.S. a separate set of books and records 
for all transactions conducted by the London office. Corporation X is a 
QBU under paragraph (b)(2)(i) of this section because of its corporate 
status. The London branch office is a QBU under paragraph (b)(2)(ii) of 
this section because (1) the sale of widgets is a trade or business as 
defined in paragraph (c) of this section; and (2) a complete and 
separate set of books and records (as described in paragraph (d) of this 
section) is maintained with respect to its sales operations.
    Example 2. A domestic corporation incorporates a wholly-owned 
subsidiary in Switzerland. The domestic corporation is a manufacturer 
that markets its product abroad primarily through the Swiss subsidiary. 
To facilitate sales of the parent's product in Europe, the Swiss 
subsidiary has branch offices in France and West Germany that are 
responsible for all marketing operations in those countries. Each branch 
has its own employees, solicits and processes orders, and maintains a 
separate set of books and records. The domestic corporation and the 
Swiss subsidiary are both QBUs under paragraph (b)(2)(i) of this section 
because of their corporate status. The French and West German branches 
are QBUs of the Swiss subsidiary. They satisfy paragraph (b)(2)(ii) 
because each constitutes a trade or business (as defined in paragraph 
(c) of this section) and because separate sets of books and records (as 
described in paragraph (d) of this section) of their respective 
operations is maintained. Each branch is considered to have a trade or 
business although each is a geographical division of the same trade or 
business.
    Example 3. W is a domestic corporation that manufactures product X 
in the United States for sale worldwide. All of W's sales functions are 
conducted exclusively in the United States. W employs individual Q to

[[Page 636]]

work in France. Q's sole function is to act as a courier to deliver 
sales documents to customers in France. With respect to Q's activities 
in France, a separate set of books and records as described in paragraph 
(d) is maintained. Under paragraph (c) of this section, Q's activities 
in France do not constitute a QBU since they are merely ancillary to W's 
manufacturing and selling business. Q is not considered to have a QBU 
because an individual's activities as an employee are not considered to 
constitute a trade or business of the individual under paragraph (c).
    Example 4. The facts are the same as in example (3) except that the 
courier function is the sole activity of a wholly-owned French 
subsidiary of W. Under paragraph (b)(2)(i) of this section, the French 
subsidiary is considered to be a QBU.
    Example 5. A corporation incorporated in the Netherlands is a 
subsidiary of a domestic corporation and a holding company for the stock 
of one or more subsidiaries incorporated in other countries. The Dutch 
corporation's activities are limited to paying its directors and its 
administrative expenses, receiving capital contributions from its United 
States parent corporation, contributing capital to its subsidiaries, 
receiving dividend distributions from its subsidiaries, and distributing 
dividends to its domestic parent corporation. Under paragraph (b)(2)(i) 
of this section, the Netherlands corporation is considered to be a QBU.
    Example 6. Taxpayer A, an individual resident of the United States, 
is engaged in a trade or business wholly unrelated to any type of 
investment activity. A also maintains a portfolio of foreign currency-
denominated investments through a foreign broker. The broker is 
responsible for all activities necessary to the management of A's 
investments and maintains books and records as described in paragraph 
(d) of this section, with respect to all investment activities of A. A's 
investment activities qualify as a QBU under paragraph (b)(2)(ii) of 
this section to the extent the activities engaged in by A generate 
expenses that are deductible under section 212 (other than that part of 
section 212 dealing with expenses incurred in connection with taxes).
    Example 7. Taxpayer A, an individual resident of the United States, 
is the sole shareholder of foreign corporation (FC) whose activities are 
limited to trading in stocks and securities. FC is a QBU under paragraph 
(b)(2)(i) of this section.
    Example 8. Taxpayer A, an individual resident of the United States, 
markets and sells in Spain and in the United States various products 
produced by other United States manufacturers. A has an office and 
employs a salesman to manage A's activities in Spain, maintains a 
separate set of books and records with respect to his activities in 
Spain, and is engaged in a trade or business as defined in paragraph (c) 
of this section. Therefore, under paragraph (b)(2)(ii) of this section, 
the activities of A in Spain are considered to be a QBU.
    Example 9. Foreign corporation FX is incorporated in Mexico and is 
wholly owned by a domestic corporation. The domestic corporation elects 
to treat FX as a domestic corporation under section 1504(d). FX operates 
entirely in Mexico and maintains a separate set of books and records 
with respect to its activities in Mexico. FX is a QBU under paragraph 
(b)(2)(i) of this section. The activities of FX in Mexico also 
constitute a QBU under paragraph (b)(2)(ii) of this section.
    Example 10. F, a foreign corporation, computes a gain of $100 from 
the disposition of a United States real property interest (as defined in 
section 897(c)). The gain is taken into account as if F were engaged in 
a trade or business in the United States and as if such gain were 
effectively connected with such trade or business. F is a QBU under 
paragraph (b)(2)(i) of this section because of its corporate status. F's 
disposition activity constitutes a separate QBU under paragraph (b)(3) 
of this section.

[T.D. 8279, 55 FR 284, Jan. 4, 1990]