Td 6629

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1963-1 C.B. 129; T.D. 6629;
1963 IRB LEXIS 315, *
Treasury Decision 6629n1
TITLE 26-INTERNAL REVENUE.-CHAPTER I, SUBCHAPTER A. PART 1.-INCOME TAX; TAXABLE YEARS
BEGINNING AFTER DECEMBER 31, 1953
1963-1 C.B. 129; T.D. 6629; 1963 IRB LEXIS 315
January 1963
[*1]
SUBJECT MATTER: SECTION 934.-LIMITATION ON REDUCTION IN INCOME TAX LIABILITY
INCURRED TO THE VIRGIN ISLANDS
APPLICABLE SECTIONS:
26 CFR 1.934: Statutory provisions; limitation on reduction in income tax liability incurred to the
Virgin Islands.
TEXT:
Regulations under section 934 of the Internal Revenue Code of 1954.
DEPARTMENT OF THE TREASURY, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, Washington
25, D.C.
To Officers and Employees of the Internal Revenue Service and Others Concerned:

On November 9, 1962, notice of proposed rulemaking prescribing regulations under
section 934 of the Internal Revenue Code of 1954, relating to limitation on reduction in
income tax liability incurred to the Virgin Islands, as added by section 4(a), Act of
September 14, 160 (Public Law 86-779, 74 Stat. 998) [C.B. 1960-2, 709], was
published in the Federal Register (27 F.R. 10951). No objection to the rules proposed
having been received during the 30-day period prescribed in the notice, the regulations
are hereby adopted as proposed. These regulations shall be applicable with respect to
taxable years beginning after December 31, 959.
§ 1.934 STATUTORY PROVISIONS; LIMITATION ON REDUCTION IN INCOME
TAX LIABILITY INCURRED TO THE VIRGIN ISLANDS.

SEC. 934. LIMITATION ON REDUCTION IN INCOME TAX LIABILITY
INCURRED TO THE VIRGIN ISLANDS.
(a) [*2] GENERAL RULE.-Tax liability incurred to the Virgin Islands
pursuant to this subtitle, as made applicable in the Virgin Islands by the Act
entitled"An Act making appropriations for the naval service for the fiscal year
ending June 30, 1922, and for other purposes", approved July 12, 1921 (48
U.S.C. 1397), or pursuant to section 28(a) of the Revised Organic Act of the

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Virgin Islands, approved July 22, 1954 (48 U.S.C. 1642), 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 subsection (b) or (c).
(b) EXCEPTION FOR CERTAIN DOMESTIC AND VIRGIN ISLANDS
CORPORATIONS.-In the case of a domestic corporation or a Virgin Islands
corporation, subsection (a) shall not apply (if the information required by
subsection (d) is supplied) to the extent such corporation derived its income
from sources without the United States if the conditions of both paragraph
(1) and paragraph (2) are satisfied:

(1) THREE-YEAR PERIOD.-If 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 [*3] 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
(2) TRADE OR BUSINESS.-If 50 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.

For purposes of the preceding sentence, the gross 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. For the purposes of this subsection, all amounts received by
such 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.
(c) EXCEPTION FOR CERTAIN RESIDENTS OF THE VIRGIN ISLANDS.Subsection (a) shall not apply in the case of an individual citizen of the
United States who is a bona fide resident of the Virgin Islands during the
entire taxable year (if the information required by subsection (d) is
supplied), to the extent his income is derived from sources within the Virgin
Islands [*4] (except that subsection (a) shall apply in the case of amounts
received for services performed as an employee of the United States or any
agency thereof). For purposes of the preceding sentence, 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.
(d) REQUIREMENT To SUPPLY INFORMATION.-Subsections (b) and (c) shall
apply only in the case of persons who supply (at such time and in such
manner as the Secretary or his delegate may by regulations prescribe) such
information as the Secretary or his delegate may by regulations prescribe for
purposes of determining the applicability of such subsections.
[Sec. 934 as added by sec. 4(a), Act of Sept. 14, 1960 (Pub. Law 86-770.
74 Stat. 998)]

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§ 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 [*5] 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 [*6]
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 [*7] the tax allowed under section 901(a).

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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, 0

Credit allowed under section 901(a)
Tax liability incurred to the Virgin Islands

2

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 Islands
$290
plus credit allowed under
section 901(a)

10
$3

(ii) Multiply by taxable income from sources
without the U.S.

$800
$240,0

(iii) Divide by total taxable income

1,000
240

(iv) Subtract credit allowed under section 901(a)

10
$230

Example [*8] (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

$5

Credit allowed under section 901(a)
Tax liability incurred to the Virgin Islands

1

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 Islands
$140
plus credit allowed under
section 901(a)

10

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$1

(ii) Multiply by taxable income from sources
without the U.S.

800
120,0

(iii) Divide by total taxable income

500
2

(iv) Subtract credit allowed under section 901 (a)

10
$2

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 [*9] 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 [*10] 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 §§ 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 [*11] rule.-For purposes of section 934(c) and this
paragraph, tax liability incurred to the Virgin Islands for the taxable year

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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 Islands
$1, 200
Taxable income from sources without the Virgin Islands

800

Total taxable income

$2, 0

Credit allowed under section 901(a)
Tax liability incurred to the Virgin Islands

3

The [*12] 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
$4

(ii) Multiply by taxable income from sources within
the Virgin
$1,200
$480,0
(iii) Divide by total taxable income

2,000
2

Example (2). B, an individual who satisfies the requirements of section 934

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(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 Islands
$800
Taxable income from sources within the Virgin Islands

($200 net loss)

Total taxable income

$6

Credit allowed under section 901(a)
Tax liability incurred to the Virgin Islands

1

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 Islands
$100
plus credit allowed
under section 901(a)

20
$1

(ii) Multiply by taxable income from sources
within the Virgin Islands

800
96,0

(iii) Divide by total taxable income

600
$1

Since the $160 derived from [*13] 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 deduction 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; and
(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 [*14] 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.

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(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 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, [*15]
trades, or businesses in such group; and

(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;
and

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(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 [*16] 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; and

(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 [*17] maintained;

(3) The beginning and the ending dates of each period of absence from
the Virgin Islands during such taxable year; and

(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); and

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(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 subparagraphs (4) (i) and (4) (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 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 [*18] 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.

(This Treasury Decision is issued under the authority contained in section 7805 of the
Internal Revenue Code of 1954 (68A Stat. 917; 26 U.S.C. 7805).)

MORTIMER M. CAPLIN,
Commissioner of Internal Revenue.
Approved December 20, 1962.
STANLEY S. SURREY,
Assistant Secretary of the Treasury.
(Filed by the Division of the Federal Register on December 27, 1962, 8:51 a.m., and published in
the issue of the Federal Register for December 28, 1962, 27 F.R. 12791)
FOOTNOTES:

n1

27 F.R. 12791.

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