Rev. Rul. 59-356

Advice has been requested whether the purchase of hydro-electric equipment, supplies, and services from European markets by a corporation will remove it from the category of a Western Hemisphere trade corporation.

A corporation, which had previously been engaged solely in mining operations in South America, constructed a hydro-electric development project there. A substantial portion of the necessary equipment, materials, and services in connection with this project was purchased from various manufacturers, suppliers, and contractors in Europe. Such purchases amounted to 15 x dollars. The taxpayer also made miscellaneous purchases in Europe, which were neither nonrecurring nor unusual in character, in the amount of 4 x dollars. For the taxable year involved, the taxpayer derived gross receipts of 100 x dollars from all sources.

The specific questions are (1) whether the purchases made for the purpose of constructing and installing the hydro-electric development project are `nonrecurring or unusual in character' and (2) whether the purchases which are neither nonrecurring nor unusual in character are minor in relation to its entire business, and, therefore, whether such purchases, in both instances, are to be treated as `incidental purchases' which will not disqualify the taxpayer as a Western Hemisphere trade corporation under section 921 of the Internal Revenue Code of 1954.

Section 921 of the Code provides, in part, as follows:

* * * For purposes of this subtitle, the term `Western Hemisphere trade corporation' means a domestic corporation all of whose business (other than incidental purchases) is done in any country or countries in North, Central, or South America, or in the West Indies, and which satisfies the following conditions:

(1) if 95 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period during which the corporation was in existence) was derived from sources without the United States; and

(2) if 90 percent or more of its gross income for such period or such part thereof was derived from the active conduct of a trade or business. For any taxable year beginning prior to January 1, 1954, the determination as to whether any corporation meets the requirements of section 109 of the Internal Revenue Code of 1939 shall be made as if this section had not been enacted and without inferences drawn from the fact that this section is not expressly made applicable with respect to taxable years beginning prior to January 1, 1954.

Under section 1.921-1(a)(1) of the Income Tax Regulations, the term `incidental purchases' means only purchases (of any kind and for any purpose) which are (1) minor in relation to the entire business of the corporation or (2) nonrecurring or unusual in character. Whether purchases made outside the Western Hemisphere are `incidental purchases' for purposes of section 921 is to be determined on the basis of all the facts of each particular case, except that in any case in which the aggregate of the purchases (of any kind and for any purpose) made outside the Western Hemisphere for the taxable year does not exceed an amount equal to five percent of the corporation's gross receipts from all sources for such taxable year, such purchases shall be deemed to be incidental purchases.

Thus, in any case in which the total of all purchases outside the Western Hemisphere does not exceed five percent of the taxpayer's gross receipts from all sources, all of such expenditures are presumed to be `incidental purchases' for the purposes of section 921 of the Code. If, however, the total of all purchases outside the Western Hemisphere does exceed five percent of gross receipts, such purchases must be considered in two groups, that is, (1) those purchases which in the light of all the facts and circumstances are unusual or nonrecurring in nature and hence by their very nature may be considered to fall within the concept of `incidental purchases' for purposes of section 921, regardless of amount, and (2) all of the other purchases outside the Western Hemisphere of whatever kind. With respect to this latter group, if the total of all such other purchases does not exceed five percent of the taxpayer's gross receipts, then for the purposes of section 921 such purchases will be considered to be minor in relation to the entire business of the taxpayer and hence will also be treated as `incidental purchases.'

Based on the foregoing it is, therefore, held in the instant case that the purchases of equipment, supplies, and services in Europe in connection with the construction and installation of the hydro-electric development project, being nonrecurring or unusual in character, are `incidental purchases' for the purposes of section 921 of the Code. It is further held that the miscellaneous purchases made outside the Western Hemisphere, since they do not exceed in total five percent of the taxpayer's gross receipts from all sources, are minor in relation to the entire business and are, therefore, `incidental purchases' for the purposes of section 921. Therefore, since all of the purchases made outside the Western Hemisphere constitute `incidental purchases,' they do not disqualify the taxpayer as a Western Hemisphere trade corporation.

1 Based on Technical Information Release 154, dated April 30, 1959.