Rev. Rul. 63-224

Advice has been requested whether a domestic corporation operating in a possession of the United States and claiming the benefits of section 931 of the Internal Revenue Code of 1954 if entitled to the special deduction allowed to Western Hemisphere trade corporations under section 922 of the Code.

Section 931(a) of the Code provides, in part, that a domestic corporation engaged in the active conduct of a trade or business within a possession of the United States is exempt from Federal income tax on income from sources outside the United States if, for the three-year period ending with the close of the taxable year, or the applicable part of such period, (1) 80 percent or more of its gross income was derived from sources within a possession and (2) 50 percent or more of its gross income is derived from a trade or business.

Section 922 of the Code provides a special deduction against taxable income for domestic corporations which qualify as Western Hemisphere trade corporations. Section 921 of the Code defines the term `Western Hemisphere trade corporation' as 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, if 95 percent or more of the corporation's gross income 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 if 90 percent or more of its gross income for such period was derived from the active conduct of a trade or business.

A domestic corporation which qualifies as a Western Hemisphere trade corporation under section 921 of the Code is taxable upon its income from sources both within and without the United States. It is, therefore, allowed the regular deductions available to domestic corporations generally and is allowed the foreign tax credit under section 901 of the Code. In addition, it is allowed a special deduction under section 922 of the Code, such deduction being computed by multiplying its taxable income by the fraction described in section 922(2)(A) and (B). Thus, while the Western Hemisphere trade corporation's income tax liability, like that of domestic corporations generally, is based upon its taxable income from all sources, the special deduction allowed by section 922 results in its being taxed at a lower effective rate than ordinary domestic corporations.

On the other hand, a domestic corporation which meets the requirements of section 931(a) of the Code is taxable only upon its income derived from sources within the United States. Therefore, it is allowed, for Federal income tax purposes, only such deductions as are allowed to resident foreign corporations by section 882(c) of the Code. Since any foreign income it may have is not subject to Federal tax, it is not allowed the foreign tax credit under section 901 of the Code. See section 931(d)(2) and 931(g) of the Code.

It is apparent from the foregoing that it is possible for a domestic corporation to meet the gross income percentage requirements of both sections 921 and 931(a) of the Code. However, it is also apparent that the bases of taxation of a section 921 corporation and a section 931 corporation are wholly different and mutually exclusive.

Accordingly, it is held that a domestic corporation operating in a United States possession and claiming the benefits of section 931 of the Code, for Federal income tax purposes, is not at the same time entitled to the special deduction allowed to Western Hemisphere trade corporations under section 922 of the Code.