Rev. Rul. 70-229

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 4046, C.B. 1951-1, 57.

The question presented is whether the taxable status of a domestic corporation doing business in Guam, which satisfies the conditions set forth in section 931 of the Internal Revenue Code of 1954, is affected by the enactment of the Organic Act of Guam, Public Law 680, Eighty-first Congress, C.B. 1950-2, 214, approved August 1, 1950.

Under section 3 of the Organic Act of Guam, Guam is declared to be "an unincorporated territory" of the United States with the capital and seat of government located at the city of Agana. That section further provides that the government of Guam shall consist of three branches, executive, legislative, and judicial, and its relations with the Federal Government shall be under the general administrative supervision of the head of such civilian department or agency of the Government of the United States as the President may direct. Section 31 of the Act, which was placed in operation as of January 1, 1951, by Executive Order 10211, C.B. 1951-1, 155, and as amended by Public Law 85-688, C.B. 1958-3, 78, reads as follows:

(a) The income-tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in Guam.

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(d)(1) The income-tax laws in force in Guam pursuant to subsection (a) of this section include but are not limited to the following provisions of the Internal Revenue Code of 1954, where not manifestly inapplicable or incompatible with the intent of this section: Subtitle A (not including chapter 2 and section 931); chapters 24 and 25 of subtitle C, with reference to the collection of income tax at source on wages; and all provisions of subtitle F which apply to the income tax, including provisions as to crimes, other offenses, and forfeitures contained in chapter 75. For the period after 1950 and prior to the effective date of the repeal of any provision of the Internal Revenue Code of 1939 which corresponds to one or more of those provisions of the Internal Revenue Code of 1954 which are included in the income-tax laws in force in Guam pursuant to subsection (a) of this section, such income-tax laws include but are not limited to such provisions of the Internal Revenue Code of 1939.

Section 30 of the Act provides in part that all Federal income taxes derived from Guam shall be covered into the treasury of Guam and held in account for the government of Guam and shall be expended for the benefit and government of Guam in accordance with the annual budgets.

Under section 931(a) of the Code, a domestic corporation which satisfies the conditions stated therein is taxable only with respect to income from sources within the United States. Those conditions are in substance that (1) 80 percent or more of the corporation's gross income was derived from sources within a possession of the United States, and (2) 50 percent or more of its gross income was derived from the active conduct of a trade or business within a possession of the United States.

The island of Guam was ceded to the United States by Spain in accordance with article II of the Treaty of Peace between the United States and Spain (30 Stat. 1754), signed at Paris on December 10, 1898, and proclaimed April 11, 1899. Guam has been a possession of this country ever since its acquisition. Although it is declared to be an "unincorporated territory" by section 3 of the Organic Act of Guam, it has the same legal status as the Virgin Islands and as that of Puerto Rico prior to enactment of section 931(c) of the Code.

Section 931(c) of the Code provides that, as used in section 931 of the Code, the term "possession of the United States" does not include the Virgin Islands of the United States and that such term, when used with respect to citizens of the United States, does not include Puerto Rico. Guam is not mentioned in that section of the Code. However, section 1.931.1(a) of the Income Tax Regulations provides, in part, that the term "possession of the United States," as used in sections 931 and 932 of the Code, includes Guam but does not include the Virgin Islands. Section 7701(a)(9) of the Code provides that the term "United States," when used in a geographical sense, includes only the States and the District of Columbia.

Since Guam is not excepted from the provisions of section 931 of the Code, it is considered a possession of the United States for Federal income tax purposes, regardless of its classification as an unincorporated territory by the Organic Act of Guam. Therefore, a domestic corporation which satisfies the conditions set forth in section 931(a) of the Code is taxable, for Federal income tax purposes, only with respect to income derived from sources within the United States.

The effect of section 31 of the Organic Act of Guam was to set up a separate income tax system for Guam which is a duplicate of the Federal income tax system. That section is substantially the same as a proviso contained in the Naval Appropriations Act of 1921, Public Law 35, Sixty-seventh Congress (42 Stat. 22), relating to the Virgin Islands, which reads as follows:

Provided further, That the income-tax laws now in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands.

The United States and Guam are separate and distinct taxing jurisdictions although their income tax laws arise from an identical statute applicable to each. In view of section 31 of the Organic Act of Guam it will be necessary in some sections of the law (Internal Revenue Code of 1954), to substitute the word "Guam" for the words "United States" in order to give the law proper effect in Guam.

Accordingly, a domestic corporation doing business in Guam which satisfies the conditions set forth in section 931(a) of the Code is exempt from United States income tax with respect to its income derived from Guam but is required to file returns and pay income tax to the government of Guam by reason of the dual system of taxation created by the Organic Act of Guam.

I.T. 4046 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.