Rev. Rul. 71-13

Advice has been requested whether a domestic corporation engaged in the sale and manufacture of products in Puerto Rico may add interest income from investments in the Panama Canal Zone to income from its operations in Puerto Rico in determining if 80 percent or more of its gross income is derived from within a possession of the United States for the period prescribed in section 931(a)(1) of the Internal Revenue Code of 1954.

X is a domestic corporation which is in receipt of interest income from investments in the Panama Canal Zone in addition to gross income received from its operations within Puerto Rico.

Section 931(a) of the Code provides, in pertinent part, that in the case of domestic corporations gross income means only gross income from sources within the United States if 80 percent or more of the gross income of such corporation (computed without the benefit of section 931 of the Code) for the three-year period immediately preceding the close of the taxable year was derived from sources within a possession of the United States.

Section 1.931-1(a)(1) of the Income Tax Regulations provides, in part, that as used in section 931 and this section, the term "possession of the United States" includes the Panama Canal Zone, Guam, American Samoa, Wake, and the Midway Islands, and Puerto Rico when used with respect to domestic corporations.

Section 7701(d) of the Code and section 1 of Title 1 of the United States Code provide, in effect, that the term "possession of the United States" as used in section 931 of the Code includes the plural "possessions" unless the context indicates otherwise.

As indicated by the specific listing of United States possessions contained in section 1.931-1(a)(1) of the regulations, section 931 of the Code contemplates that gross income derived from within one or all of the United States' possessions listed in that regulation shall be taken into account under the status-determining formula contained in section 931(a) of the Code, if, in fact, the corporation in question has derived gross income from sources within such possession or possessions. The term "possession of the United States," therefore, in this context, may be read in either the singular or the plural, depending on whether the corporation has derived gross income from sources within one or more than one possession of the United States.

Accordingly, since X has derived gross income from sources within both the Panama Canal Zone and Puerto Rico, it is held that such gross income must be added together as income from a possession of the United States in determining whether 80 percent or more of X's gross income was derived from sources within such possession for the three-year period immediately preceding the taxable year involved under the provisions of section 931(a) of the Code.