Rev. Rul. 80-167

PURPOSE

The purpose of this revenue ruling is to clarify the status of the Northern Mariana Islands for federal income tax purposes.

FACTS--LAW--ANALYSIS

Under the trusteeship agreement between the United States and the Security Council of the United Nations (61 Stat. 3301), the United States administers certain former Japanese mandated islands, now known as the Trust Territory of the Pacific Islands. The Northern Mariana Islands (Marianas), together with the Marshall Islands and the Caroline Islands, make up such territory.

On February 15, 1975, the United States and the Marianas signed a Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States (Covenant). The Covenant was approved by a Joint Resolution of Congress on March 24, 1976 (Pub L. 94-241, 90 Stat. 263, 1976-1 C.B. 513), and by the Marianas. The effect of the Covenant is the administrative separation of the Marianas from the Government of the Trust Territory of the Pacific Islands, and the eventual Commonwealth status for the Marianas as a territory of the United States.

Pursuant to the Covenant, the Marianas adopted a constitution, which was approved by Presidential Proclamation 4534, dated October 24, 1977 (42 F.R. 56593). This proclamation stated that the constitution, as well as several sections of the Covenant, were to take effect on January 9, 1978.

Sections 601 and 602 of the Covenant, dealing with revenue and taxation, were among the sections that became effective on January 9, 1978, although, as indicated below, these two sections were not to be applied until January 1, 1979.

Under section 601(a) of the Covenant, the income tax laws of the United States will come into force in the Marianas as a local territorial income tax on January 1, 1979, in the same manner as those laws are in force in Guam. Thus, the words "Northern Mariana Islands" will be substituted for the words "United States" whereever they appear in the Code.

Under section 601(b) of the Covenant, any individual who is a citizen or resident of the United States, Guam, or the Marianas (including a national of the United States who is not a citizen), will file only one income tax return in a manner similar to the provisions of section 935 of the Internal Revenue Code, which concern Guam.

Under section 601(c) of the Covenant, references to Guam in the Code will be deemed to also refer to the Marianas, unless otherwise expressly provided or unless manifestly incompatible with the intent of the Code or the Covenant. Thus, the benefits available to Guam under the Code will also be available to the Marianas. See also the analysis of section 601(c) of the Covenant prepared by the Senate Committee on Interior and Insular Affairs which states, in part, as follows:

Under (section 601(c)) the federal income tax laws will apply as a local territorial income tax in the same manner as those laws are in force in Guam. It is desirable that Guam and the Northern Mariana Islands have coordinated tax laws since they operate in the same economic and geographic sphere.

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(Section 601(c)) provides that references in the Internal Revenue Code to Guam will be deemd to also refer to the Northern Mariana Islands, where not otherwise distinctly expressed or manifestly incompatible with the intent of such sections or of the Covenant. This assures that the benefits which are available to Guam under the Internal Revenue Code will also be available to the Northern Mariana Islands. S. Rep. No. 94-433, 94th Cong., 1st Sess. 79-80 (1975).

Under section 602 of the Covenant, the Marianas may impose additional taxes and may rebate any tax it collects on income derived from sources within the Marianas.

The provision of sections 601 and 602 of the Covenant are presently in effect. Thus, references in the Code to Guam now generally apply to the Marianas as well.

Under the terms of the trusteeship agreement, the Service has held that the Marshall Islands (and therefore implicitly the Marianas), were not possessions of the United States for purposes of section 931 of the Code because the trusteeship agreement did not grant the United States such sovereignty over the islands as would justify the position that they constitute United States possessions. Rev. Rul. 70-193, 1970-1 C.B. 163.

Based on the terms of the Covenant, the Marianas retain this status and are not United States possessions for purposes of section 931 of the Code. The Covenant provides that the Marianas are to be treated in the same manner as Guam for federal income tax purposes. Section 931(c) specifies that Guam is not a United States possession for purposes of that section.

The Service has also held that the Government of the Trust Territory of the Pacific Islands is a foreign government for purposes of section 892 of the Code and has characterized the Trust Territory of the Pacific Islands as a foreign country for purposes of section 911 of the Code. Rev. Rul. 73-46, 1973-1 C.B. 342; and Rev. Rul. 68-608, 1968-2 C.B. 309 as modified by Rev. Rul. 80-78, page 171, this Bulletin.

The Government of Guam is not a foreign government for purposes of section 892 of the Code as it is under the sovereignty of the United States and is considered as part of the governmental jurisdiction of the United States. See Organic Act of Guam, Pub. L. 630, 1950-2 C.B. 214, which declared Guam to be an unincorporated territory of the united States. Nor is Guam a foreign country for purposes of sections 911 and 913 of the Code as section 5b.913-3(d) of the Temporary Income Tax Regulations provides, in part, that the term "foreign country" means territory under the sovereignty of a government other than that of the United States and does not include a possession or territory of the United States. See also section 935(c)(1) of the Code which provides that for United States income tax purposes the United States shall be treated as including Guam. Because the Marianas are to be treated in the same manner as Guam for federal income tax purposes pursuant to the Covenant, the Government of the Marianas is not a foreign government for purposes of section 892 of the Code; and the Marianas are not a foreign country for purposes of sections 911 and 913 of the Code.

HOLDING

Pursuant to the terms of the Covenant, the Marianas are not considered a possession of the United States for purposes of section 931 of the Code. Pursuant to the terms of the Covenant and for taxable years beginning on or after January 1, 1979, the Government of the Marianas is not a foreign government for purposes of section 892 of the Code and the Marianas are not a foreign country for purposes of sections 911 and 913 of the Code.

EFFECT ON OTHER REVENUE RULINGS

For taxable years beginning on or after January 1, 1979, Rev. Ruls. 68-608, 70-193, 73-46, and 80-78 are modified to exclude the Marianas from their application.