Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-6

1973-1 C.B. 347

Sec. 931

IRS Headnote

A domestic corporation doing business solely in Puerto Rico does not come within the purview of section 931(b) of the Code with respect to gross sales proceeds collected in Puerto Rico by its agent.

Full Text

Rev. Rul. 73-6

Advice has been requested whether, under the circumstances described below, a corporation is required to include in gross income sales from Puerto Rico, a possession of the United States, pursuant to section 931(b) of the Internal Revenue Code of 1954.

X, a domestic corporation all of whose stock is owned by another domestic corporation, is engaged in selling merchandise solely in Puerto Rico, a possession of the United States, through a leased department in a store owned and operated in Puerto Rico by Y corporation.

X buys and sells its own merchandise, hires and fires its own employees, and supplies its own management. It pays Y for the use of space in the departments and for services rendered by Y. X's employees in the department store sell X's products to customers who patronize the department store.

Y collects and receives at its cash registers, on behalf of X, the moneys paid by the customers for merchandise of X. The moneys so collected are commingled with the moneys collected by Y from its other departments and deposited to Y's bank account in a Puerto Rico bank. A daily accounting is made of the sales from X's department and is forwarded by Y to X's parent in the United States on a daily basis. Y's books reflect an account payable for the sales collected for X. Y makes advances to X's department manager for payrolls and other local expenses and treats these as offsets against the sales. On the 15th of each month, the home office of Y in the United States, which gathers all the income and deducts the rents and advances made to the department manager at the store, submits a check to X's parent for the net sales due X. After the end of the month a final accounting is made for the month and a settlement made between Y and X. If Y owes X, it sends its check to X's parent; if X owes Y, it must pay Y within 5 days after receipt of the statement. All checks received from Y are deposited to X's parent's checking account in the United States after which the parent accounts to X for the funds belonging to it.

X files an income tax return in Puerto Rico and pays income taxes to Puerto Rico. X also files a United States income tax return, but reports no income subject to U.S. income tax, relying on the exclusion granted in section 931(a) of the Code.

The issue in this case is whether X receives the gross income from its sales in Puerto Rico where X's customers pay Y for the merchandise or in the United States where the money is received by X's parent from Y.

Section 931(b) of the Code provides, in part, that there shall be included in gross income all amounts received by such citizens or corporations within the United States, whether derived from sources within or without the United States.

In the instant case X's right to receive the moneys arises when the merchandise is sold. Y's rights in the subject proceeds arise from a right of set-off which can be determined only after X's gross sales for the period are determined. For the time interval between the sale of merchandise and the determination of the amount due Y, Y acts as an agent for X for the limited purpose of collecting the proceeds from the sale of X's merchandise.

Accordingly, it is held that receipt by Y in Puerto Rico is receipt by X and, therefore the subject amounts were not received by X in the United States and do not come within the purview of section 931(b) of the Code. See Revenue Ruling 70-264, 1970-1 C.B. 165, which holds that fees received by the taxpayer were not received by him in the United States since receipt by the taxpayer's agents in the Panama Canal Zone was equivalent to receipt there by the taxpayer.