Rev. Rul. 88-91

1988-2 C.B. 257, 1988-43 I.R.B. 6.

                       Internal Revenue Service

                                 Revenue Ruling

                        VIRGIN ISLNADS; U.S. CORPORATION

                          Published: October 24, 1988

SECTION 934. - LIMITATION ON REDUCITON IN INCOME TAX LIABILITY INCUURED TO THE VIRGIN ISLANDS, 26 CFR 1.934-1: Limitation on reduction in income tax liability incurred to the Virgin Islands

(Also Section 7651.)

  Virgin Islands; U.S. corporation. The provision of section 28(a) of the Revised Organic Act of the Virgin Islands that requires inhabitants to satisfy their U.S. and Virgin Islands income tax obligations by paying tax on income from all sources to the Virgin Islands is now ineffective. Rev. Rul. 80-40 obsoleted.

  Section 28(a) of the Revised Organic Act of the Virgin Islands, 48 U.S.C. section 1642, requires an 'inhabitant' of the Virgin Islands to satisfy its United States and Virgin Islands income tax obligations by paying tax to the Virgin Islands on its income from all sources. Rev. Rul. 80-40, 1980-1 C.B. 175, holds that a U.S. corporation that meets the percentage tests of section 934(b) of the Internal Revenue Code of 1954, carries on a trade or business within the meaning of section 864(a), conducts all significant business operations in the Virgin Islands, holds all of its shareholder and board of directors meetings in the Virgin Islands, and has officers and directors who are Virgin Islands residents is an inhabitant of the Virgin Islands. The ruling also holds that such corporation is a domestic corporation for purposes of the dividends received deduction of section 243 of the Code.

  Section 1275(b) of the Tax Reform Act of 1986, P.L. 99-514, 1986-3 (Vol. 1) C.B. 515, amended section 7651(5)(B) of the Code to provide that, for purposes of determining income tax liability to the United States, section 28(a) of the Revised Organic Act is effective as though it had been enacted prior to the Code. As a result, to the extent that section 28(a) of the Revised Organic Act is inconsistent with the Code, it is inapplicable. Thus, the provision of section 28(a) that requires inhabitants (including corporations organized under the laws of a state or the District or Columbia) to satisfy their United States and Virgin Islands income tax obligations by paying tax on income from all sources to the Virgin Islands is now ineffective.

  In most cases, U.S. corporations that derive income from the Virgin Islands or income effectively connected with a trade or business in the Virgin Islands are now required to file two returns: one with the United States on which they report and pay tax on worldwide income, and one with the Virgin Islands on which they report and pay tax on Virgin Islands source income and income effective connected with a trade or business in the Virgin Islands. The taxes paid to the Virgin Islands may be credited against the United States tax liability in accordance with section 901 of the Code (subject to the limitations of section 904) or section 936, if applicable.

                                    HOLDING

  Rev. Rul. 80-40 is obsolete.

Rev. Rul. 88-91, 1988-2 C.B. 257, 1988-43 I.R.B. 6.