Residence Rules Involving U.S. Possessions, 4996-5005 [06-818]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 20 (Tuesday, January 31, 2006)]
[Rules and Regulations]
[Pages 4996-5005]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-818]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9248]
RIN 1545-BC86


Residence Rules Involving U.S. Possessions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations, temporary regulations, and removal of 
temporary regulations.

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SUMMARY: This document contains final regulations that provide rules 
for determining bona fide residency in the following U.S. possessions: 
American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and 
the United States Virgin Islands under sections 937(a) and 881(b) of 
the Internal Revenue Code (Code).

DATES: Effective Date: These regulations are effective January 31, 
2006.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.881-5(f)(8) and 1.937-1(i).

FOR FURTHER INFORMATION CONTACT: J. David Varley, (202) 435-5262 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1930.
    The collections of information in these final regulations are in 
Sec.  1.937-1. The collection of information required by Sec.  1.937-
1(h) is to ensure that individuals claiming to become, or cease to be, 
residents of a U.S. possession file notice of such a claim with the 
Internal Revenue Service in accordance with section 937(c) of the Code. 
Individuals subject to this reporting requirement must retain 
information to establish their residency as required by section 937(c) 
of the Code and Sec.  1.937-1. An additional collection of information 
in these final regulations is in Sec.  1.937-1(c)(4)(iii). This 
information is required to satisfy the documentation and production 
requirements for individuals who come within an exception to the 
presence test of Sec.  1.937-1(c) as a consequence of receiving (or 
accompanying certain family members who receive) qualifying medical 
treatment.
    The collections of information are mandatory and will be used for 
audit and examination purposes. The likely respondents are individuals 
who become (or cease to be) bona fide residents of a U.S. possession 
and individuals who, in satisfying the presence test requirement for 
bona fide residence in a possession, exclude days in the U.S. or 
include days in a relevant possession because they receive (or 
accompany certain family members who receive) qualifying medical 
treatment.
    Estimated total annual reporting and/or recordkeeping burden: 
300,000 hours.
    Estimated average annual burden hours per respondent: 4 hours.
    Estimated number of respondents: 75,000.
    Estimated annual frequency of responses: annually.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the Office 
of Management and Budget, Attn: Desk Officer for the Department of 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, with copies to the Internal Revenue Service, Attn: IRS Reports 
Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.
    Books or records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    The American Jobs Creation Act of 2004 (Pub. L. 108-357) was 
enacted on October 22, 2004. Section 809 of the Act added section 937 
to the Code, relating to residence, source, and effectively connected 
income with respect to the U.S. possessions. On April 11, 2005, the IRS 
and Treasury published in the Federal Register temporary regulations 
(TD 9194, 70 FR 18920, as corrected at 70 FR 32589-01), which provided 
rules to implement section 937 and to conform existing regulations to 
other legislative changes with respect to U.S. possessions. A notice of 
proposed rulemaking (REG-159243-03, 70 FR 18949) cross-referencing the 
temporary regulations was published in the Federal Register on the same 
day. Written comments were received in response to the notice of 
proposed rulemaking and a public hearing on the proposed regulations 
was held on July 21, 2005. The proposed regulations relating to the 
residence rules (specifically, Sec. Sec.  1.937-1 and 1.881-5T(f)(4)) 
are adopted as amended by this Treasury decision, and the corresponding 
temporary regulations are removed. The revisions are discussed below. 
The remainder of the proposed and temporary regulations, relating to 
source and effectively connected income with respect to U.S. 
possessions, will be finalized together with the other conforming 
changes in a forthcoming Treasury decision.

Explanation of Provisions and Summary of Comments

    The proposed and temporary regulations under Code section 937(a) 
provide rules for determining whether an individual is a ``bona fide 
resident'' of a U.S. possession. Generally, Sec.  1.937-1T provides 
that an individual is a bona fide resident of a possession if the 
individual meets a presence test, a tax home test and a closer 
connection test. The IRS received comments relating to each of the 
three tests.

I. Presence Test

A. General Rule
    Under section 937(a)(1), in order to satisfy the presence test, a 
person must be present in the possession for at least 183 days during 
the taxable year (the 183-day rule). The proposed and temporary 
regulations provide several alternatives to the 183-day rule for 
purposes of satisfying the presence test. Thus, an individual who does 
not satisfy the 183-day rule nevertheless meets the presence test under 
the proposed and temporary regulations if the individual spends no more 
than 90

[[Page 4997]]

days in the United States during the taxable year; the individual 
spends more days in the possession than in the United States and has no 
earned income in the United States; or the individual has no permanent 
connection to the United States.
    The proposed and temporary regulations also provide a special rule 
for nonresident aliens in lieu of the 183-day rule and its 
alternatives. This special rule reflects the intention of the IRS and 
Treasury to adopt, to the extent possible, the generally applicable 
rules of residence with respect to nonresident aliens. Thus, the 
special rule requires nonresident aliens to satisfy a mirrored version 
of the substantial presence test of section 7701(b) in order to meet 
the presence test of section 937(a)(1).
    A number of commentators suggested that the IRS and Treasury should 
also allow U.S. citizens and residents to satisfy the 183-day rule of 
section 937(a)(1) by satisfying a mirrored version of the substantial 
presence test of section 7701(b). These comments generally argued that 
the 183-day rule fails to provide the flexibility necessary to reflect 
the realities of island life. The comments also stated that the 
proposed and temporary regulations subject U.S. citizens and residents 
to a higher presence requirement than nonresident aliens.
    The final regulations do not incorporate the rules of section 
7701(b) as an alternative to the 183-day rule of section 937(a)(1) for 
U.S. citizens and residents. Congress considered but specifically 
rejected adopting section 7701(b) as the general rule for determining 
residency in a possession. See H.R. Conf. Rep. No. 108-755, at 791-795 
(2004). Instead, Congress adopted the 183-day rule and gave the Service 
authority to adopt appropriate exceptions to the rule to provide 
sufficient flexibility. The proposed and temporary regulations follow 
that approach and provide alternatives to the 183-day rule intended to 
address the necessity of off-island travel. The IRS and Treasury do not 
believe it is appropriate to adopt a section 7701(b) rule by 
regulations when Congress expressly rejected this view. Accordingly, 
the IRS and Treasury generally retain the approach of the proposed and 
temporary regulations in the final regulations but also provide 
additional flexibility in the application of the 183-day rule and its 
alternatives to meet the needs of island residents and offset 
differences between the rules applicable to U.S. citizens and residents 
and the rules applicable to nonresident aliens.
    Commentators also suggested that the 183-day rule should serve as a 
safe harbor whereby individuals who were present in the possession for 
at least 183 days would not need also to satisfy the tax home and 
closer connection tests. The IRS and Treasury believe that this type of 
safe-harbor rule is inconsistent with the three-part test provided by 
Congress under section 937(a), which requires individuals to pass an 
objective presence test as well as the more subjective tax home and 
closer connection tests. In addition, the IRS and Treasury believe that 
applying the presence test in combination with the tax and closer 
connection tests is the most reliable method of determining whether an 
individual is a bona fide resident of a possession.
B. Counting Days of Presence
    A number of commentators suggested that certain days an individual 
is not physically present in the possession nevertheless should be 
considered days during which the individual is present in the 
possession. Specifically, commentators suggested that days spent 
outside of the possession for medical treatment of the individual or a 
family member or because of a natural disaster in the possession, a 
family emergency, charitable pursuits, or business travel should be 
counted as days of presence in the possession for purposes of applying 
the 183-day rule. Similarly, commentators suggested that days spent in 
the United States for such purposes should not count as days spent in 
the United States under the alternatives to the 183-day rule.
    In response to these comments, the final regulations liberalize the 
rules on counting days of presence. Consistent with the legislative 
history of section 937(a), the IRS and Treasury believe that it is 
desirable to allow for situations in which an individual's presence 
outside the possession is unlikely to be attributable to a tax 
avoidance purpose. See H.R. Conf. Rep. No. 108-755, at 791-795 (2004). 
Accordingly, the final regulations provide additional flexibility for 
certain situations involving medical conditions and natural disasters.
    The proposed and temporary regulations provide that any day that an 
individual is prevented from leaving the United States because of a 
medical condition that arose while the individual was present in the 
United States is not treated as a day of presence in the United States 
for purposes of the alternatives to the 183-day rule. In response to 
the comments received, the final regulations provide additional 
flexibility for medical treatment. Under the final regulations, a 
temporary stay in the United States for certain documented medical 
treatment of the individual, or a parent, spouse or child whom the 
individual accompanies to the treatment, will not count as days spent 
in the United States for purposes of the alternatives to the 183-day 
rule, irrespective of where the medical condition arose. Further, such 
a temporary stay outside of the possession, whether in the United 
States, another possession or a foreign country, also will count as 
days of presence in the possession. Qualifying medical treatment 
generally involves any period of inpatient care in a hospital or 
hospice in the United States, and any temporary period of time spent in 
the United States for medically necessary inpatient care in a 
residential medical care facility. The final regulations focus on the 
place of treatment and the formal credentials of the health care 
provider as an objective proxy for a determination that a medical 
condition is serious enough to entail periods of treatment that may not 
be readily covered by other alternatives to the 183-day rule.
    With respect to disasters, the final regulations provide that if an 
individual leaves, or is unable to return to, a relevant possession 
during (1) a two-week period within which an officially declared major 
disaster in the relevant possession occurs, or (2) the period in which 
a mandatory evacuation order applies, then the individual will not 
count any day during either period as a day of presence in the United 
States, even though the individual has evacuated to or is otherwise 
present in the United States. The Federal Emergency Management Agency 
lists officially declared major disasters on its Web site at https://
www.fema.gov/news/disasters.fema. Furthermore, the individual may count 
that day (whether the individual's temporary presence was in the United 
States or in some other location outside the relevant possession) as a 
day of presence in the relevant possession even though the major 
disaster or mandatory evacuation order prevented the individual from 
being physically present in the relevant possession.
    The final regulations do not adopt commentators' suggestion that 
days spent outside of a possession for nonmedical family emergencies, 
charitable pursuits or business travel should count as days spent in 
the possession and outside the United States. These additional 
exceptions would have been administratively difficult to implement and 
monitor. The IRS and Treasury believe that in these

[[Page 4998]]

situations, and in medical situations not otherwise provided for in the 
final regulations, the 183-day rule in combination with the 
alternatives to that rule, as liberalized in these final regulations, 
provide sufficient flexibility to accommodate absences from the 
possession to pursue a range of activities.
C. Permanent Connection
    Under the proposed and temporary regulations, an individual may 
satisfy the presence test if the individual has ``no permanent 
connection'' to the United States during the taxable year. The proposed 
and temporary regulations provide a nonexclusive list of three items 
each of which constitutes a permanent connection. The enumerated items 
are a ``permanent home'' in the United States, a spouse or dependent 
having a principal place of abode in the United States, and current 
registration to vote in any political subdivision of the United States.
    The IRS and Treasury believe that the term significant connection 
is more precise and accurate than the term permanent connection. As a 
result, the final regulations use the term significant connection 
rather than permanent connection. In addition, the IRS and Treasury 
have concluded that the rules of the proposed and temporary regulations 
should be amended in several respects.
    The IRS and Treasury believe that it is not appropriate for the 
listing of items constituting a significant connection to be a 
nonexclusive list that leaves open the possibility that undefined or 
unspecified factors could result in a determination that an individual 
has a significant connection to the United States in a particular case. 
The significant connection test is an alternative under the presence 
test, which itself is fundamentally an objective standard. Section 
937(a) and the regulations already provide a more subjective, facts-
and-circumstances standard in the form of the closer connection test. 
With respect to the significant connection test, the IRS and Treasury 
believe that the regulations should provide certainty and that the 
three items enumerated in the proposed and temporary regulations are 
the critical significant connections. Accordingly, the final 
regulations adopt these items as the exclusive list of significant 
connections to the United States.
    The proposed and temporary regulations define permanent home by 
general reference to Sec.  301.7701(b)-2(d)(2). Commentators asserted 
that this definition does not provide adequate guidance as to the 
application of the significant connection test in the common situation 
of individuals who own several homes, including vacation homes. In 
response to these comments, the final regulations provide an exception 
for rental property.
    With respect to a spouse or dependent whose principal place of 
abode is in the United States, commentators requested that an estranged 
spouse and a child of a noncustodial parent not be treated as a 
significant connection. These commentators observed that the 
noncustodial parent may not have any control over the place where the 
child resides and that a finding of significant connection in such 
circumstances would be inappropriate. The IRS and Treasury agree, and 
the final regulations exclude such children from the definition of 
significant connection. In addition, the final regulations provide that 
only minor children are the type of dependent that constitutes a 
significant connection. Further, the final regulations do not treat as 
a significant connection a minor child who resides in the United States 
as a student, or a spouse from whom the individual is legally 
separated.
D. Earned Income
    The proposed and temporary regulations provide that an individual 
may satisfy the presence test if the individual spends more days in the 
possession than in the United States and has no earned income in the 
United States. Commentators suggested that the regulations should 
permit an individual to qualify under this alternative even with some 
de minimis amount of earned income in the United States. In addition, 
commentators suggested that income earned on any day excluded for 
purposes of counting days of presence in the United States under the 
presence test (for example, for certain medical treatment) should be 
excluded from earned income.
    The IRS and Treasury agree that from the standpoint of 
practicality, fairness and administrability, de minimis amounts of 
U.S.-earned income should not render unavailable this alternative to 
the 183-day rule. In establishing a permitted amount of earned income 
for this purpose, the IRS and Treasury believe it appropriate to look 
to existing de minimis provisions of the Code involving compensation 
for services. In this regard, the final regulations cross-reference the 
maximum amount ($3,000 under current law) of compensation for labor or 
personal services performed in the United States that is not deemed to 
be income from sources within the United States under section 
861(a)(3). The final regulations do not incorporate the suggestion that 
income earned on days excluded for purposes of counting days of 
presence should be excluded from earned income. The IRS and Treasury 
believe that this type of exclusion from earned income would be 
difficult to administer and could lead to abuse of this alternative, 
particularly given the additional flexibility provided in the final 
regulations with respect to days that can be excluded for purposes of 
counting days of presence.
    Commentators also suggested that the no-U.S.-earned-income 
alternative to the 183-day rule should be applied by treating each 
state or other defined geographic area as a separate location so that 
the United States is not treated as a single location for purposes of 
determining if an individual was present for more days in the 
possession than in the United States under this alternative. The IRS 
and Treasury believe that this type of rule could be easily manipulated 
and difficult to administer. Further, with respect to residency 
determinations, the Code typically treats the United States as a single 
location. Therefore, the final regulations do not adopt this 
suggestion.

II. Tax Home Test

    Sections 931, 932, 933 and 935 generally apply to an individual who 
is considered a bona fide resident of the respective possession under 
Code section 937(a) for the entire taxable year. The proposed and 
temporary regulations treat an individual as a bona fide resident of a 
possession for the entire taxable year only if the individual satisfies 
the presence, tax home, and closer connection tests for the taxable 
year.
    Commentators suggested that it may be difficult for an individual 
moving to a possession during a taxable year to satisfy the tax home 
test if the individual had a regular or principal place of business in 
the United States or a closer connection to the United States for the 
portion of the year prior to the date of the move to the possession. 
These commentators suggested that individuals should be able to prorate 
their income for the taxable year of the move in accordance with the 
portion of the year for which they satisfy the tax home test.
    The IRS and Treasury agree that special rules are appropriate for 
the year of a move to a possession and believe that similar rules are 
appropriate for the year of a move out of a possession. However, the 
IRS and Treasury do not believe that general statutory authority exists 
for the proration of a taxpayer's income for the taxable year in this

[[Page 4999]]

context. Only in the case of Puerto Rico does the Code expressly allow 
for prorating income according to periods of residency, and then only 
when an individual moves out of Puerto Rico. See section 933(2). 
Sections 931, 932 and 935 contain no analogous proration provisions. As 
a result, except for a special rule applicable to certain individuals 
who move from Puerto Rico, the final regulations do not provide 
proration rules.
    Instead, the final regulations adopt a standard whereby an 
individual moving to a possession during the taxable year generally 
will satisfy the tax home test if the individual does not have a tax 
home outside that possession during any part of the last 183 days of 
that taxable year. To prevent abuse of this special rule, the 
regulations further require in order to use the rule that the 
individual not have been a bona fide resident of the relevant 
possession during the three taxable years before the move and that the 
individual continue to qualify as a bona fide resident of the 
possession for the three taxable years following the year of the move. 
Corresponding rules will apply to the taxable year in which an 
individual moves from a possession. However, reflecting that section 
933(2) provides for proration of a U.S. citizen's income with respect 
to bona fide residents who move from Puerto Rico, the final regulations 
provide a special rule that allows qualifying individuals to be treated 
as bona fide residents for the part of the year before they move from 
Puerto Rico.
    Under the tax home test, the proposed and temporary regulations 
provide a special rule applicable to seafarers. The special rule 
prevents an individual from being considered to have a tax home outside 
a particular possession solely by reason of employment on a ship or 
other seafaring vessel that is used predominantly in local and 
international waters. As set forth in the proposed and temporary 
regulations, the special rule does not specify how to treat time that 
the ship spends in waters of another possession. The final regulations 
clarify that time spent in the waters of another possession is treated 
the same as time spent in the waters of the United States or a foreign 
country. Thus, under the final regulations, a ship is considered to be 
used predominantly in local or international waters if the total time 
it is used in local and international waters during a taxable year 
exceeds the total time it is used in the territorial waters of the 
United States, another possession, and any foreign country.
    See section V of this preamble for an explanation of the transition 
rule concerning the effective date of the tax home test.

III. Closer Connection Test

    Under section 937(a)(2), in order to be a bona fide resident of a 
possession, a person must not have a closer connection (determined 
under the principles of section 7701(b)(3)(B)(ii)) to the United States 
or a foreign country than to the relevant possession. The regulations 
under section 7701(b)(3)(B)(ii) provide a facts-and-circumstances test 
to determine whether an individual has a closer connection with the 
United States or with a foreign country. This facts-and-circumstances 
test provides a nonexclusive list of factors to be taken into 
consideration. See Sec.  301.7701(b)-2(d). The proposed and temporary 
regulations under section 937 apply the principles of and factors 
provided in Sec.  301.7701(b)-2(d) in determining whether an individual 
meets the closer connection test of section 937.
    Commentators suggested that the final regulations designate certain 
factors as primary and others as secondary, thereby indicating the 
relative weight of the factors listed in Sec.  301.7701(b)-2(d). 
Alternatively, commentators requested that the final regulations 
indicate that an individual who meets a majority of factors establishes 
a closer connection. Some commentators criticized Example 6 under Sec.  
1.937-1T(f) (the closer connection example) for failing to take into 
account all factors listed in Sec.  301.7701(b)-2(d) and for not 
providing an analysis of how the example concludes that the individual 
fails to satisfy the closer connection test. These commentators 
appeared to believe that the closer connection example suggests that 
the location of an individual's spouse and children is more important 
than other factors or even is determinative of whether the individual 
has a closer connection to the United States or the possession. Some 
commentators also seemed to confuse these factors with the permanent 
connection alternative to the presence test and believed that the 
closer connection test requires an individual's spouse and dependent 
children also to reside in the possession. Commentators noted that if 
it applied, this requirement would apparently conflict with the joint 
filing rule of section 932(d).
    The closer connection test is a facts-and-circumstances test. The 
very nature of the test does not allow for weighting of factors because 
a factor with respect to one set of facts and circumstances may be less 
important than with respect to another set of facts and circumstances. 
Because the test must be applied to a wide variety of individual 
situations, the final regulations do not designate specific factors as 
primary, adopt a weighting of factors, or adopt a rule that counts a 
majority of the factors to determine closer connection. Further, 
because the list in Sec.  301.7701(b)-2(d) is not exclusive, other 
factors, including, for example, whether the individual was born and 
raised in the relevant possession, may be considered in the 
determination. The final regulations amend Example 6 to demonstrate 
that all factors (including any factors important in a particular case 
but not on the nonexclusive list) must be considered in determining an 
individual's closer connection.
    Although the location of the individual's family is often a very 
important factor, it is one of many factors to be evaluated 
qualitatively under the facts-and-circumstances test, and in a 
particular case it may not be an important or overriding factor. Thus, 
unlike the no-significant-connection alternative (previously the no-
permanent-connection alternative) to the presence test, the closer 
connection test can be satisfied, depending on an individual's 
particular facts and circumstances, even if, for example, the 
individual's spouse resides in the United States. In addition, Congress 
provided in section 937(a) that individuals must satisfy the closer 
connection test to establish bona fide residency in a possession 
notwithstanding the statutory joint filing rule provided in section 
932(d). For these reasons, the regulations under section 937 do not 
conflict with section 932(d).
    The proposed and temporary regulations require that an individual 
satisfy the closer connection test for the entire taxable year in order 
to be considered a bona fide resident of a relevant possession. 
Commentators noted that, as with the tax home test, it may be difficult 
for an individual moving into a possession during a taxable year to 
satisfy the closer connection test for the entire taxable year. 
Accordingly, the final regulations provide special year-of-move rules 
under the closer connection test similar to those described in section 
II of this preamble (relating to the tax home test).
    The final regulations make clarifying amendments to the closer 
connection test. Section 1.937-1T(e)(2) of the proposed and temporary 
regulations specifies that another possession is not considered a 
foreign country for purposes of the closer connection test. The final 
regulations do not specify this

[[Page 5000]]

because a special rule distinguishing possessions from foreign 
countries is unnecessary and potentially confusing. In the absence of 
an explicit provision, possessions are not treated as foreign countries 
under the Code or Treasury Regulations. The final regulations also 
clarify that an individual's connections to the United States and 
foreign countries are considered in the aggregate, rather than on a 
country-by-country basis, when comparing those connections with the 
individual's connections to the relevant possession.
    See section V of this preamble for an explanation of the transition 
rule concerning the effective date of the closer connection test.

IV. Withholding Tax Exceptions for Certain Possessions Corporations

    Section 881(b) provides exemptions from, or reductions of, 
withholding tax and branch profits tax on certain U.S.-source income 
received by corporations organized in U.S. possessions. As one of the 
conditions for such treatment in certain cases, section 881(b)(1)(C) 
sets forth a ``base-erosion'' test requiring that no substantial part 
of the possessions corporation's income be used to satisfy obligations 
to ``persons'' who are not bona fide residents of such a possession or 
of the United States. Section 937(a) provides in relevant part that for 
purposes of section 881(b), except as provided in regulations, a 
``person'' is a bona fide resident if the person satisfies the 
requirements of section 937(a). For purposes of the base-erosion test, 
Sec.  1.881-5T(f)(4)(i) defines a bona fide resident of a possession by 
reference to Sec.  1.937-1T, which provides that only a natural person, 
rather than a juridical person, may qualify as a bona fide resident of 
a possession. Similarly, Sec.  1.881-5T(f)(4)(ii) defines bona fide 
residents of the United States for purposes of the base-erosion test as 
including only certain individuals who are citizens or residents of the 
United States.
    Commentators observed that the interaction of these rules in the 
proposed and temporary regulations could result in disqualifying income 
from the withholding tax exceptions in any situation where the 
possessions corporation makes payments to satisfy obligations to 
persons other than individuals. These commentators further noted that 
many common business arrangements would run afoul of the base-erosion 
test if corporations cannot constitute bona fide residents.
    The IRS and Treasury agree that such results would be undesirable 
and unintended. In the context of section 881(b), the IRS and Treasury 
believe that the statutory terms persons and bona fide residents should 
not be interpreted as limited to individuals. Accordingly, the final 
regulations additionally provide that a corporation, or a business 
association that is treated as a corporation for tax purposes, may 
qualify as a bona fide resident of a relevant possession or the United 
States for purposes of the base-erosion test if it is created or 
organized in that jurisdiction. The final regulations reflect that 
section 937(a) and the regulations under that section are intended to 
apply only to individuals in determining whether a person is a bona 
fide resident of a possession within the meaning of section 
881(b)(1)(C).
    Note that the IRS and Treasury believe that the words ``direct or 
indirect'' in section 881(b)(1)(C) (and Sec.  1.881-5(c)(3)) would 
authorize an anti-abuse rule that prohibits payments to possessions 
corporations that are a part of back-to-back loan arrangements or other 
base erosion schemes. Accordingly, the IRS and Treasury are strongly 
considering including such an anti-abuse rule when finalizing the 
remaining proposed and temporary regulations under section 881(b). It 
is expected that any such anti-abuse rule would be retroactive to 
January 31, 2006.
    Commentators also proposed that the final regulations adopt a 
special rule whereby publicly traded corporations may qualify for 
favorable tax treatment without regard to the conditions under section 
881(b)(1), including the base-erosion test. A similar rule is provided 
under section 884(e)(4)(B) and Sec.  1.884-5(d) under the branch 
profits tax. However, the final regulations do not adopt such a special 
rule in this context. The IRS and Treasury note that section 881(b) 
does not grant authority to depart from the statutory conditions of 
section 881(b)(1), including the base-erosion test.

V. Effective Date

    The proposed and temporary regulations are generally effective for 
tax years ending after October 22, 2004. Consistent with the effective 
date of section 937(a), the proposed and temporary regulations provide 
a transition rule that delays the effective date of the presence test 
until tax years beginning after October 22, 2004 (tax year 2005 for 
calendar year taxpayers). A number of commentators suggested that the 
final regulations should provide a similar transition rule with respect 
to the effective date of the tax home and closer connection tests so 
that the prior-law, facts-and-circumstances test continues to apply 
through tax years beginning on or before October 22, 2004.
    The IRS and Treasury believe that it is appropriate to provide a 
transition rule with respect to the tax home and closer connection 
tests consistent with the effective date of the presence test. The 
effective date of the final regulations reflects the fact that most 
taxpayers already will have filed their income tax returns for taxable 
year 2004. As a result, this transition rule is elective so that 
taxpayers may apply at their option the prior-law test for determining 
residency.
    Under section 937(a), an individual's tax home outside the relevant 
possession conclusively forecloses bona fide residency in the 
possession, rather than being one of a number of facts and 
circumstances that are considered under the prior-law test. However, in 
most instances the outcome of the residency determination under prior 
law should be the same as with the application of the section 937(a) 
tax home and closer connection tests because individuals are required 
to demonstrate similar factors to support claims that they are bona 
fide residents of a particular possession. See, e.g., Sochurek v. 
Commissioner, 300 F.2d 34, 38 (7th Cir. 1962) (enumerating 
representative factors), and Bergersen v. Commissioner, 109 F.3d 56, 
61-62 (1st Cir. 1997), aff'g T.C. Memo 1995-424 (applying prior-law 
facts-and-circumstances test in same way closer connection test is 
applied by ``taking account of all of the [taxpayers'] ties to both 
places'' to determine residency under principles of Sec. Sec.  1.871-2 
through 1.871-5). The optional effective date for the tax home and 
closer connection tests is intended to create symmetry with the 
effective date of the presence test. No inference is intended or may be 
drawn from this transition rule as to the result under prior law.

VI. Miscellaneous Changes

    Consistent with section 937(a), the final regulations specify that 
the residency rules apply for purposes of the income tax and certain 
other enumerated provisions of the Code. With respect to the estate and 
gift taxes, see Sec. Sec.  20.2209-1 and 25.2501-1(d).
    The final regulations also reflect various nonsubstantive stylistic 
edits to the proposed and temporary regulations to enhance clarity and 
readability.

VII. Mutual Agreement Procedures

    In the application of the operative provisions of the Code relating 
to possessions, for example sections 931 through 935, section 937(a) 
and the final regulations govern whether an individual is a bona fide 
resident of a

[[Page 5001]]

particular possession. A commentator observed that there is a 
possibility that the IRS and the taxing authority of a particular 
possession might reach different conclusions with respect to certain 
determinations, including residency, when administering their 
respective income tax laws. In such cases, taxpayers are advised that 
mutual agreement procedures are available. For procedures to request 
the assistance of the IRS when a taxpayer is or may be subject to 
inconsistent tax treatment by the IRS and a possession tax agency, see 
Revenue Procedure 89-8 (1989-1 C.B. 778).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. Because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is J. David Varley, 
Office of the Associate Chief Counsel (International), IRS. However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *.
    Section 1.931-1T also issued under 26 U.S.C. 7654(e).
    Section 1.932-1T also issued under 26 U.S.C. 7654(e).
    Section 1.935-1T also issued under 26 U.S.C. 7654(e). * * *
    Section 1.937-1 also issued under 26 U.S.C. 937(a). * * *


0
Par. 2. Section 1.881-5 is added to read as follows:


Sec.  1.881-5  Exception for certain possessions corporations.

    (a) through (f)(3) [Reserved]. For more information, see Sec.  
1.881-5T(a) through (f)(3).
    (f)(4) Bona fide resident--
    (i) With respect to a particular possession, means--
    (A) An individual who is a bona fide resident of the possession as 
defined in Sec.  1.937-1; or
    (B) A business entity organized under the laws of the possession 
and taxable as a corporation in the possession; and
    (ii) With respect to the United States, means--
    (A) An individual who is a citizen or resident of the United States 
(as defined under section 7701(b)(1)(A)); or
    (B) A business entity organized under the laws of the United States 
or any State that is classified as a corporation for Federal tax 
purposes under Sec.  301.7701-2(b) of this chapter.
    (5) through (7) [Reserved]. For more information, see Sec.  1.881-
5T(f)(5) through (7).
    (8) Effective date. This section applies to payments made after 
January 31, 2006. However, taxpayers may choose to apply this section 
to all payments made after October 22, 2004 for which the statute of 
limitations under section 6511 is open.
    (g) through (i) [Reserved]. For more information, see Sec.  1.881-
5T(g) through (i).

0
Par. 3. In Sec.  1.881-5T, paragraph (f)(4) is revised to read as 
follows:


Sec.  1.881-5T  Exception for certain possessions corporations 
(temporary).

* * * * *
    (f)(4) [Reserved]. For more information, see Sec.  1.881-5(f)(4).
* * * * *


Sec.  1.931-1T  [Amended]

0
Par. 4. In Sec.  1.931-1T, paragraph (a)(2) is amended by removing and 
reserving the example.


Sec.  1.932-1T  [Amended]

0
Par. 5. In Sec.  1.932-1T, paragraph (i) is amended by removing and 
reserving example 2.


Sec.  1.933-1T  [Amended]

0
Par. 6. In Sec.  1.933-1T, paragraph (a)(2) is amended by removing and 
reserving the example.


Sec.  1.935-1T  [Amended]

0
Par. 7. In Sec.  1.935-1T, paragraph (f) is amended by removing and 
reserving examples 1 and 2.

0
Par. 8. Section 1.937-1 is added to read as follows:


Sec.  1.937-1  Bona fide residency in a possession.

    (a) Scope--(1) In general. Section 937(a) and this section set 
forth the rules for determining whether an individual qualifies as a 
bona fide resident of a particular possession (the relevant possession) 
for purposes of subpart D, part III, Subchapter N, Chapter 1 of the 
Internal Revenue Code as well as section 865(g)(3), section 876, 
section 881(b), paragraphs (2) and (3) of section 901(b), section 
957(c), section 3401(a)(8)(C), and section 7654(a).
    (2) Definitions. For purposes of this section and Sec. Sec.  1.937-
2 and 1.937-3--
    (i) Possession means one of the following United States 
possessions: American Samoa, Guam, the Northern Mariana Islands, Puerto 
Rico, or the Virgin Islands. When used in a geographical sense, the 
term comprises only the territory of each such possession (without 
application of sections 932(c)(3) and 935(c)(2) (as in effect before 
the effective date of its repeal)).
    (ii) United States, when used in a geographical sense, is defined 
in section 7701(a)(9), and without application of sections 932(a)(3) 
and 935(c)(1) (as in effect before the effective date of its repeal).
    (b) Bona fide resident--(1) General rule. An individual qualifies 
as a bona fide resident of the relevant possession if such individual 
satisfies the requirements of paragraphs (c) through (e) of this 
section with respect to such possession.
    (2) Special rule for members of the Armed Forces. A member of the 
Armed Forces of the United States who qualified as a bona fide resident 
of the relevant possession in a prior taxable year is deemed to have 
satisfied the requirements of paragraphs (c) through (e) of this 
section for a subsequent taxable year if such individual otherwise is 
unable to satisfy such requirements by reason of being absent from such 
possession or present in the United States during such year solely in 
compliance with military orders. Conversely, a member of the Armed 
Forces of the United States who did not

[[Page 5002]]

qualify as a bona fide resident of the relevant possession in a prior 
taxable year is not considered to have satisfied the requirements of 
paragraphs (c) through (e) of this section for a subsequent taxable 
year by reason of being present in such possession solely in compliance 
with military orders. Armed Forces of the United States is defined (and 
members of the Armed Forces are described) in section 7701(a)(15).
    (3) Juridical persons. Except as provided in Sec.  1.881-5(f):
    (i) Only natural persons may qualify as bona fide residents of a 
possession; and
    (ii) The rules governing the tax treatment of bona fide residents 
of a possession do not apply to juridical persons (including 
corporations, partnerships, trusts, and estates).
    (4) Transition rule. For taxable years beginning before October 23, 
2004, and ending after October 22, 2004, an individual is considered to 
qualify as a bona fide resident of the relevant possession if that 
individual would be a bona fide resident of the relevant possession by 
applying the principles of Sec. Sec.  1.871-2 through 1.871-5.
    (5) Special rule for cessation of bona fide residence in Puerto 
Rico. See paragraph (f)(2)(ii) of this section for a special rule 
applicable to a citizen of the United States who ceases to be a bona 
fide resident of Puerto Rico during a taxable year.
    (c) Presence test--(1) In general. A United States citizen or 
resident alien individual (as defined in section 7701(b)(1)(A)) 
satisfies the requirements of this paragraph (c) for a taxable year if 
during that taxable year that individual--
    (i) Was present in the relevant possession for at least 183 days;
    (ii) Was present in the United States for no more than 90 days;
    (iii) Had earned income (as defined in Sec.  1.911-3(b)) in the 
United States, if any, not exceeding in the aggregate the amount 
specified in section 861(a)(3)(B) and was present for more days in the 
relevant possession than in the United States; or
    (iv) Had no significant connection to the United States. See 
paragraph (c)(5) of this section.
    (2) Special rule for alien individuals. A nonresident alien 
individual (as defined in section 7701(b)(1)(B)) satisfies the 
requirements of this paragraph (c) for a taxable year if during that 
taxable year that individual satisfies the substantial presence test of 
Sec.  301.7701(b)-1(c) of this chapter (except for the substitution of 
the name of the relevant possession for the term United States where 
appropriate).
    (3) Days of presence. For purposes of paragraph (c)(1) of this 
section--
    (i) An individual is considered to be present in the relevant 
possession on:
    (A) Any day that the individual is physically present in that 
possession at any time during the day;
    (B) Any day that an individual is outside of the relevant 
possession to receive, or to accompany on a full-time basis a parent, 
spouse, or child (as defined in section 152(f)(1)) who is receiving, 
qualifying medical treatment as defined in paragraph (c)(4) of this 
section; and
    (C) Any day that an individual is outside the relevant possession 
because the individual leaves or is unable to return to the relevant 
possession during any--
    (1) 14-day period within which a major disaster occurs in the 
relevant possession for which a Federal Emergency Management Agency 
Notice of a Presidential declaration of a major disaster is issued in 
the Federal Register; or
    (2) Period for which a mandatory evacuation order is in effect for 
the geographic area in the relevant possession in which the 
individual's place of abode is located.
    (ii) An individual is considered to be present in the United States 
on any day that the individual is physically present in the United 
States at any time during the day. Notwithstanding the preceding 
sentence, the following days will not count as days of presence in the 
United States:
    (A) Any day that an individual is temporarily present in the United 
States under circumstances described in paragraph (c)(3)(i)(B) or (C) 
of this section;
    (B) Any day that an individual is in transit between two points 
outside the United States (as described in Sec.  301.7701(b)-3(d) of 
this chapter), and is physically present in the United States for fewer 
than 24 hours;
    (C) Any day that an individual is temporarily present in the United 
States as a professional athlete to compete in a charitable sports 
event (as described in Sec.  301.7701(b)-3(b)(5) of this chapter);
    (D) Any day that an individual is temporarily present in the United 
States as a student (as defined in section 152(f)(2)); and
    (E) In the case of an individual who is an elected representative 
of the relevant possession, or who serves full time as an elected or 
appointed official or employee of the government of the relevant 
possession (or any political subdivision thereof), any day spent 
serving the relevant possession in that role.
    (iii) If, during a single day, an individual is physically 
present--
    (A) In the United States and in the relevant possession, that day 
is considered a day of presence in the relevant possession;
    (B) In two possessions, that day is considered a day of presence in 
the possession where the individual's tax home is located (applying the 
rules of paragraph (d) of this section).
    (4) Qualifying medical treatment--(i) In general. The term 
qualifying medical treatment means medical treatment provided by (or 
under the supervision of) a physician (as defined in section 213(d)(4)) 
for an illness, injury, impairment, or physical or mental condition 
that satisfies the documentation and production requirements of 
paragraph (c)(4)(iii) of this section and that involves--
    (A) Any period of inpatient care in a hospital or hospice and any 
period immediately before or after that inpatient care to the extent it 
is medically necessary; or
    (B) Any temporary period of inpatient care in a residential medical 
care facility for medically necessary rehabilitation services;
    (ii) Inpatient care. The term inpatient care means care requiring 
an overnight stay in a hospital, hospice, or residential medical care 
facility, as the case may be.
    (iii) Documentation and production requirements. In order to 
satisfy the documentation and production requirements of this 
paragraph, an individual must, with respect to each qualifying medical 
treatment, prepare (or obtain), maintain, and, upon a request by the 
Commissioner (or the person responsible for tax administration in the 
relevant possession), make available within 30 days of such request:
    (A) Records that provide--
    (1) The patient's name and relationship to the individual (if the 
medical treatment is provided to a person other than the individual);
    (2) The name and address of the hospital, hospice, or residential 
medical care facility where the medical treatment was provided;
    (3) The name, address, and telephone number of the physician who 
provided the medical treatment;
    (4) The date(s) on which the medical treatment was provided; and
    (5) Receipt(s) of payment for the medical treatment;
    (B) Signed certification by the providing or supervising physician 
that the medical treatment was qualified medical treatment within the 
meaning

[[Page 5003]]

of paragraph (c)(4)(i) of this section, and setting forth--
    (1) The patient's name;
    (2) A reasonably detailed description of the medical treatment 
provided by (or under the supervision of) the physician;
    (3) The dates on which the medical treatment was provided; and
    (4) The medical facts that support the physician's certification 
and determination that the treatment was medically necessary; and
    (C) Such other information as the Commissioner may prescribe by 
notice, form, instructions, or other publication (see Sec.  
601.601(d)(2) of this chapter).
    (5) Significant connection. For purposes of paragraph (c)(1)(iv) of 
this section--
    (i) The term significant connection to the United States means--
    (A) A permanent home in the United States;
    (B) Current registration to vote in any political subdivision of 
the United States; or
    (C) A spouse or child (as defined in section 152(f)(1)) who has not 
attained the age of 18 whose principal place of abode is in the United 
States other than--
    (1) A child who is in the United States because the child is living 
with a custodial parent under a custodial decree or multiple support 
agreement; or
    (2) A child who is in the United States as a student (as defined in 
section 152(f)(2)).
    (ii) Permanent home--(A) General rule. For purposes of paragraph 
(c)(5)(i)(A) of this section, except as provided in paragraph 
(c)(5)(ii)(B) of this section, the term permanent home has the same 
meaning as in Sec.  301.7701(b)-2(d)(2) of this chapter.
    (B) Exception for rental property. If an individual or the 
individual's spouse owns property and rents it to another person at any 
time during the taxable year, then notwithstanding that the rental 
property may constitute a permanent home under Sec.  301.7701(b)-
2(d)(2) of this chapter, it is not a permanent home under this 
paragraph (c)(5)(ii) unless the taxpayer uses any portion of it as a 
residence during the taxable year under the principles of section 
280A(d). In applying the principles of section 280A(d) for this 
purpose, an individual is treated as using the rental property for 
personal purposes on any day determined under the principles of section 
280A(d)(2) or on any day that the rental property (or any portion of 
it) is not rented to another person at fair rental for the entire day. 
The rental property is not used for personal purposes on any day on 
which the principal purpose of the use of the rental property is to 
perform repair or maintenance work on the property. Whether the 
principal purpose of the use of the rental property is to perform 
repair or maintenance work is determined in light of all the facts and 
circumstances including, but not limited to, the following: The amount 
of time devoted to repair and maintenance work, the frequency of the 
use for repair and maintenance purposes during a taxable year, and the 
presence and activities of companions.
    (iii) For purposes of this paragraph (c)(5), the term spouse does 
not include a spouse from whom the individual is legally separated 
under a decree of divorce or separate maintenance.
    (d) Tax home test--(1) General rule. Except as provided in 
paragraph (d)(2) of this section, an individual satisfies the 
requirements of this paragraph (d) for a taxable year if that 
individual did not have a tax home outside the relevant possession 
during any part of the taxable year. For purposes of section 937 and 
this section, an individual's tax home is determined under the 
principles of section 911(d)(3) without regard to the second sentence 
thereof. Thus, under section 937, an individual's tax home is 
considered to be located at the individual's regular or principal (if 
more than one regular) place of business. If the individual has no 
regular or principal place of business because of the nature of the 
business, or because the individual is not engaged in carrying on any 
trade or business within the meaning of section 162(a), then the 
individual's tax home is the individual's regular place of abode in a 
real and substantial sense.
    (2) Exceptions--(i) Year of move. See paragraph (f) of this section 
for a special rule applicable to an individual who becomes or ceases to 
be a bona fide resident of the relevant possession during a taxable 
year.
    (ii) Special rule for seafarers. For purposes of section 937 and 
this section, an individual is not considered to have a tax home 
outside the relevant possession solely by reason of employment on a 
ship or other seafaring vessel that is predominantly used in local and 
international waters. For this purpose, a vessel is considered to be 
predominantly used in local and international waters if, during the 
taxable year, the aggregate amount of time it is used in international 
waters and in the waters within three miles of the relevant possession 
exceeds the aggregate amount of time it is used in the territorial 
waters of the United States, another possession, and a foreign country.
    (iii) Special rule for students and government officials. Any days 
described in paragraphs (c)(3)(ii)(D) and (E) of this section are 
disregarded for purposes of determining whether an individual has a tax 
home outside the relevant possession under paragraph (d)(1) of this 
section during any part of the taxable year.
    (e) Closer connection test--(1) General rule. Except as provided in 
paragraph (e)(2) of this section, an individual satisfies the 
requirements of this paragraph (e) for a taxable year if that 
individual did not have a closer connection to the United States or a 
foreign country than to the relevant possession during any part of the 
taxable year. For purposes of this paragraph (e)--
    (i) The principles of section 7701(b)(3)(B)(ii) and Sec.  
301.7701(b)-2(d) of this chapter apply (without regard to the final 
sentence of Sec.  301.7701(b)-2(b) of this chapter); and
    (ii) An individual's connections to the relevant possession are 
compared to the aggregate of the individual's connections with the 
United States and foreign countries.
    (2) Exception for year of move. See paragraph (f) of this section 
for a special rule applicable to an individual who becomes or ceases to 
be a bona fide resident of the relevant possession during a taxable 
year.
    (f) Year of move--(1)Move to a possession. For the taxable year in 
which an individual's residence changes to the relevant possession, the 
individual satisfies the requirements of paragraphs (d)(1) and (e)(1) 
of this section if--
    (i) For each of the 3 taxable years immediately preceding the 
taxable year of the change of residence, the individual is not a bona 
fide resident of the relevant possession;
    (ii) For each of the last 183 days of the taxable year of the 
change of residence, the individual does not have a tax home outside 
the relevant possession or a closer connection to the United States or 
a foreign country than to the relevant possession; and
    (iii) For each of the 3 taxable years immediately following the 
taxable year of the change of residence, the individual is a bona fide 
resident of the relevant possession.
    (2) Move from a possession--(i) General rule. Except for a bona 
fide resident of Puerto Rico to whom Sec.  1.933-1(b) and paragraph 
(f)(2)(ii) of this section apply, for the taxable year in which an 
individual ceases to be a bona fide resident of the relevant 
possession, the individual satisfies the

[[Page 5004]]

requirements of paragraphs (d)(1) and (e)(1) of this section if--
    (A) For each of the 3 taxable years immediately preceding the 
taxable year of the change of residence, the individual is a bona fide 
resident of the relevant possession;
    (B) For each of the first 183 days of the taxable year of the 
change of residence, the individual does not have a tax home outside 
the relevant possession or a closer connection to the United States or 
a foreign country than to the relevant possession; and
    (C) For each of the 3 taxable years immediately following the 
taxable year of the change of residence, the individual is not a bona 
fide resident of the relevant possession.
    (ii) Year of move from Puerto Rico. Notwithstanding an individual's 
failure to satisfy the presence, tax home, or closer connection test 
prescribed under paragraph (b)(1) of this section for the taxable year, 
the individual is a bona fide resident of Puerto Rico for that part of 
the taxable year described in paragraph (f)(2)(ii)(E) of this section 
if the individual--
    (A) Is a citizen of the United States;
    (B) Is a bona fide resident of Puerto Rico for a period of at least 
2 taxable years immediately preceding the taxable year;
    (C) Ceases to be a bona fide resident of Puerto Rico during the 
taxable year;
    (D) Ceases to have a tax home in Puerto Rico during the taxable 
year; and
    (E) Has a closer connection to Puerto Rico than to the United 
States or a foreign country throughout the part of the taxable year 
preceding the date on which the individual ceases to have a tax home in 
Puerto Rico.
    (g) Examples. The principles of this section are illustrated by the 
following examples:

    Example 1. Presence test. W, a U.S. citizen, lives for part of 
the taxable year in a condominium, which she owns, located in 
Possession P. W also owns a house in State N where she lives for 120 
days every year to be near her grown children and grandchildren. W 
is retired and her income consists solely of pension payments, 
dividends, interest, and Social Security benefits. For 2006, W is 
only present in Possession P for a total of 175 days because of a 
70-day vacation to Europe and Asia. Thus, for taxable year 2006, W 
is not present in Possession P for at least 183 days, is present in 
the United States for more than 90 days, and has a significant 
connection to the United States by reason of her permanent home. 
However, under paragraph (c)(1)(iii) of this section, W still 
satisfies the presence test of paragraph (c) of this section with 
respect to Possession P because she has no earned income in the 
United States and is present for more days in Possession P than in 
the United States.
    Example 2. Presence test. T, a U.S. citizen, was born and raised 
in State A, where his mother still lives in the house in which T 
grew up. T is a sales representative for a company based in 
Possession V. T lives with his wife and minor children in their 
house in Possession V. T is registered to vote in Possession V and 
not in the United States. In 2006, T spends 120 days in State A and 
another 120 days in foreign countries. When traveling on business to 
State A, T often stays at his mother's house in the bedroom he used 
when he was a child. T's stays are always of short duration, and T 
asks for his mother's permission before visiting to make sure that 
no other guests are using the room and that she agrees to have him 
as a guest in her house at that time. Therefore, under paragraph 
(c)(5)(ii) of this section, T's mother's house is not a permanent 
home of T. Assuming that no other accommodations in the United 
States constitute a permanent home with respect to T, then under 
paragraphs (c)(1)(iv) and (c)(5) of this section, T has no 
significant connection to the United States. Accordingly, T 
satisfies the presence test of paragraph (c) of this section for 
taxable year 2006.
    Example 3. Alien resident of possession-- presence test. F is a 
citizen of Country G. F's tax home is in Possession C and F has no 
closer connection to the United States or a foreign country than to 
Possession C. F is present in Possession C for 123 days and in the 
United States for 110 days every year. Accordingly, F is a 
nonresident alien with respect to the United States under section 
7701(b), and a bona fide resident of Possession C under paragraphs 
(b), (c)(2), (d), and (e) of this section.
    Example 4. Seafarers-- tax home. S, a U.S. citizen, is employed 
by a fishery and spends 250 days at sea on a fishing vessel in 2006. 
When not at sea, S resides with his wife at a house they own in 
Possession G. The fishing vessel upon which S works departs and 
arrives at various ports in Possession G, other possessions, and 
foreign countries, but is in international and local waters (within 
the meaning of paragraph (d)(2) of this section) for 225 days in 
2006. Under paragraph (d)(2) of this section, for taxable year 2006, 
S will not be considered to have a tax home outside Possession G for 
purposes of section 937 and this section solely by reason of S's 
employment on board the fishing vessel.
    Example 5. Seasonal workers--tax home and closer connection. P, 
a U.S. citizen, is a permanent employee of a hotel in Possession I, 
but works only during the tourist season. For the remainder of each 
year, P lives with her husband and children in Possession Q, where 
she has no outside employment. Most of P's personal belongings, 
including her automobile, are located in Possession Q. P is 
registered to vote in, and has a driver's license issued by, 
Possession Q. P does her personal banking in Possession Q and P 
routinely lists her address in Possession Q as her permanent address 
on forms and documents. P satisfies the presence test of paragraph 
(c) of this section with respect to both Possession Q and Possession 
I, because, among other reasons, under paragraph (c)(1)(ii) of this 
section she does not spend more than 90 days in the United States 
during the taxable year. P satisfies the tax home test of paragraph 
(d) of this section only with respect to Possession I, because her 
regular place of business is in Possession I. P satisfies the closer 
connection test of paragraph (e) of this section with respect to 
both Possession Q and Possession I, because she does not have a 
closer connection to the United States or to any foreign country 
(and possessions generally are not treated as foreign countries). 
Therefore, P is a bona fide resident of Possession I for purposes of 
the Internal Revenue Code.
    Example 6. Closer connection to United States than to 
posses