SERVICE PROVIDES PROCEDURES TO RESOLVE ISSUES OF INCONSISTENT TAX TREATMENT BETWEEN THE IRS AND CERTAIN U.S. TERRITORIES.

Rev. Proc. 89-8

SECTION 1. PURPOSE

01 This revenue procedure sets forth the procedures that the Internal Revenue Service and taxpayers will use to resolve issues arising when a taxpayer is or may be subject to inconsistent tax treatment by the Service and the tax authorities of Puerto Rico, the Virgin Islands, American Samoa, or Guam. The issues generally involve: (1) allocations of income, deductions, credits, or allowances between related persons; (2) determinations of residency; and (3) determinations of the source of income and related expenses. This revenue procedure does not provide procedures to be used by the tax authorities of any possession.

02 An Implementation Agreement between the United States and the Virgin Islands was signed on February 24, 1987, and took effect on that date. This agreement superseded the prior Coordination Agreement (Announcement 78-21, 1978-7 I.R.B. 42). Article 6 of the Implementation Agreement deals with the mutual agreement procedure on potential double taxation.

03 An Implementation Agreement between the United States and American Samoa was signed by the Government of American Samoa on December 10, 1987, and by the Government of the United States on January 7, 1988; it generally became effective on January 1, 1988. Article 6 of the Implementation Agreement deals with the mutual agreement procedure on potential double taxation.

04 The 1977 Agreement on Coordination of Tax Administration entered into between the United States and Guam has been amended to add section 10. The amendment was signed by the Government of Guam on January 10, 1985, and by the Government of the United States on July 12, 1985. Section 10 deals with the mutual agreement procedure on potential double taxation.

05 This revenue procedure supersedes Rev. Proc. 80-57, 1980-2 C.B. 852, as supplemented by Rev. Proc. 85-23, 1985-1 C.B. 557.

SEC. 2. BACKGROUND

01 The Service has entered into agreements for coordinating tax administration (the Agreements) with the Commonwealth of Puerto Rico (Announcement 79-84, 1979-23 I.R.B. 19); the Virgin Islands, as described in Section 1.02; American Samoa, as described in Section 1.03; and Guam, as described in Section 1.04. The tax authorities of the other parties to the Agreements are hereinafter referred to as the "possession tax agencies." In accordance with the Agreements, the Service has established cooperative programs to resolve tax disputes arising from inconsistent positions taken by the Service and a possession tax agency. The procedures under these cooperative programs are hereinafter referred to as the "mutual agreement procedures."

02 The Agreements provide that the Assistant Commissioner (International) is the person in charge of exchanging United States tax returns and tax return information with a possession and developing and coordinating cooperative programs designed to improve the administration and enforcement of the tax laws of the United States and the possessions.

03 The Agreements provide generally that when, by reason of inconsistent positions taken by the Service and a possession tax agency, a taxpayer is or may be subject to inconsistent tax treatment by the two jurisdictions, the Assistant Commissioner (International) and the designated possession tax official shall seek to avoid double taxation. In particular, but not by way of limitation, the parties may exchange views to reach agreement on: (a) the same allocation of income, deductions, credits, or allowances between related persons; (b) the same determination of residency of a particular taxpayer, and (c) the same determination of the source of particular items of income.

SEC. 3. PROCEDURES TO BE FOLLOWED

01 A taxpayer, or a related person in a possession, that is potentially subject to double taxation because of inconsistent tax treatment by the Service and a possession tax agency may request assistance in accordance with this revenue procedure.

02 In addition to the tax assistance request, the taxpayer should file a claim for credit or refund of any overpayment of United States tax that was paid on the income in question, provided the period of limitations prescribed under section 6511 of the Internal Revenue Code, with respect to the claim for credit or refund, has not expired. The taxpayer, or a related person in a possession, should also take whatever steps are required under a possession tax code to prevent the expiration of the period of limitations with respect to a claim for credit or refund of a possession tax.

03 When, in conjunction with a request for assistance under this revenue procedure, a taxpayer seeks relief in the form of a credit or refund of tax due to either a possession or the United States, the allowance of such relief is subject to the applicable tax and procedural rules of the possession and the United States.

04 A United States income tax claim is to be made, as appropriate, on: Form 1040X, Amended U.S. Individual Income Tax Return; Form 1120X, Amended U.S. Corporation Income Tax Return; or Form 1041, U.S. Fiduciary Income Tax Return. The taxpayer should indicate on the appropriate form that a request for assistance under the mutual agreement procedure with the possession has been filed pursuant to this revenue procedure and should attach a copy of the request to that form.

05 Similarly, if any tax issues subject to consideration under a mutual agreement procedure are expected to recur, the taxpayer should, before the statute of limitations expires, file a protective claim for credit or refund of any United States tax that was paid with respect to the issue. The claim should describe the action or expected action of the possession tax agency and state that the taxpayer has filed or plans to file a request for assistance under the mutual agreement procedure. The taxpayer should send a copy to the Assistant Commissioner (International). If the taxpayer later decides not to file the request for assistance, the Assistant Commissioner (International) should be promptly notified by the Taxpayer. The taxpayer, or a related person in a possession, should also take whatever steps are required under the possession tax code to prevent the expiration of the period of limitations with respect to a claim for credit or refund of a possession tax.

06 With respect to the computation of the foreign tax credit, either Form 1116, Computation of Foreign Tax Credit -- Individual, Fiduciary, or Nonresident Alien Individual (which also covers credits for foreign tax on income received from foreign partnerships and other business organizations), or Form 1118, Computation of Foreign Tax Credit -- Corporations, must be attached to the Form 1040X, Form 1120X, or Form 1041.

07 The taxpayer should file a written request for assistance with the Assistant Commissioner (International), Internal Revenue Service, 950 L'Enfant Plaza South SW, Washington, D.C. 20024, as soon as it appears that the taxpayer is or may be subject to inconsistent tax treatment by the Service and a possession tax agency. Prompt action will: (1) insure consideration while the facts are more easily obtainable; (2) insure adequate time for the representatives of the two jurisdictions to exchange views to reach an agreement before any procedural barriers under the law of the United States or a possession are imposed; and (3) avoid unnecessary delay in the final determination of tax liability.

08 Without the consent of the Chief Counsel of the Service, the Assistant Commissioner (International) will not accept any taxpayer's request for consideration of a case that is pending in court. If the case is pending in the United States Tax Court, the Chief Counsel may in appropriate cases request the court to delay trial pending mutual agreement action. If the case is pending in any other court, the Chief Counsel will consult with the Department of Justice. In all cases the final decision to delay trial rests with the court. The suspension of litigation pending any mutual agreement consideration will not relieve the United States taxpayer from any obligation to act with respect to that litigation.

09 A request for assistance under this revenue procedure must be signed by the taxpayer or a person having authority to sign the taxpayer's United States income tax return; contain a statement that assistance is requested under the mutual agreement procedure with the possession; and include the following:

1 the taxpayer's name, address, and employer identification number or social security number, and (where a related person in the possession is involved) the name, address, and employer identification number or social security number of the related person;

2 the tax year or years in question and the Service Center where the taxpayer's federal income tax return was filed or, if no return was filed, a statement to that effect;

3 if income tax is involved, the type of income at issue (such as salary, dividends, or interest); a description of the transaction, activities, or other circumstances pertinent to the issue; and the respective positions taken by a possession tax agency and the taxpayer on the issue raised;

4 the amount of the particular item involved in the issue raised and the amount of tax the possession assessed or proposed for assessment;

5 when applicable, a description of the control and business relationships between the United States taxpayer and the related person in the possession;

6 when applicable, a statement of the status of the tax liability of the taxpayer and the related person in the possession for the year or years in question, as well as a statement whether the taxpayer or related person is entitled to any possession tax incentive or subsidy program benefits for the year or years in question.

7 a copy of any relevant correspondence received from the possession tax agency and copies of any briefs, protests, and other relevant material submitted to the possession tax agency;

8 a copy of the possession tax returns for the year or years in question;

9 a statement whether the federal tax return of the taxpayer and, when applicable, the tax return of the related person in the possession, for the year or years in question were examined, or are being examined;

10 a statement whether a foreign tax credit was claimed on the taxpayer's federal tax return for the tax year or years in question and, if a credit was claimed, whether the credit was claimed for all or part of the possession tax paid or accrued with respect to the particular item that is the subject of the request for assistance;

11 on a separate document, a statement signed and dated by a person having authority to sign the taxpayer's United States tax return that the United States taxpayer consents to the disclosure to the designated possession tax official of any or all of the items of information set forth in, or enclosed with, the request for assistance under this revenue procedure; and

12 other pertinent material the taxpayer may wish to submit.

SEC. 4. NOTIFICATION TO TAXPAYER

01 The taxpayer will be notified whether the facts submitted provide a basis for assistance under the mutual agreement procedure.

02 The Assistant Commissioner (International) will not assist the taxpayer if:

1 under the facts and circumstances the taxpayer is not entitled to such assistance (for example, the facts do not indicate that inconsistent positions have been taken by the Service and a possession tax agency);

2 the taxpayer is unwilling to accept an agreement under the mutual agreement procedure except under conditions that are clearly unreasonable or unfairly prejudicial to the interests of the United States; or

3 the taxpayer does not furnish, upon request, sufficient information to determine the applicability of the mutual agreement procedure or otherwise fails to act as required by this revenue procedure.

03 If the Assistant Commissioner (International) accepts a request for assistance, the continuing cooperation of the taxpayer is essential. The taxpayer must submit any additional information needed to resolve the case and keep the Assistant Commissioner (International) informed of proceedings in the possession and any other pertinent developments. The taxpayer may also be requested to execute a consent extending the period of limitations for assessments of tax for the tax year or years in question.

04 The Assistant Commissioner (International) will notify a taxpayer requesting assistance under this revenue procedure of any agreement or partial agreement that the Service and a possession tax agency reach with respect to the taxpayer's request. If the agreement or partial agreement is not acceptable to the taxpayer, the taxpayer may pursue all rights to administrative and judicial review otherwise available under the laws of the possession and the United States.

05 When appropriate, in cases covered by this revenue procedure, the taxpayer will be requested to enter into a closing agreement in accordance with sections 6.07 and 6.17 of Rev. Proc. 68-16, 1968-1 C.B. 770.

06 Rev. Proc. 65-17, 1965-1 C.B. 833, provides that a taxpayer who desires the treatment provided by that revenue procedure must request it in writing with the appropriate district director before any closing action is taken on issues arising under section 482 of the Code. Accordingly, if a taxpayer desires both assistance under this revenue procedure and the benefits provided by Rev. Proc. 65-17, a statement should be made in the request filed under this revenue procedure that the taxpayer desires the benefits of Rev. Proc. 65-17.

SEC. 5. OTHER APPLICATIONS OF THIS REVENUE PROCEDURE

At the time of publication of this revenue procedure, the United States is negotiating agreements with Puerto Rico, Guam, and the Commonwealth of the Northern Mariana Islands that may provide for mutual agreement procedures. When any such agreements become effective, the procedures set forth in this revenue procedure must be followed by taxpayers seeking relief.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective January 23, 1989.

SEC. 7. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 80-57 and Rev. Proc. 85-23 are superseded.

SEC. 8. DRAFTING INFORMATION

The principal author of this revenue procedure is Jerry Traficanti of the Office of the Associate Chief Counsel (International). For further information, call Mr. Traficanti at (202) 287-4851 (not a toll-free call).