[Title 26 CFR 1.953-2]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.953-2 - Actual United States risks.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01false1.953-2Sec. 1.953-2INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.953-2  Actual United States risks.

    (a) In general. For purposes of paragraph (a) of Sec. 1.953-1, the 
term ``United States risks'' means risks described in section 
953(a)(1)(A)--
    (1) In connection with property in the United States (as defined in 
paragraph (b) of this section),
    (2) In connection with liability arising out of activity in the 
United States (as defined in paragraph (c) of this section), or
    (3) In connection with the lives or health of residents of the 
United States

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(as defined in paragraph (d) of this section).

For purposes of section 953(a), the term ``United States'' is used in a 
geographical sense and includes only the States and the District of 
Columbia. Therefore, the reinsuring or the issuing of insurance or 
annuity contracts by a controlled foreign corporation in connection with 
property located in a foreign country or a possession of the United 
States, in connection with activity in a foreign country or a 
possession, or in connection with the lives or health of citizens of the 
United States who are not residents of the United States will not give 
rise to income to which paragraph (a) of Sec. 1.953-1 applies, unless 
the income derived by the controlled foreign corporation from such 
contracts constitutes income derived in connection with risks which are 
deemed to be United States risks, as defined in Sec. 1.953-3.
    (b) Property in the United States. The term ``property in the United 
States'' means property, as defined in subparagraph (1) of this 
paragraph, which is in the United States, within the meaning of 
subparagraph (2) of this paragraph.
    (1) Property defined. The term ``property'' means any interest of an 
insured in tangible (including real and personal) or intangible 
property. Such interests include, but are not limited to, those of an 
owner, landlord, tenant, mortgagor, mortgagee, trustee, beneficiary, or 
partner. Thus, for example, if insurance is issued against loss from 
fire and theft with respect to an insured's home and its contents, such 
risks are risks in connection with property, whether the insured is the 
owner or lessee and whether the contents include furniture or cash and 
securities. Furthermore, if insurance is issued against all risks of 
damage or loss with respect to the automobile of an insured, such risks 
are risks in connection with property, whether the risks insured against 
may be caused by the insured, another person, or natural forces.
    (2) United States location--(i) In general. Property will be 
considered property in the United States when it is exclusively located 
in the United States. Conversely, property will be considered property 
not in the United States when it is exclusively located outside the 
United States. In addition, property which is ordinarily located in, but 
temporarily located outside, the United States will be considered 
property in the United States both when it is ordinarily located in, and 
when it is temporarily located outside, the United States if the premium 
which is attributable to the reinsuring or issuing of any insurance 
contract in connection with such property cannot be allocated to, or 
apportioned between, risks incurred when such property is actually 
located in the United States and risks incurred when it is actually 
located outside the United States. If such premium can be so allocated 
or apportioned on a reasonable basis, however, such property will be 
considered property not in the United States when it is actually located 
outside the United States. However, property will not be considered 
property in the United States if it is neither property which is 
exclusively located in the United States nor property which is 
ordinarily located in, but temporarily located outside, the United 
States. The rules prescribed in subdivision (ii) of this subparagraph 
shall apply in determining whether a premium can be allocated or 
apportioned on a reasonable basis to or between risks incurred when 
property is actually located in the United States and risks incurred 
when such property is actually located outside the United States. The 
rules prescribed in subdivisions (iii) through (x) of this subparagraph 
shall apply in determining whether property is, or will be considered, 
exclusively located in or outside the United States and whether property 
is, or will be considered, ordinarily located in the United States; such 
rules also limit the rule of premium allocation and apportionment 
prescribed in this subdivision and subdivision (ii) of this 
subparagraph. The determinations required by this subparagraph shall be 
made with respect to the location of property during the policy period 
applicable to the taxable year of the insuring or reinsuring 
corporation, or, if more than one policy period exists with respect to 
such taxable year, such determinations shall be

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made separately with respect to the location of property during each 
such policy period.
    (ii) Premium allocation or apportionment. Whether a premium can be 
allocated or apportioned on a reasonable basis to or between risks 
incurred when property is actually located in the United States and 
risks incurred when such property is actually located outside the United 
States shall depend on the intention of the parties to the insurance 
contract, as determined from its provisions and the facts and 
circumstances preceding its execution. Contract provisions on the basis 
of which the premium reasonably may be so allocated or apportioned 
include, but are not limited to, provisions which separately describe 
each risk covered, the period of coverage of each risk, the special 
warranties for each risk, the premium for each risk (or the basis for 
determining such premium), and the conditions of paying the premium for 
each risk. For purposes of this subdivision, it shall be unnecessary 
formally to make a separate policy with respect to each risk covered or 
with respect to each clause attached to the policy, provided that the 
intention of the parties to the contract is reasonably clear. For 
example, if in the ordinary course of carrying on an insurance business 
an insurance policy is issued which covers fire, theft, and water damage 
risks incurred when property is actually located in the United States 
and marine risks incurred when such property is actually located outside 
the United States and which, pursuant to accepted insurance principles, 
properly describes the premium rates as percentages of the amount of 
coverage as ``.825% plus .3% fire, etc. risks plus .12% water risks = 
1.245%'', a reasonable basis exists to allocate a $124.50 premium paid 
for $10,000 of such coverage to $82.50 for foreign risks and $42.00 
($30.00+ $12.00) to United States risks.
    (iii) Property in general--(a) Ordinary and temporary location. 
Except as otherwise provided in subdivisions (iv) through (x) of this 
subparagraph, the determination of whether property is ordinarily 
located in the United States will depend on all the facts and 
circumstances in each case. Property is ordinarily located in the United 
States if its location in the United States is regular, usual, or often 
occurring. However, in all cases property will be considered ordinarily 
located in the United States if it is actually located in the United 
States for an aggregate of more than 50 percent of the days in the 
applicable policy period whereas property will, under no circumstances, 
be considered ordinarily located in the United States if it is actually 
located in the United States for an aggregate of not more than 30 
percent of the days in the applicable policy period. Property which is 
ordinarily located in the United States is temporarily located outside 
the United States when it is actually located outside the United States. 
For purposes of determining the number and percent of the days in an 
applicable policy period, the term ``day'' means, not any 24-
consecutive-hour period, but a continuous period of twenty-four hours 
commencing from midnight and ending with the following midnight; in 
determining the location of property for such purposes, an amount of 
time which is at least one-half of such a day, but less than the entire 
day, shall be considered a day, and an amount of time which is less than 
one-half of such a day shall not be considered a day.
    (b) Illustrations. The application of this subdivision may be 
illustrated by the following examples:

    Example 1. Controlled foreign corporation A issues to domestic 
corporation M a comprehensive blanket or floater insurance policy which, 
for one year, covers inventory samples which M Corporation regularly 
ships from the United States in order to encourage sales. Such shipments 
are made on the condition that they be returned to the United States 
within 5 days after they are received. During the one-year policy 
period, such samples are sent from, and returned to, the United States 
50 times, and during such one-year period are actually located in the 
United States for an aggregate of 120 days. Since the location of the 
samples in the United States during such one-year period is often 
recurring, they are property ordinarily located in, but temporarily 
located outside, the United States. Therefore, they will be considered 
property in the United States even though for such one-year period their 
location in the United States is not regular or usual and is not for an 
aggregate of more

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than 50 percent of the days in the policy period. However, if, by 
considering such factors as the terms and premium schedule of the 
insurance contract as well as the number, value, and duration of the 
location in and outside the United States, of such samples, the premium 
which is attributable to the issuing of such contract can be allocated 
to, or apportioned between, risks occurring when such samples are 
actually located in the United States and risks occurring when they are 
actually located outside the United States, such samples will be 
considered property not in the United States when they are actually 
located outside the United States.
    Example 2. A machine, located for several years in a foreign branch 
of a United States manufacturer, is permanently transferred to the home 
office of such manufacturer, where it arrives on January 1, 1963, and 
remains for the remainder of 1963. Under a separate insurance contract 
issued by a controlled foreign corporation, which uses the calendar year 
as the taxable year, such machine is insured against damage for the 
three-year period commencing on May 1, 1962. Because of the change in 
location of the machine, the premiums are increased as of January 1, 
1963. Since the machine is in the United States from January 1, 1963, to 
April 30, 1963, its location in the United States is regular and usual 
during the policy period of May 1, 1962, to April 30, 1963. Accordingly, 
the machine is ordinarily located in the United States for such policy 
period. However, since the premium which is attributable to the issuing 
of such contract is allocable to risks occurring when the machine is 
actually located in, and when it is actually located outside, the United 
States, such machine will be considered property not in the United 
States from May 1, 1962, through December 31, 1962.

    (iv) Commercial motor vehicles, ships, aircraft, railroad rolling 
stock, and containers. Any motor vehicle, ship, aircraft, railroad 
rolling stock, or any container transported thereby, which is used 
exclusively in the commercial transportation of persons or property to 
or from the United States (including such transportation from one place 
to another in the United States) and is ordinarily located in the United 
States will be considered property in the United States both when such 
property is ordinarily located in, and when such property is temporarily 
located outside, the United States. Whether such property is used in the 
transportation of persons or property to or from the United States and 
is ordinarily located in the United States are issues to be determined 
from all the facts and circumstances in each case. However, in all cases 
such transportation property will be considered ordinarily located in 
the United States if either more than 50 percent of the miles traversed 
during the applicable policy period in the use of such property are 
traversed within the United States or such property is located in the 
United States more than 50 percent of the time during such period. 
Further, such transportation property will not at any time be considered 
property in the United States if either not more than 30 percent of the 
miles traversed during the applicable policy period in the use of such 
property are traversed within the United States or such property is 
located in the United States for not more than 30 percent of the time 
during such period. Nevertheless, if not more than 30 percent of the 
miles traversed during the applicable policy period in the use of such 
transportation property are traversed within the United States, such 
property will be considered ordinarily located in the United States if 
it is located in the United States more than 50 percent of the time 
during such period Moreover, if such transportation property is located 
in the United States for not more than 30 percent of the time during the 
applicable policy period, such property will be considered ordinarily 
located in the United States if more than 50 percent of the miles 
traversed during such period in the use of such property are traversed 
within the United States. If such transportation property is considered 
property in the United States because more than 50 percent of the miles 
traversed during the applicable policy period in the use of such 
property are traversed within the United States, the apportionment of 
premium provided in subdivision (i) of this subparagraph shall be made 
on a mileage basis. If, however, such property is considered property in 
the United States because such property is located in the United States 
more than 50 percent of the time during the applicable policy period, 
the apportionment of premium provided in subdivision (i) of this 
subparagraph shall be made on a time basis.
    (v) Noncommercial motor vehicles, ships, aircraft, and railroad 
rolling stock.

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Except as provided in subdivision (iv) of this subparagraph, any motor 
vehicle, ship or boat, aircraft, or railroad rolling stock which at any 
time is actually located in the United States and which either (a) is 
registered with the United States, a State (including any political 
subdivision thereof), or any agency thereof or (b), if not so 
registered, is owned by a citizen, resident, or corporation of the 
United States will be considered property which is ordinarily located in 
the United States. Unless the premium which is attributable to the 
reinsuring or issuing of any insurance contract in connection with such 
property considered ordinarily located in the United States is 
specifically allocated under the contract to risks incurred when such 
property is actually located in the United States and to risks incurred 
when it is actually located outside the United States, such property 
will be considered property in the United States both when it is 
ordinarily located in, and when it is temporarily located outside, the 
United States; under no circumstances will such property be considered 
outside the United States on the basis of any apportionment of such 
premium.
    (vi) Property exported or imported by railroad or motor vehicle. Any 
property which is exported from, or imported to, the United States by 
railroad or motor vehicle will be considered property ordinarily located 
in the United States which, when such property is not actually located 
in the United States, is temporarily located outside the United States. 
For example, if an insurance contract reinsured or issued in connection 
with property exported from the United States by motor vehicle covers 
risks commencing when such property is loaded on the motor vehicle at 
the United States warehouse and terminating when such property is 
unloaded at the foreign warehouse, and if the premium payable with 
respect to risks incurred when the property is in the United States and 
risks incurred when the property is in the foreign country is not 
separately stated, such property will be considered property in the 
United States only until such property is actually located outside the 
United States, provided that the premium can be properly apportioned 
(for example) on the basis of time or mileage, between risks incurred 
when the property is actually located in the United States and risks 
incurred when it is actually located outside the United States. If in 
such case the premium is not so apportionable, such property will be 
considered property in the United States both when such property is 
ordinarily located in, and when it is temporarily located outside, the 
United States.
    (vii) Property exported by ship or aircraft. If an insurance 
contract which is reinsured or issued in connection with property which 
is exported from the United States by ship or aircraft covers risks all 
of which terminate when such property is placed aboard a ship or 
aircraft at the United States port of exit for shipment from the United 
States, such property will be considered property in the United States. 
If such insurance contract covers risks all of which commence when such 
property is placed aboard a ship or aircraft at the United States port 
of exit for shipment from the United States, such property will be 
considered property not in the United States. If such insurance contract 
covers risks commencing before, and terminating after, such property is 
placed aboard a ship or aircraft at the United States port of exit for 
shipment from the United States, such property will be considered 
property ordinarily located in the United States which, after such 
property is placed aboard such ship or aircraft at the United States 
port of exit, is temporarily located outside the United States. The 
application of this subdivision may be illustrated by the following 
example:

    Example. A controlled foreign corporation issues an insurance 
contract in connection with property exported from the United States by 
ship. The contract covers risks commencing after such property is 
removed from the United States warehouse and terminating when such 
property is unloaded at the foreign port of entry. Assuming that the 
premium payable with respect to the risks incurred before and the risks 
incurred after the property is placed aboard the ship at the United 
States port of exit for shipment from the United States or with respect 
to the steps in handling such property during such coverage, such as 
transporting the property to the United States port of exit, unloading 
the property there, placing the property

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aboard the ship, holding the property aboard the ship in port, the 
actual voyage, and unloading the property at the foreign port of entry, 
is separately stated in, or is determinable from, such contract, the 
property will be considered property in the United States only until 
such property is placed aboard the ship at the United States port of 
exit for shipment from the United States. Assuming, however, that the 
premiums payable with respect to such steps, or with respect to the 
risks incurred before and the risks incurred after the property is 
placed aboard the ship at the United States port of exit, are not 
allocable or apportionable under the contract, such property will be 
considered property in the United States both before and after such 
property is placed aboard the ship at the United States port of exit.

    (viii) Property imported by ship or aircraft. If an insurance 
contract which is reinsured or issued in connection with property which 
is imported to the United States by ship or aircraft covers risks all of 
which terminate when such property is unloaded at the United States port 
of entry, such property will be considered property not in the United 
States. If such insurance contract covers risks all of which commence 
after such property is unloaded at the United States port of entry, such 
property will be considered property in the United States. If such 
insurance contract covers risks commencing before, and terminating 
after, such property is unloaded at the United States port of entry, 
such property will be considered property ordinarily located in the 
United States which, before such property is unloaded at the United 
States port of entry, is temporarily located outside the United States. 
For an illustration pertaining to the allocation or apportionment of the 
premium, see the example in subdivision (vii) of this subparagraph.
    (ix) Shipments originating and terminating in the United States. Any 
property which is shipped from one place in the United States to another 
place in the United States, on or over a foreign country, the high seas, 
or the coastal waters of the United States will be considered property 
actually located at all times in the United States. For example, 
property which is shipped from New York City to Los Angeles via the 
Panama Canal or from San Francisco to Hawaii or Alaska will be 
considered property actually located at all times in the United States.
    (x) Shipments originating and terminating in a foreign country. Any 
property which is shipped by any means, or a combination of means, of 
transportation from one foreign country to another foreign country, or 
from a contiguous foreign country to the same contiguous foreign 
country, on or over the United States will be considered property 
exclusively located outside the United States. Notwithstanding the 
foregoing, any property which is shipped by any means, or a combination 
of means, of transportation from one contiguous foreign country to 
another contiguous foreign country on or over the United States will be 
considered property ordinarily located in the United States which, when 
such property is not actually located in the United States, is 
temporarily located outside the United States.
    (c) Liability from United States activity. The term ``liability 
arising out of activity in the United States'' means a loss, as 
described in subparagraph (1) of this paragraph, or a liability, as 
described in subparagraph (2) of this paragraph, which could arise from 
activity performed in the United States, as defined in subparagraph (3) 
of this paragraph.
    (1) Loss described. The term ``loss'' includes all loss of an 
insured which could arise from the occurrence of the event insured 
against except that such term does not include any loss in connection 
with property described in paragraph (b) of this section. For example, 
such term includes, in the case of a promoter of outdoor sporting 
events, the loss which could arise from the cancellation of such an 
event because of inclement weather.
    (2) Liability described. The term ``liability'' includes all 
liability of an insured in tort, contract, property, or otherwise. It 
includes, for example, the liability of a principal for the acts of his 
agent, of a husband for the acts of his spouse, and of a parent for the 
acts of his child. The term not only includes the direct liability which 
may be incurred, for example, by a tortfeasor to the person harmed, but 
also the indirect liability which may be incurred, for example, by a 
manufacturer to the

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purchaser at retail for a breach of warranty.
    (3) Activity in the United States--(i) In general. A loss or 
liability will be considered a loss or liability which could arise from 
activity performed in the United States if the loss or liability would 
result, if at all, from an activity exclusively carried on in the United 
States. Conversely, a loss or liability will be considered a loss or 
liability which could not arise from activity performed in the United 
States if the loss or liability would result, if at all, from an 
activity exclusively carried on outside the United States. In addition, 
a loss or liability will be considered a loss or liability which could 
arise from activity performed in the United States if the loss or 
liability would result, if at all, from an activity ordinarily carried 
on in, but partly carried on outside, the United States. If the premium 
which is attributable to the reinsuring or issuing of any insurance 
contract in connection with an activity ordinarily carried on in, but 
partly carried on outside, the United States can, on a reasonable basis, 
be allocated to, or apportioned between, the risks incurred with respect 
to the activity carried on in, and the risks incurred with respect to 
the activity carried on outside, the United States, such loss or 
liability will be considered a loss or liability which could not arise 
from activity performed in the United States to the extent the loss or 
liability would result, if at all, from that activity carried on outside 
the United States. However, a loss or liability will not be considered a 
loss or liability which could arise from an activity performed in the 
United States if such loss or liability would result, if at all, from an 
activity which is neither exclusively carried on in the United States 
nor ordinarily carried on in, but partly carried on outside, the United 
States. The principles of paragraph (b)(2)(ii) of this section for 
allocating or apportioning a premium on a reasonable basis to or between 
risks incurred when property is actually located in the United States 
and risks incurred when such property is actually located outside the 
United States shall apply for allocating or apportioning a premium on a 
reasonable basis to or between the risks incurred with respect to the 
activity carried on in, and the risks incurred with respect to the 
activity carried on outside, the United States. The rules prescribed in 
subdivisions (ii) through (vi) of this subparagraph shall apply in 
determining whether an activity is, or will be considered, exclusively 
carried on in or outside the United States and whether an activity is, 
or will be considered, ordinarily carried on in the United States and in 
determining what is the activity which is performed by the insured from 
which a loss or liability results or could result; such rules also limit 
the rule of premium allocation and apportionment prescribed in this 
subdivision. The determinations required by this subparagraph shall be 
made with respect to the location of an activity of the insured 
performed during the policy period applicable to the taxable year of the 
insuring or reinsuring corporation, or, if more than one policy period 
exists with respect to such taxable year, such determinations shall be 
made separately with respect to the location of the activity during each 
such policy period.
    (ii) Substantial activity carried on in the United States. The term 
``activity'' is used in its broadest sense and includes the performance 
of an act unlawfully undertaken, the wrongful performance of an act 
lawfully undertaken, and the wrongful failure to perform an act lawfully 
required to be undertaken. With respect to a loss described in 
subparagraph (1) of this paragraph, the term ``activity'' includes the 
occurrence of the event insured against. The determination of whether an 
activity ordinarily is carried on in, but is partly carried on outside, 
the United States will depend on all the facts and circumstances in each 
case. An activity ordinarily is carried on in the United States if a 
substantial amount of such activity is carried on in the United States. 
Factors which will be taken into account in determining whether a 
substantial amount of activity is carried on in the United States are 
those which are connected with the activity and include, but are not 
limited to, the location of the insured's assets, the place where 
personal services are performed, and the place

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where sales occur, but only if such assets, services, and sales are 
connected with the activity. In all cases an activity will be considered 
substantially carried on in the United States if more than 50 percent of 
the insured's total assets, personal services, and sales, if any, 
connected with such activity are located, performed, or occur in the 
United States. On the other hand, an activity will, under no 
circumstances, be considered substantially carried on in the United 
States if not more than 30 percent of the insured's total assets, 
personal services, and sales, if any, connected with such activity are 
located, performed, or occur in the United States. For this purpose, the 
mean of the value of the total assets at the beginning and end of the 
policy period shall be used, determined by taking assets into account at 
their actual value (not reduced by liabilities), which, in the absence 
of affirmative evidence to the contrary, shall be deemed to be (a) face 
value in the case of bills receivable, accounts receivable, notes 
receivable, and open accounts held by an insured using the cash receipts 
and disbursements method of accounting and (b) adjusted basis in the 
case of all other assets. Personal services shall be measured by the 
amount of compensation paid or accrued for such services, and sales 
shall be measured by the volume of gross sales. An activity is carried 
on partly outside the United States if it is carried on, whether 
substantially or in substantially, outside the United States.
    (iii) Manufacturing, producing, constructing, or assembling 
activity. If a person who manufactures, produces, constructs, or 
assembles property is liable with regard to the consumption or use of 
such property, such liability will be considered to result from the 
activity performed of manufacturing, producing, constructing, or 
assembling such property. If such person manufactures, produces, 
constructs, or assembles more than one type of product, the liability 
with regard to the consumption or use of one of such products will be 
considered to result from the activity performed of manufacturing, 
producing, constructing, or assembling that particular product. For 
example, the liability of a building contractor, which constructs 
apartment buildings only in the United States, for the improper 
construction of, or the failure to construct, an apartment building, 
will be considered to result from an activity exclusively carried on in 
the United States and will be considered a liability which could arise 
from activity performed in the United States. In further illustration, 
the liability (which is covered by a single policy of insurance) of a 
domestic corporation, which assembles refrigerators exclusively in the 
United States and manufactures automobiles both in a foreign country and 
in the United States through substantial activity carried on in each of 
such countries, for the negligent manufacturing of a part for one of the 
automobiles by the foreign branch, will be considered to result from an 
activity ordinarily carried on in, but partly carried on outside, the 
United States and will be considered a liability which could arise from 
activity performed in the United States.
    (iv) Selling activity. If a person is liable with regard to selling 
activity performed, such liability will be considered, except as 
provided in subdivisions (iii), (v), and (vi) of this subparagraph, to 
result from such selling activity. A person will be considered to be 
engaged in selling activity if such person engages in an activity 
resulting in the sale of property. Thus, it is immaterial that, under 
the Code, such activity would not constitute engaging in or carrying on 
a trade or business in the country in which such activity is carried on, 
the property in the goods does not pass in such country, or delivery of 
the property is not made in such country. For example, if a foreign 
wholesale distributor, which manages its entire business operations in a 
foreign country and sells its inventory exclusively in the United 
States--its only contact in the United States being the promotion of 
such sales to United States retail outlets by advertising in trade 
publications and distributing sales catalogues--is liable for a breach 
of warranty with regard to the sale of property to a United States 
retail outlet, such liability will be considered to result from an 
activity exclusively carried on in the United States and will be 
considered a liability which could arise

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from activity performed in the United States.
    (v) Liability from service or driving activity--(a) In general. If a 
person is liable with regard to any service activity performed, or is 
liable with regard to driving activity performed in connection with a 
motor vehicle, ship or boat, aircraft, or railroad rolling stock, 
whether or not exclusively used in the commercial transportation of 
persons or property, such liability will be considered to result from 
such service or driving activity. For example, if an oil company which 
drills for oil exclusively in a foreign country is liable with regard to 
the negligent handling by its employees of explosives in the course of 
such drilling there, such liability will be considered to result from an 
activity exclusively carried on outside the United States and will be 
considered a liability which could not arise from activity performed in 
the United States. In further illustration, if a corporation which 
services machinery exclusively in a foreign country under servicing 
contracts is liable with regard to the negligent repairing of a machine 
under such a contract, such liability will be considered to result from 
an activity exclusively carried on outside the United States and will be 
considered a liability which could not arise from activity performed in 
the United States.
    (b) Location of activities in connection with transportation 
property. For purposes of (a) of this subdivision, service or driving 
activity performed in connection with a motor vehicle, ship or boat, 
aircraft, or railroad rolling stock, whether or not exclusively used in 
the commercial transportation of persons or property, will be considered 
activity performed in the United States if the activity is carried on at 
a time when such property is or will be considered, in accordance with 
subdivision (iv) or (v) of paragraph (b)(2) of this section, actually in 
the United States or ordinarily located in the United States. However, 
if the premium which is attributable to the reinsuring or issuing of any 
insurance contract in connection with such service or driving activity 
which is carried on at a time when such property is, or will be 
considered, ordinarily located in the United States can be allocated to, 
or apportioned between, the risks incurred when such property is 
actually located in the United States and risks incurred when it is 
actually located outside the United States, such liability will be 
considered a liability which could arise from activity performed in the 
United States only when such property is actually located in the United 
States. Any allocation or apportionment of premium under the preceding 
sentence shall be made in accordance with the rules of allocation and 
apportionment provided in subdivision (iv) or (v) of paragraph (b)(2) of 
this section. For example, if a person is liable with regard to the 
performance of services outside the United States in the operation of a 
motor vehicle which is used exclusively in the commercial transportation 
of persons to and from the United States and which, because more than 50 
percent of the miles traversed during the applicable policy period in 
the use of such property are traversed within the United States, is 
considered ordinarily located in the United States, such liability will 
be considered to be a liability which could not arise from activity 
performed in the United States only to the extent that the premium which 
is attributable to the reinsuring or issuing of any insurance contract 
in connection with such service activity is apportioned on a mileage 
basis between the risks incurred when such motor vehicle is actually 
located in the United States and when such vehicle is actually located 
outside the United States. See paragraph (b)(2)(iv) of this section. In 
further illustration, if a person is liable with regard to his negligent 
driving of a motor vehicle which is not used exclusively in the 
commercial transportation of persons or property, which is registered 
with any State, and which is driven both in the United States and a 
foreign country, such liability will be considered a liability which 
could arise from activity performed in the United States, unless the 
premium which is attributable to the reinsuring or issuing of an 
insurance contract in connection with such driving performed in such 
motor vehicle ordinarily located in the United States is specifically 
allocated under

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the contract to risks incurred with respect to driving performed in, and 
to risks incurred with respect to driving performed outside, the United 
States. See paragraph (b)(2)(v) of this section.
    (c) Illustration. The application of this subdivision may be further 
illustrated by the following example:

    Example. Controlled foreign corporation A is a wholly owned 
subsidiary of domestic corporation M. Both corporations are insurance 
companies and use the calendar year as the taxable year. Corporation M 
is exclusively engaged in issuing to owners of commercial rental 
property which is located in the United States insurance contracts which 
cover any harm which may be caused in 1963 by the tortious conduct of 
the owners' employees in managing and maintaining such property. The 
owners insured under such contracts include both residents and 
nonresidents of the United States. In 1963, M Corporation cedes to A 
Corporation one-half of the insurance contracts issued by M Corporation 
in that year, including the contracts issued to nonresidents. Income of 
A Corporation derived in 1963 from reinsuring the risks of M Corporation 
is income from the insurance of United States risks since all the 
insurance contracts reinsured by it are in connection with a liability 
which could arise from service activity performed in the United States.

    (vi) Liability from delivery of property. If the person who is 
obligated to deliver property is liable with regard to such delivery, 
such liability will be considered to result from the activity performed 
of delivering such property. For example, if a corporation which exports 
all of its inventory from the United States to foreign countries or 
possessions of the United States is liable with regard to its failure to 
make delivery outside the United States of inventory it has sold, such 
liability will be considered to result from an activity exclusively 
carried on outside the United States and will be considered a liability 
which could not arise from activity performed in the United States. In 
further illustration, if a corporation which exports all of its 
inventory from a foreign country to the United States is liable with 
regard to its improper delivery in the United States of inventory it has 
sold, such liability will be considered to result from an activity 
exclusively carried on in the United States and will be considered a 
liability which could arise from activity performed in the United 
States.
    (d) Lives or health of United States residents. Risks in connection 
with the lives or health of residents of the United States include those 
risks which are the subject of insurance contracts referred to in 
section 801(a), relating to the definition of a life insurance company. 
If the insured is a resident of the United States at the time the 
insurance contract is approved, the risk is in connection with the life 
or health of a resident of the United States for the period of coverage 
under the contract. However, if during such period of coverage the 
insured notifies the insurer, or circumstances known to the insurer 
indicate, that the insured is no longer a resident of the United States, 
the risk shall cease to be a risk in connection with the life or health 
of a resident of the United States for the policy period in which the 
insured gives such notice or such circumstances are known to the 
insurer, and for each subsequent policy period. Conversely, if the 
insured is a resident of a particular foreign country at the time the 
insurance contract is approved, the risk is in connection with the life 
or health of a resident of such foreign country for the period of 
coverage under the contract. However, if during such period of coverage 
the insured notifies the insurer, or circumstances known to the insurer 
indicate, that the insured is no longer a resident of such foreign 
country, the risk shall cease to be a risk in connection with the life 
or health of a resident of such particular foreign country for the 
policy period in which the insured gives such notice or such 
circumstances are known to the insurer, and for each subsequent policy 
period. In determining the country of residence of an insured, the 
principles of Secs. 301.7701(b)-1 through 301.7701(b)-9 of this chapter, 
relating to the determination of residence and nonresidence in the 
United States and of foreign residence, shall apply. Citizens of the 
United States are not residents of the United States merely because of 
their citizenship. The application of this paragraph may be illustrated 
by the following example:


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    Example. Controlled foreign corporation A is a wholly owned 
subsidiary of domestic corporation M. Corporation A uses the calendar 
year as the taxable year and is engaged in the life insurance business 
in foreign country X. In 1963, A Corporation issues ordinary life 
insurance contracts on the lives of residents of the United States, 
including one issued on February 1, 1963, to R, a citizen of foreign 
country Y and a resident of the United States on such date. All activity 
in connection with the issuing of such contracts is transacted by mail. 
On May 1, 1963, R abandons his United States residence and establishes 
residence in foreign country Z. There are no circumstances known to A 
Corporation that R has changed his residence until R, on March 1, 1964, 
actually notifies A Corporation of that change. Income of A Corporation 
for the policy period of February 1, 1963, to January 31, 1964, from 
issuing such insurance contracts is income derived from the insurance of 
United States risks. However, income of A Corporation derived for the 
policy period of February 1, 1964, to January 31, 1965, from R's 
insurance contract is not income derived from the insurance of United 
States risks.

(Secs. 913(m) (92 Stat. 3106; 26 U.S.C. 913(m)), and 7805 (68A Stat. 
917; 26 U.S.C. 7805), Internal Revenue Code of 1954)

[T.D. 6781, 29 FR 18202, Dec. 23, 1964, as amended by T.D. 7736, 45 FR 
76143, Nov. 18, 1980; T.D. 8411, 57 FR 15241, Apr. 27, 1992]