[Title 26 CFR 1.971-1]
[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. 1.971-1 - Definitions with respect to export trade corporations.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01false1.971-1Sec. 1.971-1INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.971-1  Definitions with respect to export trade corporations.

    (a) Export trade corporations--(1) In general. For purposes of 
sections 970 through 972 and Secs. 1.970-1 to 1.972-1, inclusive, the 
term ``export trade corporation'' means a controlled foreign corporation 
which for the period specified in subparagraph (2) of this paragraph 
satisfies the conditions specified in subparagraph (3) of this 
paragraph. However, no controlled foreign corporation may qualify as an 
export trade corporation for any taxable year beginning after October 
31, 1971, unless it qualified as an export trade corporation for any 
taxable year beginning before such date. In addition, if a corporation 
fails to qualify as an export trade corporation for a period of any 3 
consecutive taxable years beginning after October 31, 1971, then for any 
taxable year beginning after such 3-year period, such corporation shall 
not be included within the term ``export trade corporation''.
    (2) Three-year period. The period referred to in subparagraph (1) of 
this paragraph is the 3-year period ending with the close of the 
controlled foreign corporation's current taxable year, or such part of 
such 3-year period as occurs on and after the beginning of the 
corporation's first taxable year beginning after December 31, 1962, 
whichever period is shorter.
    (3) Gross income requirements. The conditions referred to in 
subparagraph (1) of this paragraph are that the controlled foreign 
corporation derives--
    (i) 90 percent or more of its gross income from sources without the 
United States, and
    (ii)(a) 75 percent of more of its gross income from transactions, 
activities, or interest described in section 971(b) and paragraph (b) of 
this section, or
    (b) 50 percent or more of its gross income from transactions, 
activities, or interest described in section 971(b) and paragraph (b) of 
this section in respect of agricultural products grown in the United 
States.
    (4) Determination of sources of gross income. The sources of gross 
income of a controlled foreign corporation shall be determined for 
purposes of subparagraph (3)(i) of this paragraph in accordance with the 
rules for determining sources of gross income set forth in sections 861 
through 864 and the regulations thereunder.
    (b) Export trade income--(1) General rule. For purposes of sections 
970

[[Page 514]]

through 972 and Secs. 1.970-1 to 1.972-1, inclusive, the term ``export 
trade income'' means the gross export trade income of a controlled 
foreign corporation derived from transactions, activities, or interest 
described in subdivisions (i) through (vii) of this subparagraph, less 
deductions allowed under subdivision (viii) of this subparagraph.
    (i) Sale of export property. Gross export trade income of a 
controlled foreign corporation includes gross income it derives from the 
sale of export property (as defined in paragraph (e) of this section) 
which it purchases, if the sale is made to an unrelated person for use, 
consumption, or disposition outside the United States. See section 
971(b)(1). As a general rule, property will be presumed to have been 
sold for use, consumption, or disposition in the country of destination 
of the sale. However, if at the time of the sale the controlled foreign 
corporation knows, or should have known from the facts and circumstances 
surrounding the sales transaction, that the property will probably be 
used, consumed, or disposed of in the United States, such property will 
be presumed to have been sold for use, consumption, or disposition in 
the United States unless the controlled foreign corporation establishes 
that such property was used, consumed, or disposed of outside the United 
States. For purposes of this subdivision, export property must be sold 
by a controlled foreign corporation in essentially the same form in 
which such property is purchased. Whether export property sold is in 
essentially the same form in which such property is purchased shall be 
determined on the basis of all the facts and circumstances in each case. 
Storage, handling, transportation, packaging, or servicing of property 
will be considered not to alter the form in which property is purchased. 
However, manufacture or production, within the meaning of paragraph 
(a)(4) of Sec. 1.954-3, will be considered to alter the form in which 
property is purchased and no part of the gross income from the sale of 
such property will be treated as export trade income. The application of 
this subdivision may be illustrated by the following example:

    Example. Controlled foreign corporation A, incorporated under the 
laws of foreign country Y, purchases articles manufactured in the United 
States from domestic corporation M and sells them in the form in which 
purchased to foreign corporation B, unrelated to A Corporation, for use 
in foreign countries, X, Y, and Z. The gross income of A Corporation 
from the purchase and sale of the articles constitutes gross export 
trade income.

    (ii) Commissions and other income derived in connection with the 
sale of export property. Gross export trade income of a controlled 
foreign corporation includes gross commissions, fees, compensation, or 
other income derived by such corporation from the performance for any 
person of commercial, industrial, financial, technical, scientific, 
managerial, engineering, architectural, skilled, or other services in 
respect of a sale by such corporation in a transaction described in 
subdivision (i) of this subparagraph or in respect of the sale by any 
other person of export property to a person unrelated to the controlled 
foreign corporation for use, consumption, or disposition outside the 
United States. Such gross export trade income includes payments received 
for surveys made prior to, and in connection with, the sale of such 
export property (whether or not such sales are ultimately consummated). 
See section 971(b)(1). The term ``any person'' or ``any other person'' 
as used in this subdivision includes a related person as defined in 
section 954(d)(3) and paragraph (e) of Sec. 1.954-1. The application of 
this subdivision may be illustrated by the following examples:

    Example 1. Controlled foreign corporation A, incorporated under the 
laws of foreign country X, receives from M Corporation a commission 
equal to 6 percent of the gross selling price of all personal property 
shipped by M Corporation as a result of services performed by A 
Corporation in soliciting orders in foreign countries X, Y, and Z. In 
fulfillment of such orders, M Corporation ships products manufactured by 
it in the United States. Corporation A does not assume title to the 
property sold. Gross commissions received by A Corporation from M 
Corporation in connection with the sale of such property to persons 
unrelated to A Corporation for use, consumption, or disposition outside 
the United States constitute gross export trade income.
    Example 2. Foreign corporation B, incorporated under the laws of 
foreign country X,

[[Page 515]]

is a wholly owned subsidiary of domestic corporation N. Corporation N, 
is engaged in the business of manufacturing heavy duty electrical 
equipment in the United States. By contract, N Corporation engages B 
Corporation for the purpose of conducting engineering, technical, and 
financial studies required by N Corporation in the preparation of bids 
to supply foreign country Y with electrical equipment for a construction 
project to be undertaken by such country. Corporation N pays B 
Corporation a fee for the services, all of which are performed in 
country Y, which is based upon the number of hours of work performed 
without regard to whether a sale is ultimately consummated. Corporation 
N does not receive a contract from country Y on its bid to supply 
equipment. Income derived by B Corporation from performance of the 
service contract constitutes gross export trade income.

    (iii) Commissions and other income derived in connection with the 
installation or maintenance of export property. Gross export trade 
income of a controlled foreign corporation includes gross commissions, 
fees, compensation, or other income derived by such corporation from the 
performance for any person of commercial, industrial, financial, 
technical, scientific, managerial, engineering, architectural, skilled, 
or other services in respect of the installation or maintenance of 
export property which has been sold by such corporation in a transaction 
described in subdivision (i) of this subparagraph or by any other person 
to a person unrelated to the controlled foreign corporation for use, 
consumption, or disposition outside the United States. See section 
971(b)(1). The term ``any person'' or ``any other person'' as used in 
this subdivision includes a related person as defined in section 
954(d)(3) and paragraph (e) of Sec. 1.954-1.
    (iv) Commissions and other income derived in connection with the use 
of patents, copyrights, and other like property. Gross export trade 
income of a controlled foreign corporation includes gross commissions, 
fees, compensation, or other income derived by such corporation from the 
performance for any person of commercial, industrial, financial, 
technical, scientific, managerial, engineering, architectural, skilled, 
or other services in connection with the use outside of the United 
States by an unrelated person of patents, copyrights, secret processes 
and formulas, goodwill, trademarks, trade brands, franchises, and other 
like property, including gross income derived from obtaining licensees 
for patents, but only if the patent, copyright, or other like property 
is acquired, or developed, and owned by the manufacturer, producer, 
grower, or extractor of any export property, in respect of which the 
controlled foreign corporation also derives gross export trade income 
within the meaning of subdivision (i), (ii), or (iii) of this 
subparagraph. See section 971(b)(2). The application of this subdivision 
may be illustrated by the following example:

    Example. Foreign corporation A incorporated under the laws of 
foreign country X, is a wholly owned subsidiary of domestic corporation 
M. Corporation M, the owner of a patent registered in foreign country X, 
grants B Corporation, a corporation unrelated to A Corporation, the 
right to use such patent in foreign country Y in exchange for payment of 
a royalty. By a separate contract with B Corporation, A Corporation 
agrees for a gross fee of $100,000 to furnish, by maintaining a staff of 
technical representatives at the offices of B Corporation, technical 
services to B Corporation in connection with B Corporation's use of the 
patent. Corporation A also derives export trade income from the sale of 
export property which it purchases from M Corporation, the manufacturer 
of such property, and sells to C Corporation, an unrelated person, for 
use in country Y by C Corporation. The gross fee of $100,000 received by 
A Corporation for the furnishing of technical services in connection 
with B Corporation's use of M Corporation's patent constitutes gross 
export trade income since the service for which the fee is paid is 
performed in connection with the use outside the United States by an 
unrelated person (B Corporation) of a patent owned by a manufacturer (M 
Corporation) of export property in respect of which the controlled 
foreign corporation (A Corporation) derives gross export trade income 
from the sale to an unrelated person (C Corporation) for use outside the 
United States of export property purchased by it from the manufacturer 
(M Corporation).

    (v) Income attributable to use of export property by an unrelated 
person. Gross export trade income of a controlled foreign corporation 
includes gross commissions, fees, rents, compensation, or other income 
which is received by such corporation from an unrelated person and is 
attributable to the use of export property by such unrelated person. See

[[Page 516]]

section 971(b)(3). The application of this subdivision may be 
illustrated by the following example:

    Example. Foreign corporation A, incorporated under the laws of 
foreign country X, is a wholly owned subsidiary of domestic corporation 
M. Corporation A acquires by purchase bottling machines manufactured in 
the United States and leases the machines to B Corporation, a 
corporation unrelated to A Corporation, for use by B Corporation in 
foreign country Y. Gross rental income of A Corporation from the lease 
of the machines to B Corporation constitutes gross export trade income.

    (vi) Income attributable to the use of export property in the 
rendition of technical, scientific, or engineering services--(a) 
General. Gross export trade income of a controlled foreign corporation 
includes gross commissions, fees, compensation, or other income which is 
received by such corporation from an unrelated person and is 
attributable to the use of export property in the performance of 
technical, scientific, or engineering services to such unrelated person. 
See section 971(b)(3).
    (b) Rule of apportionment. If a commission, fee, or other income 
received by a controlled foreign corporation from an unrelated person 
under a contract or arrangement for the performance of technical, 
scientific, or engineering services is not solely attributable to the 
use of export property in the performance of such services and the 
amount of the gross income attributable to such use of export property 
cannot be established by reference to transactions between other 
unrelated persons, such gross income shall be an amount which bears the 
same ratio to total gross income from the contract or arrangement as the 
cost of the export property consumed in the performance of such 
services, including a reasonable allowance for depreciation with respect 
to the export property so used, bears to the total costs and expenses 
attributable to the production of income under the contract or 
arrangement.
    (c) Illustration. The application of this subdivision may be 
illustrated by the following example:

    Example. Foreign corporation A, incorporated under the laws of 
foreign country X, is a wholly owned subsidiary of domestic corporation 
M. Corporation A is engaged in the seismograph service business in 
foreign country X. In an effort to establish the probable existence of 
oil in a concession area it owns in foreign country Y, B Corporation 
which is unrelated to A Corporation enters into a contract with A 
Corporation whereby A Corporation is required to make seismographic 
tests of the area in country Y for a fixed fee of $100,000. In 
performance of the contract, A Corporation hires a skilled crew to carry 
out the contract and utilizes equipment and supplies (for example, 
trucks, seismographic equipment, etc.) which constitute export property. 
Corporation A cannot establish by reference to transactions between 
other unrelated persons, the income attributable to the use of the 
export property in the performance of the contract. Corporation A's 
total costs and expenses (for example, salaries of the crew, 
administrative expenses, all supplies, total depreciation on property 
used in performance of the contract, etc.) incurred in performance of 
the contract are $80,000. The cost of export property consumed in 
performance of the contract (for example, dynamite, motor oil, and other 
supplies which were produced in the United States, reasonable 
depreciation on trucks and seismographic equipment manufactured in the 
United States and used in performance of the contract, etc.) is $30,000. 
Corporation A's gross export trade income from the contract is $37,500, 
that is, the amount which bears the same ratio to total gross income 
from the contract ($100,000) as the cost of the export property consumed 
in the rendition of the services ($30,000) bears to total costs and 
expenses attributable to the contract ($80,000).

    (vii) Interest from export trade assets. Gross export trade income 
of a controlled foreign corporation includes interest derived by it from 
export trade assets described in section 971(c)(4) and paragraph (c)(5) 
of this section. See section 971(b)(4).
    (viii) Deductions to be taken into account. Export trade income of a 
controlled foreign corporation for any taxable year shall be the amount 
determined by deducting from the items or categories of gross income 
described in subdivisions (i) through (vii) of this subparagraph the 
entire amount of those expenses, taxes, and other deductions properly 
allocable to such items or categories of income. For purposes of this 
section, expenses, taxes, and other deductions shall first be allocated 
to items or categories of gross income to which they directly relate;

[[Page 517]]

then, expenses, taxes, and other deductions which cannot definitely be 
allocated to some item or category of gross income shall be ratably 
apportioned among all items or categories of gross income, except that 
no expense, tax, or other deduction shall be allocated to an item or 
category of income to which it clearly does not apply and no deduction 
allowable to such controlled foreign corporation under section 882(c) 
and the regulations thereunder shall be taken into account.
    (2) Cross reference. For rules governing the determination of gross 
income and taxable income of a foreign corporation, see Sec. 1.952-2.
    (c) Export trade assets--(1) In general. For purposes of sections 
970 through 972 and Secs. 1.970-1 to 1.972-1, inclusive, the term 
``export trade assets'' means--
    (i) Working capital reasonably necessary for the production of 
export trade income,
    (ii) Inventory of export property held for use, consumption, or 
disposition outside the United States,
    (iii) Facilities located outside the United States for the storage, 
handling, transportation, packaging, servicing, sale, or distribution of 
export property, and
    (iv) Evidences of indebtedness executed by unrelated persons in 
connection with payment for purchases of export property for use, 
consumption, or disposition outside the United States, or in connection 
with the payment for services described in section 971(b)(2) or (3) and 
paragraph (b)(1)(iv), (v), or (vi) of this section.
    (2) Working capital. For purposes of subparagraph (1)(i) of this 
paragraph, working capital of a controlled foreign corporation is the 
excess of its current assets over its current liabilities. Liabilities 
maturing in one year or less shall be considered current liabilities. A 
determination of the amount of working capital of a controlled foreign 
corporation which is reasonably necessary for the production of export 
trade income will depend upon the nature and volume of the activities of 
the controlled foreign corporation which produce export trade income as 
they exist on the applicable determination date. In determining working 
capital which is reasonably necessary for the production of export trade 
income, the anticipated future needs of the business will be taken into 
account to the extent that such needs relate to the year of the 
controlled foreign corporation following the applicable determination 
date; anticipated future needs relating to a later period will not be 
taken into account unless it is clearly established that such needs are 
reasonably related to the production of export trade income as of the 
applicable determination date.
    (3) Inventory of export property. For purposes of subparagraph 
(1)(ii) of this paragraph, the inclusion of items in inventory shall be 
determined in accordance with rules applicable to domestic corporations. 
See Secs. 1.471-1 through 1.471-9. Inventory of export property of a 
controlled foreign corporation includes export property held for use, 
consumption, or disposition outside the United States regardless of 
where it is located on the applicable determination date. Thus, such 
property may be physically located in the United States on such date. 
However, for property physically located in the United States to 
constitute export property, it must have been acquired by the controlled 
foreign corporation with a clear intent that it would dispose of the 
property for use, consumption, or disposition outside the United States. 
As a general rule, if during the year following the applicable 
determination date export property which was physically located in the 
United States on such date is actually exported for use, consumption, or 
disposition outside the United States, such property will be deemed held 
for such purpose on the applicable determination date. On the other 
hand, the indefinite warehousing of export property in the United States 
by the controlled foreign corporation, or the subsequent sale of export 
property by such corporation for use, consumption, or disposition in the 
United States, will evidence a lack of intent by such corporation on the 
applicable determination date to hold such property for use, 
consumption, or disposition outside the United States.
    (4) Facilities located outside the United States--(i) In general. 
For purposes of subparagraph (1)(iii) of this paragraph, a facility, as 
defined in subdivision

[[Page 518]]

(ii)(a) of this subparagraph, will be considered an export trade asset 
only--
    (a) If such facility is located outside the United States, and
    (b) To the extent that such facility is used, within the meaning of 
subdivision (ii)(c) of this subparagraph, by the controlled foreign 
corporation for the storage, handling, transportation, packaging, 
servicing, sale, or distribution of export property in essentially the 
same form in which such property is acquired by such corporation.

Thus, a facility in which property is manufactured or produced, even 
though export property is used or consumed in the production or becomes 
a component part of the manufactured article, will not qualify as an 
export trade asset.
    (ii) Special rules--(a) Facility defined. For purposes of 
subdivision (i) of this subparagraph, the term ``facility'' includes any 
asset or group of assets used for the storage, handling, transportation, 
packaging, servicing, sale, or distribution of export property. Thus, 
such term includes warehouse, storage, or sales facilities (for example, 
sales office equipment), transportation equipment (for example, motor 
trucks, vessels, etc.), and machinery and equipment (for example, 
packaging equipment, servicing equipment, cranes, forklift trucks used 
in warehouses, etc.).
    (b) Determination of location of transportation facilities. A 
transportation facility shall be considered to be located outside the 
United States for purposes of subdivision (i)(a) of this subparagraph if 
such property is predominantly located outside the United States. As a 
general rule, on an applicable determination date a transportation 
facility will be considered to be predominantly located outside the 
United States if 70 percent or more of the miles traversed (during the 
12-month period immediately preceding such determination date or for 
such part of such period as such facility is owned by the controlled 
foreign corporation) in the use of such facility are traversed outside 
the United States or if such facility is located outside the United 
States at least 70 percent of the time during such period or such part 
thereof.
    (c) Determination of use. For purposes of subdivision (i)(b) of this 
subparagraph, the extent to which a facility is used in carrying on the 
activities described in such subdivision depends on the use made of the 
facility for the 12-month period immediately preceding the applicable 
determination date or for such part of such period as such facility is 
owned by the controlled foreign corporation. The method of measuring 
such use will depend upon the facts and circumstances in each case. 
However, such determinations of use will generally be made for a 
facility as a whole and not on the basis of individual items used in the 
operation of a facility. Thus, a determination as to the use of a 
warehouse facility will generally be made with respect to the entire 
facility and not separately for the items used in such warehouse, such 
as forklift trucks, storage bins, etc.
    (5) Evidences of indebtedness. For purposes of subparagraph (1)(iv) 
of this paragraph, the term ``evidence of indebtedness'' shall mean a 
note, installment sales contract, a time bill of exchange evidencing a 
sale on credit, or similar written instrument executed by an unrelated 
person which evidences the obligation of an unrelated person to pay for 
export property which an unrelated person purchases for use, 
consumption, or disposition outside the United States or to pay for 
services described in section 971(b)(2) or (3) and paragraph (b)(1)(iv), 
(v), or (vi) of this section which are performed for an unrelated 
person. Receivables which arise out of the delivery of export property, 
or the performance of services, which are evidenced by invoices, bills 
of lading, bills of exchange which do not evidence a sale on credit, 
sales slips, and similar documents created by the unilateral act of a 
creditor shall not be considered evidences of indebtedness for purposes 
of section 971(c)(4).
    (6) Duplication of treatment and priority of application. No asset 
which constitutes an export trade asset shall be taken into account more 
than once in determining the investments in export trade assets of a 
controlled foreign corporation. Assets which constitute working capital 
and also constitute inventory to which section 971(c)(2) applies or 
evidences of indebtedness to

[[Page 519]]

which section 971(c)(4) applies shall be taken into account in 
determining whether the amount of working capital of the controlled 
foreign corporation is reasonably necessary for the production of export 
trade income. However, to the extent that the amount of inventory to 
which section 971(c)(2) applies or evidences of indebtedness to which 
section 971(c)(4) applies is not included in working capital to which 
section 971(c)(1) applies on the ground that such amount is not 
reasonably necessary for the production of export trade income, the 
amount shall be included under section 971(c)(2) or 971(c)(4), as the 
case may be, in a controlled foreign corporation's investments in export 
trade assets.
    (d) Export promotion expenses--(1) In general. For purposes of 
sections 970 through 972 and Secs. 1.970-1 to 1.972-1, inclusive, the 
term ``export promotion expenses'' means, subject to the provisions of 
subparagraph (2) of this paragraph, all the ordinary and necessary 
expenses paid or incurred during the taxable year by the controlled 
foreign corporation which are reasonably allocable to the receipt or 
production of export trade income including--
    (i) A reasonable allowance for salaries or other compensation for 
personal services actually rendered for such purpose,
    (ii) Rentals or other payments for the use of property actually used 
for such purpose, and
    (iii) A reasonable allowance for the exhaustion, wear and tear, or 
obsolescence of property actually used for such purpose.

In determining for purposes of this subparagraph whether expenses are 
reasonably allocable to the receipt or production of export trade 
income, consideration shall be given to the facts and circumstances of 
each case. As a general rule, if export trade income results from the 
sale of export property, export promotion expenses allocable to such 
income shall include warehousing, advertising, selling, billing, 
collection, other administrative, and similar costs properly allocable 
to the marketing activity, but shall not include cost of goods sold, 
income or similar tax, any expense which does not advance the 
distribution or sale of export property for use, consumption, or 
disposition outside the United States, or any expense for which the 
controlled foreign corporation is reimbursed. If export trade income 
results from the rental of export property, export promotion expenses 
allocable to such income shall include a reasonable allowance for 
depreciation and servicing of such property, and the administrative and 
similar costs properly allocable to the rental activity. If export trade 
income results from the performance of services, export promotion 
expenses shall include a reasonable allowance for compensation of the 
persons performing services for the controlled foreign corporation in 
the execution of the service contract or arrangement and administrative 
expenses reasonably allocable to the service activity. In no case shall 
income taxes be included in export promotion expenses.
    (2) Expenses incurred within the United States. No expense incurred 
within the United States shall be treated as an export promotion expense 
for purposes of section 971(d) and subparagraph (1) of this paragraph 
unless at least--
    (i) 90 percent of all salaries and other personal service 
compensation incurred in the receipt or the production of export trade 
income,
    (ii) 90 percent of rents and other payments for the use of property 
used in the receipt or the production of export trade income,
    (iii) 90 percent of the allowances for the exhaustion, wear and 
tear, or obsolescence of property used in the receipt or the production 
of export trade income, and
    (iv) 90 percent of all other ordinary and necessary expenses 
reasonably allocable to the receipt or the production of export trade 
income,

is incurred outside the United States. For this purpose, personal 
service compensation will be considered incurred at the place where the 
service is performed (for example, salaries will be considered incurred 
at the place where the employee works; payments for art work will be 
considered incurred at the place where the art work is prepared, etc.); 
rent, depreciation, and other expenses related to real or personal 
property will be considered incurred at the place where the property is 
located;

[[Page 520]]

and expenses for media advertising will be considered incurred at the 
place where the advertising is consumed. For such purpose, newspaper or 
periodical advertising will be considered consumed where the newspaper 
or periodical is principally distributed, and television and radio 
advertising will be considered consumed at the place where the audience 
is primarily located. Technicalities of contract or payment, for 
example, the place where a contract is executed or the location of a 
bank account from which payment is made, shall not be determinative of 
the place where an expense is incurred.
    (e) Export property. For purposes of sections 970 through 972 and 
Secs. 1.970-1 to 1.972-1, inclusive, the term ``export property'' means 
property, or any interest in property, which is manufactured, produced, 
grown, or extracted in the United States. Whether property will be 
considered manufactured or produced in the United States will depend on 
the facts and circumstances of each case. As a general rule, if--
    (1) The property sold, serviced, used, or rented by the controlled 
foreign corporation is substantially transformed in the United States 
prior to its export from the United States, or
    (2) The operations conducted in the United States with respect to 
the property sold, serviced, used, or rented by the controlled foreign 
corporation, whether performed in the United States by one person or a 
series of persons in a chain of distribution, are substantial in nature 
and are generally considered to constitute the manufacture or production 
of property,

then the property sold, serviced, used, or rented will be considered to 
have been manufactured or produced in the United States. The rules under 
paragraph (a)(4)(ii) of Sec. 1.954-3, relating to the substantial 
transformation of property, and paragraph (a)(4)(iii) of such section, 
dealing with a substantive test for determining whether property will be 
treated as having been manufactured or produced, shall apply for 
purposes of making determinations under this paragraph.
    (f) Unrelated person. For purposes of sections 970 through 972 and 
Secs. 1.970-1 to 1.972-1, inclusive, the term ``unrelated person'' means 
a person other than a related person as defined in section 954(d)(3) and 
paragraph (e) of Sec. 1.954-1.

[T.D. 6755, 29 FR 12710, Sept. 9, 1964, as amended by T.D. 7293, 38 FR 
32802, Nov. 28, 1973; T.D. 7533, 43 FR 6603, Feb. 15, 1978]