Federal Register / Vol. 72, No. 121 / Monday, June 25, 2007 / Rules and Regulations 34597 

2See 72 FR 27951, May 18, 2007. 

3 In addition to the general advance notice of 

future amendments provided by the Board, and the 

Board’s notices of final amendments, the Reserve 

Banks strive to inform affected depository 

institutions of the exact date of each office 

transition at least 120 days in advance. The Reserve 

Banks’ communications to affected depository 

institutions are available at http:// 

www.frbservices.org. 

4Section 229.18(e) of Regulation CC requires that 

banks notify account holders who are consumers 

within 30 days after implementing a change that 

improves the availability of funds. 

As explained in the Board’s final rule 

published in the Federal Register on 

May 18, 2007, the Federal Reserve 

Banks have decided to restructure their 

check processing services by reducing 

further the number of locations at which 

they process checks.2 The Board issues 

separate final rules amending appendix 

A for each phase of the restructuring, 

and the amendments set forth in this 

notice are such final rules.3

As part of the restructuring process, 

the head office of the Federal Reserve 

Bank of San Francisco will cease 

processing checks on August 18, 2007. 

As of that date, banks with routing 

symbols currently assigned to the San 

Francisco head office for check 

processing purposes will be reassigned 

to the San Francisco Reserve Bank’s Los 

Angeles branch office. As a result of this 

change, some checks that are drawn on 

and deposited at banks located in the 

affected check processing regions and 

that currently are nonlocal checks will 

become local checks subject to faster 

availability schedules. 

To assist banks in identifying local 

and nonlocal banks, the Board 

accordingly is amending the lists of 

routing symbols assigned to Twelfth 

District check processing offices to 

conform to the transfer of operations 

from the San Francisco head office to 

the Los Angeles branch office. To 

coincide with the effective date of the 

underlying check processing changes, 

the amendments are effective August 18, 

2007. The Board is providing advance 

notice of these amendments to give 

affected banks ample time to make any 

needed processing changes. The 

advance notice also will enable affected 

banks to amend their availability 

schedules and related disclosures, if 

necessary, and provide their customers 

with notice of these changes.4 The 

Federal Reserve routing symbols 

assigned to all other Federal Reserve 

branches and offices will remain the 

same at this time. The Board of 

Governors, however, intends to issue a 

similar notice at least sixty days prior to 

the elimination of check processing 

operations at the Helena branch office of 

the Federal Reserve Bank of 

Minneapolis, as described in the May 

2007 Federal Register document. 

Administrative Procedure Act 

The Board has not followed the 

provisions of 5 U.S.C. 553(b) relating to 

notice and public participation in 

connection with the adoption of this 

final rule. The revisions to the appendix 

are technical in nature, and the routing 

symbol revisions are required by the 

statutory and regulatory definitions of 

‘‘check-processing region.’’ Because 

there is no substantive change on which 

to seek public input, the Board has 

determined that the section 553(b) 

notice and comment procedures are 

unnecessary. 

Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3506; 

5 CFR part 1320 Appendix A.1), the 

Board has reviewed the final rule under 

authority delegated to the Board by the 

Office of Management and Budget. This 

technical amendment to appendix A of 

Regulation CC will delete the reference 

to the head office of the Federal Reserve 

Bank of San Francisco and reassign the 

routing symbols listed under that office 

to the Los Angeles branch office of the 

Federal Reserve Bank of San Francisco. 

The depository institutions that are 

located in the affected check processing 

regions and that include the routing 

numbers in their disclosure statements 

would be required to notify customers 

of the resulting change in availability 

under § 229.18(e). However, because all 

paperwork collection procedures 

associated with Regulation CC already 

are in place, the Board anticipates that 

no additional burden will be imposed as 

a result of this rulemaking. 

List of Subjects in 12 CFR Part 229 

Banks, Banking, Reporting and 

recordkeeping requirements. 

Authority and Issuance 

■ For the reasons set forth in the 

preamble, the Board is amending 12 

CFR part 229 to read as follows: 

PART 229—AVAILABILITY OF FUNDS 

AND COLLECTION OF CHECKS 

(REGULATION CC) 

■ 1. The authority citation for part 229 

continues to read as follows: 

Authority: 12 U.S.C. 4001–4010, 12 U.S.C. 

5001–5018. 

■ 2. The Twelfth District routing symbol 

list in appendix A is revised to read as 

follows: 

Appendix A to PART 229—Routing 

Number Guide to Next-Day Availability 

Checks and Local Checks 

* * * * * 

Twelfth Federal Reserve District 

[Federal Reserve Bank of San Francisco] 

Los Angeles Branch 

1210 3210 

1211 3211 

1212 3212 

1213 3213 

1220 3220 

1221 3221 

1222 3222 

1223 3223 

1224 3224 

Seattle Branch 

1230 3230 

1231 3231 

1232 3232 

1233 3233 

1250 3250 

1251 3251 

1252 3252 

* * * * * 

By order of the Board of Governors of the 

Federal Reserve System, acting through the 

Secretary of the Board under delegated 

authority, June 20, 2007. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. E7–12194 Filed 6–22–07; 8:45 am] 

BILLING CODE 6210–01–P 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 115 

RIN 3245–AF39 

Surety Bond Guarantee ProgramPreferred Surety Qualification, 

Increased Guarantee for Veteran and 

Service-Disabled Veteran-Owned 

Business, Deadline for Payment of 

Guarantee Fees, Denial of Liability, and 

Technical Amendments 

AGENCY: U.S. Small Business 

Administration (SBA). 

ACTION: Final rule. 

SUMMARY: On September 26, 2006, SBA 

published a proposed rule in the 

Federal Register addressing six changes 

to the SBA Surety Bond Guarantee 

(SBG) Program in order to improve 

operation of the SBG program and make 

it easier for sureties and small business 

concerns to participate in the program. 

Specifically, this rules makes the 

following amendments to the program: 

(1) Gives effect to the statutory 

reduction in the frequency of audits 

required of Preferred Surety Bond (PSB) 

Sureties; (2) obligates SBA to guarantee 

90 percent of the loss incurred by a 

Prior Approval Surety on bonds issued 


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34598 Federal Register / Vol. 72, No. 121 / Monday, June 25, 2007 / Rules and Regulations 

on behalf of small businesses owned 

and controlled by veterans, and Servicedisabled veterans; (3) imposes a 60-day 

deadline for the submission of surety 

fees to SBA; (4) allows PSB Sureties to 

charge premiums in accordance with 

applicable state ceilings, as presently 

permitted under the Prior Approval 

Program; (5) deletes the existing 

reference to the expiration of the PSB 

Program; and (6) allows Affiliates of a 

PSB Surety to participate in the Prior 

Approval Program. 

DATES: This rule is effective July 25, 

2007. 

FOR FURTHER INFORMATION CONTACT: 

Frank Lalumiere, Director, Office of 

Surety Guarantees, (202) 205–6540; 

Frank.Lalumiere@sba.gov. 

SUPPLEMENTARY INFORMATION: 

SBA can guarantee bonds for 

contracts up to $2 million, covering bid, 

performance and payment bonds for 

small and emerging contractors who 

cannot obtain surety bonds through 

regular commercial channels. SBA’s 

guarantee gives sureties an incentive to 

provide bonding for small businesses 

and thereby strengthens their ability to 

obtain bonding and greater access to 

contracting opportunities. 

Section 411(g)(3) of the Small 

Business Investment Act of 1958 (the 

Act) formerly required PSB Sureties to 

be audited every year. 15 U.S.C. 

694b(g)(3). As amended by Public Law 

108–447, Div. K. Section 203, the Small 

Business Reauthorization and 

Manufacturing Assistance Act of 2004, 

the Act now requires audits to be made 

at least once every 3 years. This final 

rule implements this statutory 

requirement. 

In relevant part, Section 4(b)(1) of the 

Small Business Act provides that SBA 

‘‘shall give special consideration to 

veterans of the Armed Forces of the 

United States and their survivors and 

dependents.’’ 15 U.S.C. 633(b)(1). This 

final rule encourages the issuance of 

bonds on behalf of small business 

concerns owned and controlled by 

veterans and Service-disabled veterans, 

by guaranteeing to pay 90 percent of a 

Prior Approval Program Surety’s loss. 

This guaranty affords such concerns 

more opportunity to obtain contracts 

generally. 

Section 411(h) of the Small Business 

Investment Act mandates the operation 

of the program ‘‘on a prudent and 

economically justifiable basis’’ and 

authorizes SBA to impose fees on both 

small business concerns and sureties, 

‘‘to be payable at such time as may be 

determined by [SBA].’’ Accordingly, 

this final rule establishes a clear 

deadline for a Prior Approval Surety’s 

payment of the guarantee fees owed to 

SBA in order to maintain SBA’s 

guarantee. 

The final rule also allows PSB 

Program Sureties to charge no more than 

the premium rates permitted under 

applicable State law, as Prior Approval 

Sureties are already allowed. The initial 

regulations for the PSB program 

specified that the premium rates 

charged by PSB Sureties could not 

exceed the Surety Association of 

America’s advisory premium rates in 

effect on August 1, 1987. SAA 

discontinued its rate setting function 

shortly after promulgating the 1987 

rates, and participating surety 

companies have been obligated to use 

the 1987 SAA rates for the past 18 years 

despite economic and market place 

changes. This change puts the Preferred 

and Prior Approval Programs on the 

same footing by relying on the 

individual State oversight bodies for 

setting fee rates. 

From its creation in 1988 until 2004, 

the PSB program was a pilot program, 

subject to automatic termination in the 

absence of affirmative Congressional 

action. Now that the PSB program has 

been made permanent, the present 

regulation that speaks of the termination 

of the program has been removed. 

Finally, pursuant to this rule 

Affiliates of PSB Sureties are no longer 

barred from participation in the Prior 

Approval program. The term ‘‘Affiliate’’

is defined in 13 CFR part 121, but in the 

context of the present discussion it 

means a relationship in which one 

Surety owns or otherwise controls 

another Surety, or in which two or more 

Sureties are commonly owned by, or 

under common control with, a third 

party. A series of mergers and 

acquisitions in the surety industry in 

recent years had caused Sureties 

previously eligible to participate in the 

Prior Approval Program to become 

Affiliates of PSB Sureties and lose their 

eligibility. This final amendment should 

encourage increased participation in the 

Prior Approval Program by otherwise 

qualified Sureties that are Affiliates of 

PSB Sureties. 

Discussion of Public Comments 

SBA received five public comments 

on the proposed rule, three from 

associations and two from individual 

surety companies. Each commenter 

supported the proposed changes, with 

two exceptions. 

Four commenters recommended 

removal of the proposed language in 

§ 115.19, Denial of Liability, that would 

allow SBA to deny bond liability as a 

result of the failure of a surety company 

to pay the required surety fee. In 

general, the commenters stated that 

such a requirement would weaken the 

SBA/Surety Industry partnership that is 

designed to assist small businesses. 

While SBA values its partners in the 

surety industry, the Agency has a 

fiduciary responsibility to ensure timely 

payment of guaranty fees in order to 

honor its guaranty. Accordingly, the 

language in the proposed rule regarding 

the denial of bond liability if the surety 

fee is not paid within 60 days is 

retained. The proposed rule also 

included a provision that the guaranty 

can be reinstated if a valid reason for the 

delinquent payment of guaranty fee is 

provided and the contract is not in 

default. This language is also retained in 

the final rule. 

Three commenters expressed concern 

with the proposed 45 days fee payment 

requirement. One commenter requested 

clarification of when the 45-day period 

begins. A few commenters said it would 

be difficult to remit payment within 45 

days, in part because many sureties do 

not receive payment on the final bond 

premium until 45 days after the bond is 

issued, and to require payment before 

collection on the premium is unduly 

punitive. In consideration of these 

comments, in this final rule, SBA has 

amended the proposed rule. First, the 

proposed 45-day period cited in 

§ 115.32 is increased to 60 days. SBA 

believes that the additional 15 days will 

provide time for a surety company agent 

to provide the surety company with 

sufficient information for the surety 

company to make payment. Second, the 

same section is also revised to specify 

that payment is required within 60 days 

following SBA approval of the Prior 

Approval Payment or Performance Bond 

on the SBA Form 990, Guarantee 

Agreement. 

One commenter also suggested that 

the agency should extend the 10-day 

deadline for PSB sureties to submit the 

executed bond to SBA to a 15-day 

deadline. SBA did not propose to 

amend this particular requirement, and 

it will be considered among other 

changes in a future amendment. 

Compliance With Executive Orders 

12866, 12988, and 13132, the 

Paperwork Reduction Act (44 U.S.C. 

Ch. 35), and the Regulatory Flexibility 

Act (5 U.S.C. 601–612) 

Compliance With Executive Order 

12866 

The Office of Management and Budget 

(OMB) has determined that this rule 

constitutes a significant regulatory 

action for purposes of Executive Order 

12866, thereby necessitating a 

regulatory impact analysis. SBA 


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Federal Register / Vol. 72, No. 121 / Monday, June 25, 2007 / Rules and Regulations 34599 

published this analysis in the Proposed 

Rule. The agency did not receive any 

comments addressing the analysis and 

is not aware of any additional 

information that would require revision 

of its initial conclusions. 

Compliance With Executive Order 

12988 

This action meets applicable 

standards set forth in Sections 3(a) and 

3(b)(2) of Executive Order 12988, Civil 

Justice Reform, to minimize litigation, 

eliminate ambiguity, and reduce 

burden. The action does not have 

retroactive or preemptive effect. 

Compliance With Executive Order 

13132 

For purpose of E.O. 13132, the SBA 

has determined that the rule will not 

have substantial direct effects on the 

States, on the relationship between the 

national government and the States, or 

on the distribution of power and 

responsibilities among the various 

levels of government. Therefore, for the 

purpose of Executive Order 13132, SBA 

determines that this final rule has no 

federalism implications warranting 

preparation of a federalism assessment. 

Compliance With Paperwork Reduction 

Act, 44 U.S.C. Ch. 35 

SBA has determined that this final 

rule does not impose additional 

reporting or recordkeeping requirements 

under the Paperwork Reduction Act, 44 

U.S.C., Chapter 35. 

Compliance With the Regulatory 

Flexibility Act, 5 U.S.C. 601–612 

The Regulatory Flexibility Act (RFA), 

5 U.S.C. 601, requires administrative 

agencies to consider the effect of their 

actions on small entities, small nonprofit enterprises, and small local 

governments. Pursuant to the RFA, 

when an agency issues a rulemaking, 

the agency must prepare a regulatory 

flexibility analysis which describes the 

impact of the rule on small entities. 

However, Section 605 of the RFA allows 

an agency to certify a rule, in lieu of 

preparing an analysis, if the rulemaking 

is not expected to have a significant 

economic impact on a substantial 

number of small entities. Within the 

meaning of RFA, SBA certifies that this 

rule will not have a significant 

economic impact on a substantial 

number of small entities. Consequently, 

this rule doe not meet the substantial 

number of small businesses criterion 

anticipated by the Regulatory Flexibility 

Act. 

There are about a dozen Sureties that 

participate in the SBA program, and this 

rule does not impose any additional cost 

or any significant burden on them. 

Allowing PSB Sureties to charge the 

highest premium rates permitted by 

applicable State law raises the 

possibility of an economic impact on 

those contractors that now receive their 

bonding from PSB Sureties, but out of 

843 contractors participating in the SBA 

program in FY2005, about 143 were 

bonded by PSB Sureties. Prior Approval 

Sureties are already allowed to charge 

the premium rates permitted by the 

individual State law, so the economic 

effect, if any, of this final rule would be 

to subject approximately 17 percent of 

the contractors in the SBA program to 

the risk that they might have to pay the 

same premium rates that their fellow 

participating contractors must pay. No 

public comments were received in 

response to the RFA analysis provided 

in the proposed rule. 

List of Subjects in 13 CFR Part 115 

Claims, Reporting and recordkeeping 

requirements, Small businesses, Surety 

bonds. 

■ For the reasons stated in the preamble, 

the Small Business Administration 

amends 13 CFR part 115 as follows: 

PART 115—SURETY BOND 

GUARANTEE 

■ 1. The authority citation for part 115 

is revised to read as follows: 

Authority: 5 U.S.C. app. 3; 15 U.S.C. 687b, 

687c, 694a, 694b note, Pub. L. 106–554; Pub. 

L. 108–447, Div K, § 203. 

■ 2. Amend § 115.10 by adding the 

following definitions in alphabetical 

order. 

§ 115.10 Definitions. 

* * * * * 

Service-Disabled Veteran means a 

veteran with a disability that is serviceconnected, as defined in Section 101(16) 

of Title 38, United States Code. 

Small Business Owned and 

Controlled by Service-Disabled Veterans 

means: 

(1) A Small Concern of which not less 

than 51 percent is owned by one or 

more Service-Disabled Veterans; or a 

publicly-owned Small concern of which 

not less than 51 percent of the stock is 

owned by one or more Service-Disabled 

Veterans; and 

(2) The management and daily 

business operations of which are 

controlled by one or more ServiceDisabled Veterans, or in the case of a 

Service-Disabled Veteran with 

permanent and severe disability, the 

spouse or permanent caregiver of such 

Veteran. 

Small Business Owned and 

Controlled by Veterans means: 

(1) A Small Concern of which not less 

than 51 percent is owned by one or 

more Veterans; or a publicly-owned 

Small Concern of which not less than 51 

percent of the stock is owned by one or 

more Veterans; and 

(2) The management and daily 

business operations of which are 

controlled by one or more Veterans. 

* * * * * 

Veteran has the meaning given the 

term in Section 101(2) of Title 38, 

United States Code. 

■ 3. Revise § 115.19(g) to read as 

follows: 

§ 115.19 Denial of liability. 

* * * * * 

(g) Delinquent fees. The Surety has 

not remitted to SBA the Principal’s 

payment for the full amount of the 

guarantee fee within the time period 

required under § 115.30(d) for Prior 

Approval Sureties or § 115.66 for PSB 

Sureties, or has not made timely 

payment of the Surety’s fee within the 

time period required by § 115.32(c). 

SBA may reinstate the guarantee upon 

showing that the contract is not in 

default and that a valid reason exists 

why a timely remittance or payment 

was not made. 

* * * * * 

■ 4. Revise § 115.21(a)(2) to read as 

follows: 

§ 115.21 Audits and investigations. 

(a) * * * 

(1) * * * 

(2) Frequency of PSB Audits. Each 

PSB Surety is subject to an audit at least 

once every 3 years by examiners 

selected and approved by SBA. 

* * * * * 

■ 5. Revise § 115.31(a)(2) to read as 

follows: 

§ 115.31 Guarantee percentage. 

(a) * * * 

(1) * * * 

(2) The bond was issued on behalf of 

a small business owned and controlled 

by socially and economically 

disadvantaged individuals, on behalf of 

a qualified HUBZone small business 

concern, or on behalf of a small business 

owned and controlled by veterans or a 

small business owned and controlled by 

Service-disabled veterans. 

* * * * * 

■ 6. Revise § 115.32 (c) and (d)(2) to 

read as follows: 

§ 115.32 Fees and premiums. 

* * * * * 

(c) SBA charge to Surety. SBA does 

not charge Sureties application or Bid 

Bond guarantee fees. Subject to 


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34600 Federal Register / Vol. 72, No. 121 / Monday, June 25, 2007 / Rules and Regulations 

§ 115.18(a)(4), the Surety must pay SBA 

a guarantee fee on each guaranteed bond 

(other than a Bid Bond) within 60 

calendar days after SBA’s approval of 

the Prior Approval Payment or 

Performance Bond on the SBA Form 

990, Guarantee Agreement. The fee is a 

certain percentage of the bond premium 

determined by SBA and published in 

Notices in the Federal Register from 

time to time. The fee is rounded to the 

nearest dollar. SBA does not receive any 

portion of a Surety’s non-premium 

charges. See paragraph (d) of this 

section for additional requirements 

when the Contract or bond amount 

changes. 

(d) * * * 

(1) * * * 

(2) Increases; fees. Notification of 

increases in the Contract or bond 

amount under this paragraph (d) must 

be accompanied by the Principal’s 

check for the increase in the Principal’s 

guarantee fee computed on the increase 

in the Contract amount. If the increase 

in the Principal’s fee is less than $40, no 

payment is due until the total amount 

of increases in the Principal’s fee equals 

or exceeds $40. The Surety’s check for 

payment of the increase in the Surety’s 

guarantee fee, computed on the increase 

in the bond Premium, must be 

submitted to SBA within 60 calendar 

days of SBA’s approval of the 

supplemental Prior Approval 

Agreement, unless the amount of such 

increased guarantee fee is less than $40. 

When the total amount of increase in 

the guarantee fee equals or exceeds $40, 

the Surety’s check must be submitted to 

SBA within 60 calendar days. 

* * * * * 

■ 7. Revise § 115.60(a)(2) to read as 

follows: 

§ 115.60 Selection and admission of PSB 

Sureties. 

(a) * * * 

(1) * * * 

(2) An agreement that the Surety will 

neither charge a bond premium in 

excess of that authorized by the 

appropriate State insurance department, 

nor impose any non-premium fee unless 

such fee is permitted by applicable State 

law and approved by SBA. 

* * * * * 

§ 115.61 [Removed & Reserved] 

■ 8. Remove and reserve § 115.61. 

■ 9. Revise § 115.62 to read as follows: 

§ 115.62 Prohibition on participation in 

Prior Approval program. 

A PSB Surety is not eligible to submit 

applications under subpart B of this 

part. This prohibition does not extend to 

an Affiliate, as defined in 13 CFR 

§ 121.103, of a PSB Surety that is not 

itself a PSB Surety provided that the 

relationship between the PSB Surety 

and the Affiliate has been fully 

disclosed to SBA and that such Affiliate 

has been approved by SBA to 

participate as a Prior Approval Surety 

pursuant to § 115.11. 

Steven C. Preston, 

Administrator. 

[FR Doc. 07–2983 Filed 6–22–07; 8:45 am] 

BILLING CODE 8025–01–M 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9332] 

RIN 1545–BG00 

Exclusions From Gross Income of 

Foreign Corporations 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final and temporary 

regulations. 

SUMMARY: This document contains final 

and temporary regulations under section 

883(a) and (c) of the Internal Revenue 

Code (Code), relating to the exclusion 

from gross income of income derived by 

certain foreign corporations engaged in 

the international operation of ships or 

aircraft. These regulations revise 

§ 1.883–3 of the final regulations, 

relating to the eligibility of controlled 

foreign corporations for the exclusion 

under section 883, following the repeal 

of section 954(a)(4) and (f) (foreign base 

company shipping provisions) by 

section 415 of the American Jobs 

Creation Act of 2004. In addition, these 

regulations provide certain additional 

guidance under section 883(a) and (c), 

including for foreign corporations that 

are organized in countries providing an 

exemption from taxation for certain 

shipping and air transport income solely 

through an income tax convention. The 

text of these temporary regulations also 

serves as the text of the proposed 

regulations (REG–138707–06) set forth 

in the Proposed Rules section in this 

issue of the Federal Register. 

DATES: Effective Date: These regulations 

are effective on June 25, 2007. 

Applicability Date: For dates of 

applicability, see § 1.883–5T. 

FOR FURTHER INFORMATION CONTACT: 

Patricia A. Bray, at (202) 622–3880 (not 

a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

These regulations are being issued 

without prior notice and public 

procedure pursuant to the 

Administrative Procedure Act (5 U.S.C. 

553). For this reason, the collections of 

information contained in these 

regulations has been reviewed, and 

pending receipt and evaluation of 

public comments, approved by the 

Office of Management and Budget under 

control number 1545–1667. Responses 

to these collections of information are 

mandatory. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

For further information concerning 

these collections of information, where 

to submit comments on the collections 

of information and the accuracy of the 

estimated burden, and suggestions for 

reducing this burden, please refer to the 

preamble to the cross-referencing notice 

of proposed rulemaking published in 

the Proposed Rules section of this issue 

of the Federal Register. 

Books and records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

1. Section 883 and the Final Regulations 

Sections 883(a)(1) and (a)(2) of the 

Code generally provide that income 

from the international operation of ships 

or aircraft derived by a foreign 

corporation will be excluded from gross 

income and exempt from U.S. taxation 

if the foreign country in which the 

corporation is organized grants an 

equivalent exemption to corporations 

organized in the United States. Section 

883(c)(1) provides that a foreign 

corporation cannot qualify for the 

section 883(a) exemption if 50 percent 

or more of the value of its stock is 

owned by individuals who are not 

residents of a country that grants an 

equivalent exemption to U.S. 

corporations. However, under section 

883(c)(2), section 883(c)(1) does not 

apply to a foreign corporation that is a 

controlled foreign corporation as 

defined in section 957(a)(CFC). In 

addition, under section 883(c)(3), 

section 883(c)(1) does not apply to a 

foreign corporation whose stock is 

primarily and regularly traded on an 

established securities market in the 


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