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 ------------------------------------------------------------------------                                                              Sources                  Year                     Possession I       outside                                              sources      possession I------------------------------------------------------------------------2004....................................            $10x            $20x2005....................................             20x             10x2006....................................             25x             15x------------------------------------------------------------------------
  (ii) A Corp owns 50 percent of the outstanding shares of B Corp, a corporation organized under the laws of Country FC. During 2004 through 2006, B Corp has gross income from the following sources:
 ------------------------------------------------------------------------                                                              Sources                  Year                     Possession I       outside                                              sources      possession I------------------------------------------------------------------------2004....................................            $10x             $6x2005....................................             14x              8x2006....................................             10x              4x------------------------------------------------------------------------
  (iii) A Corp is treated as having received 50 percent of the gross income of B Corp. Therefore, for 2004 through 2006, the gross income of A Corp is from the following sources:
 ------------------------------------------------------------------------                                                              Sources                  Year                     Possession I       outside                                              sources      possession I------------------------------------------------------------------------2004....................................            $15x            $23x2005....................................             27x             14x2006....................................             30x             17x                                         -------------------------------    Totals..............................             72x             54x------------------------------------------------------------------------
  (iv) Pursuant to paragraph (g) of this section, the portion of the dividend of $70x that X receives from Corp A in 2006 that is treated as income from sources within Possession I is 72/126 of $70x, or $40x.

Example 5.  X is a U.S. citizen and a bona fide resident of the Northern Mariana Islands (NMI). In 2005, X receives compensation for services performed as a member of the crew of a fishing boat. Ten percent of the services for which X receives compensation are performed in the NMI, and 90 percent of X's services are performed in international waters. X is a “United States person” as defined in section 7701(a)(30)(A). Accordingly, pursuant to section 863(d)(1)(A), the compensation that X receives for services performed in international waters is treated as income from sources within the United States for purposes of the Internal Revenue Code (including section 7654, as in effect with respect to the NMI). Under the principles of section 861(a)(3) as applied pursuant to paragraph (b) of this section, the compensation that X receives for services performed in the NMI is treated as income from sources within the NMI.

(l) Effective date. Except as otherwise provided in this paragraph (l), this section applies to income earned in tax years ending after October 22, 2004. Paragraph (c)(1) of this section applies to income earned after December 31, 2004. Paragraph (f) of this section applies to dispositions after April 11, 2005. Paragraphs (c)(2), (g)(1), (h), and (i) of this section apply to amounts paid or accrued after April 11, 2005.

[T.D. 9194, 70 FR 18942, Apr. 11, 2005]

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