rp-01-37.pdf

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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund; determination of correct tax
liability.
(Also Part I, Sections 942, 943.)
Rev. Proc. 2001-37
SECTION 1. PURPOSE
This revenue procedure provides guidance to taxpayers regarding certain elections made
pursuant to the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (the “Act”). Pub.
L. No. 106-519, 114 Stat. 2423 (Nov. 15, 2000). Specifically, this revenue procedure includes
guidance with respect to the election to exclude gross receipts from foreign trading gross receipts
under § 942(a)(3) of the Internal Revenue Code (“Code”), the election (and revocation of such
election) by a foreign corporation to be treated as a domestic corporation under § 943(e)(1), and
the election (and revocation of such election) by a taxpayer to apply the extraterritorial income
exclusion (the “ETI exclusion”) in lieu of the foreign sales corporation (“FSC”) provisions to
certain transactions under § 5(c)(2) of the Act.
SEC. 2. BACKGROUND

.01 On November 15, 2000, the Act was signed into law, repealing the FSC provisions of
§§ 921 through 927 effective October 1, 2000, and amending the definition of gross income to
exclude certain extraterritorial income.
.02 The amendments to the Code made by the Act apply to all transactions entered into after
September 30, 2000. Section 943(b)(1) defines the term “transaction” as “any sale, exchange, or
other disposition . . . any lease or rental, and . . . any furnishing of services.”
.03 Section 5(c)(1) of the Act provides a transition rule for FSCs in existence on September 30,
2000, whereby the FSC provisions remain applicable to FSC transactions for a limited transition
period.
.04 The Act contains several taxpayer elections. First, a taxpayer may elect to exclude the
gross receipts from a transaction or transactions from its “foreign trading gross receipts” in any
taxable year under § 942(a)(3). Second, certain foreign corporations may elect to be treated as
domestic corporations under § 943(e)(1). Third, a taxpayer may elect under § 5(c)(2) of the Act
to apply the ETI exclusion provisions in lieu of the FSC provisions to certain transactions
otherwise covered by the transition rules.
SEC. 3. FORM 8873 (“EXTRATERRITORIAL INCOME EXCLUSION”)
A taxpayer that reports extraterritorial income on its income tax return calculates its ETI
exclusion with respect to that income on Form 8873 (“Extraterritorial Income Exclusion”). Such
taxpayer must attach a completed Form 8873 to its income tax return.
SEC. 4. ELECTION TO EXCLUDE CERTAIN GROSS RECEIPTS FROM FOREIGN
TRADING GROSS RECEIPTS
A taxpayer may elect to exclude gross receipts from its “foreign trading gross receipts” in any
taxable year under § 942(a)(3). A taxpayer makes a § 942(a)(3) election on a transaction-by-

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transaction basis. A taxpayer makes such election by checking the box on line 1 in Part I of
Form 8873 and attaching the completed form to its income tax return. In the case of a
partnership, each partner may make this election with respect to any transaction for which the
partnership maintains separate accounts. A taxpayer that excludes some, but not all, of its gross
receipts from foreign trading gross receipts must attach to its Form 8873 a tabular schedule that
identifies the gross receipts that are excluded from foreign trading gross receipts.
SEC. 5. ELECTION BY A FOREIGN CORPORATION TO BE TREATED AS A DOMESTIC
CORPORATION
.01 Generally. Section 943(e)(1) allows an “applicable foreign corporation” to elect to be
treated as a domestic corporation for all purposes of the Code if that corporation waives all
benefits granted to it by the United States under any treaty. Making the election is a prerequisite
to the ETI exclusion under § 943(a)(2) with respect to property manufactured, produced, grown,
or extracted outside the United States by a foreign corporation. A corporation that makes a
§ 943(e)(1) election may not elect to be an S corporation under § 1362(a).
.02 Who may elect. Pursuant to § 943(e)(2), an applicable foreign corporation is any foreign
corporation if either:
(1) it manufactures, produces, grows, or extracts property in the ordinary course of the
corporation’s trade or business, or
(2) substantially all of its gross receipts are foreign trading gross receipts.
.03 Period of election. A § 943(e)(1) election applies to the taxable year for which made and to
all subsequent years unless revoked by the taxpayer pursuant to § 943(e)(3)(A) or terminated
pursuant to § 943(e)(3)(B). A § 943(e)(1) election may be filed after September 30, 2000, but
cannot be effective for any taxable year beginning before October 1, 2000.

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.04 Method of election. A corporation makes a § 943(e)(1) election by checking the box on
line 3 in Part I of Form 8873 and attaching the completed form to a timely filed Form 1120
(“U.S. Corporation Income Tax Return”) (including extensions) for the first taxable year of the
election.
.05 Where return is filed. A foreign corporation that makes a § 943(e)(1) election but does not
become a member of a consolidated group under § 1501 as a result of such election shall file its
Form 1120 at the applicable Service Center address listed in the “Where To File” section of the
instructions for Form 1120. If a foreign corporation makes a § 943(e)(1) election and becomes a
member of a consolidated group under § 1501 as a result of such election, the common parent of
such group shall include the corporation that made the § 943(e)(1) election in its consolidated
return (Form 1120) for the group.
.06 Revocation of election. A corporation may revoke a § 943(e)(1) election by filing a
statement that the election is revoked. The revocation statement shall be entitled “Revocation of
Election under Section 943(e)(1) to be Treated as a Domestic Corporation – Filed Pursuant to
[citation of this revenue procedure]” and shall include the corporation’s name, address,
employer identification number, and contact phone number, and a statement that the taxpayer
revokes its election under § 943(e)(1). The revocation statement shall be signed by any person
authorized to sign a corporate return under § 6062. The corporation shall file such revocation
statement with the same Service Center (“Attn: Entity Control”) with which the corporation files
its income tax return as determined under § 5.05 of this revenue procedure. Once properly filed,
the revocation of a § 943(e)(1) election is automatic and applies to taxable years beginning on or
after the date the revocation statement is filed.

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.07 Termination of election. If a corporation that made a § 943(e)(1) election in any taxable
year meets neither of the requirements described in § 5.02 of this revenue procedure for any
subsequent taxable year, the election will not apply to taxable years beginning after such
subsequent taxable year.
.08 Effect of termination or revocation. If a corporation that made a § 943(e)(1) election
revokes the election or the election is terminated, that corporation (and any successor
corporation) may not make another § 943(e)(1) election for five taxable years beginning with the
first taxable year for which the original election is not in effect as a result of the revocation or
termination.
.09 Effect of election by FSCs. A FSC that elects to be treated as a domestic corporation under
§ 943(e)(1) is not treated as a FSC for any year for which such election applies and for all
subsequent years.
.10 Effect of election for purposes of section 367.
(1) Except as provided in § 5.10(2) of this revenue procedure, a foreign corporation that
makes a § 943(e)(1) election is treated, for purposes of § 367, as transferring, on the first day of
the first taxable year to which the election applies, all of its assets to a domestic corporation in
connection with an exchange described in § 354.
(2) In the case of a foreign corporation described in § 5(c)(3) of the Act that makes a
§ 943(e)(1) election, earnings and profits (“E&P”) accumulated in taxable years ending before
October 1, 2000, are not included in the gross income of its shareholders by reason of such
election. This rule does not apply to E&P acquired by the foreign corporation in a transaction
after September 30, 2000, that is subject to § 381, unless the E&P would have qualified for the
exclusion under § 5(c)(3) of the Act in the hands of the transferor or distributor. Rules similar to

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rules under § 953(d)(4)(B)(ii) through (iv) shall apply to E&P not included in gross income under
§ 5(c)(3) of the Act.
.11 Effect of revocation or termination for purpose of section 367. If a corporation’s
§ 943(e)(1) election ceases to apply because it is revoked or terminated, then, for purposes of
§ 367, such corporation shall be treated as a domestic corporation transferring all of its assets to a
foreign corporation in connection with an exchange to which § 354 applies on the first day of the
first taxable year to which the election ceases to apply.
SEC. 6. TRANSITION RULES; ELECTION TO APPLY EXTRATERRITORIAL INCOME
EXCLUSION PROVISIONS IN LIEU OF FSC PROVISIONS
.01 FSC elections. After September 30, 2000, no corporation may elect to be a FSC under
§ 922(a)(2). For purposes of the transition rule, a FSC election is deemed to occur upon the
formation of an otherwise eligible electing corporation, provided that the corporation makes the
election within 90 days of formation pursuant to the requirements of § 1.921-1T(b)(1) of the
Income Tax Regulations.
.02 Termination of inactive FSCs. If a FSC has no foreign trade income (as defined in former
§ 923(b)) for any period of five consecutive taxable years beginning after December 31, 2001,
such FSC will no longer be treated as a FSC for any taxable year beginning after such five-year
period.
.03 Transition period for existing FSCs. In general, the Act repeals the FSC provisions for
transactions entered into after September 30, 2000. However, § 5(c)(1) of the Act provides that
the FSC provisions continue to apply for a limited time period with respect to certain transactions
entered into in the ordinary course of business involving a FSC in existence on September 30,

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2000. Specifically, the FSC provisions continue to apply to transactions involving a FSC and
occurring:
(1) before January 1, 2002, or
(2) after December 31, 2001, pursuant to a binding contract which is in effect on September
30, 2000, and thereafter, and which is between the FSC (or a person related to the FSC) and a
person other than a related person.
.04 Election to apply extraterritorial income provisions. In the case of transactions occurring
after September 30, 2000, for which the FSC provisions continue to apply pursuant to § 5(c)(1)
of the Act, a taxpayer may elect under § 5(c)(2) of the Act to apply the ETI exclusion provisions
in lieu of the FSC provisions. A taxpayer makes a § 5(c)(2) election on a transaction-by-
transaction basis. Such election with respect to a transaction is effective for the taxable year for
which made and all subsequent taxable years.
.05 Method of election. A § 5(c)(2) election is made by checking the box on line 2 in Part I of
Form 8873 on which the taxpayer determines its ETI exclusion and attaching the completed form
to the taxpayer’s timely filed income tax return (including extensions) for the first taxable year of
the election. As set forth in Form 8873 and the accompanying instructions, the taxpayer shall
attach to Form 8873 a tabular schedule that identifies the transactions for which the taxpayer has
elected ETI exclusion treatment pursuant to § 5(c)(2) of the Act.
.06 Method of revocation. A taxpayer may revoke a § 5(c)(2) election with respect to a
transaction only with the consent of the Secretary of the Treasury. To request consent for a
§ 5(c)(2) revocation, the taxpayer shall file a statement entitled “Revocation of Election under
Section 5(c)(2) of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 – Filed
Pursuant to [citation of this revenue procedure]” requesting revocation of the § 5(c)(2)

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election. Until regulations are issued, such statement shall include the name, address, taxpayer
identification number, and contact phone number of the taxpayer, the Service Center with which
the taxpayer filed its last income tax return, the first taxable year of the taxpayer for which the
revocation is to be effective, and reasons justifying the granting of consent for the § 5(c)(2)
revocation. In addition, the statement shall indicate the transactions to which the request for
consent to revoke the § 5(c)(2) election applies. The statement shall be signed by, or on behalf
of, the taxpayer requesting consent by an individual with authority to bind the taxpayer in such
matters. The taxpayer shall file such statement with Internal Revenue Service, 1111 Constitution
Ave. NW, LMSB Mint Bldg., Room M3-333 LM:PFT:I, Washington, DC 20224. A § 5(c)(2)
revocation applies to taxable years beginning after the year in which such revocation is requested.
SEC. 7. EFFECTIVE DATE
This revenue procedure is effective October 1, 2000.
SEC. 8. DRAFTING INFORMATION
The principal author of this revenue procedure is Christopher J. Bello of the Office of
Associate Chief Counsel (International). For further information regarding this revenue
procedure, contact Mr. Bello at (202) 874-1490 (not a toll-free call).
SEC. 9. PAPERWORK REDUCTION ACT
The collections of information contained in this revenue procedure have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control number 1545-1731.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection
of information unless the collection of information displays a valid OMB control number.

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The collections of information in this revenue procedure are in §§ 3, 4, 5, and 6. The
collections in §§ 4, 5 and 6 are required for a taxpayer that elects to exclude some, but not all, of
its gross receipts from foreign trading gross receipts for purposes of the ETI exclusion
provisions; for a corporation subject to an election to be treated as a domestic corporation to
revoke such election; for a taxpayer that elects to apply the ETI exclusion provisions to its
transactions in lieu of the FSC provisions; and for a taxpayer subject to an election to apply the
ETI exclusion provisions, in lieu of the FSC provisions, to revoke such election. The likely
respondents are businesses.
The estimated total annual reporting burden in §§ 5.06 and 6.06 with respect to the revocation
of the above elections is 19 hours. The estimated annual burden per respondent is 20 minutes.
The estimated number of respondents is 56. The estimated annual frequency of responses is
once.
The estimated average annual burden per respondent required in §§ 3, 4, 5.04, and 6.05 is
reflected in the burden of Form 8873.
Books or 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.