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1999 Department of the TreasuryInternal Revenue ServiceInstructions forForm 1120-FU.S. Income Tax Return of a Foreign CorporationSection references are to the Internal Revenue Code unless otherwise noted.

Pending LegislationAt the time of printing, Congress wasconsidering legislation affecting theseinstructions. Included in the pending legislationare provisions that would change the definitionof a capital asset, modify the treatment of gainsfrom constructive ownership transactions,repeal the use of the installment method forcertain taxpayers, and limit the use of thenonaccrual experience method of accounting.See Pub. 553, Highlights of 1999 TaxChanges, to find out if this legislation wasenacted, and details on the changes.

A Change To NoteNew rules for determining whether thecorporation must use the Electronic FederalTax Payment System (EFTPS) to makeFederal tax deposits are effective beginningJanuary 1, 2000. For details, see ElectronicDeposit Requirement on page 4.

Photographs of MissingChildrenThe Internal Revenue Service is a proudpartner with the National Center for Missingand Exploited Children. Photographs ofmissing children selected by the Center mayappear in instructions on pages that wouldotherwise be blank. You can help bring these

children home by looking at the photographsand calling 1-800-THE-LOST (1-800-843-5678)if you recognize a child.

How To Get Forms andPublicationsPersonal computer. You can access theIRS's Internet Web Site 24 hours a day, 7 daysa week at www.irs.gov to:q Download forms, instructions, andpublications.q See answers to frequently asked taxquestions.q Search publications on-line by topic orkeyword.q Send us comments or request help by e-mail.q Sign up to receive local and national taxnews by e-mail.

You can also reach us using file transferprotocol at ftp.irs.gov.CD-ROM. Order Pub. 1796, Federal TaxProducts on CD-ROM, and get:q Current year forms, instructions, andpublications.q Prior year forms, instructions, andpublications.q Popular tax forms that may be filled inelectronically, printed out for submission, andsaved for recordkeeping.q The Internal Revenue Bulletin.

Buy the CD-ROM on the Internet atwww.irs.gov/cdorders from the NationalTechnical Information Service (NTIS) for $16(plus a $5 handling fee) and save 30%, or call1-877-CDFORMS (1-877-233-6767) toll-free tobuy the CD-ROM for $23 (plus a $5 handlingfee).By phone and in person. You can orderforms and publications 24 hours a day, 7 daysa week, by calling 1-800-TAX-FORM(1-800-829-3676). You can also get most formsand publications at your local IRS office.

General Instructions

Purpose of FormUse Form 1120-F to report the income, gains,losses, deductions, credits, and to figure theU.S. income tax liability of a foreigncorporation. Also, use Form 1120-F to claimany refund that is due.

Who Must FileUnless one of the exceptions in ExceptionsFrom Filing below applies, every foreigncorporation must file Form 1120-F if, during thetax year, it:q Overpaid income tax that it wants refunded.q Engaged in a trade or business in the UnitedStates, whether or not it had income from that

trade or business.q Had income, gains, or losses treated as ifthey were effectively connected with that U.S.trade or business. See Section II on page 7 forthe definition of effectively connected income.q Had income from any U.S. source (even if itsincome is tax exempt under an income taxtreaty or code section).

Others that must file Form 1120-F:q A Mexican or Canadian branch of a U.S.mutual life insurance company. The branchmust file Form 1120-F on the same basis as aforeign corporation if the U.S. company electsto exclude the branch's income and expensesfrom its own gross income.q A receiver, assignee, or trustee in dissolutionor bankruptcy, if that person has or holds titleto virtually all of a foreign corporation's property

or business. Form 1120-F is due whether ornot the property or business is being operated.q An agent in the United States, if the foreigncorporation has no office or place of businessin the United States when the return is due.Treaty Exemption. If the corporation does notowe any tax because it is claiming a treatyexemption, it must still file Form 1120-F toshow that the income was exempted by treaty.However the corporation should only completethe identifying information at the top of page 1and Item W at the bottom of page 5.

If the foreign corporation does not owe thebranch profits tax or the tax on excess interestbecause it is claiming a treaty exemption,

complete Item W and attach a statementexplaining why the corporation is a qualifiedresident or otherwise qualifies for treatybenefits.Note: An exemption from tax under Section IIbased on the permanent establishment articleof an income tax treaty does not necessarilyexempt the corporation from the branch profitstax.

Consolidated returns. A foreign corporationcannot belong to an affiliated group ofcorporations that files a consolidated returnunless it is a Canadian or Mexican corporationmaintained solely for complying with the lawsof Canada or Mexico for title and operation ofproperty.

Exceptions From Filing

A foreign corporation does not need to fileForm 1120-F if any of the following apply:q Its only income is not subject to U.S. taxationunder section 881(d).q It is a beneficiary of an estate or trustengaged in a U.S. trade or business, but woulditself otherwise not need to file.q It files Form 1120-L, U.S. Life InsuranceCompany Income Tax Return, as a foreign lifeinsurance company, or Form 1120-PC, U.S.Property and Casualty Insurance CompanyIncome Tax Return, as a foreign property andcasualty insurance company.q It did not engage in a U.S. trade or business

during the year, and its full U.S. tax waswithheld at source.q It has filed Form 8279, Election To BeTreated as a FSC or as a Small FSC, and theelection is still in effect. These corporationsmust file Form 1120-FSC, U.S. Income TaxReturn of a Foreign Sales Corporation.

When To File

Foreign Corporation With An Office inthe U.S.

A foreign corporation that maintains an officeor place of business in the United States must:q File Form 1120-F by the 15th day of the 3rdmonth after the end of its tax year, ORq Get an extension of time to file.

To get an extension, the corporation mayEITHER:

1. File Form 7004, Application forAutomatic Extension of Time To FileCorporation Income Tax Return, by the 15thday of the 3rd month after the end of its taxyear to obtain a 6-month extension.Note: The extension granted by the timelyfiling of Form 7004 doesnotextend the timefor payment of the tax. If the tax is paid afterthe 15th day of the 3rd month following theclose of the corporation's tax year, thecorporation must pay interest on the latepayment and is subject to the penalty for latepayment of tax.

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OR2. Get a 3-month extension by attaching to

Form 1120-F the statement described inRegulations section 1.6081-5. If additional timeis needed beyond the 3 month extension, thenfile Form 7004 before the end of the 3-monthextension period to obtain up to an additional3 months to file. If Form 7004 is not filed by theexpiration of the 3-month extension period, andthe corporation files its income tax return aftersuch period, it may be liable for the penalty forlate filing of return described on page 4. In noevent may the total extension period exceed 6months from the original due date of the return

(i.e., the return must be filed by the 15th dayof the 9th month after the end of its tax year).See Rev. Rul. 93-85, 1993-2 C.B. 297.

Note: The corporation is still required to paythe tax due by the 15th day of the 3rd monthafter the end of its tax year. If it does not, thecorporation must pay the interest on the latepayment but isnotsubject to the penalty forlate payment of tax if it pays the tax due by the15th day of the 6th month after the end of itstax year.

CAUTION

!The options described in1 and2aboveare mutually exclusive. If a corporationchooses the option described in1 to

extend the time to file, it maynotlater choosethe option described in2.

Foreign Corporation With No Office orPlace of Business in the U.S.

If the foreign corporation does not maintain anoffice or place of business in the United Statesit must:q File Form 1120-F by the 15th day of the 6thmonth after the end of its tax year; ORq File Form 7004 to request a 6-monthextension of time to file.Note: The extension does not extend the timefor payment of tax. If the tax is paid after the15th day of the 6th month after the end of itstax year, the corporation must pay interest onthe late payment and a penalty for latepayment of tax may apply. SeeInterest andPenaltieson page 4.

Other Filing Requirements

q A new corporation filing a short-period returnmust generally file by the 15th day of the 3rdmonth after the short period ends.q A corporation that has dissolved mustgenerally file by the 15th day of the 3rd monthafter the date it dissolved.q If the due date of any filing falls on aSaturday, Sunday, or legal holiday, thecorporation may file on the next business day.q Form 1120-F must be filed on a timely basisand in a true and accurate manner in order fora foreign corporation to take deductions andcredits against its effectively connectedincome. For these purposes, Form 1120-F isgenerally considered to be timely filed if it isfiled no later than 18 months after the due dateof the current year's return. An exception mayapply to foreign corporations that have yet tofile Form 1120-F for the preceding tax year.q A foreign corporation is allowed the followingdeductions and credits regardless of whetherForm 1120-F is timely filed:

1. The charitable contributions deduction(page 3, Section II, line 19);

2. The credit from Form 2439 (page 1, line6f);

3. The credit for Federal tax on fuels (page1, line 6g); and

4. U.S. income tax paid or withheld atsource (page 1, line 6h).See Regulations section 1.882-4 for details.

Private Delivery Services

You can use certain private delivery servicesdesignated by the IRS to meet the timelymailing as timely filing/paying rule for taxreturns and payments. The most recent list ofdesignated private delivery services waspublished by the IRS in August 1999. The listincludes only the following:q Airborne Express (Airborne): Overnight AirExpress Service, Next Afternoon Service,Second Day Service.q DHL Worldwide Express (DHL): DHLSameDay Service, DHL USA Overnight.

q Federal Express (FedEx): FedEx PriorityOvernight, FedEx Standard Overnight, FedEx2 Day.q United Parcel Service (UPS): UPS Next DayAir, UPS Next Day Air Saver, UPS 2nd DayAir, UPS 2nd Day Air A.M.

The private delivery service can tell you howto get written proof of the mailing date.

Who Must SignThe return must be signed and dated by:q The president, vice president, treasurer,assistant treasurer, chief accounting officer; orq Any other corporate officer (such as taxofficer) authorized to sign.

Receivers, trustees, or assignees must alsosign and date any return filed on behalf of a

corporation.If a corporate officer completes Form

1120-F, the Paid Preparer's space shouldremain blank. Anyone who prepares Form1120-F but does not charge the corporationshould not sign the return. Generally, anyonewho is paid to prepare the return must sign itand fill in the Paid Preparer's Use Only area.

The paid preparer must complete therequired preparer information andq Sign the return, by hand, in the spaceprovided for the preparer's signature (signaturestamps or labels are not acceptable).q Give a copy of the return to the taxpayer.

Where To FileFile Form 1120-F with the Internal RevenueService Center, Philadelphia, PA 19255.

Other Forms, Returns,Schedules, and StatementsThat May Be RequiredA foreign corporation may have to file some ofthe following forms. See the forms for moreinformation.

Information Returns

Form 1098, Mortgage Interest Statement, isused to report the receipt from any individualof $600 or more of mortgage interest andpoints in the course of the corporation's tradeor business.

Forms 1099-A is used to report acquisitionsand abandonments of secured property.Form 1099-B is used to report proceeds frombroker and barter exchange transactions.Form 1099-C is used to report cancellation ofa debt.Form 1099-DIV is used to report certaindividends and distributions.Form 1099-INT is used to report interestincome.Form 1099-LTC is used to report certainpayments made under a long-term careinsurance contract and certain accelerateddeath benefits.

Form 1099-MISC is used to reportmiscellaneous income (e.g., payments tocertain fishing boat crew members; paymentsto providers of health and medical services;gross proceeds paid to attorneys;miscellaneous income payments; andnon-employee compensation).Form 1099-MSA is used to report distributionsfrom a medical savings account (MSA) orMedicare+Choice MSA.Form 1099-OID is used to report original issuediscount.Form 1099-PATR is used to report

distributions from cooperatives to their patrons.Form 1099-R is used to report distributionsfrom retirement or profit-sharing plans, anyindividual retirement arrangements (IRAs), orinsurance contracts.Form 1099-S is used to report proceeds fromreal estate transactions.Form W-2, Wage and Tax Statement (andForm W-3, Transmittal of Wage and TaxStatements), is used to report withheld income,wages, tips, other compensation, socialsecurity, and Medicare taxes for an employee.Form 5498, IRA Contribution Information, isused to report contributions (including rollovercontributions) to any IRA, Roth conversions,and the fair market value of the account.Form 5498-MSA, MSA or Medicare+ChoiceMSA Information, is used to report

contributions to a medical savings account(MSA) and the value of an MSA orMedicare+Choice MSA.Form 8300, Report of Cash Payments Over$10,000 Received in a Trade or Business, isfiled to report the receipt of more than $10,000in cash or foreign currency in one transactionor a series of related transactions.

Note: To transmit Forms 1098, 1099, and5498, getForm 1096, Annual Summary andTransmittal of U.S. Information Returns.

Employment Tax Returns

Form 940 or Form 940EZ, Employer's AnnualFederal Unemployment (FUTA) Tax Return, isused to report annual Federal unemployment(FUTA) tax. The tax applies if the corporationeither:q Paid wages of $1,500 or more in anycalendar quarter in 1998 or 1999; orq Had at least one employee who worked forthe corporation for some part of a day in any20 or more different weeks in 1998 or 20 ormore different weeks in 1999.Form 941, Employer's Quarterly Federal TaxReturn (or, for agricultural employers, Form943, Employer's Annual Tax Return forAgricultural Employees), is filed quarterly toreport payroll income tax withheld, andemployer and employee social security andMedicare taxes. Also, see Trust fundrecovery penalty on page 5.Form 945, Annual Return of Withheld FederalIncome Tax, is filed to report income taxwithholding from nonpayroll distributions (e.g.,

pensions, annuities, IRAs, military retirement,gambling winnings, Indian gaming profits, andbackup withholding). Also, see Trust fundrecovery penalty on page 5.

International Forms

Form 1042, Annual Withholding Tax Return forU.S. Source Income of Foreign Persons, andForm 1042-S, Foreign Person's U.S. SourceIncome Subject to Withholding, are used toreport and send withheld tax on payments ordistributions made to nonresident alienindividuals, foreign partnerships, or foreigncorporations. Also, see sections 1441 and1442, and Pub. 515, Withholding of Tax onNonresident Aliens and Foreign Corporations.

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Form 5471, Information Return of U.S.Persons With Respect to Certain ForeignCorporations, is filed by certain officers,directors, and shareholders of foreign personalholding companies to report the informationrequired by sections 551(c) and 6035. Formore information, see Form 5471 and itsinstructions.Form 5472, Information Return of a 25%Foreign-Owned U.S. Corporation or a ForeignCorporation Engaged in a U.S. Trade orBusiness, is filed by a foreign corporationengaged in a U.S. trade or business that hadcertain reportable transactions with a related

party. See Form 5472 for filing instructions andinformation for failure to file and maintainrecords.Form 5713, International Boycott Report, mustbe filed if the corporation had operations in orrelated to certain boycotting countries.Form 8288, U.S. Withholding Tax Return forDispositions by Foreign Persons of U.S. RealProperty Interests, and Form 8288-A,Statement of Withholding on Dispositions byForeign Persons of U.S. Real PropertyInterests. Use these forms to report andtransmit withheld tax on the sale of U.S. realproperty by a foreign person. However, fordistributions described in Regulations section1.1445-8, use Forms 1042 and 1042-S. Seesection 1445 and the related regulations foradditional information.

Form 8621, Return by a Shareholder of aPassive Foreign Investment Company orQualified Electing Fund, is filed by acorporation that was a shareholder in a passiveforeign investment company (under section1297) at any time during the tax year.

Other Forms

Form 720, Quarterly Federal Excise TaxReturn, is used to report and pay the luxury taxon passenger vehicles, environmental taxes,communications and air transportation taxes,fuel taxes, manufacturers taxes, shippassenger taxes, and certain other excisetaxes.Form 8264, Application for Registration of aTax Shelter, is used to apply for a tax shelterregistration number (used by tax shelterorganizers).Form 8271, Investor Reporting of Tax ShelterRegistration Number, is used to report aregistered tax shelter's registration number.This form must be filed with any return onwhich a deduction, loss, credit, or other taxbenefit is claimed or reported (or any incomeis reported) from an interest in a tax shelter.The requirement applies to all returns, includingapplications for tentative refund (Form 1139)and amended returns.Form 8275, Disclosure Statement, and Form8275R, Regulation Disclosure Statement, areused to disclose (to avoid parts of theaccuracy-related penalty or certain preparerpenalties) items or positions taken on a taxreturn that are not otherwise adequatelydisclosed on the tax return or that are contraryto Treasury regulations.Form 8594, Asset Acquisition Statement, isused to report the purchase or sale of a groupof assets that constitute a trade or business ifgoodwill or going concern value attach to theassets.Form 8697, Interest Computation Under theLook-Back Method for Completed Long-TermContracts, is used to figure the interest due orto be refunded under the look-back method ofsection 460(b)(2). The look-back methodapplies to certain long-term contractsaccounted for under the percentage ofcompletion or percentage ofcompletion-capitalized cost method.

Form 8810, Corporate Passive Activity Lossand Credit Limitations, is used to figureallowable passive activity loss and credit forclosely held or personal service corporations.Form 8817, Allocation of Patronage andNonpatronage Income and Deductions, is usedto figure and report patronage andnonpatronage income and deductions (used bytaxable cooperatives).Form 8842, Election to Use DifferentAnnualization Periods for Corporate EstimatedTax, is used to elect one of the annualizationperiods in section 6655(e)(2) to figureestimated tax payments under the annualizedinstallment method.Form 8849, Claim for Refund of Excise Taxes,is used to claim a refund of excise taxesreported on Forms 720, 730, or 2290.Schedule PH (Form 1120), U.S. PersonalHolding Company Tax. See Line 4. PersonalHoldingCompany Tax, on page 6.

Statements

Stock ownership in foreign corporations.Attach the statement required by section 551(c)if:q The foreign corporation owned 5% or morein value of the outstanding stock of a foreignpersonal holding company; andq The corporation was required to include in itsgross income any undistributed foreign

personal holding company income from aforeign personal holding company.Transfers to a corporation controlled by thetransferor. If a person receives stock of acorporation in exchange for property, and nogain or loss is recognized under section 351,the person (transferor) and the transferee musteach attach to their tax returns the informationrequired by Regulations section 1.351-3.Statements instead of schedules. If theforeign corporation has no gross income for thetax year, do not complete the Form 1120-Fschedules. Instead, attach a statement to thereturn showing the types and amounts ofincome excluded from gross income.

Attachments

Attach Form 4136, Credit for Federal Tax Paid

on Fuels, after page 6, Form 1120-F. Attachschedules in alphabetical order and other formsin numerical order after Form 4136.

Complete every applicable entry space onForm 1120-F. Do not write See attachedinstead of completing the entry spaces. If morespace is needed on the forms or schedules,attach separate sheets, using the same sizeand format as on the printed forms. Show thetotals on the printed forms. Attach theseseparate sheets after all the schedules andforms. Be sure to put the corporation's nameand EIN on each sheet.

Accounting MethodsAn accounting method is a set of rules used to

determine when and how income andexpenses are reported.Figure taxable income using the method of

accounting regularly used in keeping thecorporation's books and records. Generally,permissible methods include:q Cash,q Accrual, orq Any other method authorized by the InternalRevenue Code.

In all cases, the method used must clearlyshow taxable income.

Generally, a corporation (other than aqualified personal service corporation) mustuse the accrual method of accounting if its

average annual gross receipts exceed $5million. See section 448(c). A corporationengaged in farming operations must also usethe accrual method. For exceptions, seesection 447.

Under the accrual method, an amount isincludible in income when:q All the events have occurred that fix the rightto receive the income, andq The amount can be determined withreasonable accuracy.See Regulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer can

deduct accrued expenses in the tax year when:q All events that determine the liability haveoccurred,q The amount of the liability can be figured withreasonable accuracy, andq Economic performance takes place withrespect to the expense.

There are exceptions to the economicperformance rule for certain items, includingrecurring expenses. See section 461(h) and therelated regulations for the rules for determiningwhen economic performance takes place.

Long-term contracts (except for certain realproperty construction contracts) must generallybe accounted for using the percentage ofcompletion method described in section 460.See section 460 for general rules on long-termcontracts.

Mark-to-market accounting method.Generally, dealers in securities must use themark-to-market accounting method describedin section 475. Under this method, any securitythat is inventory to the dealer must be includedin inventory at its fair market value. Anysecurity held by a dealer that is not inventoryand that is held at the close of the tax year istreated as sold at its fair market value on thelast business day of the tax year. Any gain orloss must be taken into account in determininggross income. The gain or loss taken intoaccount is generally treated as ordinary gainor loss. For details, including exceptions, seesection 475, the related regulations, and Rev.Rul. 94-7, 1994-1 C.B. 151.

Dealers in commodities and traders insecurities and commoditiesmay elect to use

the mark-to-market accounting method. Tomake the election for tax years beginning onor after January 1, 1999, the corporation mustfile a statement describing the election, the firsttax year the election is to be effective, and, inthe case of an election for traders in securitiesor commodities, the trade or business for whichthe election is made. Except for new taxpayers,the statement must be filed by the due date(not including extensions) of the income taxreturn for the tax year immediately precedingthe election year and attached to that return,or if applicable, to a request for an extensionof time to file that return. For details, see Rev.Proc. 99-17, 1999-7 I.R.B. 52 and sections475(e) and (f).Change in accounting method. Generally,the corporation may change the method of

accounting used to report taxable income (forincome as a whole or for any material item)only by getting consent on Form 3115,Application for Change in Accounting Method.For more information, get Pub. 538,Accounting Periods and Methods.

Accounting PeriodsA corporation must figure its taxable incomeon the basis of a tax year. The tax year is theannual accounting period the corporation usesto keep its records and report its income andexpenses. Generally, corporations can use acalendar year or a fiscal year. Personal servicecorporations, however, must generally use a

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calendar year unless they meet one of theexceptions discussed in Item OPersonalService Corporation on page 7. Special rulesapply to specified foreign corporations. SeeSpecified Foreign Corporations below.

For more information about accountingperiods, see Temporary Regulations sections1.441-1T, 1.441-2T, and Pub. 538.Calendar year. If the calendar year is adoptedas the annual accounting period, thecorporation must maintain its books andrecords and report its income and expenses forthe period from January 1 through December31 of each year.Fiscal year. A fiscal year is 12 consecutivemonths ending on the last day of any monthexcept December. A 52-53 week year is afiscal year that varies from 52 to 53 weeks.Adoption of tax year. A corporation adoptsa tax year when it files its first income taxreturn. It must adopt a tax year by the due date(not including extensions) of its first income taxreturn.Change of tax year. Generally, a corporationmust get the consent of the IRS beforechanging its tax year by filing Form 1128,Application To Adopt, Change, or Retain a TaxYear. However, under certain conditions, acorporation (other than a personal servicecorporation) may change its tax year withoutgetting the consent. See Regulations section1.442-1 and Pub. 538.

Specified Foreign Corporations

The annual accounting period of a specifiedforeign corporation is generally required to bethe tax year of its majority U.S. shareholder.For more information, see section 898.

A specified foreign corporation is any foreigncorporation:q That is treated as a controlled foreigncorporation under subpart F (sections 951through 964), or is a foreign personal holdingcompany (as defined in section 552); andq In which more than 50% of the total votingpower or value of all classes of stock of thecorporation is treated as owned by a U.S.shareholder (section 898(b)(2)).

If the specified foreign corporation made an

election under section 898(c)(1)(B) or changedits tax year to conform to the tax year requiredby section 898, see Rev. Proc. 90-26, 1990-1C.B. 512.

Any specified foreign corporation that wishesto change to any U.S. tax year (or to changeto its pre-change year), must get the consentof the IRS using the procedures of section 442and the related regulations. For more details,see Notice 95-13, 1995-1 C.B. 296.

Rounding Off to Whole DollarsThe corporation may show amounts on thereturn and accompanying schedules as wholedollars. To do so, drop amounts less than 50cents and increase amounts from 50 centsthrough 99 cents to the next higher dollar.

RecordkeepingKeep the corporation's records for as long asthey may be needed for the administration ofany provision of the Internal Revenue Code.Usually, records that support an item ofincome, deduction, or credit on the return mustbe kept for 3 years from the date the return isdue or filed, whichever is later. Keep recordsthat verify the corporation's basis in property foras long as they are needed to figure the basisof the original or replacement property.

The corporation should keep copies of allfiled returns. They help in preparing futurereturns and amended returns.

Payment of Tax DueThe requirements for payment of tax dependon whether the foreign corporation has anoffice or place of business in the United States.q Foreign corporations that do not maintainan office or place of business in the UnitedStates must pay the tax due (page 1, line 8) infull when they file their tax return, but no laterthan the 15th day of the 6th month after theend of the tax year.

The tax must be paid directly to the IRS (i.e.,do not use the depository method of taxpayment described below). The tax may be

paid by check or money order, payable to theUnited States Treasury. To help ensure propercrediting, write the corporation's employeridentification number (EIN), Form 1120-F,and the tax period to which the paymentapplies on the check or money order. Enclosethe payment when the corporation files Form1120-F with the Internal Revenue ServiceCenter, Philadelphia, PA 19255.q Foreign corporations that do maintain anoffice or place of business in the United Statesmust pay the tax due (page 1, line 8) in fullwhen they file their tax return, but no later thanthe 15th day of the 3rd month after the end ofthe tax year.

Depository Method of Tax Payment

The two methods of depositing corporate

income taxes for corporations that do maintainan office or place of business in the UnitedStates are discussed below.

Electronic Deposit Requirement

If the corporation maintains an office or placeof business in the United States, thecorporation must make electronic deposits ofall depository tax liabilities that occur after1999 if it deposited, in 1998, more than$200,000 in all Federal depository taxes (suchas employment tax, excise tax, or corporateincome tax). If the corporation is alreadydepositing electronically but its deposits did notexceed $200,000, the corporation maycontinue to do so, or it may make deposits withForm 8109, Federal Tax Deposit Coupon(below). Corporations that exceed the new

$200,000 threshold must continue to depositelectronically in all later years.The Electronic Federal Tax Payment System

(EFTPS) must be used to make electronicdeposits. If the corporation is required to makeelectronic deposits and fails to do so, it maybe subject to a 10% penalty.

A corporation that is not required to makeelectronic deposits may voluntarily participatein EFTPS. To enroll in EFTPS, call1-800-555-4477 or 1-800-945-8400. Forgeneral information about EFTPS, call1-800-829-1040.

Deposits With Form 8109

If the corporation maintains an office or placeof business in the United States and does notuse EFTPS, deposit corporate income tax

payments (and estimated tax payments) withForm 8109. Do not send deposits directly to anIRS office. Mail or deliver the completed Form8109 with the payment to a qualified depositaryfor Federal taxes or to the Federal Reservebank (FRB) servicing the corporation'sgeographic area. Make checks or moneyorders payable to that depositary or FRB. Tohelp ensure proper crediting, write thecorporation's EIN, the tax period to which thedeposit applies, and Form 1120-F on thecheck or money order. Be sure to darken the1120 box on the coupon. Records of thesedeposits will be sent to the IRS.

A penalty may be imposed if the depositsare mailed or delivered to an IRS office ratherthan to an authorized depositary or FRB. Formore information on deposits, see theinstructions in the coupon booklet (Form 8109)and Pub. 583, Starting a Business andKeeping Records.

CAUTION

!If the corporation owes tax when it filesForm 1120-F, do not include thepayment with the tax return. Instead,

mail or deliver the payment with Form 8109 toa qualified depositary or FRB or use EFTPS, ifapplicable.

Estimated Tax PaymentsGenerally, the following rules apply to a foreigncorporation's payments of estimated tax.q The corporation must make installmentpayments of estimated tax if it expects itsestimated tax to be $500 or more.q The installments are due by the 15th day ofthe 4th, 6th, 9th, and 12th months of the taxyear. If any date falls on a Saturday, Sunday,or legal holiday, the installment is due on thenext regular business day.q Use Form 1120-W, Estimated Tax forCorporations, as a worksheet to computeestimated tax.q If the foreign corporation maintains an officeor place of business in the United States, and

does not use EFTPS, use the deposit coupons(Forms 8109) to make deposits of estimatedtax.

For more information on estimated taxpayments, including penalties that apply if thecorporation fails to make required payments,see Line 7. Estimated Tax Penalty on page6.Overpaid estimated tax. If the corporationoverpaid estimated tax, it may be able to get aquick refund by filing Form 4466, CorporationApplication for Quick Refund of Overpaymentof Estimated Tax. The overpayment must beat least 10% of the corporation's expectedincome tax liability and at least $500. File Form4466 before the 16th day of the 3rd month afterthe end of the tax year, but before thecorporation files its income tax return. Do not

file Form 4466 before the end of thecorporation's tax year.

Interest and PenaltiesInterest. Interest is charged on taxes paid lateeven if an extension of time to file is granted.Interest is also charged on penalties imposedfor failure to file, negligence, fraud, grossvaluation overstatements, and substantialunderstatements of tax from the due date(including extensions) to the date of payment.The interest charge is figured at a ratedetermined under section 6621.Penalty for late filing of return. A corporationthat does not file its tax return by the due date,including extensions, may be penalized 5% ofthe unpaid tax for each month or part of amonth the return is late, up to a maximum of

25% of the unpaid tax. The minimum penaltyfor a return that is over 60 days late is thesmaller of the tax due or $100. The penalty willnot be imposed if the corporation can show thatthe failure to file on time was due to reasonablecause. Corporations that file late must attacha statement explaining the reasonable cause.Penalty for late payment of tax. Acorporation that does not pay the tax when duegenerally may be penalized 1/2 of 1% of theunpaid tax for each month or part of a monththe tax is not paid, up to a maximum of 25%of the unpaid tax. The penalty will not beimposed if the corporation can show that the

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failure to pay on time was due to reasonablecause.Trust fund recovery penalty. This penaltymay apply if certain excise, income, socialsecurity, and Medicare taxes that must becollected or withheld are not collected orwithheld, or these taxes are not paid. Thesetaxes are generally reported on Forms 720,941, 943, or 945. (See Other Forms, Returns,Schedules, and Statements That May beRequired on page 2.) The trust fund recoverypenalty may be imposed on all persons whoare determined by the IRS to have beenresponsible for collecting, accounting for, and

paying over these taxes, and who acted willfullyin not doing so. The penalty is equal to theunpaid trust fund tax. See the instructions forForm 720, Pub. 15 (Circular E), Employer'sTax Guide, or Pub. 51 (Circular A), AgriculturalEmployer's Tax Guide, for details, including thedefinition of responsible persons.Other penalties. Other penalties can beimposed for negligence, substantialunderstatement of tax, and fraud. See sections6662 and 6663.

Claim for Refund or CreditIf a foreign corporation has only income that isnot effectively connected with the conduct of aU.S. trade or business and Form 1120-F isbeing used as a claim for refund or credit of tax

paid or withheld at source, attach Form(s)1042-S, 8805, 8288-A, etc., to the return toverify the amount(s) of withholding creditreported. Include all income from U.S. sourceson the return, even though all tax due on it waspaid or withheld at source.

If the refund results from tax that waswithheld at source, a statement from thepayer/withholding agent (or from anintermediate nominee acting on thecorporation's behalf as the foreign recipient ofthe income) may be substituted for Form1042-S. The statement should show:q The amount(s) of tax withheld;q The name(s) and address(es) of the U.S.withholding agent(s);q The U.S. tax identification number of the U.S.withholding agent;q The name in which the tax was withheld, ifdifferent from the name of the taxpayerclaiming the refund or credit; andq If applicable, enough information to show thatthe taxpayer was entitled to a reduced tax rateunder a treaty.

Special Rules for ForeignCorporations

Source Of Income Rules

The source of income is important indetermining the extent to which income istaxable to foreign corporations. Each type ofincome has its own sourcing rules.

Interest IncomeThe source of interest income is usuallydetermined by the residence of the obligor.

Example. Interest paid by an obligor who isa resident of the United States is U.S. sourceincome, and interest paid by an obligor who isa resident of a country other than the UnitedStates is foreign source income.Exceptions. The following types of interestincome are treated as foreign source income:q Interest income received from foreignbranches of U.S. banks and savings and loanassociations.

q Interest income received from a U.S.corporation or a resident alien individual, if 80%or more of the U.S. corporation's (or residentalien individual's) gross income is active foreignbusiness income during the testing period.

Active foreign business income is incomefrom sources outside the United Statesattributable to the active conduct of a trade orbusiness in a foreign country or U.S.possession.

The testing period is generally the 3 taxyears of the U.S. corporation or resident alienindividual preceding the tax year during whichthe interest is paid. If the payer existed forfewer than 3 years before the tax year of thepayment, the testing period is the term of thepayer's existence before the current year. If thepayment is made during the payer's first taxyear, that year is the testing period.q The interest allowable as a deduction to aforeign corporation (under Regulations section1.882-5) in figuring its effectively connectedtaxable income is treated as paid by a domesticcorporation. This interest is treated as U.S.source interest, although the actual payer ofthe interest is a foreign corporation. For moredetails, see Part IITax on Excess Intereston page 16.Look-thru rule. If the foreign corporation is arelated person to a U.S. corporation orresident alien individual that meets the 80%rule described above, the foreign corporation

will have foreign source income only when theincome of the payer was from foreign sources.See section 861(c)(2)(B) for more information.

Dividend Income

The source of dividend income is usuallydetermined by the payer.Example. Dividends paid by a corporation thatwas incorporated in the United States are U.S.source income; and dividends paid by acorporation that was incorporated in a foreigncountry are foreign source income.Exceptions. Dividends paid by a U.S.corporation are foreign source income:q If the U.S. corporation has made a validelection under section 936 (or section 30A),relating to certain U.S. corporations operatingin a U.S. possession, orq To the extent the dividends are from qualifiedexport receipts described in section 993(a)(1)(other than interest and gains described insection 995(b)(1)).

Dividends paid by a foreign corporation areU.S. source income:q If the dividend is treated under section 243(e)as a distribution from the accumulated profitsof a predecessor U.S. corporation; orq To the extent the foreign corporation'seffectively connected gross income for thetesting period (defined below) bears to all of theforeign corporation's gross income for thetesting period, but only if 25% or more of theforeign corporation's gross income during thetesting period was effectively connected withthe conduct of a U.S. trade or business.

The testing period is generally the 3 taxyears of the foreign corporation payerpreceding the tax year during which it declaredthe dividend. If the foreign corporation existedfor fewer than 3 years before the tax year ofdeclaration, the testing period is the term of theforeign corporation's existence before thecurrent year. If the foreign corporation declaredthe dividend in its first tax year, that year is thetesting period. Regardless of source, however,there is no tax imposed on any dividends paidby a foreign corporation out of earnings andprofits for a tax year in which the foreigncorporation was subject to the branch profitstax (determined after application of any incometax treaty).

Rent and Royalty Income

The source of rent and royalty income for theuse of property is determined based on wherethe property is located.

Income From the Sale or Exchange of RealEstate

The source of this income is determined basedon where the property is located.

Income From the Sale or Exchange ofPersonal Property

Income from the sale of personal property by

a foreign corporation is sourced as follows:q Income from the purchase and sale ofinventory property is generally sourced undersections 861(a)(6) and 862(a)(6);q Income from the production and sale ofinventory property is generally sourced undersection 863(b)(2);q Income from the sale of depreciable propertyis generally sourced under section 865(c); andq Income from the sale of intangibles isgenerally sourced under section 865(d).Foreign corporations with an office or fixedplace of business in the United States.Income from the sale of personal propertyattributable to such office or fixed place ofbusiness is U.S. source income regardless ofany of the above rules relating to the sourceof income from the sale or exchange of

personal property unless the foreigncorporation is an export trade corporation (seesections 865(e)(2)(A) and 971).Exception. Income from the sale of inventoryproperty is foreign source income if the goodswere sold for use, disposition, or consumptionoutside the United States and a foreign officeof the corporation materially participated in thesale.

Other Special Rules

Basis of Property and Inventory Costs forProperty Imported by a Related Person

If property is imported into the United Statesby a related person in a transaction and theproperty has a customs value, the basis orinventory cost to the importer cannot exceed

the customs value. For more information, seesection 1059A.

Income of Foreign Governments andInternational Organizations

Income of foreign governments andinternational organizations from the followingsources is generally not subject to taxation:q Investments in the United States in stocks,bonds, or other domestic securities owned bysuch foreign government or internationalorganization.q Interest on deposits in banks in the UnitedStates of money belonging to such foreigngovernment or international organization.q Investments in the United States in financialinstruments held (by a foreign government) inexecuting governmental financial or monetary

policy.Note: The income described in section892(a)(2) that is received directly or indirectlyfrom commercial activities is subject to both taxand withholding.

Specific Instructions

Period CoveredFile the 1999 return for calendar year 1999 andfiscal years that begin in 1999 and end in 2000.

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For a fiscal year, fill in the tax year space at thetop of the form.Note: The 1999 Form 1120-F may also beused if:q The corporation has a tax year of less than12 months that begins and ends in 2000, andq The 2000 Form 1120-F is not yet availableat the time the corporation is required to file itsreturn.The corporation must show its 2000 tax yearon the 1999 Form 1120-F and take intoaccount any tax law changes that are effectivefor tax years beginning after December 31,1999.

AddressInclude the suite, room, or other unit numberafter the street address. If a preaddressed labelis used, include this information on the label. Ifthe Post Office does not deliver mail to thestreet address and the corporation has a P.O.box, show the box number instead.

If a foreign address, enter the informationin the following order: city, province or state,and country. Follow the country's practice forentering the postal Code. Please do notabbreviate the country's name.

If the corporation's address has changedfrom the last time Form 1120-F was filed, checkthe box at the top of page 1.Note: If achange in addressoccurs after thereturn is filed, useForm 8822, Change ofAddress, to notify the IRS of the new address.

Employer Identification Number(EIN)Show the corporation's correct EIN. If thecorporation does not have an EIN, it shouldapply for one on Form SS-4, Application forEmployer Identification Number. Form SS-4can be obtained at Social SecurityAdministration (SSA) offices, or by calling1-800-TAX-FORM. If the corporation has notreceived its EIN by the time the return is due,write Applied for in the space for the EIN. SeePub. 583 for details.

Computation of Tax Due orOverpayment

Line 4. Personal Holding Company Tax

If the corporation is a personal holdingcompany (as defined in section 542) but not aforeign personal holding company, it must fileSchedule PH (Form 1120) with Form 1120-Fand report the personal holding company taxon line 4. See section 542 and Schedule PH(Form 1120) for details.

Line 6b. Estimated Tax Payments

Enter any estimated tax payments thecorporation made for the tax year.Beneficiaries of trusts. If the corporation isthe beneficiary of a trust, and the trust makes

a section 643(g) election to credit its estimatedtax payments to its beneficiaries, include thecorporation's share of the payment in the totalfor line 6b. Write T and the amount on thedotted line next to the entry space.

Line 6f. Credit for Tax Paid onUndistributed Capital Gains

Enter the credit (from Form 2439, Notice toShareholder of Undistributed Long-TermCapital Gains) for the corporation's share of thetax paid by a regulated investment companyor a real estate investment trust onundistributed long-term capital gains includedin the corporation's income. Attach Form 2439to Form 1120-F.

Line 6g. Credit for Federal Tax onFuels

Complete and attach Form 4136 if thecorporation qualifies to take this credit.Credit for ozone-depleting chemicals.Include on line 6g any credit the corporation isclaiming under section 4682(g)(2) for tax paidon ozone-depleting chemicals. Write ODC onthe dotted line to the left of the entry space.

Line 6i. Total Payments

Backup withholding. If the corporation hadincome tax withheld from any payments it

received, because, for example, it failed to givethe payer its correct EIN, include the amountwithheld in the total for line 6i. This type ofwithholding is called backup withholding. Showthe amount withheld in the blank space in theright-hand column between lines 5 and 6i, andwrite backup withholding.

Line 7. Estimated Tax Penalty

A corporation that does not make estimated taxpayments when due may be subject to anunderpayment penalty for the period ofunderpayment. Generally, a corporation issubject to the penalty if its tax liability is $500or more, and it did not timely pay the smallerof:q 100% of its tax liability for 1999, orq 100% of its prior year's tax.See section 6655 for details and exceptions,including special rules for large corporations.

Use Form 2220, Underpayment ofEstimated Tax by Corporations, to see if thecorporation owes a penalty and to figure theamount of the penalty. Generally, thecorporation does not have to file this formbecause the IRS can figure any penalty andbill the corporation for it. However, even if thecorporation does not owe the penalty, completeand attach Form 2220 if:q The annualized income or adjusted seasonalinstallment method is used; orq The corporation is a large corporationcomputing its first required installment basedon the prior year's tax. (See the Form 2220instructions for the definition of a largecorporation.)

If you attach Form 2220, check the box online 7 of Form 1120-F and enter any penaltyon this line.

Section I.Certain Gains,Profits, and Income From U.S.Sources That Are NOTEffectively Connected With theConduct of a Trade or Businessin the United StatesInclude in Section I amounts received by theforeign corporation that meet all of thefollowing conditions:q The amount received is fixed or

determinable, annual or periodic (FDAP). Seebelow.q The amount received is includible in thegross income of the foreign corporation.q The amount received is from U.S. sources(see Source of Income Rules on page 5).q The amount received is not effectivelyconnected with the conduct of a U.S. trade orbusiness. See Section II on page 7.q The amount received is not exempt fromtaxation.

For more information, see section 881(a)and Regulations section 1.881-2.

Amounts fixed or determinable, annualor periodic include:

1. Interest (other than original issuediscount (OID) as defined in section 1273),dividends, rents, royalties, salaries, wages,premiums, annuities, compensation, and otherFDAP gains, profits, and income.

2. Gains described in section 631(b) or (c),relating to disposal of timber, coal, or domesticiron ore with a retained economic interest.

3. On a sale or exchange of an OIDobligation, the amount of the OID accruingwhile the obligation was held by the foreigncorporation, unless this amount was taken intoaccount on a payment.

4. On a payment received on an OIDobligation, the amount of the OID accruingwhile the obligation was held by the foreigncorporation, if such OID was not previouslytaken into account and if the tax imposed onthe OID does not exceed the payment receivedless the tax imposed on any interest includedin the payment received. This rule applies topayments received for OID obligations issuedafter March 31, 1972.

5. Gains from the sale or exchange ofpatents, copyrights, and other intangibleproperty if the gains are from payments that arecontingent on the productivity, use, ordisposition of the property or interest sold orexchanged.

For rules that apply to other OID obligations,see Pub. 515, Withholding of Tax onNonresident Aliens and Foreign Corporations.Note: Certain portfolio interest and OID arenot taxable for obligations issued after July 18,1984. See section 881(c) for more details.

Important: For purposes of determiningwhether its income is taxable under section881(a), a corporation created or organized inGuam, American Samoa, the Northern MarianaIslands, or the U.S. Virgin Islands will not betreated as a foreign corporation if it meets therules of section 881(b).

Line 9. Gross Transportation Income

A 4% tax is imposed on a foreign corporation'sU.S. source gross transportation income for thetax year. U.S. source gross transportationincome generally is any gross income that istransportation income if such income is treated

as from U.S. sources.Transportation income is any income fromor connected with:q The use (or hiring or leasing for use) of avessel or aircraft, orq The performance of services directly relatedto the use of a vessel or aircraft. (The termvessel or aircraft includes any container usedin connection with a vessel or aircraft.)

Generally, 50% of all transportation incomethat is attributable to transportation that eitherbegins or ends in the United States is treatedas from U.S. sources. See section 863(c)(2)(B)for a special rule for personal service income.

U.S. source gross transportation incomedoes not include income that is:q Effectively connected with the conduct of aU.S. trade or business, orq Taxable in a possession of the United Statesunder the provisions of the Internal RevenueCode as applied to that possession.

Transportation income of the corporation willnot be treated as effectively connected incomeunless:q The corporation has a fixed place of businessin the United States involved in the earning oftransportation income, andq Substantially all of the corporation's U.S.source gross transportation income(determined without regard to the rule that suchincome does not include effectively connected

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income) is attributable to regularly scheduledtransportation (or, in the case of income fromthe leasing of a vessel or aircraft, is attributableto a fixed place of business in the UnitedStates).For more information, see section 887.

Enter the foreign corporation's U.S. sourcegross transportation income on line 9, column(b). Also, attach a statement showing the datesthe vessels or aircraft entered or left the UnitedStates and the amount of gross income foreach trip.

Additional Information RequiredBe sure to complete all items at the bottom ofpage 2 that apply to the corporation.

Item OPersonal Service Corporation

A personal service corporation is a corporationwhose principal activity for the testing period(defined below) for the tax year is theperformance of personal services. The servicesmust be substantially performed byemployee-owners. Employee-owners must ownmore than 10% of the fair market value of thecorporation's outstanding stock on the last dayof the testing period.Testing period. Generally, the testing periodfor a tax year is the prior tax year. The testingperiod for a new corporation starts with the first

day of its first tax year and ends on the earlierof:q The last day of its first tax year, orq The last day of the calendar year in which thefirst tax year began.Principal activity. The principal activity of acorporation is considered to be theperformance of personal services if, during thetesting period, the corporation's compensationcosts for the performance of personal services(defined below), are more than 50% of its totalcompensation costs.Performance of personal services. Personalservices are those performed in the health, law,engineering, architecture, accounting, actuarialscience, performing arts, or consulting fields(as defined in Temporary Regulations section1.448-1T(e)). The term performance ofpersonal services includes any activityinvolving the performance of personal servicesin these fields.Substantial performance byemployee-owners. Personal services aresubstantially performed by employee-owners if,for the testing period, more than 20% of thecorporation's compensation cost for theperformance of personal services are forservices performed by employee-owners.Employee-owner. A person is considered tobe an employee-owner if the person:q Is an employee of the corporation on any dayof the testing period, andq Owns any outstanding stock of thecorporation on any day of the testing period.

Stock ownership is determined under the

attribution rules of section 318 (except thatany is substituted for 50% in section318(a)(2)(C)).Accounting period. A personal servicecorporation must use a calendar tax yearunless:q It can establish a business purpose for adifferent tax year (see Rev. Proc. 87-32,1987-2 C.B. 396, and Rev. Rul 87-57, 1987-2C.B. 117), orq It elects under section 444 to have a tax yearother than a calendar year. To make theelection, get Form 8716, Election To Have aTax Year Other Than a Required Tax Year.

Personal service corporations that want tochange their tax year must also file Form 1128.

If a corporation makes the section 444election, its deduction for certain amounts paidto employee-owners may be limited. GetSchedule H (Form 1120), Section 280HLimitations for a Personal Service Corporation(PSC), to figure the maximum deduction.

If a section 444 election is terminated andthe termination results in a short tax year, typeor print at the top of the first page of Form1120F for the short tax year, SECTION 444ELECTION TERMINATED. See TemporaryRegulations section 1.444-1T(a)(5) for moreinformation.

For more information about personal servicecorporations, see Temporary Regulationssection 1.441-4T.Other rules. For other rules that apply topersonal service corporations, see Passiveactivity limitations on page 9 andContributions of property other than cashon page 10.

Item P

Show any tax-exempt interest received oraccrued. Include any exempt-interest dividendsreceived as a shareholder in a mutual fund orother regulated investment company.

Item R

Check this box if the corporation elects undersection 172(b)(3) to forego the carrybackperiod for a net operating loss (NOL). If thisbox is checked, do not attach the statementdescribed in Temporary Regulations section301.9100-12T(d).

Item S

Enter the amount of the NOL carryover to thetax year from prior years, even if some of theloss is used to offset income on this return. Theamount to enter is the total of all NOLsgenerated in prior years but not used to offsetincome (either as a carryback or carryover) toa tax year prior to 1999. Do not reduce theamount by any NOL deduction reported onpage 3, Section II, line 30a.

Pub. 536, Net Operating Losses, has aworksheet for figuring a corporation's NOLcarryover.

Item T

Check the Yes box if the corporation is asubsidiary in a parent-subsidiary controlledgroup. This applies even if the corporation is asubsidiary member of one group and the parentcorporation of another.Note: If the corporation is an excludedmember of a controlled group (see section1563(b)(2)), it is still considered a member ofa controlled group for this purpose.

A parent-subsidiary controlled group isone or more chains of corporations connectedthrough stock ownership (section 1563(a)(1)).Both of the following requirements must bemet:

1. 80% of the total combined voting powerof all classes of stock entitled to vote or at least80% of the total value of all classes of stockof each corporation in the group (except theparent) must be owned by one or more of theother corporations in the group.

2. The common parent must own at least80% of the total combined voting power of allclasses of stock entitled to vote or at least 80%of the total value of all classes of stock of atleast one of the other corporations in the group.Stock owned directly by other members of thegroup is not counted when computing thevoting power or value.

See section 1563(d)(1) for the definition ofstock for purposes of determining the stockownership above.

Section II.Income EffectivelyConnected With the Conduct ofa Trade or Business in theUnited States

Foreign Corporations Engaged in aU.S. Trade or Business

These corporations are taxed on theireffectively connected income using the samegraduated tax rate schedule (see page 14) thatapplies to domestic corporations. Effectivelyconnected income can be U.S. source orforeign source.

U.S. Source Effectively Connected Income

Fixed or determinable, annual or periodic(FDAP) items are generally effectivelyconnected income (and are therefore includiblein Section II) if one or both of the following testsis met.Asset-use test. The FDAP items are fromassets used in, or held for use in, the conductof U.S. trade or business. For example, thefollowing items are effectively connectedincome:q Income earned on a trade or note receivableacquired in the conduct of the U.S. trade orbusiness.q Interest income earned from the temporaryinvestment of funds needed in the foreigncorporation's U.S. trade or business.Business-activities test. The activities of theU.S. trade or business were a material factorin the realization of the FDAP items.

If neither test is met, FDAP items aregenerally not effectively connected income(and are therefore includible in Section Iinstead of Section II).

For more information, see section 864(c)(2)and the examples in Regulations section1.864-4(c).

U.S. source income other than FDAP items

is effectively connected income.Foreign Source Effectively ConnectedIncome

Foreign source income is generally noteffectively connected income. However, if theforeign corporation has an office or other fixedplace of business in the United States, thefollowing types of foreign source income itreceives from that U.S. office are effectivelyconnected income:q Rents or royalties received for the useoutside the United States of intangible personalproperty described in section 862(a)(4) if fromthe active conduct of a U.S. trade or business;q Dividends or interest from foreign sources iffrom the active conduct of a U.S. banking,financing, or similar business, OR if the

principal business of the foreign corporation istrading in stocks or securities for its ownaccount; orq Income from the sale or exchange ofinventory outside the United States through theU.S. office, unless the property is sold orexchanged for use, consumption, or dispositionoutside the United States and an office of theforeign corporation in a foreign countrymaterially participated in the sale.

See section 864(c)(5)(A) and Regulationssection 1.864-7 for definition of office or otherfixed place of business in the United States.See sections 864(c)(5)(B) and (C) andRegulations section 1.864-6 for special rulesfor determining when foreign source income

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received by a foreign corporation is from anoffice or other fixed place of business in theUnited States.Foreign insurance companies. Foreignsource income of a foreign insurance companythat is attributable to its U.S. trade or businessis effectively connected income.Exceptions. Foreign source income thatwould otherwise be effectively connectedincome under any of the above rules for foreignsource income is excluded if:q It is foreign source dividends, interest, orroyalties paid by a foreign corporation in which

the taxpayer owns or is considered to own(within the meaning of section 958) 50% ormore of the total combined voting power of allclasses of stock entitled to vote; orq The taxpayer is a controlled foreigncorporation (as defined in section 957) and theforeign source income is subpart F income (asdefined in section 952).

For more information, see section 864(c)(4)and Regulations section 1.864-5.

Foreign Corporations NOT Engaged ina U.S. Trade or Business

Report income in Section II only if thesecorporations:q Had current year income or gain from a saleor exchange of property or from performingservices (or any other transaction) in any other

tax year and would have been effectivelyconnected income in that other tax year (seesection 864(c)(6));q Had current year income or gain from adisposition of property that is no longer usedor held for use in conducting a U.S. trade orbusiness within the 10-year period before thedisposition and would have been effectivelyconnected income immediately before suchcessation (see section 864(c)(7));q Elected to treat real property income aseffectively connected income (see below);q Were created or organized and areconducting a banking business in a U.S.possession, and receive interest on U.S.obligations that is not portfolio interest (seesection 882(e)); orq Had gain or loss from disposing of a U.S. real

property interest (see below).

Election to Treat Real Property Incomeas Effectively Connected Income

A foreign corporation that receives, during thetax year, any income from real property locatedin the United States, or from any interest insuch real property, may elect, for the tax year,to treat all such income as effectivelyconnected income. Income to which thiselection applies includes:q Gains from the sale or exchange of realproperty or an interest therein;q Rents or royalties from mines, wells, or othernatural deposits; andq Gain described in sections 631(b) or (c).

The election may be made whether or not

the corporation is engaged in a U.S. trade orbusiness during the tax year for which theelection is made or whether or not thecorporation has income from real property that,for the tax year, is effectively connected withthe conduct of a U.S. trade or business.

To make the election:q Figure the tax on this income in Section II.q Attach a statement that includes theinformation required in Regulations section1.871-10(d)(1)(ii) to Form 1120-F for the firsttax year for which the election is to apply.

Disposition of U.S. Real PropertyInterest by a Foreign Corporation

A foreign corporation that disposes of a U.S.real property interest (as defined in section897(c)) must treat the gain or loss from thedisposition as effectively connected income,even if the corporation is not engaged in a U.S.trade or business. Figure this gain or loss onSchedule D (Form 1120), Capital Gains andLosses. Carry the result to Section II, line 8,on page 3 of Form 1120-F.

A foreign corporation may elect to betreated as a domestic corporation for purposes

of sections 897 and 1445. See sections 897(i)and 882(d).See Temporary Regulations section

1.897-5T for the applicability of section 897 toreorganizations and liquidations.

If the corporation had income tax withheldon Form 8288-A, include the amount withheldin line 6h, page 1.

Income

Line 1. Gross Receipts

Enter gross income effectively connected withthe conduct of a U.S. trade or business (exceptthose income items that must be reported onlines 4 through 10). For reporting advancepayments, see Regulations section 1.451-5. Toreport income from long-term contracts, seesection 460.Installment sales. Generally, the installmentmethod cannot be used for dealer dispositionsof property. A dealer disposition means anydisposition of personal property by a personwho regularly sells or otherwise disposes ofproperty of the same type on the installmentplan. The disposition of property used orproduced in the farming business is notincluded as a dealer disposition. See section453(l) for details and exceptions.

Enter on line 1 (and carry to line 3) the grossprofit on collections from installment sales forany of the following:q Dealer dispositions of property before March1, 1986.q Dispositions of property used or produced in

the trade or business of farming.q Certain dispositions of timeshares andresidential lots reported under the installmentmethod.

Attach a schedule showing the followinginformation for the current and the 3 precedingyears: (a) gross sales, (b) cost of goods sold,(c) gross profits, (d) percentage of gross profitsto gross sales, (e) amount collected, and(f) gross profit on the amount collected.

For sales of timeshares and residential lotsreported under the installment method, thecorporation's income tax is increased by theinterest payable under section 453(l)(3). Toreport this addition to the tax, see theinstructions for Schedule J, line 11 on page 15.Nonaccrual experience method. Accrualbasis taxpayers do not need to accrue certain

amounts to be received from performingservices that, on the basis of their experience,will not be collected (section 448(d)(5)). Thisprovision does not apply to any amount ifinterest is required to be paid on that amountor if there is any penalty for failure to timely paythat amount. Corporations that fall under thisprovision should attach a schedule showingtotal gross receipts, the amount not accruedas a result of the application of section448(d)(5), and the net amount accrued. Enterthe net amount on line 1a. For moreinformation and guidelines on this nonaccrualexperience method, see TemporaryRegulations section 1.448-2T.

Line 2. Cost of Goods Sold

See the instructions for Schedule A on page12.

Line 4. Dividends

See instructions for Schedule C on page 13.

Line 5. Interest

Enter taxable interest on U.S. obligations andon loans, notes, mortgages, bonds, bankdeposits, corporate bonds, tax refunds, etc.

Do not offset interest expense againstinterest income.

Line 6. Gross Rents

Enter the gross amount received for the rentalof property. Deduct expenses such as repairs,interest, taxes, and depreciation on the properlines for deductions. A rental activity held by aclosely held corporation or a personal servicecorporation may be subject to the passiveactivity loss rules. See Form 8810 and itsinstructions.

Line 8. Capital Gain Net Income

Every sale or exchange of a capital asset mustbe reported in detail on Schedule D (Form1120), Capital Gains and Losses, even thoughno gain or loss is indicated. In computing theadjustments to the accumulated earnings taxunder section 535(b)(6), foreign corporations

must only include capital gains and losses thatare effectively connected with a U.S. trade orbusiness.

Line 10. Other Income

Enter any other taxable income not reportedon lines 1 through 9. List the type and amountof income on an attached schedule. If thecorporation has only one item of other income,describe it in parentheses on line 10. Examplesof other income to report on line 10 are:q Any adjustment under section 481(a)required to be included in income during thecurrent tax year due to a change in a methodof accounting.q Recoveries of bad debts deducted in prioryears under the specific charge-off method.q The credit for alcohol used as fuel

(determined regardless of the limitation basedon tax) that was entered on Form 6478, Creditfor Alcohol Used as Fuel.q Refunds of taxes deducted in prior years ifthey reduced income subject to tax in the yeardeducted (see section 111). Do not offsetcurrent year taxes against tax refunds.q The amount of any deduction previouslytaken under section 179A that is subject torecapture. The corporation must recapture thebenefit of any allowable deduction forclean-fuel vehicle property (or clean-fuelvehicle refueling property), if the property laterceases to qualify. See Regulations section1.179A-1 for details.q Ordinary income from trade or businessactivities of a partnership from Schedule K-1(Form 1065 or 1065-B).

Deductions

Important. In computing the taxable incomeof a foreign corporation engaged in a U.S.trade or business, deductions are allowed onlyif they are connected with income effectivelyconnected with the conduct of a trade orbusiness in the United States. Charitablecontributions, however, may be deductedwhether or not they are so connected. Seesection 882(c) and Regulations section1.882-4(b) for more information.

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Apportionment of Expenses

Expenses that are directly related to a class ofgross income (including tax-exempt income)must be allocated to that class of gross income.Expenses not directly related to a class ofgross income should be allocated to all classesof income based on the ratio of gross incomein each class of income to total gross income,or some other ratio that clearly relates to theclasses of income. See Regulations section1.861-8 and Temporary Regulations section1.861-8T for more information.

Attach a schedule showing each class of

gross income, and the expenses directlyallocable to each class. For expenses that arenot directly allocable to a class of grossincome, show the computation of the expenseallocated to each class.

Limitations on Deductions

Section 263A uniform capitalization rules.The uniform capitalization rules of section 263Arequire corporations to capitalize or include asinventory costs certain costs incurred inconnection with:q The production of real and tangible personalproperty held in inventory or held for sale in theordinary course of business.q Real property or personal property (tangibleand intangible) acquired for resale.q The production of real property or tangible

personal property by a corporation for use in itstrade or business or in an activity engaged infor profit.

Tangible personal property produced by acorporation includes a film, sound recording,video tape, book, or similar property.

Corporations subject to these rules arerequired to capitalize:

1. Direct costs, and2. An allocable portion of most indirect

costs (including taxes) that (a) benefit theassets produced or acquired for resale, or (b)are incurred by reason of the performance ofproduction or resale activities.

See Regulations section 1.263A-1(e) forindirect expenses that must be capitalized andthose that may be currently deductible.

Interest expense paid or incurred duringthe production period of designated propertymust be capitalized and is governed by specialrules. For more details, see Regulationssections 1.263A-8 through 1.263A-15.

The costs required to be capitalized undersection 263A are not deductible until theproperty to which the costs relate is sold, used,or otherwise disposed of by the corporation.Exceptions. Section 263A does not apply to:q Personal property acquired for resale if thecorporation's annual average gross receipts forthe 3 prior tax years are $10 million or less;q Timber;q Most property produced under a long-termcontract;q Certain property produced in a farmingbusiness;

q Research and experimental costs undersection 174;q Intangible drilling costs for oil, gas, andgeothermal property;q Mining exploration and developmental costs.

For more details on the uniformcapitalization rules, see Regulations sections1.263A-1 through 1.263A-3.Transactions between related taxpayers.

Generally, an accrual basis taxpayer may onlydeduct business expenses and interest owedto a related party in the year the payment isincluded in the income of the related party.See sections 163(e)(3), 163(j), and 267 for

limitations on deductions for unpaid interestand expenses.Section 291 limitations. Corporations may

be required to adjust deductions for depletionof iron ore and coal, intangible drilling andexploration and development costs, certaindeductions for financial institutions, and theamortizable basis of pollution control facilities.See section 291 to determine the amount ofadjustment. Also see section 43.Golden parachute payments. A portion of

the payments made by a corporation to keypersonnel that exceeds their usualcompensation may not be deductible. Thisoccurs when the corporation has an agreement(golden parachute) with these key employeesto pay them these excessive amounts if controlof the corporation changes. See section 280G.Business startup expenses. Business

startup expenses must be capitalized unlessan election is made to amortize them over aperiod of 60 months. See section 195 andRegulations section 1.195-1.Passive activity limitations. Limitations on

passive activity losses and credits undersection 469 apply to personal servicecorporations as defined in TemporaryRegulations section 1.441-4T (see ItemOPersonal Service Corporation on page7), and closely held corporations (definedbelow).

Generally, two kinds of passive activitiesare:q Trade or business activities (defined below)in which the corporation did not materiallyparticipate for the tax year (see TemporaryRegulations section 1.469-1T(g)(3)); andq Rental activities regardless of itsparticipation.

For exceptions, see Form 8810.An activity is a trade or business activity

if the activity is not a rental activity, andinvolves:q The conduct of a trade or business (i.e.,deductions from the activity would be allowableunder section 162 if other limitations, such asthe passive loss rules, did not apply); orq Research and experimental costs that aredeductible under section 174 (or would be

deductible if the corporation chose to deductrather than capitalize them).

Corporations subject to the passive activitylimitations must complete Form 8810 tocompute their allowable passive activity lossand credit. Before completing Form 8810, seeTemporary Regulations section 1.163-8T,which provides rules for allocating interestexpense among activities. If a passive activityis also subject to the earnings stripping rulesof section 163(j) or the at-risk rules of section465, those rules apply before the passive lossrules. For more information, see section 469,the related regulations, and Pub. 925, PassiveActivity and At-Risk Rules.

Closely held corporations. For thispurpose, a corporation is a closely heldcorporation if:

q At any time during the last half of the tax yearmore than 50% in value of its outstanding stockis owned, directly or indirectly, by or for notmore than five individuals; andq The corporation is not a personal servicecorporation.Certain organizations are treated as

individuals for purposes of this test. (Seesection 542(a)(2).) For rules of determiningstock ownership, see section 544 (as modifiedby section 465(a)(3)).Reducing certain expenses for whichcredits are allowable. For each credit listedbelow, the corporation must reduce theotherwise allowable deductions for expenses

used to figure the credit by the amount of thecurrent year credit:q Work opportunity credit.q Research credit.q Enhanced oil recovery credit.q Disabled access credit.q Empowerment zone employment credit.q Indian employment credit.q Employer credit for social security andMedicare taxes paid on certain employee tips.q Orphan drug credit.q Welfare-to-work credit.

If the corporation has any of these credits,be sure to figure each current year creditbefore figuring the deduction for expenses onwhich the credit is based.

Line 12. Compensation of Officers

Complete Schedule E if total receipts (line 1a,plus lines 4 through 10, on page 3 of Form1120-F) are $500,000 or more. Do not includecompensation claimed elsewhere on the return,such as amounts included in cost of goodssold, elective contributions to a section 401(k)cash or deferred arrangement, or amountscontributed under a salary reduction SEPagreement or a SIMPLE IRA plan.

Include only the deductible part of officers'compensation on Schedule E. (SeeDisallowance of deduction for employeecompensation in excess of $1 millionbelow.) Complete line 1, columns (a) through(f), for all officers. The corporation determineswho is an officer under the laws whereincorporated.Disallowance of deduction for employeecompensation in excess of $1 million.Publicly held corporations may not deductcompensation to a covered employee to theextent that the compensation exceeds $1million. Generally, a covered employee is:q The chief executive officer of the corporation(or an individual acting in that capacity) as ofthe end of the tax year; andq An employee whose total compensation mustbe reported to shareholders under theSecurities Exchange Act of 1934 because theemployee is among the four highestcompensated officers for that tax year (otherthan the chief executive officer).

For this purpose, compensation does notinclude the following:q Income from certain employee trusts, annuityplans, or pensions; andq Any benefit paid to an employee that isexcluded from the employee's income.

The deduction limit does not apply to:q Commissions based on individualperformance;q Qualified performance-based compensation;andq Income payable under a written, bindingcontract in effect on February 17, 1993.

The $1 million limit is reduced by amountsdisallowed as excess parachute paymentsunder section 280G.

For details, see section 162(m) andRegulations section 1.162-27.

Line 13. Salaries and Wages

Enter the amount of salaries and wages paidfor the tax year, reduced by any:q Work opportunity credit from Form 5884,q Empowerment zone credit from Form 8844,q Indian employment credit from Form 8845,andq Welfare-to-work credit from Form 8861.See the instructions for these forms for more

information. Do not include salaries and wagesdeductible elsewhere on the return, such asamounts included in cost of goods sold,

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elective contributions to a section 401(k) cashor deferred arrangement, or amountscontributed under a salary reduction SEPagreement or a SIMPLE IRA plan.

CAUTION

!If the corporation provided taxable fringebenefits to its employees, such aspersonal use of a car, do not deduct as

wages the amount allocated for depreciationand other expenses claimed on lines 20 and27.

Line 14. Repairs and Maintenance

Enter the cost of incidental repairs and

maintenance not claimed elsewhere on thereturn, such as labor and supplies, that do notadd to the value of the property or appreciablyprolong its life. New buildings, machinery, orpermanent improvements that increase thevalue of the property are not deductible. Theymust be depreciated or amortized.

Line 15. Bad Debts

Enter the total debts that became worthless inwhole or in part during the tax year. A smallbank or thrift institution using the reservemethod of section 585 should attach aschedule showing how it arrived at the currentyear's provision.

CAUTION

!A cash basis taxpayer may not claim abad debt deduction unless the amountwas previously included in income.

Line 16. Rents

If the corporation rented or leased a vehicle,enter the total annual rent or lease expensepaid or incurred during the year. Also completePart V of Form 4562, Depreciation andAmortization. If the corporation leased avehicle for a term of 30 days or more, thededuction for vehicle lease expense may haveto be reduced by an amount called theinclusion amount. The corporation may havean inclusion amount if:

See Pub. 463 for instructions on figuring theinclusion amount.

Line 17. Taxes and Licenses

Enter taxes paid or accrued during the tax year,but do not include the following:q Federal income taxes.q Foreign or U.S. possession income taxes ifa tax credit is claimed.q Taxes not imposed on the corporation.q Taxes, including state or local sales taxes,

that are paid or incurred in acquiring ordisposing of property (these taxes must betreated as a part of the cost of the acquiredproperty or, in the case of a disposition, as areduction in the amount realized on thedisposition).q Taxes assessed against local benefits thatincrease the value of the property assessed(such as for paving, etc.).q Taxes deducted elsewhere on the return,such as those reflected in cost of goods sold.

See section 164(d) for apportionment oftaxes on real property between seller andpurchaser.

See section 906(b)(1) for rules concerningcertain foreign taxes imposed on income fromU.S. sources that may not be deducted orcredited.

Line 18. Interest

Important: In determining the amount ofinterest expense disallowed under section 265or 163(j), deferred under section 163(e) or267(a)(3), or capitalized under section 263Afrom a U.S. trade or business, take intoaccount only the amount of interest expenseallocable to effectively connected income underRegulations section 1.882-5.

Note: The deduction for interest is limitedwhen the corporation is a policyholder orbeneficiary with respect to a life insurance,endowment, or annuity contract issued afterJune 8, 1997. For details, see section 264(f).Attach a schedule showing the computation ofthe deduction.

All foreign corporations (includingcorporations that are residents of countries withwhich the U.S. has an income tax treaty) mustuse the 3-step process described inRegulations 1.882-5 to allocate interest. Inaddition, all corporations must attach aschedule showing how the deduction wasdetermined, using the exclusive rules outlinedin the regulations.

The interest expense allocable to effectivelyconnected income is the sum of:q The interest paid or accrued by the foreigncorporation on its liabilities booked in the U.S.,adjusted under the 3-step process described inRegulations section 1.882-5; andq Any interest directly allocated to income froman asset (see Regulations section1.882-5(a)(1)(ii)).

In determining the amount of interestexpense allocable to effectively connectedincome (Step 3 of the process), the corporationmay use either:q The adjusted booked liabilities method(Regulations section 1.882-5(d)), orq The separate currency pools method(Regulations section 1.882-5(e)).

Generally, once a method is elected, it mustbe used for a consecutive 5- year period.

Indicate the method used.If the separate currency pool method is

used, attach a schedule showing the following:1. The currency denomination of each

currency pool in which U.S. assets aredenominated;

2. The amount of U.S.-connected liabilitiesin each currency pool; and

3. The average rate of interest paid onliabilities by all branches and offices of theforeign corporation world-wide in each currencypool. The corporation may convert anycurrency pool in which it holds less than 3% ofits U.S. assets for the year in U.S. dollars, andapply the U.S. dollar interest rate. SeeRegulations 1.882-5(e).

Line 19. Charitable Contributions

Note: This deduction is allowed for allcontributions, whether or not connected withincome that is effectively connected with theconduct of a trade or business in the UnitedStates. See section 882(c)(1)(B).

Enter contributions or gifts actually paidwithin the tax year to or for the use of charitableand governmental organizations described insection 170(c) and any unused contributionscarried over from prior years.

Corporations reporting taxable income onthe accural method may elect to treat as paidduring the tax year any contributions paid bythe 15th day of the 3rd month after the end ofthe tax year if the contributions were authorized

by the board of directors during the tax year.Attach a declaration to the return, signed by anofficer, stating that the resolution authorizingthe contributions was adopted by the board ofdirectors during the tax year. Also attach acopy of the resolution.Limitation on deduction. The total amountclaimed may not exceed 10% of taxableincome (Section II, line 31) computed withoutregard to the following:q Any deduction for contributions;q The special deductions on line 30b;q The deduction allowed under section 249;q

Any net operating loss (NOL) carryback tothe tax year under section 172; andq Any capital loss carryback to the tax yearunder section 1212(a)(1).

Carryover. Charitable contributions overthe 10% limitation may not be deducted for thetax year but may be carried over to the next 5tax years.

Special rules apply if the corporation has anNOL carryover to the tax year. In figuring thecharitable contributions deduction for the taxyear, the 10% limit is applied using the taxableincome after the deduction for the NOL.

To figure the amount of any remaining NOLcarryover to later years, taxable income mustbe modified (see section 172(b)). To the extentthat contributions are used to reduce taxableincome for this purpose and increase an NOL

carryover, a contributions carryover is notallowed. See section 170(d)(2)(B).Substantiation requirements. Generally, nodeduction is allowed for any contribution of$250 or more unless the corporation gets awritten acknowledgment from the doneeorganization that shows the amount of cashcontributed, describes any propertycontributed, and gives a description and a goodfaith estimate of the value of any goods orservices provided in return for the contribution.The acknowledgment must be obtained by thedue date (including extensions) of thecorporation's return, or if earlier, the date thereturn is filed. Do not attach theacknowledgment to the tax return, but keep itwith the corporation's records. These rulesapply in addition to the filing requirements for

Form 8283 described below.For more information on substantiation and

recordkeeping requirements, see theregulations under section 170 and Pub. 526,Charitable Contributions.Contributions to organizations conductinglobbying activities. Contributions made to anorganization that conducts lobbying activitiesare not deductible if:q The lobbying activities relate to matters ofdirect financial interest to the donor's trade orbusiness, andq The principal purpose of the contribution wasto avoid Federal income tax by obtaining adeduction for activities that would have beennondeductible under the lobbying expenserules if conducted directly by the donor.Contributions of property other than cash.

If a corporation (other than a c