A foreign subsidiary's activities are not attributed to its U.S. parent for sourcing services income, because the subsidiary is not the parent's agent

Plain-English summary

This is Chief Counsel Advice to an Appeals officer about where a company's services income comes from, which matters for the foreign tax credit limitation under Section 904. Services income is generally sourced to the place where the taxpayer's own employees or agents perform the work. Here, a U.S. company (USP) provides HR and risk-management services to U.S. customers and subcontracts a large part of the work to its wholly owned foreign subsidiary (CFC) in another country. USP wanted the CFC's foreign activities treated as its own, which would increase USP's foreign-source income and expand its foreign tax credit. The Chief Counsel's office concluded that the CFC's activities are not attributed to USP because the CFC is a subcontractor, not an agent: applying the six-factor test from National Carbide and the stricter agency filters from Bollinger, the CFC does not act in USP's name, does not bind USP, does not hold out as USP's agent, and there is no written agency agreement. USP remains responsible to its customers and the CFC is paid an arm's-length fee for its own account. So the CFC's activities cannot be attributed to USP in sourcing USP's services income. As Chief Counsel Advice, this gives legal analysis rather than granting or denying a taxpayer request.

Ruling snapshot

• Question: Are a wholly-owned CFC's activities attributed to its U.S. parent as agent for purposes of sourcing the parent's services income under §§ 861/862 and the § 904 credit limitation?
• Outcome: advice (no agency; activities not attributed)
• Key authorities: IRC §§ 861, 862, 904; Treas. Reg. § 1.861-4(b); National Carbide Corp. v. Commissioner; Commissioner v. Bollinger

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           Memorandum
           Number: 202502005
           Release Date: 1/10/2025
           CC:INTL:B03:ANaughton
           POSTU-117946-22

 UILC:     861.04-01

  date:    August 29, 2024

     to:   Duane Binns
           Appeals Officer, International Specialist
           (Independent Office of Appeals)

  from:    Peter H. Blessing
           Associate Chief Counsel
           (International)


subject:   Agency Attribution for Purposes of Sourcing Services Income

           This Chief Counsel Advice responds to your request for assistance under sections 861
           and 904 of the Internal Revenue Code (Code). This memorandum addresses whether
           activities performed by a wholly-owned controlled foreign corporation in Country X can
           be attributed to its U.S. shareholder (USP) for purposes of sourcing USP’s services
           income to determine USP’s credit limitation under section 904(a) with respect to each
           separate limitation category. This advice may not be used or cited as precedent.


           LEGEND

           USP (TAXPAYER) = ------------------------
           CFC = ----------------------------
           COUNTRY X = --------


           ISSUE

           For purposes of sourcing USP’s services income under section 861 and Treas. Reg. §
           1.861-4 to determine USP’s credit limitation under section 904(a), are CFC’s activities
           attributed to USP, thereby increasing USP’s foreign-source income?
POSTU-117946-22                             2

CONCLUSION

In the case of an entity deriving services income, the source of such income generally is
determined by reference to the place at which the entity’s employees or other agents
perform such services. In a case (as in focus here) in which an entity subcontracts to
another entity (subcontractor) work that the first entity (contractor) has contracted to
provide, then, unless the subcontractor is treated as an agent for such purpose, the
source of income derived by the contractor is not determined by reference to the place
of performance by the subcontractor. Rather, the contractor’s income is properly
determined by the place at which its own employees or other agents act in connection
with such services, which may include, apart from any directly provided services,
various other functions (for example, marketing, coordination among entities involved in
providing the services, monitoring and quality control, and maintaining customer
relations).

National Carbide Corp. v. Commissioner1 provides a six-factor test to determine
whether a subsidiary corporation should be considered an agent of the parent
corporation. Commissioner v. Bollinger2 recognized the need for additional filters that
the IRS may apply in testing the legitimacy of a taxpayer’s claim that its subsidiary
corporation is its agent. CFC does not satisfy the tests in National Carbide and
Bollinger. For these reasons, CFC is not considered an agent of USP for Federal
income tax purposes, and the activities of CFC cannot be attributed to USP for
purposes of sourcing USP's services income under section 861 and Treas. Reg. §
1.861-4 to determine USP’s gross income within the relevant section 904(d) separate
limitation categories.

FACTS

USP is a domestic corporation that provides risk management services, insurance and
reinsurance brokerage, and human resource (HR) consulting and outsourcing. As part
of its HR consulting and outsourcing business, USP enters into service agreements with
customers to manage and administer part or all of customer HR programs and to
provide consulting services related to the design, implementation, communication, and
operation of the HR programs.

Typical service agreements between USP and its customers state that USP will provide
services to its customers and that customers will compensate USP for the provision of
services based on a set fee schedule delineated in the service agreements. USP bears
the ultimate responsibility for delivering the services, including guaranteeing that
services are delivered in accordance with the standards articulated in the agreements.
The service agreements permit USP to enter into subcontracts with other parties in
connection with the services to be rendered, but in such a case USP remains
responsible to its clients for the services provided by the subcontractor. The service

1 336 U.S. 422 (1949).
2 485 U.S. 340 (1988).
POSTU-117946-22                                   3

agreements neither specify the identity of any potential subcontractor nor generally limit
the parties with which USP may enter into a subcontract. Customers’ data may not be
stored, transmitted, or accessed outside the United States unless the customer provides
advance written authorization.

USP contracts with its wholly-owned CFC incorporated in Country X to provide a
substantial part of the services for which USP’s U.S. customers have contracted. A
representative agreement states that CFC shall provide “outsourcing support/IT
services” to USP in consideration for CFC performing the contracted services, CFC’s
cost of travel related to the services, and a mark-up supported by the most current
transfer pricing study. Under a typical provision of services arrangement, USP’s
customers pay USP 100x for the contracted services, and USP pays CFC 20x for its
services.3

The representative agreement describes CFC as the subcontractor of USP. The
representative agreement does not state that CFC has the power to enter into
arrangements with third parties that bind USP or that CFC otherwise serves as the
agent of USP. A study prepared by USP to support that CFC is paid arm’s length
compensation indicates that CFC is hired in a “limited risk/subcontracting capacity.”
CFC does not maintain business relationships with USP’s customers. CFC does not
commit to provide services to USP’s customers, and CFC is not responsible for
resolving USP’s customer’s issues.

USP solicits customers, markets services to them, and enters the contracts to provide
services to the customers. CFC is not involved in this process and is not a party to the
contracts.

CFC recruits, hires, and supervises its own employees, although USP provides some of
the initial training to CFC’s employees. After USP determines the specific type of
product required by its customers as determined under the contract between USP and
its customers, including software designed for customers’ HR departments, USP
provides CFC with the necessary IP infrastructure to develop the product. CFC is
responsible for certain production tasks associated with developing the software (such
as coding and testing the software), but USP at all times owns the rights to the software
and performs all conceptual development, core design, sales and marketing, and post-
sales client support for the final product. According to Taxpayer’s transfer pricing study,
CFC’s role in producing software “is limited to that of a back-end software developer.”
Additionally, CFC processes and analyzes USP’s client’s data for HR management
services for which USP’s clients contract with USP.




3 This CCA does not address the allocation of income under section 482.
POSTU-117946-22                                     4

LAW AND ANALYSIS

Section 904 limits the total amount of the credit allowed under section 9014 that may be
used to offset the United States tax liability on foreign-source income in a taxable year.
To calculate the section 904(a) limitation within each separate limitation category, it is
necessary to determine the source (U.S. or foreign) of each item of income.

Sourcing Compensation for Services Income

Services income of a taxpayer is sourced as domestic or foreign based on where the
services are performed by the taxpayer. Section 861(a)(3) provides that compensation
for personal services performed within the United States shall be treated as income
from sources within the United States, and section 862(a)(3) provides that
compensation for personal services performed outside the United States shall be
treated as income from sources outside the United States. When services are
performed by a corporation or other entity partly within and partly outside the United
States, Treas. Reg. § 1.861-4(b)(1)(i) provides as follows:

        In the case of compensation for labor or personal services performed partly
        within and partly without the United States by a person other than an individual,
        the part of that compensation that is attributable to the labor or personal services
        performed within the United States, and that is therefore included in gross
        income as income from sources within the United States, is determined on the
        basis that most correctly reflects the proper source of the income under the facts
        and circumstances of the particular case. In many cases, the facts and
        circumstances will be such that an apportionment on the time basis, as defined in
        paragraph (b)(2)(ii)(E) of this section, will be acceptable.

A corporation or other entity generally is considered to earn income from services
provided through its employees (or certain other agents).5 The Code and regulations do
not specify when the activities of a putative agent should be attributed to the service
provider for purposes of sourcing services income. Certain case law provides some
guidance.

Where a taxpayer providing services enters into a contract with another taxpayer that
performs some component of the services undertaken by the first taxpayer, such as an
arrangement described as a subcontract, the situs of the services performed by the
second taxpayer is not taken into account for sourcing the first taxpayer’s income unless
the second taxpayer is the agent of the first taxpayer. For example, in Le Beau Tours


4 Sections 901(a) and (b) of the Code allow a credit for the amount of income, war profits, and excess

profits tax (collectively, an income tax) paid or accrued to a foreign country.
5 See, e.g., Bank of America v. U.S., 680 F.2d 142, 150 (Ct. Cl. 1982) (holding that negotiation

commissions received by a U.S. bank from foreign banks in export letter of credit transactions were
charged for personal services and should be sourced by analogy as personal services under §§ 861(a)(3)
and 862(a)(3) to the U.S. bank’s U.S. offices, where the services were performed).
POSTU-117946-22                                     5

Inter-America, Inc. v. United States,6 the taxpayer failed a 95% foreign source-based
test under section 921 because taxpayer itself did not deliver foreign hotel and tour
services, but rather subcontracted for those services from foreign operators functioning
as independent contractors.7 And in Miller v. Commissioner,8 the foreign corporate
taxpayer’s income for R&D services was not U.S. source income even though it had
subcontracted performance of the relevant R&D services to its domestic affiliate, which
performed the services in the United States, because the affiliate was considered by the
court to function as an independent contractor.

Taxpayer refers to InverWorld v. Commissioner,9 which it asserts supports the notion
that the location of services performed by a subsidiary benefitting clients of its parent
company and pursuant to a contract with the parent company can determine the source
of services income of the parent company from such clients even without the existence
of an agency relationship. In that case, the Tax Court held that a Cayman corporation
earned U.S. source income, including services income, on the basis that its U.S.
subsidiary functioned as its dependent agent, including that it regularly entered
transactions binding its Cayman parent company (notwithstanding contractual language
disavowing any agency relationship between the parties). Thus, contrary to Taxpayer’s
claim, an agency relationship was present in respect of the services income in
InverWorld. Moreover, in a case in which the issue is taxable nexus with the United
States, a lesser standard for attribution of activities applies than for U.S. tax purposes
generally.10 Finally, InverWorld involved an assertion of agency by the IRS, and hence
the additional filters of the Bollinger factors, described below, was not required.

Agency Attribution

In certain cases, an individual or entity obligated to perform services may retain a third
party to perform all or part of the services. If that third party acts as an agent on behalf
of such individual or entity (principal) rather than for its own account, the income derived
from such services may be attributed in appropriate cases to the agent’s principal (less
an arm’s length fee for the agent’s services).




6 547 F.2d 9, 11 (2d Cir. 1976).
7 415 F. Supp. 48, 52 (S.D.N.Y. 1976), aff’d per curiam, 547 F.2d 9 (2d Cir. 1976). The domestic

corporation compensated by U.S. clients for organizing package tours abroad was considered a separate
service business dealing directly with the customers. Taxpayer also was considered to derive more than
five percent of its services in the United States based on administrative services provided by U.S. based
individuals legally employed by the domestic group parent company.
8 T.C. Memo. 1997-134.
9 T.C. Memo. 1996-301.
10 See, e.g., Helvering v. Boekman, 107 F.2d 388 (2d Cir. 1939) (“It can hardly be that when an alien

employs agents in this country to do things from which he collects a profit, Congress intended him to
escape, though it meant to tax him, if he came here to do them himself. The income, de facto, certainly
comes from local activities which are carried on for the benefit of the alien; and ‘the natural aim of
Congress would be to reach it.’ Helvering v. Stockholms, etc., Bank, 293 U.S. 84, 89, 55 S.Ct. 50, 52, 79
L.Ed. 211.”)
POSTU-117946-22                                       6

Certain Supreme Court cases have addressed the issue of agency in the context of a
corporation and its subsidiary. In National Carbide Corp. v. Commissioner,11 the
Supreme Court held that the profits of three wholly-owned subsidiaries conducting
production activities were not properly attributed to the parent company under an
agency theory. The Court articulated six factors for determining whether agency exists:

         [1] Whether the corporation operates in the name and for the account of the
         principal, [2] binds the principal by its actions, [3] transmits money received to the
         principal, and [4] whether receipt of income is attributable to the services of
         employees of the principal and to assets belonging to the principal are some of
         the relevant considerations in determining whether a true agency exists. [5] If the
         corporation is a true agent, its relations with its principal must not be dependent
         on the fact that it is owned by the principal if such is the case. [6] Its business
         purpose must be the carrying on of the normal duties of an agent.12

Nearly four decades later, in Bollinger, the Supreme Court clarified the National Carbide
test for when a taxpayer may successfully assert that the activities of a corporation are
attributable to its controlling shareholder on the basis of agency. The issue in Bollinger
was whether, for federal income tax purposes, certain shareholders owned real estate
assets the title to which was held by a wholly-owned corporation.13 The properties at
issue had been arranged by the shareholders to be acquired by the corporation in order
to avoid usury law restrictions on loans to non-corporate borrowers. The corporation
had entered into written agreements that provided that it held the properties as “agent
and nominee” for the sole purposes of securing financing and would operate as directed
by the shareholders. In addition, the shareholders undertook all material activities with
respect to the construction and operation of the real estate, and the banks providing the
financing regarded the shareholders as the actual owner of the properties. On the facts
before it, the Supreme Court upheld the taxpayer’s agency claim. It cautioned,
however, that “it is reasonable for the Commissioner to demand unequivocal evidence
of genuineness in the corporation-shareholder context [of agency], in order to prevent
evasion of Moline.” It proceeded to state why the particular facts before it provided such
unequivocal evidence:

         It seems to us that the genuineness of the agency relationship is adequately
         assured, and tax-avoiding manipulation adequately avoided, when the fact that
         the corporation is acting as agent for its shareholders with respect to a particular
         asset is set forth in a written agreement at the time the asset is acquired, the
         corporation functions as agent and not principal with respect to the asset for all
         purposes, and the corporation is held out as the agent and not principal in all
         dealings with third parties relating to the asset.

11 336 U.S. 422 (1949).
12 Id. at 437.
13 Although Bollinger involved the ownership of property, the principles articulated in it apply equally in the

context of claimed attribution of activities, as illustrated most obviously by the decision’s express
clarification of its holding in National Carbide, which involved a claimed attribution of income from
production activities.
POSTU-117946-22                                      7


These three factors have been considered in effect to comprise a conjunctive test
which, if met, and if agency otherwise is shown based on common law factors, generally
should allow the owner of a corporation to claim that the corporation is acting as its
agent.14 The additional filters that Bollinger permits the IRS to apply in order to assure a
genuine agency are, by design, restrictive, in order to reduce the risk that the IRS would
be whipsawed by a taxpayer arguing against its chosen form to claim that the activities
of a subsidiary can be attributed to its sole shareholder.15

Courts have applied Bollinger in both inbound and outbound international tax
controversies where agency attribution was at issue. For example, in First Chicago
Corp. v. Commissioner, the Tax Court applied the Bollinger test in holding that the
taxpayer’s principal subsidiary, a U.S. bank, could not aggregate its ownership of voting
shares in a foreign bank with the shares held by its related subsidiaries to meet the ten
percent ownership threshold under former section 902, because the bank’s subsidiaries
were not shown to be the bank’s agents.16 And in New York Guangdong Finance, Inc.
v. Commissioner, the Tax Court quoted Bollinger in holding that a Chinese company
had not provided ”unequivocal evidence“ that its Hong Kong subsidiary was acting as its
agent for purposes of whether the taxpayer was liable for withholding tax on interest
paid to the subsidiary.17

Analysis

The facts do not indicate that the relationship between USP and CFC meets the tests
articulated by the Supreme Court for a taxpayer to show that a corporation acts as an
agent on behalf of its shareholder(s).

As a threshold matter, CFC fails to meet the six factors articulated in National Carbide
to determine whether a corporation functions as an agent. First, CFC does not operate
in the name and for the account of USP. The subcontracts between CFC and USP do
not vest CFC with the power to hold itself out to USP’s customers as doing business in
the capacity of USP’s agent.18 Rather, CFC performs back-end software development
and data analysis, among other functions, at the direction of USP, which bears the
ultimate responsibility for delivering the services to its clients under its own name.
Representative agreements allow USP to enter into subcontracts with other entities to

14 The Court also noted that payment of an agency fee is not necessarily required for a valid agency.
15 See Northern Indiana Public Service Co. v. Commissioner, 105 T.C. 341, 348 (1995).
16 96 T.C. 421 (1991), aff’d, 135 F.3d 457 (7th Cir. 1998).
17 T.C. Memo 2008-62, aff’d, 588 F.3d 889 (5th Cir. 2009). Also, in Northern Indiana Public Service Co. v.

Commissioner, the Tax Court referred to Bollinger in the context of holding that a conduit financing entity
was not an agent of its sole shareholder, the taxpayer, for purposes of whether the taxpayer was liable for
withholding tax under section 1441 on interest paid to Euronote holders. 105 T.C. 341, 348 (1995), aff’d
on other grounds, 115 F.3d 506 (7th Cir. 1997).
18 Cf. Ourisman v. Comm’r, 82 T.C. 171, 180-82 (1984) (rev’d on different grounds) (finding that the first

factor was satisfied when a wholly-owned corporation acquired record title of its partnership shareholders’
real property and took out loans on behalf of its partnership shareholders; the creditors were aware that
the corporation represented the partnership).
POSTU-117946-22                                        8

render the services for which USP’s customers have contracted, but these agreements
mention CFC only in a subcontracting capacity without stating that CFC otherwise
serves as the agent of USP. Second, the representative agreements between USP and
its customers do not cause USP to be bound by CFC’s actions. CFC provides agreed
services for its own account to USP; the agreements between USP and CFC state that
CFC will operate as a subcontractor in a “limited risk” capacity. Third, CFC does not
receive third-party funds and so does not transmit them to USP. USP receives all
remuneration from its customers, and CFC is compensated with an arm’s length
payment for the tasks it performs for USP. For such reason, the fourth factor is not
applicable. Fifth, USP’s control over CFC does not appear in excess of the type of
control that a parent corporation would exert over its wholly-owned subsidiary, and,
accordingly, CFC’s “relations with” USP appear to be “dependent upon the fact that it is
owned by the principal.”19 Sixth, the facts do not support that CFC’s business purpose
is the carrying on of the normal duties of an agent; CFC is acting for its own account as
would a typical group subsidiary and not for the account of USP.

Further, even if some agency attributes are present, CFC has not provided unequivocal
evidence of a genuine agency and hence is not treated as an agent of USP when the
filters of Bollinger are applied. First, there is no evidence of a written agency agreement
between USP and CFC delegating authority for CFC to act on behalf of USP and thus to
bind USP by CFC’s actions.20 On the contrary, the representative agreement between
USP and CFC does not describe CFC as an agent, but rather as a subcontractor hired
and compensated on a limited risk basis. Nothing in the representative agreement
states that CFC may bind USP by its actions with third parties. Because no written
agency agreement exists in the service agreement between USP and CFC or in any
other materials provided, the first prong of the conjunctive criteria is not satisfied.

The second and third factors in Bollinger look to whether CFC functions as agent of
USP, and not principal, in all dealings with respect to the services performed by it, and
whether CFC is held out as the agent, and not principal, in all its dealings with third
parties with respect to such services. USP also fails to meet these criteria of Bollinger.
CFC does not function as USP’s agent with respect to the service activities CFC

19 Bollinger marginalized the independent significance of the fifth factor as follows: “We think the fifth

National Carbide factor—so much more abstract than the others—was no more and no less than a
generalized statement of the concern, expressed earlier in our own discussion, that the separate entity
doctrine of Moline not be subverted.” Similarly, a pre-Bollinger case, Roccaforte v. Comm’r, 708 F.2d
986, 990 (5th Cir. 1983), commented on the factor as follows: “Closely-held corporations often function as
agents or surrogates for their owners. Under Moline, however, they are treated as separate, taxable
entities. If a taxpayer could, by the simple expedient of relying upon characteristics common to all such
corporations, avoid tax liability, the separate entity regime would collapse.” The concern was addressed
by the additional filters enunciated in Bollinger.
20 See the first two National Carbide factors, which under Bollinger should be reflected in a written

agreement in order to evidence the genuineness of an agency relationship. The service agreements
between USP and its customers preclude USP from assigning or delegating its duties without its
customers’ prior authorization. This is not inconsistent with normal subcontracting, and in fact the service
agreements permit USP to subcontract with other parties for the provision of services, without a
requirement to disclose the identity of potential subcontractors.
POSTU-117946-22                              9

conducts and is not held out as USP’s agent in all dealings with USP and USP’s
customers. In all dealings with its customers, USP represents that it bears the ultimate
responsibility for delivering the various services for which customers have contracted
and guarantees that these services will be performed in accordance with the service
contracts, to which CFC is not a party. CFC does not enter into contracts on behalf of
USP, does not commit to provide its services to USP’s customers, and is not
responsible for resolving USP’s customer’s issues or otherwise responsible to such
USP’s customer. CFC’s customer relationship is with USP. In sum, CFC’s activities are
indistinguishable from that of a typical subcontractor, and any control exercised by USP
is no different from that held by virtue of USP’s ownership of the stock of CFC and its
role as the contracting party with USP’s customers.

None of the three factors indicated by the Supreme Court in Bollinger as providing,
conjunctively, satisfactory evidence of a genuine agency in the face of a claim of agency
by a corporation with respect to its owner against the IRS are present in this case.
Further, even if alternative evidence might be probative (as to which we express no
view), we understand that none has been provided in this case. Accordingly, CFC’s
activities cannot be attributed to USP in sourcing USP’s services income that USP
receives from its third-party customers.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please contact Andrew Naughton at (202) 317-5356 if you have any further questions.