TAX 9869 Lecture Notes - Lecture 47: Foreign Corporation, Capital Gain, Fungibility

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17 Jul 2020
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Unit 9: Treatment of Foreign-Owned United States Business Income
C. OVERVIEW
U.S. source investment income that is not effectively connected to a United States trade
business/ may be subject to a flat 30% withholding tax.
U.S trade/business income that is effectively connected with the conduct of such
trade/business is potentially taxed at regular rates.
9.01 Engaged in a Trade/Business in the U.S.
A U.S. trade/business is generally characterized by progression, continuity, or sustained
activity that occurs during some substantial portion of the taxable year.
•Rev. Ruling 58-63 shows in some cases just one instance of activity can constitute a domestic
trade/business (entry of a horse in a race).
•For a Domestic trade/business to exist, a foreign corporation’s “core activities” (activities
essential to deriving profit) must be conducted in the U.S.
9.02 Attribution though Agents
•To be considered a Dependent Agent it is sufficient that the U.S. based person or entity either
acts exclusively or near exclusively for such foreign person.
9.03 Performance of Services as a Trade or Business
§864(b) states that a foreign person who provides services in the U.S at any time within a
taxable year is automatically deemed to be engaged in a U.S. trade/business, regardless of
duration, frequency and if the person performs services as an employee or as an independent
contractor.
In Rev. Ruling 55-17, the Service found that license treatment should prevail if the personal
services are only nominally valuable apart from the license itself.
•Ex. A foreign company provides some of it’s workers to provide training to the workers of a
domestic company.
•§864(b)(1) De minimis provision- Presence and employer status limitation must be met and the
compensation must not exceed $3,000
If compensation exceeds $3,000, a trade/business exists and the entire amount is deemed to
be ECI and will be taxed at the graduated rate.
9.04 Real Property Activity as a Trade or Business
Merely owning U.S. real property does not automatically mean that a person is engaged in a
U.S. trade/business.
2 Rules require certain income derived from real Property by foreign person to be treated as
ECI even if no trade or business exists
•1) Under §871(d) (for individuals) and §881(d)(for corporations), foreign persons may make a
“net income election” to treat income derived from U.S. real property as ECI.
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