THRESHOLD QUESTION – Determination of whether a person is a U.S. person or foreign person:2
I. U.S. Person – taxed at net basis regardless of source (Cook v. Tait, Pg. 32; presumption that U.S. citizenship provides some sort of benefit; Situs of the property is not the basis of power to tax).2
II. Foreign Person – principally non-resident aliens and foreign corporations.3
III. Tax avoidance and changes of citizenship.3
IV. Tax Treaties. 3
I. Why do we care?. 4
II. Source rules. 4
What income is effectively connected to the U.S. T or B?. 6
Permanent establishment – PE, treaty threshold.6
Dependent vs. Independent Agents (864(c)(5)(A) [TXT 129]):7
EFFECTS OF TAX TREATY PROVISIONS:9
BRANCH PROFITS TAX (§ 884)10
FDAP and Capital Gains – does not usually tax capital gains, except:11
Inbound Transactions. Error! Bookmark not defined.
FIRPTA (Pg. 232) (Section 897) (Article 13, Model Treaty)11
FOREIGN TAX CREDIT.. Error! Bookmark not defined.
REGS to determine whether or not to credit.12
– “Deemed to have paid.13
FTC Limitations 14
– §904(c) Carryovers of excess credit 14
– Credit v Deduction 15
§911 Exemption for US Taxpayers Living Abroad 16
– Proponent arguments:16
– Critics arguments. 16
– Amount of exclusion 17
Housing Costs  §911(a)(2).18
Role of Tax Treaties 19
– CFC (Subpart F: Controlled Foreign Corporation) [§951-964; 1248,1249] [txt405]21
– Mechanics of Subpart F inclusion  [§951(a)(1),(2)]22
– Exclusion of USTorB Income 23
I. Threshold question: Is the taxpayer a U.S. person or a foreign person?
A. Inbound: the foreign person is investing in the U.S.
B. Outbound: foreign income of U.S. person.
II. Jurisdiction – Who can tax?
A. U.S. is one of the broadest tax jurisdictions, i.e., U.S. will attempt to tax you no matter what.
B. Goal is to avoid double taxation, which can be alleviated by tax treaties.
i. Foreign tax credits.
ii. Deductions for foreign taxes paid.
iii. §911, foreign earned income exclusion.
iv. Competent authority clause. Provisions exist so that taxpayers can argue “fairness” of tax measures in their specific case as a last resort. Usually the authorities from the residence country meets with the U.S. IRS to discuss.
III. Key theories
A. Capital export neutrality – Persons pay same tax on income no matter where it is earned (Favored by U.S. policymakers).
B. Capital import neutrality – Tax should be the same for a particular industry in a particular country, no matter their nationality.
C. National neutrality – Total returns on capital are the same, no matter where invested. Never given much notice amongst policymakers.
THRESHOLD QUESTION – Determination of whether a person is a U.S. person or foreign person:
I. U.S. Person – taxed at net basis regardless of source (Cook v. Tait, Pg. 32; presumption that U.S. citizenship provides some sort of benefit; Situs of the property is not the basis of power to tax).
A. Three types: Resident citizens, aliens, and corporations.
B. Subject to tax regardless of where the income comes from. However, there are tools to provide for relief from double taxation (foreign tax credits, deductions, and income exclusion). Check treaties.
C. U.S. person/corporation starting a separately incorporated foreign subsidiary does not pay U.S. taxes on foreign source income until the earnings are repatriated.
D. Resident Aliens – several tests to determine taxation.
i. Green card test (permanent residence)
ii. Substantial presence test § 7701(b)(1)(A)(ii) [Code 338]. Exempt people in § 7701(b)(5) (teachers, students, governmental officials, etc). § 7701 (b)(3)(D) for exceptions.
a. Greater than or equal to 31 days in the present year AND
b. Greater than or equal to 183 days in the last 3 years, using the special yearly multiplier (x1 for current year, x1/3 for year before, x1/6 for 2 years before).
c. Closer Connection Test Exception § 7701(b)(3)(B)(ii) [Code 389]. Key factors in Reg. 301.7701(b)-2(d)(1).
1. If a person has a closer connection to another country, they may be exempt. See factors in regs. Does not apply to foreign persons who are attempting to get a green card in the U.S.
iii. First year election – § 7701(b)(4).
a. Good for deductions, because aliens usually cannot take personal deductions. Also allows for the standard deduction.
II. Foreign Person – principally non-resident aliens and foreign corporations.
A. Two tax regimes.
i. Trade or business income § 871(b), 882 – net income effectively connected with the U.S. business activity, taxed at U.S. rates. Subject to deductions, § 864(b).
ii. Other U.S. Source income § 871(a), 881(a) – income from investments not effectively connecte
3. Signing Bonuses cases (Pg. 79). Signing bonuses were paid before salaries were signed, but it takes into account future services.
4. Non-compete cases (Korfund, Pg. 80). How to source negative performance? In the place where reliance on the law to enforce non-competition occurs.
5. Exclusivity contracts – same as Korfund. Soccer cases.
v. Real property § 861-2(a)(5) – situs is where the property is taxed.
vi. Personal property § 861-2(a)(6), 865 – Is generally linked to the residence of the seller [look to 865(a)(g)]. However, there are exceptions.
1. inventory property §861-2(a)(6), 865(b) (as stated in § 1221) – generally determined by the situs of where the title is transferred. Passage of title test (Regs § 1.861-7(b, c)). Allows passage of title wherever sellers choose. If tax is being avoided, then use different factors. (50/50 rule, default method), IFP method [93-94], elective by taxpayer, or books and records method to determine how much income is generated. § 863 for goods manufactured or produced by seller.
i. A.P. Green Export Co. v. U.S. (1960) (Pg. 85) – § 1.863-3. Allocation and appointment of income for certain inventory. Passage of title test upheld. Minimization of taxation is not inherently bad, but one cannot use fraudulent means to pursue such ends. Title passage test is easy to manipulate.
2. depreciation or amortization (865(c)) (Pg. 91) – A form of recapture. Treats as U.S. source income that which is depreciated or amortized.
3. sales on intangibles (865(d)) (Pg. 91) – general rule that income from the sale of an intangible asset by a U.S. citizen is sourced in the United States. Gain realized from the sale of goodwill is deemed to be sourced from the country where the goodwill is generated. Though sometimes it is difficult to distinguish goodwill from other intangibles. Look to International Multifoods Corp case (Pg. 92).
4. Sale of stock in foreign affiliated corporation (865(f)).