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U.S. Taxation of International Transactions
University of California, Hastings School of Law
Morse, Susan C.

–          Questions of JX
o   Can tax…
o   Should tax…
o   Agree how to tax w/ other countries…
–          Problems of where to tax arise in…
o   Dual citizens
o   Traveling executive
§  General principle à tax on income earned there
o   Multinational corporation
§  Economic source is sometimes indeterminate
o   Product developed in one place, marketed and sold in another
–          International tax = JX-nal puzzle
–          Inbound (from U.S. perspective)
o   When a non-U.S. person does business or invests in the U.S.
–          Outbound (from U.S. perspective)
o   When a U.S. person does business or invests outside the U.S.
 
–          Residency Classification Rules (Section 7701)
o   Overview
§  A taxpayer’s residency classification is a threshold issue for determining the applicability of U.S. taxation
§  Taxpayers are generally considered to be either “domestic” or “foreign” under 7701(a)(4), (5), and (30)
§  U.S. citizens, residents, and domestic corporations are generally subject to tax on their worldwide incomes under Section 61
§  Nonresident alien individuals and foreign corporations are typically subject to U.S. taxation only on specified items or types of income under 871 (applicable to foreign individuals) and 881 and 882 (applicable to foreign corporations)
§  U.S. persons may experience double taxation because the U.S. imposes tax based on residence while a foreign country may simultaneously impose tax on an item of income derived within its borders
·         Vice versa for a foreign person
·         Double taxation is considered to be so distortive to efficient economic behavior that most countries, including the U.S., have addressed it
·         Double taxation can be addressed either statutorily or through treaties
o   Residency Classification for Individuals (7701)
§  U.S. citizens and resident aliens à domestic persons
·         All U.S. citizens, even if they’re also citizens of another JX, are subject to worldwide income taxation
·         Alien individual will be considered a U.S. resident if (7701(b)):
o   Individual is a lawful, permanent resident of the U.S. at any time during the calendar year – green card test
§  If s/he holds a green card at any time during the year, and
§  The status as a green card holder has not been revoked or determined administratively or judicially to have been abandoned
§  Nonresident aliens in the process of applying for a green card DON’T meet the green card test
o   Individual meets a “substantial presence test” (Section 7701(b)(3))
§  This test focuses on the alien individual’s actual physical presence in the U.S.
§  An alien individual is treated as a resident alien IF s/he is present in the U.S. on at least 31 days of the current year AND at least 183 total days of the current and two preceding calendar years
·         Current = * 1
·         First preceding year days  = * 1/3
·         Second preceding year days = * 1/6
·         Is sum at least equal to 183?
§  The 30-Day De Minimis Rule Exception
·         Focuses on current year, even if the 183-day formula would otherwise be met
·         If an alien individual is in the U.S. for 30 days or less in the current calendar year, s/he will be considered a nonresident even if the 183-day formula would otherwise be met
§  The Tax-Home Exception
·         An alien individual is treated as a nonresident even IF the substantial presence test is met if (1) the individual is present within the U.S. on fewer than 183 days during the current year, (2) establishes that his/her tax home for the current year is in a foreign country, and (3) has a closer connection to the foreign country than to the U.S. [closer connection à 301.7701(b)-2(D)(1); i.e. location of the individual’s permanent home] ·         A tax home is defined as the individual’s regular or principal place of business (162(a)(2)); if there’s no regular or principal place of business, tax home is the principal place of abode
·         This exception DOES NOT APPLY for any year in which the individual has applied for a green card, has taken other steps to become a permanent resident, or has an application for adjustment of status pending
§  Exempt and other special categories of alien individuals (certain days of presence are NOT counted towards individual’s U.S. residency; 7701(b)(3))
·         Exempt Individuals à foreign gov’t-related individuals, teachers, trainees, students, and professional athletes competing in charitable sporting events
·         Medical Conditions à individual objectively intended to leave the U.S. but was unable to due to a medical condition or problem arising while the individual was present in the

rd test
§  Residency terminates on the last day of the calendar year in which the individual is deemed to be lawfully admitted for permanent residence provided s/he has a closer connection to a foreign country for the remainder of the year and s/he is not a U.S. resident at any time during the next calendar year
§  If alien individual surrenders green card, the date of surrender controls the date of termination of residency
o   If substantial presence test
§  An individual’s last day of physical presence will close the period of residency, provided after such date the individual has a closer connection to a foreign country for the balance of the calendar year and is NOT a U.S. resident in the next year
o   Residents and citizens who give up their status (expatriates) are subject to Section 877 à which may tax these individuals on certain of their U.S.-source income under regular progressive rates applicable to current citizens and residents if this results in a higher total tax than would be achieved if they were taxed as nonresidents
·         Cook v. Tait
o   Whether Congress has power to impose a tax upon income received by a native U.S. citizen who, at the time the income was received, was permanently resident and domiciled in another country, the income being from real and personal property located outside the U.S.
o   Holding: Yes, Congress DOES have the power to impose a tax
§  The government, by its very nature, benefits the citizen and his property wherever found, and therefore has the power to make the benefit complete
§  The power to tax was not and cannot be made dependent upon the site of the property in all cases, it being in or out of the U.S., nor was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the U.S., BUT upon his relation as a citizen to the U.S. and the relation of the latter to him as citizen.