I. General:
a. “US persons” are citizens or residents of the US, even if they’ve never lived in the US. I.R.C. sec. 7701(a)(30). The person must either have a green card or meet the substantial presence test. US persons are taxable on their worldwide income. They are taxable on their world-wide income.
i. Substantial Presence Test (I.R.C. sec. 7701(b)(3)(a)): Must be present in the US: (1) at least 31 days of the current year; and (2) at least 183 days under a formula calculated by adding of the days present in the US, plus 1/3 of the days present in the previous year, plus 1/6 of the days in the year preceding that. He is present any day he is physically present at all.
1. Exception to Substantial Presence = Closer Connection Test (I.R.C. sec. 7701(b)(3)(B)): Substantial Presence may be rebutted if (1) he was present in the US for less than 183 days that year; (2) he has a tax home in a foreign country; and (3) has closer connections with that foreign country than with the US. For (3), all of the relevant facts are considered.
2. Exception to Substantial Presence Test = Exempt Individuals (I.R.C. sec. 7701(b)(3)(D)): Diplomats, foreign government reps., students, and teachers do not count for a period of time. Individuals who are unable to leave because of medical conditions and F, J, M, or K visas are exempt. This exemption is denied after 5 years unless the individual shows that he does not intend to become a resident.
ii. Corporations: US persons if incorporated in the US. I.R.C. sec. 7701(a)(3). Foreign persons if organized outside of the US. Id.
iii. Partnerships: Partnerships are residents of the US if they are engaged in a US trade or business.
b. Non-“US persons” are taxable only on their business income and US-source non-business income. I.R.C. sec. 871(b), 882(a).
i. Business Income: Non-US persons are subject to 35% tax rates on net income that is effectively connected (ECI) with a US trade or business. If a tax treaty applies, ECI is taxable only if it is attributable to a permanent US establishment (a higher level of activity than a US trade or Business).
ii. Fixed or Determinable Annual or Periodical Income (FDAPI): Non-US citizens are subject to a 30% withholding from FDAPI that is not ECI. Capitol gains not effectively connected with a US trade or business are taxed only to nonresident aliens who are physically present in the US for 183 days or more, during the year in which the gain is realized. If a tax treaty applies, the withholding is either reduced or eliminated.
II. Source of Income: Generally, it is the origin of the activity generating the income. Thus, it is US source if the capitol or labor that produces the income takes place in the US.
a. Interest: Generally, the residence of the payor I.R.C. sec. 861(a)(1). This includes partnerships if it is engaged in a US trade or Business. Reg. sec. 1.861-2(a)(1). There are exceptions, though:
i. Banks: Interest on deposits with a foreign branch of a domestic corporation or partnership bank is foreign-source income. I.R.C. sec. 861(a)(1)(B).
ii. Active Foreign Business: Foreign-source if more than 80% of the gross from the preceding 3 years was derived from a foreign business. I.R.C. sec. 861(a)(1)(A). This does not apply to a partnership payer of interest.
1. If this exception applies, none of the interest is treated as US sourced, even though some of it may be attributable to a corporation’s US activ
property is located. I.R.C. sec. 861(a)(5).
f. Sale of Personal Property: Sourced at the residence of the seller. I.R.C. sec. 865(a).
i. Inventory Exception: Sourced where title passes. I.R.C. sec. 861(a)(6).
ii. Nonresident Sale Through Fixed Office or Place of Business: Income attributable to a fixed office in the US maintained by a nonresident would still be US sourced. I.R.C. sec. 865(e)(2). Exception: Inventory sold for use, disposition, or consumption outside of the US, if a foreign office or place of business martially participated in the sale. I.R.C. sec. 865(e)(2)(b).
iii. Resident Sale Through Foreign Fixed Office or Place of Business: Income from certain types of personal property are foreign sourced. I.R.C. sec. 865(e)(1). This rule does not apply unless an income tax equal to at least 10% of the income from the sale is paid to a foreign country.
iv. Sale of Depreciable Property: Sourced where the property was used, up to the amount of depreciable deductions available. I.R.C. sec. 865(c).
v. Losses: Sourced the same as gains. I.R.C. sec. 865(j)(1).
vi. Intangible Property: Sourced at the residence of the seller. I.R.C. sec. 865(a). Exception:
1. If consideration is contingent on use it is sourced at the place of use. I.R.C. sec. 865(d)(1).
2. Sale of Goodwill: Sourced where the goodwill was generated. I.R.C. sec. 865(d)(3).
