§ 871(a)(2) Taxed on capital gains if present 183 days, no student exceptions Income from Trade/Business: §871(b) A nonresident alien individual engaged in trade or business within US shall be taxable on his taxable income which is effectively connected with the conduct of a trade or business within the US. §864 trade or biz - includes performance of personal services, “Effectively Connected” §864 (c) §881. Taxation of Foreign Corporations Subject to tax on certain class of income derived from US sources or activities Passive Income: §881(a) imposes a 30% tax on all passive income derived within the United States on a gross basis Income from Trade/Business §882 imposes tax on effectively connected income derived from US ToB at graduated corporate rates §882(d) foreign corp can elect to treat income from US real property as effectively connected § 871(d) Taxed on net basis with graduated rates. No mandatory withholding, personal exemption. 7-1. Surya, a citizen and bona fide resident of Nepal, has never been present in the US. During Year 1, he had no US ToB, but he owned a number of assets that produced the following items of income: $20,000 dividend on the stock of DelCo., a corporation formed in Delaware; $5,000 gain on sale of ten shares of stock in UruCo., a corporation formed in Uruguay; $13,000 dividend on the UruCo. stock, of which $5,200 is US source and $7,800 is foreign source; $10,000 in rents from rental property located in the United States; $1,000 of foreign-source interest on a loan made to Emily, a citizen and resident of Bolivia: $2,000 of interest on a deposit at a Chicago, Illinois bank; and $8,000 in cash from the sale of the United States rights to a patent Surya created for five percent of the net profits from products produced through its use. Surya's potential deductions for the year consisted of depreciation and expenses with respect to the rental property of $3,000, a $1,000 loss on the sale of five shares of UruCo. stock, and medical expenses of $4,500. Assume that Surya would be subject to a 20 percent effective tax rate on his taxable income. 23
(a) What is Surya’s United States taxable income and his tax liability for Year 1? Step 1: Is this an inboud/outbound activity? Surya is a nonresident alien so this is inbound. Step 2: Is there a trade or business? No. Therefore we are unconcerned about §864 or §871(b) Do not need to worry if you have income effectively connected with a trade or business which would push you into §871(b) Step 3: Source Items of Passive Income $20K dividend: US 30% tax (§ 871a), $5,000 gain: Foreign (§ 865a) $5200 US § 871i2(D) US source, exempted from tax $7800 Foreign 10,000 Rent US 30% tax, Foreign interest- foreign source n0 tax. $1,000 Foreign (see rules from previous class) $2,000 US § 871i2(A) US source but exempt from US tax $8000 – 865(d) – sale on contingent basis source by royalty rule – US, 30% tax Expenses: Under 873(a) you are only allowed deductions with respect to income effectively connected with trade or business.
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- Taxation in the United States