Treaty-Based Return Positions

SUMMARY: This document contains final regulations under section 6114 of

the Internal Revenue Code of 1986 providing that reporting is

specifically required if the residency of an individual is determined

under a treaty and apart from the Code.

The IRS concluded, in the process of completing the regulations

under section 7701(b), that the rules of section 6114 should apply to

individuals determining their residency under a treaty.

These final regulations are necessary to implement the section 6114

rules to individuals determining their residency under a treaty. Also

contained in this document are final regulations relating to section

7701(b) and conforming changes to regulations under sections 6038 and

6046.

EFFECTIVE DATE: These regulations are effective December 15, 1997.

FOR FURTHER INFORMATION CONTACT: David A. Juster, telephone (202-622-

3850) (not a toll-free number), regarding sections 6114 and 7701(b) and

Carl M. Cooper, telephone (202-622-3840) (not a toll-free number)

regarding sections 6038 and 6046, both of the Office of Associate Chief

Counsel (International), within the Office of Chief Counsel, IRS.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations

have been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under

control number 1545-1126. Responses to these collections of information

are mandatory.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid OMB control number.

The estimated annual burden per respondent varies from 1/2 hour to

3 hours, depending on individual circumstances, with an estimated

average of 1 hour.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,

DC 20224, and to the Office of Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and

Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

On April 27, 1992, a notice of proposed rulemaking was published in

the Federal Register (57 FR 15272) proposing amendments to the final

Regulations on Procedure and Administration (26 CFR 301.6114-1),

published in the Federal Register on March 14, 1990 (55 FR 9438) and on

July 12, 1990 (55 FR 28608). The proposed amendments related to

Sec. 301.6114-1 (b) and (c) and Sec. 301.7701(b)-7(c)(2). No written

comments responding to the notice were received. No public hearing was

requested or held. The proposed amendments are adopted without change

by this Treasury decision. This Treasury decision also includes

modifications to Secs. 1.6038-2(j), 1.6046-1(g), 301.6114-1(d),

301.7701(b)-3(b) (3) and (4), 301.7701(b)-7(c)(1) and 301.7701(b)-8(b)

(1) and (2).

Explanation of Provisions

Section 301.6114-1(b) is amended by adding paragraph (b)(8) to

provide that reporting is required under section 6114 where residency

of an individual is determined under a treaty and apart from the

Internal Revenue Code (Code). The regulations provide, however, that

reporting is waived for an individual if payments or income items

reportable by reason of paragraph (b)(8) do not exceed $100,000 in the

aggregate. Section 301.6114-1(d) currently provides that when reporting

is required under section 6114, a taxpayer must furnish as an

attachment to his or her return a written statement with the

information as set forth in paragraph (d). Section 301.7701(b)-7(b)

currently provides that a dual resident taxpayer who claims a treaty

benefit as a nonresident of the United States must file a statement in

the form required by paragraph (c) of that section. Section 301.6114-

1(d) is now amended to provide that, when reporting is required under

section 6114, a taxpayer must furnish, as an attachment to his or her

return, a fully completed Form 8833 (Treaty-Based Return Position

Disclosure Under Section 6114 or 7701(b)) or appropriate successor

form. Section 301.7701(b)-7(c)(1) is amended to provide that the

written statement required to be furnished under paragraph (b) of that

section, as an attachment to a dual resident taxpayer's return, must be

in the form of a fully completed Form 8833 (Treaty-Based Return

Position Disclosure Under Section 6114 or 7701(b)) or appropriate

successor form. Form 8833 was developed to provide standardized

reporting of the information currently required by Secs. 301.6114-1(d)

and 301.7701(b)-7(c).

In an effort to provide standardized reporting of the information

currently required to be reported, under Sec. 301.7701(b)-8(b), by

taxpayers claiming the closer connection exception and exempt

individuals and individuals with a medical condition, the Service has

developed Form 8840 (Closer Connection Exception Statement) and Form

8843 (Statement for Exempt Individuals and Individuals with a Medical

Condition). Accordingly, Sec. 301.7701(b)-8(b)(1) is amended to provide

that the statement filed by alien individuals claiming the closer

connection exception, described in Sec. 301.7701(b)-2, must be in the

form of a fully completed Form 8840 or appropriate successor form.

Section 301.7701(b)-8(b)(2) is amended to provide that the statement

filed by exempt individuals and individuals with a medical condition,

described in Sec. 301.7701(b)-3, must be in the form of a fully

completed Form 8843 or appropriate successor form.

Sections 3121(b)(19), 3306(c)(19) and 3231(e)(1) of the Code

provide that ``J'' class visa holders (teachers and trainees) are

exempt from FICA, FUTA and Railroad Retirement Act taxes, respectively.

Section 320 of the Social Security Independence and Program

Improvements Act of 1994, Public Law 103-296 (108 Stat. 1464), extends

the FICA, FUTA and Railroad Retirement Act tax exemptions and certain

other tax rules to ``Q'' class visa holders (participants in

international cultural exchange programs). Accordingly, conforming

changes have been made to Sec. 301.7701(b)-3(b) (3) and (4) to reflect

the revisions in the Code to the definitions of a teacher or trainee

and student contained in section 7701(b)(5).

Section 301.7701(b)-7(c)(2), adopted as proposed, provides that,

for purposes of stating the approximate amount of subpart F income to

be included in the

[[Page 53385]]

statement required to be furnished under paragraph (b) of that section

by a dual resident taxpayer who is a shareholder in a controlled

foreign corporation (as defined in section 957 or section 953(c)), the

approximate amount of income may be based on the audited foreign

financial statements of the CFC if there are no other United States

shareholders in that CFC. Parallel rules with respect to information

reporting under sections 6038 and 6046 are added in Secs. 1.6038-

2(j)(2)(ii) and 1.6046-1(g). Under these rules, a taxpayer who claims a

treaty benefit as a nonresident of the United States, but who is a

United States person for purposes of the information reporting

requirements of sections 6038 or 6046, may satisfy certain information

reporting requirements by filing the audited foreign financial

statements of the foreign corporation with respect to which the

information reporting is required. However, these rules apply only if

the taxpayer is the sole United States person for purposes of the

information reporting requirements with respect to the foreign

corporation. If there are other United States persons for those

purposes, then the taxpayer must report the information required by the

regulations in the form and manner generally prescribed.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

does not apply to these regulations, and because the notice of proposed

rulemaking preceding the regulations was issued prior to March 29,

1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the Code, the notice of proposed

rulemaking preceding these regulations was submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment

on its impact on small business.

Drafting Information: Various personnel from the Office of

Associate Chief Counsel (International), within the Office of Chief

Counsel, IRS and the Treasury Department participated in developing the

regulations.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 301 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.6038-2 is amended by:

1. Redesignating paragraph (j)(2)(ii) as paragraph (j)(2)(iii).

2. Adding new paragraph (j)(2)(ii) to read as follows:

Sec. 1.6038-2 Information returns required of United States persons

with respect to annual accounting periods of certain foreign

corporations beginning after December 31, 1962.

* * * * *

(j) * * *

(2) * * *

(ii) If an individual who is a United States person required to

furnish information with respect to a foreign corporation under section

6038 is entitled under a treaty to be treated as a nonresident of the

United States, and if the individual claims this treaty benefit, and if

there are no other United States persons that are required to furnish

information under section 6038 with respect to the foreign corporation,

then the individual may satisfy the requirements of paragraphs (f)(10),

(f)(11), (g), and (h) of this section by filing the audited foreign

financial statements of the foreign corporation with the individual's

return required under section 6038.

* * * * *

Par. 3. In Sec. 1.6046-1, paragraph (g) is amended by adding a

sentence at the end to read as follows:

Sec. 1.6046-1 Returns as to organization or reorganization of foreign

corporations and as to acquisitions of their stock, on or after January

1, 1963.

* * * * *

(g) * * * If an individual who is a United States person required

to make a return with respect to a foreign corporation under section

6046 is entitled under a treaty to be treated as a nonresident of the

United States, and if the individual claims this treaty benefit, and if

there are no other United States persons that are required to furnish

information under section 6046 with respect to the foreign corporation,

then the individual may satisfy the requirements of paragraphs (b)(10),

(11) and (12), (c)(3)(ii)(d), and (g) of this section by filing the

audited foreign financial statements of the foreign corporation with

the individual's return required under section 6046.

* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

Par. 4. The authority citation for part 301 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *.

Section 301.6114-1 also issued under 26 U.S.C. 6114; * * *.

Par. 5. Section 301.6114-1 is amended by:

1. Removing the language ``(c)(1)'' in paragraph (b)(4)

introductory text and adding ``(c)(1)(i)'' in its place.

2. Removing the language ``(c)(1)'' in paragraph (b)(5)

introductory text and adding ``(c)(1)(i)'' in its place.

3. Removing the language''(c)(4)'' in paragraph (b)(6) and adding

``(c)(1)(iv)'' in its place.

4. Removing the language ``or'' at the end of paragraph (b)(6).

5. Removing the period at the end of paragraph (b)(7) and adding

``; or'' in its place.

6. Adding a paragraph (b)(8).

7. Paragraphs (c)(1) through (c)(6) are redesignated as paragraphs

(c)(1)(i) through (c)(1)(vi), respectively.

8. Paragraphs (c)(7) introductory text, (c)(7)(i), (c)(7)(ii), and

(c)(7)(iii) are redesignated as paragraphs (c)(1)(vii) introductory

text, (c)(1)(vii)(A), (c)(1)(vii)(B) and (c)(1)(vii)(C), respectively.

9. The introductory text of paragraph (c) is redesignated as the

introductory text of paragraph (c)(1).

10. Revising newly designated paragraph (c)(1)(ii).

11. Removing the concluding text immediately following newly

designated paragraph (c)(1)(vii)(C).

12. Adding paragraphs (c)(2), (c)(3), (c)(4) and (c)(5).

13. Revising paragraph (d).

The additions and revisions read as follows:

Sec. 301.6114-1 Treaty-based return positions.

* * * * *

(b) * * *

(8) For returns relating to taxable years for which the due date

for filing

[[Page 53386]]

returns (without extensions) is after December 15, 1997, that residency

of an individual is determined under a treaty and apart from the

Internal Revenue Code.

(c) Reporting requirement waived. (1) * * *

(ii) For returns relating to taxable years for which the due date

for filing returns (without extensions) is on or before December 15,

1997, that residency of an individual is determined under a treaty and

apart from the Internal Revenue Code.

* * * * *

(2) Reporting is waived for an individual if payments or income

items otherwise reportable under this section (other than by reason of

paragraph (b)(8) of this section), received by the individual during

the course of the taxable year do not exceed $10,000 in the aggregate

or, in the case of payments or income items reportable only by reason

of paragraph (b)(8) of this section, do not exceed $100,000 in the

aggregate.

(3) Reporting with respect to payments or income items the

treatment of which is mandated by the terms of a closing agreement with

the Internal Revenue Service, and that would otherwise be subject to

the reporting requirements of this section, is also waived.

(4) If a partnership, trust, or estate that has the taxpayer as a

partner or beneficiary discloses on its information return a position

for which reporting is otherwise required by the taxpayer, the taxpayer

(partner or beneficiary) is then excused from disclosing that position

on a return.

(5) This section does not apply to a withholding agent with respect

to the performance of its withholding functions.

(d) Information to be reported--(1) Returns due after December 15,

1997. When reporting is required under this section for a return

relating to a taxable year for which the due date (without extensions)

is after December 15, 1997, the taxpayer must furnish, in accordance

with paragraph (a) of this section, as an attachment to the return, a

fully completed Form 8833 (Treaty-Based Return Position Disclosure

Under Section 6114 or 7701(b)) or appropriate successor form.

(2) Earlier returns. For returns relating to taxable years for

which the due date for filing returns (without extensions) is on or

before December 15, 1997, the taxpayer must furnish information in

accordance with paragraph (d) of this section in effect prior to

December 15, 1997 (see Sec. 301.6114-1(d) as contained in 26 CFR part

301, revised April 1, 1997).

(3) In general--(i) Permanent establishment. For purposes of

determining the nature and amount (or reasonable estimate thereof) of

gross receipts, if a taxpayer takes a position that it does not have a

permanent establishment or a fixed base in the United States and

properly discloses that position, it need not separately report its

payment of actual or deemed dividends or interest exempt from tax by

reason of a treaty (or any liability for tax imposed by reason of

section 884).

(ii) Single income item. For purposes of the statement of facts

relied upon to support each separate Treaty-Based Return Position

taken, a taxpayer may treat payments or income items of the same type

(e.g., interest items) received from the same ultimate payor (e.g., the

obligor on a note) as a single separate payment or income item.

(iii) Foreign source effectively connected income. If a taxpayer

takes the return position that, under the treaty, income that would be

income effectively connected with a U.S. trade or business is not

subject to U.S. taxation because it is income treated as derived from

sources outside the United States, the taxpayer may treat payments or

income items of the same type (e.g., interest items) as a single

separate payment or income item.

(iv) Sales or services income. Income from separate sales or

services, whether or not made or preformed by an agent (independent or

dependent), to different U.S. customers on behalf of a foreign

corporation not having a permanent establishment in the United States

may be treated as a single payment or income item.

(v) Foreign insurers or reinsurers. For purposes of reporting by

foreign insurers or reinsurers, as described in paragraph

(c)(1)(vii)(B) of this section, such reporting must separately set

forth premiums paid with respect to casualty insurance and indemnity

bonds (subject to section 4371(1)); life insurance, sickness and

accident policies, and annuity contracts (subject to section 4371(2));

and reinsurance (subject to section 4371(3)). All premiums paid with

respect to each of these three categories may be treated as a single

payment or income item within that category. For reports first due

before May 1, 1991, the report may disclose, for each of the three

categories, the total amount of premiums derived by the foreign insurer

or reinsurer in U.S. dollars (even if a portion of these premiums

relate to risks that are not U.S. situs). Reasonable estimates of the

amounts required to be disclosed will satisfy these reporting

requirements.

* * * * *

Par. 6. Section 301.7701(b)-0 is amended in the contents listing

by:

1. Adding entries for Sec. 301.7701(b)-7, paragraphs (c)(1)(i) and

(c)(1)(ii).

2. Removing the language ``[Reserved]'' in the entry for

Sec. 301.7701(b)-7, paragraph (c)(2).

3. Adding entries for Sec. 301.7701(b)-8, paragraphs (b)(1)(i),

(b)(1)(ii), (b)(2)(i) and (b)(2)(ii).

The additions read as follows:

Sec. 301.7701(b)-0 Outline of regulation provision for section

7701(b)-1 through (b)-9.

* * * * *

Sec. 301.7701(b)-7 Coordination with income tax treaties.

* * * * *

(c) * * *

(1) * * *

(i) Returns due after December 15, 1997.

(ii) Earlier returns.

* * * * *

Sec. 301.7701(b)-8 Procedural rules.

* * * * *

(b) * * *

(1) * * *

(i) Returns due after December 15, 1997.

(ii) Earlier returns.

(2) * * *

(i) Returns due after December 15, 1997.

(ii) Earlier returns.

* * * * *

Par. 7. Section 301.7701(b)-3 is amended by revising paragraphs

(b)(3) and (b)(4) to read as follows:

Sec. 301.7701(b)-3 Days of presence in the United States that are

excluded for purposes of section 7701(b).

* * * * *

(b) * * *

(3) Teacher or trainee. A teacher or trainee includes any

individual (and that individual's immediate family), other than a

student, who is admitted temporarily to the United States as a

nonimmigrant under section 101(a)(15) (J) (relating to the admission of

teachers and trainees into the United States) or section 101(a)(15)(Q)

(relating to the admission of participants in international cultural

exchange programs) of the Immigration and Nationality Act (8 U.S.C.

1101(a)(15) (J), (Q)) and who substantially complies with the

requirements of being admitted.

(4) Student. A student is any individual (and that individual's

[[Page 53387]]

immediate family) who is admitted temporarily to the United States as a

nonimmigrant under section 101(a)(15)(F) or (M) (relating to the

admission of students into the United States) or as a student under

section 101(a)(15)(J) (relating to the admission of teachers and

trainees into the United States) or section 101(a)(15)(Q) (relating to

the admission of participants in international cultural exchange

programs) of the Immigration and Nationality Act (8 U.S.C. 1101(a)(15)

(F), (J), (M), (Q)) who substantially complies with the requirements of

being admitted. For rules concerning taxation of certain nonresident

students or trainees, see section 871(c) and Sec. 1.871-9(a) of this

chapter.

* * * * *

Par. 8. Section 301.7701(b)-7 is amended by:

1. Revising paragraph (c)(1).

2. Adding text for paragraph (c)(2).

The revision and addition read as follows:

Sec. 301.7701(b)-7 Coordination with income tax treaties.

* * * * *

(c) * * * (1) In general--(i) Returns due after December 15, 1997.

The statement filed by an individual described in paragraph (a)(1) of

this section, for a return relating to a taxable year for which the due

date (without extensions) is after December 15, 1997, must be in the

form of a fully completed Form 8833 (Treaty-Based Return Position

Disclosure Under Section 6114 or 7701(b)) or appropriate successor

form. See section 6114 and Sec. 301.6114-1 for rules relating to other

treaty-based return positions taken by the same taxpayer.

(ii) Earlier returns. For returns relating to taxable years for

which the due date for filing returns (without extensions) is on or

before December 15, 1997, the statement filed by the individual

described in paragraph (a)(1) of this section must contain the

information in accordance with paragraph (c)(1) of this section in

effect prior to December 15, 1997 (see Sec. 301.7701(b)-7(c)(1) as

contained in 26 CFR part 301, revised April 1, 1997).

(2) Controlled foreign corporation shareholders. If the taxpayer

who claims a treaty benefit as a nonresident of the United States is a

United States shareholder in a controlled foreign corporation (CFC), as

defined in section 957 or section 953(c), and there are no other United

States shareholders in that CFC, then for purposes of paragraph (c)(1)

of this section, the approximate amount of subpart F income (as defined

in section 952) that would have been included in the taxpayer's income

may be determined based on the audited foreign financial statements of

the CFC.

* * * * *

Par. 9. Section 301.7701(b)-8 is amended by revising paragraphs

(b)(1) and (b)(2) to read as follows:

Sec. 301.7701(b)-8 Procedural rules.

* * * * *

(b) * * * (1) Closer connection exception--(i) Returns due after

December 15, 1997. The statement filed by an individual described in

paragraph (a)(1) of this section, for a return relating to a taxable

year for which the due date (without extensions) is after December 15,

1997, must be in the form of a fully completed Form 8840 (Closer

Connection Exception Statement) or appropriate successor form.

(ii) Earlier returns. For returns relating to taxable years for

which the due date for filing returns (without extensions) is on or

before December 15, 1997, the statement filed by the individual

described in paragraph (a)(1) of this section must contain the

information in accordance with paragraph (b)(1) of this section in

effect prior to December 15, 1997 (see Sec. 301.7701(b)-8(b)(1) as

contained in 26 CFR Part 301, revised April 1, 1997).

(2) Exempt individuals and individuals with a medical condition--

(i) Returns due after December 15, 1997. The statement filed by an

individual described in paragraph (a)(2) of this section, for a return

relating to a taxable year for which the due date (without extensions)

is after December 15, 1997, must be in the form of a fully completed

Form 8843 (Statement for Exempt Individuals and Individuals with a

Medical Condition) or appropriate successor form.

(ii) Earlier returns. For returns relating to taxable years for

which the due date for filing returns (without extensions) is on or

before December 15, 1997, the statement filed by the individual

described in paragraph (a)(2) of this section must contain the

information in accordance with paragraph (b)(2) of this section in

effect prior to December 15, 1997 (see Sec. 301.7701(b)-8(b)(2) as

contained in 26 CFR Part 301, revised April 1, 1997).

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 10. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 11. In Sec. 602.101, paragraph (c) is amended by adding an

entry in numerical order to the table and revising the entry for

301.7701(b)-7 to read as follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control No.

------------------------------------------------------------------------

* * * * *

301.6114-1................................................. 1545-1126

* * * * *

301.7701(b)-7.............................................. 1545-0089

1545-1126

* * * * *

------------------------------------------------------------------------

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97-25997 Filed 10-6-97; 8:45 am]

BILLING CODE 4830-01-P