Untitled Document

The Tax Resource Group: Professional Tax Research Material, Resources, and Consulting

Category: International; Partnerships & LLCs; Tax Returns, Examinations & IRS Procedures
Subject: Nonresident Alien Limited Partners, Taxation of
Title: Various Issues
IRC Sections: 1231, 1441, 871, 875(1), 6012
Filename: 1364.html
Date Produced: 06/93

Facts

Taxpayer (TP) is a resident of the Philippines. TP is a nonresident alien for U.S. tax purposes and has not previously filed U.S. tax returns. For calendar year 1991, TP was a limited partner in a U.S. partnership (PSHP) which owns and operates an apartment building located in San Francisco, California. TP's K-1 from the partnership is incorporated by reference into this document.

Assumption

It is assumed for purposes of this matter that PSHP (or its agents) regularly and continuously engage in all the activities necessary to manage and operate the rental property.

Issues

1. Is TP required to file Form 1040NR for 1991?

2. Is the passive rental loss an offset to the §1231 gain reported on the K-1?

3. Is the rental income reported on the K-1 subject to the 30% tax on certain U.S. source income earned by nonresidents (IRC §1441)?

Findings

1. TP is required to file Form 1040NR.

2. The normal passive loss rules seem to apply to the items of income on TP's K-1.

3. Based on the facts and assumptions set forth above, it appears that TP's rental income from PSHP is not subject to 30% withholding tax notwithstanding the lack of an election under §871(d).Discussion

Trade or Business
The issues raised turn on the determination of whether TP is engaged in a U.S. trade or business. It appears that he is. First, §875(1) provides that a nonresident partner is considered to be engaged in a U.S. trade or business if the partnership in which the nonresident alien is a member is so engaged. Second, there is a line of court cases which establish the concept that the activity of a nonresident alien in connection with domestic real estate that is beyond the mere receipt of income from rented property and the payment of expenses incidental to the collection thereof places the nonresident alien in a U.S. trade or business provided that such activity is considerable, regular, and continuous. See, for example, Jan Casimir Lewenhaupt, 20 T.C. 151 (1953) and Inez De Amodio, 34 T.C. 894 (1960). See also Revenue Ruling 73-522, 1973-2 C.B. 226. Based on these cases and the assumption set forth above regarding PSHP's activities, it appears that PSHP (and hence TP) are engaged in a U.S. trade or business.

Return Requirement
Under §6012, a nonresident alien is required to file a U.S. income tax return if, inter alia, the alien in engaged in a U.S. trade or business. As discussed above, it appears that TP is engaged in a U.S. trade or business by virtue of his investment in PSHP. Accordingly, it appears that a U.S. income tax return (Form 1040NR) is required for 1991.

As we discussed on the telephone, I urge you to carefully review the regulations under Section 874 which deny the otherwise allowable deductions of nonresident aliens who fail to file appropriate U.S. tax returns within prescribed time limits. It would appear based on my limited knowledge of TP's circumstances that the deadline for 1991 is imminent.

Passive Activity Rules
Neither the passive activity rules under §469 nor the specific provisions dealing with the taxation of nonresident aliens (i.e., §§871-879) provide any special passive activity rules specifically applicable to nonresident aliens. Accordingly, it appears that the general passive activity rules under §469 would apply to the items of income and loss which appear of TP's K-1.

30% Withholding Tax
§1441 imposes tax withholding at the rate of 30% (or such lower rate established by treaty) against rents and certain other items of U.S. source gross income earned by nonresident aliens. §1441(c)(1) specifically exempts items of income which are effectively connected with a U.S. trade or business and included in income under §871(b)(2). Since it appears that TP is engaged in a U.S. trade or business with respect to his investment in PSHP and since the income from PSHP will be included in TP's gross income subject to U.S. graduated income tax rates, 30% withholding under §1441 appears to be inapplicable.