Rev. Rul. 73-522



Section 871. - Tax on Nonresident Alien Individuals



26 CFR 1.871-8: Definition of engaging in trade or business within the United States.



(Also Section 61; 1.61-8.)



1973-2 C.B. 226; 1973 IRB LEXIS 245; REV. RUL. 73-522

July, 1973

 [*1] 

Nonresident alien; trade or business within U.S.; rents from property leases. A nonresident alien who did not make the election under section 871(d) of the Code, and whose only activity in the U.S. during the taxable year was a short visit for the purpose of supervising the negotiation of leases on rental property he owned during that year, is not considered to be engaged in a trade or business within the U.S. under section 871. Further, "rents," as used in section 871, include amounts paid by the lessee for taxes, repairs, etc., as well as the stipulated rental.



Advice has been requested whether a nonresident alien individual is considered to be engaged in trade or business within the United States during the taxable year, within the meaning of section 871 of the Internal Revenue Code of 1954, under the circumstances described below. Advice has also been requested whether the term "rents," as used in section 871, includes considerations other than the payment of a stipulated rental, i.e., payment of taxes, repairs, etc., by the lessee described below.

The taxpayer, a nonresident alien individual who has not elected to treat real property income as income effectively connected with  [*2]  the conduct of a trade or business within the United States pursuant to section 871(d) of the Code, did not, except as described below, engage in any activity within the United States during the taxable year ended December 31, 1971.

The taxpayer owned rental property situated in the United States that was subject to long-term leases each providing for a minimum monthly rental and the payment by the lessee of real estate taxes, operating expenses, ground rent, repairs, interest and principal on existing mortgages, and insurance in connection with the property leased. The leases are referred to as "net leases" and were entered into by the taxpayer on December 1, 1971. The taxpayer visited the United States for approximately one week during November 1971 for the purpose of supervising new leasing 227 negotiations, attending conferences, making phone calls, drafting documents, and making significant decisions with respect to the leases. This was his only visit to the United States in 1971. The leases were identical in form (net leases) to those applicable to the properties owned by the taxpayer prior to December 1, 1971, and were entered into with lessees unrelated to each other  [*3]  or to the taxpayer.

Section 871(a)(1) of the Code imposes for each year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as income in the form of items enumerated, but only to the extent that the amount so received is not effectively connected with the conduct of a trade or business within the United States.

Section 871(b)(1) of the Code provides for the imposition of a tax on a nonresident alien individual engaged in trade or business in the United States during the taxable year as provided in section 1 or 1201(b) on his taxable income that is effectively connected with the conduct of a trade or business within the United States.

Court decisions involving nonresident alien individual owners of real estate in the United States have developed a test for determining when such individuals are engaged in trade or business within the United States as a result of such ownership. These cases hold that activity of nonresident alien individuals (or their agents) 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,  [*4]  places the owner in a trade or business within the United States, provided that such activity is considerable, continuous, and regular. Jan Casimir Lewenhaupt 20 T.C. 151 (1953), aff'd per curiam, 221 F. 2d 227 (9th Cir. 1955); Elizabeth Herbert 30 T.C. 26 (1958), acq. 1958-2 C.B. 6; Inez De Amodio 34 T.C. 894 (1960), aff'd 229 F. 2d 623 (3rd Cir. 1962).

In the instant case the taxpayer's only activity in the United States during the taxable year ended December 31, 1971, was the supervision of the negotiation of leases covering rental property that he owned during that year. No other acitvity was necessary on the part of the lessor in connection with the properties because of the provisions of the net leases. The taxpayer's supervision of the negotiation of new leases is not considered to be beyond the scope of mere ownership of real property or the mere receipt of income from real property since such activity was sporadic rather than continuous (that is a day-to-day activity), irregular rather than regular, and minimal rather than considerable.

Accordingly, the taxpayer in the instant case is not considered to be engaged in trade or business within  [*5]  the United States during the taxable year ended December 31, 1971, within the meaning of section 871 of the Code. See Evelyn M. L. Neil, 46 B.T.A. 197 (1942), wherein the operation of one parcel of real estate by the lessee did not result in the owner being considered to be engaged in trade or business. Compare Adolph Schwarcz, 24 T.C. 733, acq. 1956-1, C.B. 5, wherein an owner operating one parcel of rental property in all its aspects was considered to be engaging in trade or business.

With regard to the second question presented, section 1.871-7(b)(1) of the Income Tax Regulations provides that for purposes of section 871(a)(1) of the Code "amounts" received (including rents) means "gross income." Section 1.61-8(c), to the extent pertinent, provides that if a lessee pays any of the expenses of the lessor such payments are additional rental income of the lessor.

Accordingly, "rents," as used in section 871 of the Code, includes considerations other than the payment of a stipulated rental, i.e., amounts paid by the lessee for taxes, repairs, etc., in accordance with the terms of a net lease.