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the rental income as if it was effectively connected with a trade
or business within the United States.
On January 13, 1994, respondent issued a notice of
deficiency to petitioner for the taxable years 1987 through 1991.
In the notice of deficiency, respondent determined that
petitioner was liable for deficiencies and additions to tax in
the above listed amounts. Respondent treated petitioner's income
as effectively connected with a U.S. trade or business, but
determined that petitioner was not entitled to the benefit of any
deductions pursuant to section 874(a). For each year in issue,
respondent further determined that petitioner is liable for
additions to tax for failure to file tax returns pursuant to
section 6651(a)(1) and for failure to pay estimated tax pursuant
to section 6654.
OPINION
Section 874(a)
In order to understand the primary issue it is useful to
briefly explore the taxation of rental income of nonresident
alien individuals under the Internal Revenue Code. Under section
871(a)(1)(A) the "amount" from rents received by a nonresident
alien individual that is not effectively connected with the
conduct of a trade or business within the United States is taxed
at a 30-percent rate. This 30-percent rate is imposed on gross
rental income. See sec. 1.871-7(a)(3), Income Tax Regs. A
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