Guillermo Baez Espinosa - Page 6

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          nonresident alien individual engaged in a trade or business                 
          within the United States is taxed on the "taxable income"                   
          effectively connected with that trade or business at the                    
          graduated rates of tax (graduated rates), applicable to U.S.                
          residents enumerated in section 1.  Sec. 871(b)(1).  "Taxable               
          income" means gross income reduced by allowable deductions.                 
          Secs. 3(d), 63(a).  In determining taxable income, generally,               
          deductions "shall be allowed * * * only if and to the extent that           
          they are connected with income which is effectively connected               
          with the conduct of a trade or business within the United                   
          States".   Sec. 873(a).  Thus, there may be a dramatic difference           
          in the tax treatment of rental income depending on whether the              
          income is effectively connected with a trade or business.  If the           
          income is effectively connected with a trade or business,                   
          deductions are allowed (unless barred by sec. 874, as discussed             
          infra) and the graduated tax rates in section 1 apply.  If the              
          income is not effectively connected with a trade or business, no            
          deductions are allowed, and the gross rental income is taxed at a           
          30-percent rate.                                                            
               Because of the uncertainties in determining whether a rental           
          activity constitutes a trade or business, Congress has provided             
          an election under section 871(d).  See S. Rept. 1707, 89th Cong.            
          2d Sess. (1966), 1966-2 C.B. 1055, 1076-1077.  Section 871(d)(1)            
          provides that a nonresident alien individual who derives any                





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