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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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