Nonresident Alien Students And the Tax Home Concept
The tax home concept can affect whether the capital gain income of a nonresident alien student will be taxable in the United States.
I.R.C. § 871(a)(2) makes taxable the U.S.-source capital gains of a nonresident alien who is present in the United States for 183 days or more in a calendar year. I.R.C. § 865(g) adds the stipulation that these capital gains will be U.S.-source (and thus possibly taxable) only if the alien’s tax home has passed to the United States. These provisions affect mainly "exempt individuals" as defined by I.R.C. § 7701(b)(5). Specifically, these provisions affect foreign government related individuals, foreign students and foreign scholars, all individuals that typically remain in the United States for long periods of time as nonresidents.
Most foreign government related individuals are employed before they come to the United States, and most are employed in the United States after they arrive in the United States, thus establishing their tax home in the United States upon their arrival in the United States (unless their stay in the United States is expected to last less than one year).
Likewise, most foreign scholars (teachers/researchers) are employed before they come to the United States, and are employed in the United States after they arrive in the United States, thus establishing their tax home in the United States upon their arrival in the United States (unless their stay in the United States is expected to last less than one year).
Many foreign students, however, are not employed or engaged in a trade or business before they arrive in the United States, and many of them are not employed in the United States after they arrive in the United States. In this situation the issue arises as to what constitutes a foreign student's tax home--his residence or his place of employment? Revenue Ruling 93-86 provides as follows:
Section 162(a)(2) of the Code allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, including travel expenses (including amounts expended for meals and lodging other than amounts that are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business. Under section 262(a), no deduction is allowed for personal, living, or family expenses, unless expressly provided by law.
For travel expenses to be deductible under section 162(a)(2) of the Code, they must satisfy the following three conditions: (1) they must be ordinary and necessary, (2) they must be incurred while away from home, and (3) they must be incurred in pursuit of a trade or business. See Commissioner v. Flowers, 326 U.S. 465 (1946), 1946-1 C.B. 57, and Rev. Rul. 60-189, 1960-1 C.B. 60.
A taxpayer's "home" for purposes of section 162(a)(2) of the Code is generally considered to be located at (1) the taxpayer's regular or principal (if more than one regular) place of business, or (2) if the taxpayer has no regular or principal place of business, then at the taxpayer's regular place of abode in a real and substantial sense. If a taxpayer comes within neither category (1) nor category (2), the taxpayer is considered to be an itinerant whose "home" is wherever the taxpayer happens to work. Rev. Rul. 73-529, 1973-2 C.B. 37, and Rev. Rul. 60-189. Travel expenses paid or incurred in connection with an indefinite or permanent work assignment are generally nondeductible.
In Revenue Ruling 74-453, IRS took the following position:
Nonresident alien's maintenance allowance; United States on-the-job trainee. A maintenance allowance received from a U.S. business firm by a nonresident alien, a foreign university degree candidate in the United States during his summer vacation under an on-the-job training program intended to supplement his education but not required by the university in his native country with which the United States has no tax treaty, does not qualify as a scholarship or fellowship grant and is compensation for services includible in gross income under section 61 of the Code. The remuneration received constitutes income effectively connected with the conduct of his trade or business in the United States subject to the rules of sections 871(b) and 873, but his "tax home" is the location of his training and no deduction may be claimed under section 162(a) for travel expenses in connection with the services performed for the U.S. firm.
Storerios and Catherine Hantzis v. CIR, 638 F.2d 248 (1st. Cir.)
In Hantizis, the First Circuit of the U.S. Court of Appeals took the position that an unemployed full-time law student residing in Boston while attending Harvard Law School in Cambridge, MA who took a summer job in New York for only 10 weeks had a tax home only in New York because New York was the location of her employment. The fact of her unemployed full-time student status in Boston was not sufficient to establish her tax home in Boston.
Eldon D. Brinley and Mary Alice Brinley v. CIR, 782 F.2d 1326 (5th. Cir.)
In Brinley v. CIR, the Fifth Circuit U.S. Court of Appeals stated the following:
In discussing the phrase "away from home" within the meaning of § 162(a)(2) we have stated that; the question of whether a taxpayer is away from home within the meaning of section 162(a)(2) is essentially a question of fact to be determined from all the facts and circumstances of the case, but the principles that guide the decision have long been established. A taxpayer's home, for purposes of section 162(a)(2), means the vicinity of his principal place of employment and not where his personal residence is located, if such residence is located in a different place from his principal place of employment. When a taxpayer who maintains a residence in the vicinity of his principal place of employment is required to travel to a different location for temporary work, he is considered to be 'away from home'. A taxpayer who accepts permanent or indefinite employment in a location different from that of his residence, however, is considered to have moved his tax home to the new location, and is therefore no longer considered away from home. A job may be considered indefinite or permanent if, under all the circumstances, it appears likely to last beyond a short period of time, even if there is no firm commitment that it will do so. A job which is temporary at the outset, may become permanent or indefinite by a change of circumstance or merely the passage of time. Finally, an itinerant worker who maintains no permanent residence is never considered away from home because he has no home to be away from.
Michel v. Commissioner, 629 F.2d 1071 (5th Cir. 1980)
In Michel, the court stated that "if the [taxpayer's] prospects are that his work will continue for an 'indefinite' or 'intermediate' [sic-indeterminate] or 'substantially long' period, then the deduction is disallowed."
These and many other court cases seem to confirm the principle that the tax concept of a "tax home" is inextricably bound up with the idea of the taxpayer's employment or engaging in a trade or business, or engaging in an activity for which deductions are allowed under I.R.C. § 162. The absence of such employment or trade or business or activity means that the taxpayer's tax home is not necessarily located where he resides. In the absence of such employment or trade or business or activity, the taxpayer may have no tax home at all.
The activity of being a student does not constitute a trade or business under the Internal Revenue Code, and thus, in and of itself, cannot establish a tax home. The only exception to this rule arises from I.R.C. § 871(c) which provides as follows:
Participants in certain exchange or training programs. For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended (8 U.S.. 1101(a)(15)(F), (J), (M), or (Q)), shall be treated as a nonresident alien individual engaged in trade or business within the United States, and any income described in the second sentence of section 1441(b) which is received by such individual shall, to the extent derived from sources within the United States, be treated as effectively connected with the conduct of a trade or business within the United States.
The second sentence of I.R.C. § 1441(b) reads as follows:
The items of income referred to in subsection (a) from which tax shall be deducted and withheld at the rate of 14 percent are amounts which are received by a nonresident alien individual who is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act and which are—
- incident to a qualified scholarship to which section 117(a) applies, but only to the extent includible in gross income; or
- in the case of an individual who is not a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii), granted by—
- an organization described in section 501(c)(3) which is exempt from tax under section 501(a),
- a foreign government,
- an international organization, or a bi-national or multinational educational and cultural foundation or commission created or continued pursuant to the Mutual Educational and Cultural Exchange Act of 1961, or
- the United States, or an instrumentality or agency thereof, or a State, or a possession of the United States, or any political subdivision thereof, or the District of Columbia, as a scholarship or fellowship for study, training, or research in the United States.
This means that a nonimmigrant temporarily present in the United States in F, J, M or Q status is considered to be engaged in a U.S. trade or business for the purpose of taxing any income from scholarships or fellowships he may have. This conclusion is confirmed by the procedures outlined in Revenue Procedure 88-24, which make clear that the scholarship/fellowship income of nonimmigrants described in I.R.C. § 871(c) may be taxed at the graduated rates and that deductions under I.R.C. § 162 may be taken against such scholarship/fellowship income. The resulting conclusion must be that the tax home of nonimmigrants temporarily present in the United States in F, J, M, or Q status and who have U.S. sourced scholarship/fellowship income is in the United States if such nonimmigrants intend to remain in the United States for a period longer than 1 year.
Based on all the above, we may make the following statements with respect to the issue of the tax home of foreign students:
- A nonresident alien student temporarily present in the United States in F, J, M, or Q status who, at the time of his arrival in the United States, intended to remain in the United States for a period longer than 1 year, and who is employed in the United States (or self-employed even if illegally under the immigration law) has established his tax home in the United States beginning on the date his employment or self-employment begins if such employment or self-employment is expected to last for a period longer than 1 year. Such a nonresident alien student shall be taxable on his U.S.--sourced capital gains income in any calendar year in which his presence in the United States equals or exceeds 183 days.
- A nonresident alien student temporarily present in the United States in F, J, M, or Q status who, at the time of his arrival in the United States, intends to remain in the United States for a period longer than 1 year, and who is the recipient of a U.S. source scholarship or fellowship has established his tax home in the United States beginning on the first date he is eligible to receive such scholarship or fellowship income if his eligibility to receive such scholarship or fellowship income is expected to last for a period longer than 1 year. The nonresident alien student shall be taxable on his U.S. source capital gains income in any calendar year in which his presence in the United States equals or exceeds 183 days.
A nonresident alien student temporarily present in the United States in any nonimmigrant status who is not employed (or self-employed even if illegally under the immigration law) and is not the recipient of a U.S. source scholarship or fellowship, has not established a tax home in the United States. The nonresident alien student shall not be taxable on his U.S. source capital gains income in any calendar year in which his presence in the United States does not equal or exceed 183 days.
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