CHAPTER 4

NON-RESIDENT ALIENS

The law imposes a tax upon the net income received by nonresident alien individuals "from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States." The term "non-resident aliens," as used in several places in the 1916 Law, was not defined therein, but clearly referred to individuals only and not to partnerships, corporations, or associations. The Revenue Act of 1918, however, removes all doubt by using the expression "non-resident alien individuals.' The expression "non-resident aliens" is used in this chapter to mean only non-resident alien individuals.

Who Is a Non-Resident Alien. Ordinarily it is a simple matter to determine whether an individual is or is not a non-resident alien; he falls into this class if he is neither a citizen nor a resident. Any individual who is a citizen of any possession of the United States (but not otherwise a citizen of United States) and who is not a resident of the United States is subject to income tax upon income derived from sources within the United States, and his tax is computed and paid in the same manner and subject to the same conditions as the tax of non-resident aliens who are citizens or subjects of foreign countries.2 The term "nonresident alien," therefore,, is used in this chapter to include any non-resident citizen of any possession of the United States.. Dif

1 Revenue Act of 1918, §§ 210 and 213 (c); Reg. 45, Art. 3.

2 Revenue Act of 1918, § 260. Income of citizens and residents of Porto Rico or the Philippines is taxed in those jurisdictions in accordance with the provisions of the Revenue Act of 1916, as amended, the legislatures of Porto Rico and the Philippines having power to amend, alter, modify or repeal that law in their respective jurisdictions (Revenue Act of 1918, § 261).

ficulty may arise in determining whether an individual is or is not a non-resident alien, where a non-resident citizen, naturalized or native, has resided abroad for a period sufficient to raise a presumption that he has abandoned his citizenship, and again where an alien has resided in this country for a period so long as to raise a presumption of residence. In either of these cases the intent of the individual is important. The Treasury Department holds that the status of a non-resident native or naturalized citizen remains unchanged until some affirmative action is taken, or the right to citizenship is forfeited by some overt act. When any naturalized citizen has left the United States and resided. for two years in the foreign country from which he came, or for five years in any other foreign country, he is presumed to have lost his American citizenship; but this presumption does not apply to residence abroad while the United States is at war. An Italian, who has come to the United States and filed his declaration of intention to become a citizen, but who has not yet received his final citizenship papers, is an alien. A Swede, who, after having come to the United States and become naturalized here, returned to Sweden and resided there for two years prior to April 6, 1917, is presumed to be once more an alien. On the other hand, an alien, coming to the United States with the intention of becoming a resident within the meaning and intent of the income tax statute, may indicate that fact and thereupon will be taxed as a resident, re

3 The Act of March 2, 1907, provides, briefly, that any American citizen becomes an alien by becoming naturalized in a foreign state or taking an oath of allegiance to any foreign state. A naturalized citizen residing for two years in the country from which he came or for five years in any other foreign country, is presumed to have renounced his American citizenship in the absence of satisfactory evidence to the contrary. A woman assumes the nationality of her husband, but may resume her original citizenship on becoming a widow; she assumes or retains her American citizenship as a widow if, living abroad, she registers with a United States consul, or without formal action if she resides here. Minor children of naturalized citizens are deemed to be citizens from the time they begin to reside permanently in this country. Children born outside of the United States of citizens, and continuing to reside abroad must at the age of 18 declare their intention as to citizenship. Determination of citizenship by the State Department under this Act is not conclusive upon the Treasury Department; other factors may also be considered, as indicated in the text.

4 T. D. 2135.

5 Reg. 45. Art. 4.

gardless of the length of time he has been here.

The tests as to the residence of aliens located within this country have been set forth in another chapter."

RESIDENCE OF ALIEN SEAMEN. In order to determine whether an alien seaman is a resident within the meaning of the income tax law, it is necessary to decide whether the presumption of non-residence is overcome by facts showing that he has established a residence in the territorial United States, which consists, of the States, the District of Columbia, and the Territories of Hawaii and Alaska, and excludes other places. Residence may be established on a vessel regularly engaged in coastwise trade, but the mere fact that a sailor makes his home on a vessel flying the United States flag and engaged in foreign trade is not sufficient to establish residence in the United States, even though the vessel, while carrying on foreign trade, touches at American ports. An alien seaman may acquire an actual residence in the territorial United States, although the nature of his calling requires him to be absent from the place where his residence is established for a long period. An alien seaman may acquire such a residence at a sailor's boarding house or hotel, but such a claim should be carefully scrutinized in order to make sure that such residence is bona fide. The filing of Form 1078 (Revised), or taking out first citizenship papers, is proof of residence in the United States from the time the form is filed or the papers taken. out, unless rebutted by other evidence showing an intention to be a transient. The fact that a head tax has been paid on behalf of an alien seaman entering the United States is no evidence that he has acquired residence, because the head tax is payable unless the alien who is entering the country is merely in transit through the country. An alien may remain a non-resident although he is not in transit through the country.

Extent to which Non-Resident Aliens Are Taxable. Non-resident aliens are subject to the normal tax and the surtax imposed by the Revenue Act of 1918, upon their net income received from all sources within the United States, including interest on bonds,

6 Reg. 45, Art. 313; T. D. 2242. 7 See Chapter 3.

See Chapter 3 for status of resident aliens.

8 Reg. 45, Art. 312a; T. D. 2869. As to when the wages of alien seamen are subject to tax, see Reg. 45, Art. 92a and page 47.

notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States. Non-resident aliens are not taxed at the lower rate of normal tax upon the first $4,000 of their taxable net income as are citizens or residents, but their entire taxable net income is subject to a normal tax of 8%.10

Income from Sources Within the United States. The words 'sources within the United States' are not defined in the law

• Revenue Act of 1918, §§ 210 and 213 (c); Reg. 45, Art. 3. This rate was 12% for the taxable year 1918. The 1913 Law, which was repealed by the 1916 Law, imposed a tax on the net income of non-resident aliens "from all property owned and from every business, trade, or profession carried on in the United States." This language was held, under two opinions of the Attorney General, not to include interest or dividends received by non-resident alien investors from domestic corporations, but on March 21, 1916, the Treasury Department reversed this holding and thereafter claimed the tax from non-resident aliens on the classes of income in question. (T. D. 2313.) In DeGanay v. Lederer, 239 Fed. 568, the District Court held a non-resident alien taxable on such income if the stock certificates and bonds were kept in this country, as then they acquired a situs here for purposes of the income tax. This decision has now been affirmed by the United States Supreme Court which takes the position that stock certificates, bonds, and mortgages are "property" within the meaning of the statute, having a situs within the United States in spite of the maxim mobilia sequuntur personam. The court said: "In the case under consideration the stocks and bonds were those of corporations organized under the laws of the United States, and the bonds and mortgages were secured upon property in Pennsylvania. The certificates of stock, the bonds and mortgages were in the Pennsylvania Company's offices in Philadelphia. Not only is this so, but the stocks, bonds and mortgages were held under a power of attorney which gave authority to the agent to sell, assign, or transfer any of them, and to invest and reinvest the proceeds of such sales as it might deem best in the management of the business and affairs of the principal. It is difficult to conceive how property could be more completely localized in the United States. There can be no question of the power of Congress to tax the income from such securities. Thus situated and held, and with the authority given to the local agent over them, we think the income derived is clearly from property within the United States within the meaning of Congress as expressed in the statute under consideration." The language of the 1916 Law and the present law expressly included such income, regardless of where the securities might be kept.

10 Revenue Act of 1918, § 210 (a); Reg. 45, Art. 2.

and their interpretation raises many difficult questions. The term is very broad and was intended to include income of all kinds from sources over which this country has jurisdiction. No cases have arisen in the courts involving construction of the phrase. The most comprehensive ruling defining gross income from sources within the United States includes in the term, in addition to the items specified in the statute, rentals, and royalties from property, and income from business carried on in the United States, interest on deposits in banks located within the United States, income from capital otherwise invested in the United States, and income from services rendered or labor performed within the United States.11 The tax does not apply to charter money or freight payments received by a foreign owner in regard to a vessel operated between the United States and foreign ports, if the person receiving the income maintains no regular agency in the United States and is not doing business in the United States. Compensation received by non-resident alien munitions inspectors and purchasing agents, from foreign governments, is not subject to the tax.12 The term "income" includes gains, profits and income derived from all salaries, wages.or compensation for personal services, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or income derived from any sources whatever.13 Non-resident aliens are not taxed on income specified in the law to be exempt.14

INCOME FROM BUSINESS BRANCHES. Where a non-resident alien establishes a branch of his business in this country, the net in

11 Reg. 45, Art. 91. Until the latest revision of Regulations 45 income from isolated transactions or activities directly resulting in gain, carried on within the United States by a non-resident or his representative in person, was stated to be from sources within the United States, but the Treasury Department seems now to have abandoned this position.

12 Reg. 45, Art. 92.

13 Revenue Act of 1918, § 213 (a). Compare this section with § 2 (a) of the Revenue Act of 1916.

14 Revenue Act of 1918, § 213. Exempt income is generally exempt regardless of the status of the recipient. See Chapter 14 for a further discussion of this point and the exceptions to such general rule.