US 18 | s882: Foreign Corporations plus USTB

US Tax

The answer is that US-sourced income that is not effectively connected and not FDAP - so-called 'Non-ECI non-FDAP income' - is not taxable in the US if derived by a foreign person. US Sourced Non-ECI Non-FDAP income is not taxable in the US.

But the question in this episode is: Why? How can US-sourced non-ECI non-FDAP income not be taxable in the US when s882 (b) (1) clearly says that it is included in the gross income of a foreign corporation?

It all starts with section 11. Section 11 says, "A tax is hereby imposed …on the taxable income of every corporation. The amount of the tax …shall be 21 percent of taxable income....In the case of a foreign corporation, the tax imposed by subsection (a) shall apply only as provided by section 882."

So that takes us to s882 (a), which says, "A foreign corporation engaged in trade or business within the United States …shall be taxable as provided in section 11…on its taxable income which is effectively connected with the conduct of a trade or business within the United States....In determining taxable income …, gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States." So far so good. All this is clear and straightforward. Now to (b).

"(b) In the case of a foreign corporation, except where the context clearly indicates otherwise, gross income includes only—

1. gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
2. gross income which is effectively connected with the conduct of a trade or business within the United States.

And so this is the confusing bit. And then there is also s864 but we will cover s864 in the next episode.

The speaker in this episode is Bryan Kelly of Wilkie, Farr & Gallagher in Los Angeles.

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