Proposed Regulation on the Source of Income of Artists, Athletes,
and Other Performers Raises Many Questions
By David R. Tillinghast,
Esq.
Baker & McKenzie, New York, NY
The IRS has launched a compliance initiative aimed at foreign
athletes and entertainers performing in the United
States.1 But it is doing more
than this. It recently proposed a regulation under §861 (the
“Proposed Reg”)2
which seems designed to enable the IRS to tax a larger share of income
derived from performances in the United States. Unfortunately, the
Proposed Reg raises as many questions as it answers.
Existing Regs. §1.861-4 makes no special provision for
determining the source of the income earned by artists and athletes.
In paragraph (b)(2)(ii)(C), it reserves on the subject. The Proposed
Reg would delete this and provide a special rule by adding a
subparagraph (G) to paragraph (b)(2)(ii). This would introduce an
“event basis” source rule, under which the U.S.- or
foreign-source of the income of foreign persons determined on an
“event basis” would be the location of the event. It would
not be determined under the general rule, based on where services are
performed, apportioned on a time basis when the services are performed
both within and outside the United States. (We will pass over here the
numerous exceptions and qualifications.) The Proposed Reg
specifically, though ambiguously, indicates that the place where
preparation for the event takes place does not count. It seems clear
that, at least in some cases, more income would be deemed to arise in
the United States, where the big- ticket performances take place. But
the parameters of the rule are not clear.
To begin with, it is not clear to what types of performers the
Proposed Reg would apply. The only reference in the existing
regulation to artists and athletes would be deleted. The Proposed Reg
makes no reference to artists and athletes; it refers only to
“persons.” The Preamble states that it applies to income
received by “a person, including an individual who is an
artist or an athlete, as compensation. . . .” (Emphasis
added.) This could include a lot of other people, such as producers,
directors, choreographers, lecturers, chess players, persons acting as
arbitrators, and many others. Of course, it would apply only if the
compensation received is determined on an “event basis,”
and this will be discussed below.
The provision amended is paragraph (b)(2)(ii), which applies by its
express terms only to employees. However, the Proposed Reg also amends
paragraph (b)(1), which applies in determining the source of income in
other cases, by adding a reference to this provision. (What effect
this actually has is a question discussed below.)
It is also not clear whether the “event basis” rule is
absolute. It refers to compensation which, “based on the
facts and circumstances,” is attributable to services
performed at the location of the event. (Emphasis added.) The
italicized phrase could be read only to refer to the need to apportion
compensation relating to events inside and outside the United States,
as discussed below. Proposed Example (8) seems to support this
reading. But this is not clear. The rule is immediately followed by
the statement that time spent in preparation “will
generally” not be taken into account. (Emphasis added.)
So there may be some cases in which preparation time counts. In
addition, the Preamble states (without citing authority for the
proposition) that the Commissioner has discretion to determine source
on a different basis.
Moreover, the amendment which the Proposed Reg makes to paragraph
(b)(1) seems to beg this question. The existing subparagraph states
with effortless circularity that in the relevant cases the source of
services income will be determined on the basis which most correctly
reflects the proper source of the income and adds that in many cases
“apportionment on a time basis . . . will be acceptable.”
The Proposed Reg simply adds after “time basis” the words
“or the event basis as defined in paragraph
(b)(2)(ii)(G).” So the “event basis” is
“acceptable.” Is that supposed to mean that the taxpayer
may apply it or that the IRS will require it to be applied? If
application of the “event basis” rule is not mandatory
under paragraph (b)(1), how can it be under paragraph (b)(2)?
Although the Proposed Reg provides no definition, the proposed
examples make it clear that “income determined on an event
basis” means any amount, whether fixed or computed on the basis
of a “formula,” which is contingent on a person making a
specific appearance or performance. Proposed Example (10) makes it
clear, on the other hand, that the term does not include a fixed
salary earned for a fixed period by an employee (a hockey player in
the example). Thus, the Stemkowski case remains the
law.3
In the case of income derived by an entity, we presumably are to
look to whether the income of the entity is “event-based,”
since fixed income of employees, at least, is not covered. In the case
of a partnership in which one or more partners has a fixed income
interest, the intent is not clear. Proposed Example (8) applies the
“event basis” rule to Group B, described as a Country N
corporation “all of the members of which are citizens and
residents” of Country N, which has an “employment
relationship” [sic] with another foreign corporation. The rule
is applied to the entire amount received by Corporation N, without
reference to what is paid to the individuals. Perhaps the IRS is
suggesting that, in the facts presented, the corporation's income
would be deemed to have been received by the
individuals,4 but this is not
clear.
If compensation is received for events which occur both within and
outside the United States, it will be apportioned based on the facts
and circumstances. The only hint of what this might mean appears in
proposed Example (8), in which “event basis” income is
apportioned based on a comparison of the “relative gross
receipts” attributable to the performances involved. It is not
clear whether the reference is to the gross receipts of the
performers' employer or the “gate” of whoever arranged the
performances, but it seems to be the latter.
Finally, there is no indication of how the Proposed Reg would
relate to treaty provisions based on Article 17 of the U.S. Model
Convention, relating to artists and athletes. Since the range of
persons covered by the Proposed Reg is apparently broader than just
artists and athletes, rules set forth in such an article, and
interpretations set forth in the Technical Explanation of the U.S.
Model, may not apply.
One final footnote: The proposal amends only the regulation under
§861 and not also Regs. §1.862-1(a)(1)(iii), which defines
as foreign-source income compensation “for labor or personal
services performed outside the United States.” In the case of a
foreign person, the Proposed Reg may implicitly settle the matter,
since it deals with cases in which the foreign person's income is
derived in part, at least, from foreign events and treats that portion
as foreign-source. But is the rule intended to apply to determine the
source of income of a U.S. person receiving income from abroad
determined on an “event basis”? At least some foreign
countries tax artists and athletes, at least, on an “event
basis,” and if the United States does not apply a similar rule,
this may raise foreign tax credit limitation issues.
The Proposed Reg would become effective when published in final
form, and comments are solicited. There should be plenty of these.
This commentary also will appear in the January 11, 2008, issue
of the Tax Management International Journal. For more
information, in the Tax Management Portfolios, see Blessing and
Lubkin, 905 T.M., Source of Income Rules, and in Tax Practice
Series, see ¶7120, Foreign Persons' U.S. Activities, and
¶7130, U.S. Persons' Foreign Activities.
1
The initial focus will be on tennis, golf, and music. See IRS unnumbered announcement, December 5, 2007, available at http://www.irs.gov/businesses/small/international/article/0,,id=176176,00/html. See also 48 Tax Notes International 568 (November 7, 2007).
2
See 2007 TNT 201-10 (October 16, 2007).
3
See Stemkowski v. Comr., 690 F.2d 40 (2d Cir. 1982).
4
Cf. Rev. Rul. 74-330, 1974-2 C.B. 278; and Rev. Rul. 74-331, 1974-2 C.B. 281 (discussion of treatment of the income derived by “loan-out” companies).
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