Written by attorney Christopher Michael Larson

Is Taxpayer Engaged in a US Trade or Business?

1.Fact Specific Question Which Depends on the Following Factors:

a.NOTE: Trading in Securities or Commodities is Not a US Trade or Business Per Se(§864(b)(2))

b.Attribution Through Agents

1) Activity through dependant agents can be trade or business

a) Especially if agents act nearly exclusively for foreign principal

2) Activity through independent agents generally not T or B

3) Licensees are NOT agents

c.Sales and Marketing in US

1) Isolated sales do not rise to the level of trade or business

2) But extensive sales or marketing activity conducted in the US can be a T or B

3) Carrying of Inventory, and sales activity can be a T or B

d.More Than Mere Ministerial, Collection, or Purchase Functions

1) Activities and Functions Performed Within the US MUST be Pivotal to the Active Pursuit of Profit for a Trade or Business to Exist

2) Purchasing activityalone, no matter how extensive, is generally not considered a T or B, even if trucks, ships or other transport equipment is used.

a) However, the courts have found that purchasing activity can rise to the level of a T or B where the purchasing agent was a part owner, and exercised large amounts of discretion, judgment, and responsibility. (US v. Balanovski 2nd Cir. 1956)

e.Business Location in US

f.Sustained Activity

1) Generally, some type of continuous or sustained activity, over a period of time to rise to the level of trade or business

a) However, the courts have also determined that in the case of activity, such as entering a horse in a US horse race can constitute a Trade or Business with just one instance of activity.(Rev. Rul. 58-63)

g.§162/§212 dichotomy informative

h.Personal Service Activities are T or B

1) Generally, Performance of Personal Services Within the US is Always Considered a Trade or Business(§864(b))

2) Employee vs. Independent Contractor– For the purposes of whether a trade or business exists it is irrelevant whether services are performed as an employee or independent contractor

3) Exception – Personal Services do not constitute a trade or business if:

a) The services are performed by a non-resident alien, for a foreign party who is not engaged in a US Trade or Business; or(§864(b)(1)(A))

b) Or is performed for a domestic party in a foreign country; (§864(b)(1)(B))

c) The non-resident is present in the US during the year for no more than 90 days in aggregate; and(§864(b)(1))

d) The total compensation for these services does not exceed $3,000(§864(b)(1))

e) NOTE: Exception is an “all or nothing" deal. If compensation exceeds $3,000, none is excluded

i.Attribution of Trade or Business to Partners

1) The activities of any partnership involved in a trade or business will also be attributable to the partners, and they will in essence be engaged in a US trade or business(§875(1))

2) Does NOT apply to corporate shareholders

3) Does apply to beneficiaries of trusts and estates(§875(2))

j.NOTE: Receiving Income From US Real Property Does NOT mean the Taxpayer is Engaged in a US Trade or Business in itself, Despite the Fact that the income itself is Considered ECI under §871(d)(1)

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