Rev. Rul. 70-543

Advice has been requested regarding the filing of Form 4224 (a statement for use by a nonresident alien individual or fiduciary, foreign partnership, or foreign corporation in claiming exemption from withholding of tax on income effectively connected with the conduct of a trade or business in the United States) by a nonresident alien individual conducting a trade or business in the United States. Three typical situations are described below.

Situation (1). A, a pugilist, is a self-employed nonresident alien individual who has contracted to engage in a prize fight in the United States during the taxable year. A pays the salaries of his handlers, pays commissions to his agent, and has other allowable expenses.

Situation (2). B, a professional golfer, is a nonresident alien individual who enters various professional golfing tournaments in the United States during the taxable year. B pays the fees of his caddies, incurs traveling expenses, and has other allowable expenses.

Situation (3). C is a nonresident alien individual who is an owner and operator of a stable of racing horses in his native country. During the taxable year C enters some of his horses in one or more races to be held in the United States in either flat or harness races, or both. C employs jockeys to ride his horses in flat races; however, C may drive his own sulky in harness races. C pays the jockeys' fees, entrance fees, stable and other allowable expenses.

It has been established that the nonresident alien individual in each of the above situations is engaged in trade or business in the United States and that the income from such self-employment is not excluded in whole or in part from gross income under section 61 of the Internal Revenue Code of 1954 by any tax convention to which the United States is a party.

Section 871(b) of the Code provides that a nonresident alien individual engaged in trade or business within the United States is taxable at graduated rates under section 1 or section 1201(b) of the Code on taxable income which is effectively connected with the conduct of such trade or business within the United States. The imposition of the 30 percent tax rate on gross income under section 871(a) of the Code is therefore not applicable to such income.

Section 1441(a) of the Code provides, in pertinent part, for the withholding at the source of Federal income tax at the rate of 30 percent on items of fixed and determinable annual or periodical gains, profits, or income from sources within the United States paid to a nonresident alien or foreign partnership, except as otherwise provided in section 1441(c) of the Code.

Section 1441(c)(1) of the Code provides that no deduction or withholding under section 1441(a) of the Code is required in the case of any item of income (other than compensation for personal services) which is effectively connected with the conduct of a trade or business within the United States and which is included in the gross income of the recipient under section 871(b)(2) of the Code for the taxable year. Section 1441(c)(4) of the Code provides that regulations may be promulgated to exempt compensation for personal services from deduction and withholding under section 1441(a) of the Code.

Section 1.1441-4(a)(1) of the Income Tax Regulations provides, in pertinent part, that no withholding is required under section 1441 of the Code in the case of any item of income if such income is effectively connected with the conduct of a trade or business within the United States by the person entitled to such income and is includible in his gross income under section 871(b)(2) of the Code and if he has filed the statement prescribed by section 1.1441-4(a)(2) of the regulations. Such statement may be made on Form 4224 (statement claiming exemption). This section of the regulations does not exempt from withholding compensation for personal services performed by a nonresident alien individual and the instructions on Form 4224 explicitly state that such Form is not to be filed for compensation for personal services performed by a nonresident alien individual.

Section 1.1441-4(b) of the regulations, however, exempts from withholding under section 1441 of the Code that compensation for personal services performed by a nonresident alien individual which (1) is subject to withholding at graduated rates under section 3402 of the Code; (2) would be subject to withholding at graduated rates but for section 3401(a) of the Code (other than section 3401(a)(6) of the Code); (3) is paid to certain Mexican and Canadian residents; or (4) is exempt from tax by reason of a provision of the Code or a tax convention to which the United States is a party. Section 1.1441-4(b)(2) of the regulations sets forth the information which must be included in the statement claiming exemption from withholding based on a claimed exemption from Federal income tax, and further states that no particular form is prescribed for such statement. Although with respect to exemption from withholding provided by section 1.1441-4(b)(1)(i) through (iii) no statement is required to be filed by the person entitled to the compensation referred to therein, the withholding agent, in connection with the filing of annual information returns. Forms 1042S, must file a brief statement as to the authority for his failure to withhold. See section 1.1461-2(c)(2)(ii) of the regulations.

Section 3401 and section 3402 of the Code apply to remuneration for services performed by an employee for an employer and hence have no application to compensation paid for personal services where such an employment relationship does not exist. Section 31.3401(a)(1) of the Employment Tax Regulations. See also section 6015(i)(2) of the Code which provides, in effect, that a nonresident alien individual is required to file a declaration of estimated tax on income (other than compensation for personal services subject to deduction and withholding under section 1441 of the Code) which is effectively connected with the conduct of a trade or business in the United States.

In view of the above sections of the Internal Revenue Code and the regulations prescribed thereunder, the compensation for personal services performed by a self-employed nonresident alien individual is not exempt from withholding at the 30 percent rate under section 1441 of the Code if such compensation is not otherwise exempt from Federal tax and is gross income effectively connected with the conduct of a trade or business within the United States under section 871(b)(2) of the Code.

The conclusions set forth below apply the foregoing principles to the factual situations presented above.

Situation (1). The purse received by A for participation in the prize fight is compensation for personal services as a self-employed nonresident alien individual. The exemptions from withholding provided by section 1.1441-4(b) of of the regulations are not applicable. Accordingly, it is held that the purse received for such prize fight during the taxable year is subject to withholding at 30 percent even though A will be taxable at graduated rates on the amount of his taxable income under section 871(b) of the Code. A may not file Form 4224 or any other statement to claim exemption from withholding of tax.

Situation (2). The amounts received by B during the year as prizes for participation in various golfing tournaments are compensation for personal services as a self-employed nonresident alien individual. Accordingly, these amounts are subject to withholding at 30 percent even though B will be taxable at graduated rates on the amount of his taxable income under section 871(b) of the Code. B may not file Form 4224 or any other statement to claim exemption from withholding of tax.

Situation (3). The amounts received ceived by C as winner's purses are not compensation for personal services as that term is used in section 1441(c)(1) of the Code. It is immaterial whether the purses are won when C drives the sulky himself in a harness race or hires a professional jockey in a flat race. See Helvering v. Boekman, 107 F. 2d 388 (1939).

Accordingly, it is held that C is exempt from withholding of tax under section 1441 of the Code on the amount of the winner's purses provided a Form 4224 or an equivalent statement is filed with the withholding agent in accordance with section 1.1441-4(a)(2) of the regulations.

Revenue Ruling 60-249, C.B. 1960-2, 264, is modified to hold that if the taxpayer described therein is found to have a permanent establishment in the United States, he may be exempt from withholding of tax at 30 percent on the winner's purses provided he files a statement or Form 4224 with the withholding agent in accordance with section 1.1441-4(a)(2) of the regulations.