Rev. Rul. 58-63

Advice has been requested whether a nonresident alien individual, owning a racing stable in France and engaged in the operation of same for profit, who enters a horse in a race in the United States, is exempt from United States income tax on the winnings therefrom.

A citizen and resident of France owned and operated a horse racing stable, located in France, for profit. He was invited to enter an outstanding horse in a race to be held in the United States. He and the racing association agreed that the horse would not compete in any other races while in the United States. The racing association invited him to view the race and participate in the social events connected therewith. The invitation was accepted. The horse won the race and the owner was paid the winner's purse.

The operation of a racing stable for profit is a business enterprise. The entry of a horse in a race in this country constitutes being `engaged in trade or business within the United States,' within the meaning of section 871(c) of the Internal Revenue Code of 1954. Accordingly, income derived therefore is subject to United States income tax unless exempted by some other provision of law.

Article 3 of the income tax convention between the United States and France, C.B. 1946-1, 134, provides, in part, that an enterprise of one of the contracting states is not subject to taxation by the other contracting state in respect of its industrial and commercial profits except in respect of such profits allocable to its permanent establishment in the latter state. A `French enterprise' includes every form of undertaking carried on by an individual resident of France in France. `Industrial and commercial profits' include profits derived from the industrial activity of a French enterprise. The term `permanent establishment' includes branches, mines and oil wells, plantations, factories, workshops, stores, purchasing and selling and other offices, agencies, warehouses, and other fixed places of business.

Accordingly, it is held that a nonresident alien individual does not have a permanent establishment in the United States merely by entering a race horse in a single race in the United States and coming to the United States to view the race and to participate in the social events connected therewith. While the winner's purse received by the owner of a racing stable operated for profit constitutes industrial or commercial profits, this income is exempt from United States income tax under Article 3 of the income tax convention between the United States and France.