Part IV. Treaties and Tax Legislation Subpart A.–Tax Conventions United States-Belgian Income Tax Teachers and professors. Remuneration received by a professor of a Belgian university invited to teach at a U.S. branch of a Belgian university, which is an accredited institution of the U.S., is exempt from Federal income tax under Article 20 of the United StatesBelgian Income Tax Convention. Rev. Rul. 73-606 A, a professor at a university in Belgium and a resident of Belgium, was invited by a United States branch of a recognized university in Belgium to teach at some branch for a period not exceeding two years. The branch was incorporated in the United States and is an accredited educational institution of the United States. A commenced teaching at the branch university in 1973. Article 20 of the new Income Tax Convention between the United States and the Kingdom of Belgium, 1973-1 C.B. 619, provides, in part, that an individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who, at the invitation of a university or other recognized educational institution in that other Contracting State, is temporarily present in that other Contracting State for the primary purpose of teaching at a university or other recognized educational institution shall be exempt from tax by that Contracting State on his income from personal services for teaching at such institution for a period not exceeding two years. The term "regognized edu. cational institution" is construed to mean "accredited educational institu editoonusconstruie.to tion.” See Article 17 of the United States-France Income Tax Convention, 1968-2 C.B. 691, 699. Held, since the United States branch the United States by a Canadian corof the Belgium university is an accred- poration engaged in the banking busiited educational institution of the ness in Canada falls within the definiUnited States, the income from per tion of "industrial and commercial sonal services received in 1973 by A profits" for purposes of Article I of for teaching at such branch is exempt the United States-Canada Income from United States tax under Article Tax Convention, T.D.5206, 1943 C.B. 20 of the United States-Belgium In- 526. come Tax Convention. A foreign corporation, which was created under the laws of Canada and engaged in the banking business in United States-Belgium Income Tax Canada, is also engaged during the Convention taxable year in the active conduct of T.D. 6160, 1956-1 C.B. 815; 26 CFR the banking business in the United 504.103: Scope of the convention. States through a permanent estabProcedures to be followed by United lishment. During the taxable year the States residents to obtain Belgian treaty home office of the Canadian corporabenefits under the dividend, interest, tion in Canada receives interest from royalty, and private pension and annuity provisions of the new Income Tax Conven loans made to residents of the United tion between the United States and the States as part of the ordinary income Kingdom of Belgium. See Rev. Proc. 73-18, from the conduct of its banking busipage 467. ness in Canada. This interest is in come from sources within the United United States-Canada Income Tax States that is not effectively connected Convention with the conduct of the bank's trade or T.D. 5206, 1943 C.B. 526, 538; 26 CFR business in the United States. See 519.112 (as redesignated): Reduction in Example (4) of section 1.864-4(c)(5) rate of the tax withheld at source. (vii) of the Income Tax Regulations. (Also Part 1, Section 894; 1.894-1.) Pursuant to Article I of the United Canadian convention; interest States-Canada Income Tax Convenpaid by U.S. borrowers to Canadian tion a Canadian enterprise is exempt bank. Interest received from bor. from United States tax upon its inrowers in the U.S. by a Canadian dustrial and commercial profits exbank as part of its ordinary income cept to the extent of such profits from from the conduct of its Canadian sources within the United States allobanking business, that is not ef- cable to its permanent establishment fectively connected with its bank in the United States. ing business in the U.S. through a Article II of the Convention propermanent establishment, does not vides that the term "industrial and qualify as "industrial and commer- commercial profits” shall not include cial" profits exempt from tax under income in the form of rentals and Article 1 of the United States- royalties, interest, dividends, manageCanada Income Tax Convention. ment charges, or gains derived from Such interest income is subject to the sale or exchange of capital assets. tax at the rate of 15 percent, to Such income items are taxed separatebe withheld at the source, underly or together with industrial and Article XI as modified by section commercial profits in accordance with 894(b) of the Code. the laws of the contracting States. Rev. Rul. 73-562 Article XI of the Convention, as modified by the supplementary conAdvice has been requested whether vention of August 8, 1956, 1957-2 C.B. interest received from borrowers in 1014, 1015, provides, in part, an in spect of income other than came conduct of a ban United States-France Income Tax Procedures to be used by United States residents in applying for refund of the French tax on dividends declared and distributed (avoir fiscal). See Rev. Proc. 73-34, page 489. come tax rate of 15 percent in respect of income (other than earned income) derived from sources within the United States by Canadian residents and corporations not having a permanent establishment in the United States. Under the terms of Article XI, the existence of a permanent establishment in the United States precludes taxation of such income at the reduced treaty rate, even though the income has no connection with the permanent establishment. Section 894(b) of the Internal Rev. enue Code of 1954 provides that for pplying any exemption from, or reduction of, any tax provided by a treaty to which the United States is a party with respect to income which is not effectively connected with the conduct of a trade or business within the United States, a nonresident alien individual or a for eign corporation shall be deemed not to have a permanent establishment in the United States at any time during the taxable year. In effect, section 894(b) modifies Article XI of the Convention on the taxation of income not effectively connected with the conduct of a trade or business in the United States. Section 864(c) of the Code provides, in part, that in the case of a nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year, income effectively connected with the conduct of such trade or business within the United States may include periodical income from sources within the United States of the types described in section 871 (a)(1) or section 881(a). If this income is not effectively connected with such trade or business, it is taxable on a gross basis under section 871(a) or section 881 (a) and is subject to withholding under section 1441 or section 1442. The basic issue is whether interest income received from sources within the United States by a Canadian bank as part of its ordinary income from the conduct of a banking business in Canada qualifies as industrial and commercial profits within the meaning of Article I of the Convention. If it qualifies as industrial and commercial profits, such interest income is exempt from Federal income tax when it is not allocable to a permanent establishment of the bank in the United States. On the other hand, if üritaben ohne bank in the the interest income is excluded from industrial and commercial profits by Article II, and if such interest income is not effectively connected with the conduct of a trade or business in the United States, it is subject to Article XI as modified by section 894(b) of the Code and taxable at a 15 percent rate even though the bank has a permanent establishment in the United States. Under Article II of the Convention the interest income is excluded from the term "industrial and commercial profits” even though it is part of the business income of the bank. Therefore, by reason of Article II, Article I is inapplicable. Since such interest income is from sources within the United States and is not effectively connected with the conduct of a trade or business within the United States, it is not taxed together with industrial and commercial profits as provided in Article II but is subject to Federal income tax imposed by section 881(a) of the Code, subject to the reduced rate of Article XI. Accordingly, the interest income received by the Canadian bank from borrowers in the United States does not fall within the definition of industrial and commercial profits and is not exempt from Federal income tax under Article I of the United StatesCanada Income Tax Convention. By the application of section 894(b) of the Code to Article XI, such interest income is subject to Federal income tax at the rate of 15 percent. In accordance with section 519.112 of Treasury Decision 5206, such tax must be withheld at the source. United States-Swiss Confederation Income Tax Convention T.D. 6149, 1955-2 C.B. 814; 26 CFR 509.109: Interest, (Also T.D. 5569, 1947-2 C.B. 100.) Swiss and U.K. conventions; dual residency. The Swiss branch of a bank with no permanent establishment in the U.S., incorporated in Switzerland, managed and controlled in the United Kingdom, and carrying on business in both countries qualifies as a resident of both countries under the United StatesSwiss Confederation Income Tax Convention and the United StatesUnited Kingdom Income Tax Convention and may choose to apply the provisions of either convention to interest received on an indebtedness from a domestic bank located in the U.S.: Rev. Rul. 72-378 distinguished. Rev. Rul. 73-354 Advice has been requested whether, under the circumstances described below, a taxpayer may choose which income tax convention will apply where it is established that the taxpayer qualifies as a resident in more than one country with which the United States has an income tax convention. The taxpayer, a bank, is incorporated under the laws of Switzerland and has its central management and control in the United Kingdom. The taxpayer carries on business in both Switzerland and the United Kingdom. The Swiss branch of the bank granted a loan to a domestic bank located in the United States and received inter tatesine United States come. Tant of the United Kingdom US. pursuan est payments from such loan during the taxable year. The taxpayer does not have a permanent establishment in the United States. Article VII of the United States. Swiss Confederation Income Tax Convention, T.D. 6149, 1955-2 C.B. 841, provides, in pertinent part, that the rate of tax imposed by one of the Contracting States on interest on indebtedness derived from sources within such Contracting State by a resident or corporation of the other Contracting State not having a permanent establishment in the former State shall not exceed five percent. Article II(f) of the United States Swiss Confederation Income Tax Convention defines the term Swiss corporation to include a corporation created or organized under Swiss law. Article VII of the United StatesUnited Kingdom Income Tax Convention, T.D. 5569, 1947-2 C.B. 100 provides, in pertinent part, that interest derived and beneficially owned by a resident of the United Kingdom shall be exempt from tax by the United States. Article II(1) (g) of the United States United Kingdom Income Tax Convention provides that the term “resident of the United Kingdom" means any person (other than a citizen of the United States or a United States corporation) who is a resident in the United Kingdom for the purpose of United Kingdom tax and not a resident of the United States for the purpose of United States tax. A corporation is to be regarded, for tax purposes, as a resident in the United Kingdom if its business is managed and controlled in the United King. dom. In the instant case, the taxpayer is regarded as a Swiss corporation under Article II (f) of the United StatesSwiss Confederation Income Tax Convention. Thus, Article VII of that Convention would apply to interest payments made by a United States entity to the taxpayer. The rate of the United States tax would be five per. erty located in the U.S. are not cent. industrial and commercial profits Under Article II(1) (g) of the within the meaning of Article 11(1) United States United Kingdom In- (h) of the U.S.-Swiss Confederation come Tax Convention the taxpayer is Income Tax Convention but are a resident of the United Kingdom. rents or royalties taxable by the Thus, Article VII of that Convention U.S. pursuant to Article IX(1) of would apply to interest payments re- the Convention. ceived by the taxpayer from a United Rev. Rul. 73-419 States entity exempting the interest from tax by the United States. Advice has been requested whether Accordingly, the taxpayer may payments received by a Swiss corpochoose either tax convention since it ration, the holder of a net profits inqualifies for treatment under the inqualifies for treatment under the in terest in oil and gas mineral property come tax conventions the United located in the United States, are in Located and he munited Statesaverhin States has with the United Kingdom dustrial and commercial profits within and Switzerland. the meaning of Article III(1)(a) of Rev. Rul. 72-378, 1972-2 C.B. the United States-Swiss Confederation 662, is distinguishable from the instant Income Tax Convention, T.D. 6149, cases. Rev. Rul. 72-378 holds that Ar- 1955-2 C.B. 814. ticles II and VII of the United M, a domestic corp States-Swiss Confederation Income gaged in the exploration for, and deTax Convention apply to reduce the velopment, production, and marketing tax withheld to five percent of the in- of, oil and gas in the United States. M terest paid by a United States entity is the owner of working interests in to a United Kingdom branch office of certain oil and gas leases. S, a foreign the Swiss bank. The United States- corporation organized under the laws United Kingdom Income Tax Con of Switzerland, holds a net profits invention does not apply to exempt the terest in a mineral property in which interest paid to the United Kingdom M owns the working interest under an branch office of the Swiss bank be- oil and gas lease. cause the management and control s is entitled under the net profits over the United Kingdom branch of interest to receive during any calendar the Swiss bank is exercised by the quarter its share of the net profits realhead office of the bank which is lo ized from the sale of oil and gas pro ited in Switzerland. Thus, the United duced from such property. Kingdom branch is not a resident Article III(1) (a) of the Convenof the United Kingdom within the tion provides that a Swiss enterprise meaning of Article II(1) (g) of the shall not be subject to taxation by the United States United Kingdom In United States in respect of its induscome Tax Convention. Rev. Rul. 72 trial and commercial profits unless it 378 is hereby distinguished. is engaged in trade or business in the United States through a permanent United States-Swiss Confederation establishment situated in the United Income Tax Convention States. T.D. 6149, 1955-2 C.B. 814. Article II(1) (f) of the Convention Section 509.111: Real property income and provides, in part, that the term “Swiss natural resource royalties. enterprise" means an industrial or Swiss convention; net profits in- commercial enterprise or undertaking terest in oil and gas mineral prop. carried on in Switzerland by a Swiss erty. Payments received by a Swiss corporation. corporation from its net profits in Article II(1)(h) of the Conventerest in oil and gas mineral prop- tion defines the term "industrial or the taxpayerder Section 50 commercial profits” to include manu- the Convention does not require facturing, mercantile, mining, financ- otherwise, payments received by a ing, and insurance profits, but does Swiss corporation from a net profits not include income in the form of interest are not industrial and comdividends, interest, rents or royalties, mercial profits within the meaning of or remuneration for personal services. Article II(1) (h) of the Convention. Article IX(1) of the Convention Further, the payments received by the provides, in part, that royalties re- Swiss corporation, in the instant case, ceived from operations of mines, quar- from a net profits interest are rents or ries, or other natural resources will be royalties taxable by the United States taxable only in the contracting State pursuant to the provisions of Article in which such mines, quarries, or IX(1) of the Convention. other natural resources are situated. Article II(2) of the Convention United States United Kingdom provides that in the application of the provisions of the Convention by one Income Tax Convention of the contracting States any term not T.D. 5569, 1947-2 C.B. 100. otherwise defined shall, unless the Whether a taxpayer may elect which in context otherwise requires, have the come tax convention will apply where it is meaning which such term has under established that he qualifies as a resident under more than one foreign country. See its own tax laws. Rev. Rul. 73-354, page 435. Neither the term “net profits interest” nor the term “rents or royalties” is defined in the Convention or the su Subpart B.-Legislation general regulations issued thereunder. See T.D. 6149. Therefore, the specific Public Law 93-29, issue is whether payments received 93rd Congress, S. 50, 1 from a net profits interest are to be May 3, 1973 characterized as "rents or royalties” An Act to strengthen and improve as that term is used in the Federal the Older Americans Act of 1965, and income tax laws. for other purposes. The Supreme Court of the United Be it enacted by the Senate and States in Kirby Petroleum Co. v. House of Representatives of the Unit. Commissioner, 326 U.S. 599 (1946), ed States of America in Congress as1946-1 C.B. 69, held that payments sembled, That this Act may be cited received from a net profits interest are as the “Older Americans Comprerents or royalties for purposes of com- hensive Services Amendments of puting the allowance for depletion of 1973”. mineral properties. TITLE I_DECLARATION OF For purposes of the special rules in section 614 of the Internal Revenue OBJECTIVES Code of 1954, section 1.614-2(b) of Findings and Purposes the Income Tax Regulations provides, Sec. 101. The Congress finds that in part, that for the computation of millions of older citizens in this Nathe allowance for depletion the term tion are suffering unnecessary harm operating mineral interest "does not from the lack of adequate services. include royalty interests or similar in It is therefore the purpose of this Act, terests, such as . . . net profits inter in support of the objectives of the ests.” Thus, under the United States Older Americans Act of 1965, to income tax laws, payments received (1) make available comprehensive from a net profits interest are rents or royalties. programs which include a full range of health, education, and social services to our older citizens who need them, (2) give full and special consideration to older citizens with special needs in planning such programs, and, pending the availability of such programs for all older citizens, give priority to the elderly with the greatest economic and social need, (3) provide comprehensive programs which will assure the coordinated delivery of a full range of essential services to our older citizens, and, where applicable, also furnish meaningful employment opportunities for many individuals, including older persons, young persons, and volunteers from the community, a (4) insure that the planning and operation of such programs will be undertaken as a partnership of older citizens, community agencies, and State and local governments, with appropriate assistance from the Federal Government. Sec. 102. Section 101(8) of the Older Americans Act of 1965 is amended by inserting after “services" the following: ", including access to low-cost transportation,”. TITLE VI–NATIONAL OLDER PROGRAM "(d) Notwithstanding any other provision of law, no compensation provided to individual volunteers under this part shall be considered income for any purpose whatsoever." Sec. 602. Section 603 of the Older Americans Act of 1965 is amended by inserting immediately before the period at the end thereof the following: "and $15,000,000 for the fiscal year ending June 30, 1973, $17,500,000 for the fiscal year ending June 30, 1974, 1 This publication is restricted to excerpts involving Accordingly, since the context of Senate Report No. 93-19 are not published. internal revenue matter : House Report No. 93-43 and $20.000,000 for the fiscal year come for any purpose whats section refunds m der this part shall be considered income for any purpose whatsoever.” (c) The first sentence of section 613 of such Act is amended to read as follows: as "In administering this part, the Commissioner shall consult with the Office of Economic Opportunity, the Department of Labor and Health, Ed. ucation, and Welfare and any other Federal agencies administering relevant programs with a view to achiev. ing optimal coordination with such other programs and shall promote the coordination of projects under this part with other public or private programs or projects carried out at State and and local levels.” ulations that checks issued to individuals (other than trusts and estates) as refunds made in respect of the taxes imposed by subtitle A of the Internal Revenue Code of 1954 may, at the time and in the manner provided in such regulations, become United States savings bonds of series E. Except as provided in paragraph (2), bonds issued under this subsection shall be treated for all purposes of law as series E bonds issued under this section. This subsection shall apply only if the claim for refund was filed on or before the last day prescribed by law for filing the return (determined without extensions thereof) for the taxable year in respect of which the refund is made. “(2) Any check-bond issued under this subsection shall bear an issue date Approved May 3, 1973. Public Law 93-53 93rd Congress, H.R. 84101 July 1, 1973 and $20,000,000 for the fiscal year ending June 30, 1975”. Sec. 603. (a) The heading of part B of title VI of the Older Americans Act of 1965 is amended to read as follows: “Foster Grandparent Program and Older Americans Community Service Programs”. (b) Section 611 of such Act is amended to read as follows: "Sec. 611. (a) The Commissioner is authorized to make grants to or contracts with public and nonprofit private agencies and organizations to part or all of the cost of develop. ment and operation of projects de de signed to provide opportunities for low-income persons aged sixty or over to render supportive person-toperson services in health, education, welfare, and related settings to children having exceptional needs, includ. ing services as 'Foster Grandparents' to children receiving care in hospitals, homes for dependent and neglected children, or other establishments providing care for children with special needs. "(b) The Commissioner is also authorized to make grants or contracts to carry out the purposes described in subsection (a) in the case of persons (other than children) having exceptional needs, including services as 'senior health aides' to work with persons receiving home health care and nursing care, and as 'senior companions' to persons having developmental disabilities. "(c) Payments under this part pursuant to a grant or contract may be made (after necessary adjustment on account of previously made overpayments or underpayments) in advance or by way of reimbursement, in such installments and on such conditions as the Commissioner may determine. "(d) Notwithstanding any other provision of law, no compensation provided to individual volunteers un month beginning after the close of the taxable year for which issued. “(3) In the case of any check-bond issued under this subsection to joint payees, the regulations prescribed under this subsection may provide that either payee may redeem the bond upon his request." (b) The amendment made by subsection (a) shall apply with respect to refunds made after December 31, 1973. An Act to continue the existing tem porary increase in the public debt limit through November 30, 1973, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 101 of the Act of October 27, 1972, providing for a temporary increase in the public debt limit for the fiscal year ending June 30, 1973 (Public Law 92-599), is amended by striking out “June 30, 1973” and inserting in lieu thereof “November 30, 1973”. Sec. 3. (a) Section 22 of the Second Liberty Bond Act, as amended (31 U.S.C. 757c), is amended by adding at the end thereof the following new sub. section: “(j) (1) The Secretary of the Treassury is authorized to prescribe by reg. Sec. 6. (a) Section 6096 of the Internal Revenue Code of 1954 (relating to designation by individuals of income tax payments to Presidential Election Campaign Fund) is amended to read as follows: “Sec. 6096. DESIGNATION BY INDI VIDUALS. “(a) In General.—Every individual other than a nonresi whose income tax liability for the taxable year is $1 or more may designate that $1 shall be paid over to the Presidential Election Campaign Fund in accordance with the provisions of section 9006(a). In the case of a joint return of husband and wife having an income tax liability of $2 or more, each * This publication is restricted to excerpts involving internal revenue matters: Senate Report No. 93-249, page 446, House Report No. 93.267 and Conference Report No. 93-362 are not published. |