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TAX CLINIC

partner of a foreign office to qualify for least some (if not most) of the income
Ultimately, the Sec. 911 exclusion. from a U.S. partnership would likely be
considered U.S.-source and therefore in-
the specific Income sourcing — distributive eligible for the FEIE. As such, an expa-
circumstances of share of partnership income triate working outside the United States
The source and character of a distribu-
will generally prefer guaranteed pay-
each partner will tive share of partnership income is de- ments over a priority profit allocation, as
termined at the partnership level (Sec. guaranteed payments would clearly be
determine which type 702(b); Regs. Sec. 1.702-1(b); Rev. Rul. considered foreign-source income that is
of partnership income 67-158). Therefore, income that does eligible for the benefits of the FEIE.
not qualify as a guaranteed payment is
provides the most considered foreign income only to the Nonresident aliens in general
favorable income extent of the partnership’s foreign-source In contrast to the treatment of U.S. citi-
zens and residents, the United States has
income, regardless of the residence or
tax result. location of the recipient partner. limited tax jurisdiction over nonresident
If a partnership is engaged in a trade alien individuals. A nonresident alien
or business in the United States, gener- is subject to U.S. tax on U.S.-source
or a foreign corporation” or for “a foreign ally all sales, services, or manufacturing fixed, determinable, annual, or periodical
corporation” each place it appears in Sec. income from U.S. sources is considered (FDAP) income as well as ECI (Secs.
864(c). effectively connected income (ECI) 871(a) and (b)(1)). The United States
(Secs. 864(c)(3) and (c)(2)). The excep- does not have jurisdiction to tax the
Income sourcing — guaranteed tion to this is inventory sold for use out- foreign-source income of nonresident
payments side the United States through a foreign aliens, and, for that reason, a nonresi-
The sourcing of wages and personal fixed place of business that materially dent alien performing services outside
services income is generally determined participated in the sale (Sec. 865(e)(2) the United States will generally not be
by where the services are performed (B)). subject to U.S. tax, as his or her foreign-
(Sec. 861(a)(3); Sec. 862(a)(3); Regs. source income will generally avoid the
Sec. 1.861-4; Regs. Sec. 1.862-1(a)(1) US expatriate partner performing U.S. tax regime.
(iii)). Other factors, such as the residence work outside the US Nonresident alien performing
of the service recipient, the place of U.S. citizens and residents are gener- services inside the United States:
contracting, and the time and place of ally subject to tax on their worldwide Nonresident partners who are present
payment are irrelevant. income. U.S. individuals living abroad and working in the United States
The legislative history further may be able to reduce or eliminate their will find it difficult to avoid U.S.
provides that a guaranteed payment U.S. income tax obligation through the tax. Nonresident partners of a U.S.
received by a partner is considered for- Sec. 911 foreign earned income exclu- partnership will generally be subject to
eign earned income if it is: (1) fixed in sion (FEIE). Sec. 911 allows qualified U.S. tax on their partnership income,
amount, (2) paid for services performed individuals a gross income exclusion for whether paid as guaranteed payments
by the partner in a foreign country, and all or a portion of their foreign earned or as a distributive share of partnership
(3) payable regardless of whether the income if they meet specific require- income. Guaranteed payments are
partnership has any profits (Sec. 707(c); ments for foreign country residency or considered U.S.-source if the services are
Rev. Ruls. 81-300 and 81-301). The Tax physical presence. For these purposes, performed within the United States. The
Court in Miller, 52 T.C. 752 (1969), foreign earned income is defined as sourcing rules will provide that some
and the Court of Claims in Carey, 427 foreign-source earned income that is (if not most) of a distributive share of
F.2d 1014 (Ct. Cl. 1970), held that a earned during a period the individual income would be considered U.S.-source
guaranteed payment to a partner work- qualifies to claim the FEIE. income to the extent of the partnership’s
ing outside the United States qualified As stated earlier, guaranteed pay- U.S.-source income.
as foreign-source compensation for ments are sourced based on where the A nonresident alien individual part-
purposes of the Sec. 911 exclusion. In related services are performed. In con- ner in a U.S. partnership would generally
Private Letter Ruling 7939005, the IRS trast, a distributive share of partnership prefer that income be classified as a
followed Miller and Carey and allowed income is sourced based on the underly- distributive share of partnership income
a guaranteed payment to the managing ing partnership activity, meaning that at rather than a guaranteed payment

20 August 2022 The Tax Adviser