PAYMENT TO RESIDENT ALIEN RELATING TO WORK PERFORMED ABROAD IS SUBJECT TO U.S. TAX.

UIL Number(s) 0861.04-00, 0861.04-01

                                             Date: April 16, 1996

[1] This is in response to your letter dated October 23, 1995, submitted by you as an authorized representative for Taxpayer, in which a ruling was requested that income from services to be received by Taxpayer is not subject to tax under the Internal Revenue Code ("Code"). Additional information was submitted in letters dated February 15, 1996 and February 29, 1996.

[2] The ruling contained in this letter is predicated upon the facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not yet verified any of the material submitted in support of the request for a ruling. Verification of the factual information, representations and other data may be required as part of the audit process.

FACTS

[3] Taxpayer is a citizen of * * * and has been a resident alien of the United States and an employee of Corp Y since June 1991. From October 1984 until June 1991, Taxpayer was a resident of the * * * and employed by Corp X, a * * * corporation. From 1989 until 1991, Taxpayer was the managing director of Corp X.

[4] Taxpayer represents that Taxpayer and A, the president of Corp X, orally discussed in early 1989, a compensation arrangement which, in addition to Taxpayer's salary, was intended to compensate Taxpayer for his past services and to provide an incentive to Taxpayer to further enhance the earnings and value of Corp X. A promised that Taxpayer would receive five percent of the proceeds from the sale of Corp X stock. In early 1990, A orally promised that Taxpayer would receive an additional ten percent of the proceeds from the sale of Corp X stock should Corp X stock be sold for at least Amount C. A is the beneficiary of certain trusts (the "Trusts") that own all of the shares of Corp X.

[5] In September 1990, Taxpayer and A entered into a written agreement (the "1990 Agreement") which provides, in relevant part, that in consideration of the continuing efforts by Taxpayer to increase the profitability and capital value of Corp X, A would pay Taxpayer 15 percent of the net sales price of the stock sold upon the sale of Corp X's stock provided that the gross sales price exceeds Amount C and Taxpayer continues his employment with Corp X until the completion of the sale of the shares. Taxpayer represents that the terms of the 1990 Agreement were intended to compensate him for both his past and his ongoing efforts to increase the profitability and capital value of Corp X, although there is no indication to that effect in the 1990 Agreement itself.

[6] In May 1991, Taxpayer's employment contract with Corp X terminated. Taxpayer continued to work for Corp X during June 1991 under an oral extension. In June 1991, instead of offering Taxpayer continued employment with Corp X, A offered Taxpayer employment with Corp Y, a domestic affiliate of Corp X also owned by Trusts. Taxpayer accepted the offer and immediately moved to the United States to manage Corp Y.

[7] In 1993, the stock of Corp X was sold for an amount substantially in excess of Amount C. As Taxpayer was not employed by Corp X when the sale of shares took place pursuant to the terms of the 1990 Agreement, an uncertainty arose as to whether A was obligated to pay Taxpayer 15 percent of the net sales price of the stock of Corp X. In 1995, Taxpayer and A entered into an oral agreement (the "Settlement Agreement") in which A agreed to procure the payment of Amount D (the "Settlement Payment") to Taxpayer in exchange for Taxpayer's release of A from the 1990 Agreement. Taxpayer has not yet received the Settlement Payment. The Settlement Payment is 16.7 percent of the net sales price of the stock of Corp X.

LAW

[8] Section 1 of the Code imposes an income tax on the income of all resident alien individuals. Treas. Reg. section 1.1-1(a). Section 61(a) provides that compensation for services shall be included in gross income. Treas. Reg. section 1.1-1(b) provides that all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources without or sources within the United States.

[9] Section 861(a)(3) provides, in relevant part, that compensation for labor or personal services performed in the United States shall be sourced within the United States. Section 862(a)(3) provides that compensation for labor or personal services performed outside the United States shall be sourced without the United States.

[10] Section 894(a) provides that the provisions of the Code shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer.

[11] Article 15 of the Income Tax Treaty between the United States and the * * * ("Treaty") provides, with exceptions not relevant here, that salaries, wages and other similar remuneration derived by a resident of one Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. Article 1 of the Treaty provides, with an exception not relevant here, that notwithstanding any other provision of the Treaty, the United States may tax its residents and its nationals as if the Treaty had not come into effect. A resident of the United States is defined by Article 4 of the Treaty, in part, as an individual resident in the United States for purposes of U.S. tax.

DISCUSSION

[12] Taxpayer anticipates that he will be resident in the United States when he receives the Settlement Payment. As a resident alien, Taxpayer will be subject to tax on the entire amount of the Settlement Payment as compensation for the performance of personal services, regardless of its source, unless a Treaty provision applies. Treas. Reg. section 1.1-1(b). I.R.C. section 894.

[13] Taxpayer is not entitled to benefits under the Treaty. The United States is not precluded from imposing a tax on the Settlement Payment because it represents remuneration derived by a U.S. resident in respect of employment. Even if Taxpayer could claim a benefit under the Treaty, the United States may nevertheless tax the Settlement Payment because of the specific reservation in Article 1 of the Treaty preserving the right of the United States to tax its residents as if the Treaty had not come into effect.

[14] Accordingly, based on the information submitted and the representations made, it is held that the entire anticipated Settlement Payment to be received by Taxpayer in accordance with the Settlement Agreement is includable in Taxpayer's gross income in the year it is received.

[15] A ruling was also requested that the entire amount of the Settlement Payment be treated as derived from sources without the United States. However, because of Taxpayer's ongoing relationships with A, Corp X, and Corp Y, no opinion is expressed regarding how the Settlement Payment should be sourced.

[16] In addition, no opinion is expressed about the tax treatment of the above transactions under other provisions of the Code and Regulations, or about the tax treatment of any conditions existing at the time of, or effects resulting from, the above transactions that are not specifically covered by this ruling.

[17] This letter is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that this ruling may not be used or cited as precedent.

[18] In accordance with the power of attorney on file with this office, a copy of this letter is being sent to Taxpayer. A copy of this letter should be attached to any federal income tax return to which it is relevant.

                                   Charles P. Besecky