Rev. Rul. 72-232

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3296, C.B. 1939-2, 133.

The question presented is whether a domestic corporation is required to withhold income tax at the source with respect to royalties paid to a nonresident alien individual under the circumstances described below.

A, a nonresident alien individual, residing in a foreign country with which the United States has not entered into an income tax treaty, prepared the manuscript, as an independent contractor, for certain textbooks to be used in the public schools of that country. The books were printed in the United States by M, a domestic corporation, and were copyrighted in the United States and the foreign country. The books were not designed for use in the United States and are sold exclusively in the foreign country. A received the royalties from M for the books sold in that foreign country.

Section 1441 of the Internal Revenue Code of 1954 provides, in part, that all persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any of the items of income specified in section 1441(b) of the Code, to the extent that any of such items constitutes gross income from sources within the United States, or any nonresident alien shall deduct and withhold from such items a tax equal to 30 percent thereof.

Section 1.1441-2 of the Income Tax Regulations provides that other kinds of income are included in section 1441(b) of the Code such as, for instance, royalties.

Section 861(a)(4) of the Code provides, in pertinent part, that royalties shall be treated as income from sources within the United States where they are received from property located in the United States or from any interest in such property, including royalties for the use of, or for the privilege of using copyrights in the United States.

Section 862(a)(4) of the Code provides, in pertinent part, that royalty income from property located without the United States or from any interest in such property, including royalties for the use of or for the privilege of using copyrights without the United States shall be treated as income from sources without the United States.

In the instant case there is no commercial publication of the textbooks within the United States in that the textbooks are not sold within the United States. Without such commercial publication M is engaged solely in printing or manufacturing books within the United States, which books are later sold in the foreign country. In the vending of such books in the foreign country, the foreign country copyrights are used and not the United States copyright.

Accordingly, the royalties paid by M in the instant case are not taxable to A, a nonresident alien individual, as income from sources within the United States, and are not subject to the withholding of Federal income tax under the provisions of section 1441 of the Code.

I.T. 3296 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.