Prop. regs. clarify source of compensation rules.

• Author: Beavers, James

The IRS has issued proposed regulations that would clarify the determination of the source of compensation for a person, including an artist or athlete, who is compensated for labor or personal services performed at a specific event or events.

Current Rules

Compensation for labor or personal services performed in the United States is treated as gross income from sources within the United States, and compensation for labor or personal services performed outside the United States is treated as gross income from sources without the United States (Secs. 861(a)(3) and 862(a)(3)). Compensation for labor or personal services performed partly within and partly outside the United States is apportioned among the countries in which the services were performed (Regs. Sec. 1.861-4(b)).

If an individual performs labor or personal services partly within and partly outside the United States other than as an employee, the compensation's source is determined on the basis that most correctly reflects the proper source of that income under the facts and circumstances of the particular case. If an individual performs labor or personal services within and outside the United States as an employee, the compensation's source is generally determined on a time basis, with certain fringe benefits sourced on a geographic basis. However, an employee may determine the compensation's source under an alternative basis if the employee establishes to the Service's satisfaction that, under the facts and circumstances, the alternative basis more properly determines the compensation's source than the general rules. In addition, the IRS may determine the source of an individual's compensation under an alternative basis if the compensation is not for a specific time period, provided that the alternative basis determines the compensation's source in a more reasonable manner than the basis used by the individual. (See Regs. Sec. 1.861-4(b)(2)(ii).)

Proposed Regulations

The Service has proposed regulations that would create a new "event basis" rule for sourcing compensation received by a person, including an artist or athlete. Using the event basis, the amount of income that is properly treated as a person's compensation is the amount of compensation that, based on the facts and circumstances, is attributable to the labor or personal services a person performs at the location of a specific event. The compensation's source is the location of the event. The event basis would apply...