2010-05-02
Code §§ 861, 862, and 863 provide rules for determining whether a particular class of income is considered U.S. source income or foreign source income. Code §§ 861(a)(1) through (a)(7) provide rules as to when specific classes of income are sourced within the U.S. Code § 862(a) is a parallel section providing when those same classes of income are sourced outside the U.S.
The classes of income specified in Code §§ 861 and 862 include the following:
Code § 863 grants the Secretary of the Treasury authority to promulgate regulations allocating income not specified within Code §§ 861(a) and 862(a) to U.S. and foreign sources. Other sourcing rules also exist in other code sections (e.g., Code §§ 865, 988(a)(3), etc.).
When an item of income does not fall within one of the classes of income listed above, courts have sourced the item by comparison and analogy with classes of income specified with the statutes. Container Corp. v. Commissioner, 134 T.C. No. 5 (2010), Bank of America v. U.S., 680 F.2d 142 (Ct.Cl. 1982), Howkins v. Commissioner, 49 T. C. 689 (1968).
Last year the IRS published Rev. Rul. 2009-14 which deals in part with the payment of death benefits under a life insurance contract to a foreign corporation not engaged in the conduct of a trade or business in the United States. In the ruling, the insured individual was a U.S. citizen residing in the U.S. and the insurance company that issued the policy was a domestic corporation.
Rev. Rul. 2009-14 properly identifies that the payment of death benefits under an insurance policy is not one of the types of income listed in Code §§ 861 and 862. The ruling then correctly identifies that “the source of such income is determined by comparison and analogy to classes of income that are specified within the statute.”
Unfortunately, the ruling does not in any way compare or analogize the payment of death benefits with the classes of income that are specified within the statute. Instead, it simply concludes that the death benefit income is U.S. source income. The conclusion seems to be based on the fact that the insured individual was a U.S. citizen residing in the U.S. and that the insurance company that issued the policy was a domestic corporation. However, it is not clear which, if any, of these factors controls.
This criticism is not to suggest that the conclusion of the ruling is inaccurate. The conclusion may very well be correct. This criticism is to simply say that there was no analysis included in the ruling to support the conclusion given.