Passive Investment Income
Ind may have never set foot in U.S., but might have assets in U.S. or might have investments there. Difficult to impose tax, so we don’t have them file return. Instead we impose simple tax on U.S. source income, FDAP. FDAP is income is not effectively connected with U.S. trade or business and not subject to any exclusion. First make sure u.s. source, then FDAP, not ECI, and no exclusion. Then 30% tax on gross income. FDAP is gross income. Only do one item at a time, no need to know total. The 30% tax is almost always imposed by withholding at source. Meaning person paying the income has to withhold the 30%. Payor is typically U.S. person. If foreigner has this type of income, they don’t file return; the money is just withheld. Treaties typically reduce the 30% rate to something much lower, sometimes 0, sometimes 5-15%. In many cases, treaty eliminates the tax. We do that under assumption foreign country will impose tax. Tax treaties cut back on source based income tax, and this is example.
Look to see if income is FDAP. FDAP=fixed or determinable annual or periodical: interest, dividends, rents, salaries, wages, annuities, compensations, premiums, etc. Very little authority that tells you whether FDAP and not always clear. Royalties are FDAP, though not included in the code. Authority says that single payment can be FDAP, does not have to be periodic. E.g., Wodehouse—single payment for copyright was FDAP. Gambling winnings are also included (Barba case). Difficult to tell from code what FDAP is. Best approach may be to ask what is not FDAP and everything else is. What FDAP does not include:
Gains from Sales of Property
Suppose foreign person sells prof property from U.S. office. If FDAP income, then 30% tax on gain, which buyer would have to withhold, but prof doesn’t know sellers basis, so too complicated to collect gain on sales of property.
If sell intellectual property and sell for contingent payment (price contingent on how used). Separate sourcing rule for this, which is royalty rule. If sell IP with contingent payments, even though under general rule, sales of property are not FDAP, there is special rule in 871(a)(1)(D) dealing with sales of IP for contingent payments ((A) covers FDAP).