80 FR 51975 - Residence Rules Involving U.S. Possessions

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 80, Issue 166 (August 27, 2015)

This document contains proposed amendments to the regulations for determining whether an individual is a bona fide resident of a U.S. territory. These proposed amendments affect individuals establishing bona fide residency in a U.S. territory by allowing additional days of constructive presence in a U.S. territory.

[Federal Register Volume 80, Number 166 (Thursday, August 27, 2015)]
[Proposed Rules]
[Pages 51975-51977]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-21258]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-109813-11]
RIN 1545-BK18


Residence Rules Involving U.S. Possessions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to the regulations 
for determining whether an individual is a bona fide resident of a U.S. 
territory. These proposed amendments affect individuals establishing 
bona fide residency in a U.S. territory by allowing additional days of 
constructive presence in a U.S. territory.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 25, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-109813-11), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
109813-11), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-109813-11).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Stephen Huggs, (202) 317-6941; concerning submission of comments and/or 
requests for a hearing, Oluwafunmilayo (Funmi) Taylor, (202) 317-6901 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 937 of the Internal Revenue 
Code (Code). Section 937 was added to the Code by the American Jobs 
Creation Act of 2004 (Public Law 108-357, 118

[[Page 51976]]

Stat. 1418 (2004)). Section 937(a) provides rules for determining if an 
individual is a bona fide resident of a U.S. possession (generally 
referred to in this preamble as a ``U.S. territory'').
    On April 11, 2005, the Federal Register published temporary 
regulations (TD 9194, 70 FR 18920) and proposed regulations (REG-
159243-03, 70 FR 18949) under section 937, providing rules to implement 
section 937 and conforming existing regulations to other legislative 
changes with respect to the U.S. territories. On January 31, 2006, the 
Federal Register published final regulations (TD 9248, 71 FR 4996) 
under section 937(a) concerning whether an individual is a bona fide 
resident of a U.S. territory. Section 1.937-1 was amended on November 
14, 2006, and on April 9, 2008, to provide additional guidance 
concerning bona fide residency in the U.S. territories. See TD 9297 (71 
FR 66232) and TD 9391 (73 FR 19350).
    Section 937(a) provides that an individual is a bona fide resident 
of a U.S. territory if the individual meets a presence test, a tax home 
test, and a closer connection test. In order to satisfy the presence 
test, an individual must be present in the U.S. territory for at least 
183 days during the taxable year (183-day rule), unless otherwise 
provided in regulations.
    Section 1.937-1 provides several alternatives to the 183-day rule. 
An individual who does not satisfy the 183-day rule nevertheless meets 
the presence test if the individual satisfies one of four alternative 
tests: (1) The individual is present in the relevant U.S. territory for 
at least 549 days during the three-year period consisting of the 
current taxable year and the two immediately preceding taxable years, 
provided the individual is present in the U.S. territory for at least 
60 days during each taxable year of the period; (2) the individual is 
present no more than 90 days in the United States during the taxable 
year; (3) the individual has no more than $3,000 of earned income from 
U.S. sources and is present for more days in the U.S. territory than in 
the United States during the taxable year; or (4) the individual has no 
significant connection to the United States during the taxable year. 
The term ``significant connection'' is generally defined as a permanent 
home, voter registration, spouse, or minor child in the United States. 
See Sec.  1.937-1(c)(5). Section 1.937-1 also provides that certain 
days count as days of presence in the relevant U.S. territory for 
purposes of the presence test, even if the individual is not physically 
present in the U.S. territory (constructive presence).

Explanation of Provisions

    Following the original issuance of Sec.  1.937-1, the Department of 
the Treasury (Treasury Department) and the Internal Revenue Service 
(IRS) received comments requesting that the presence test be revisited 
to make it more flexible. These comments included a proposal to allow 
days of constructive presence for business or personal travel outside 
of the relevant U.S. territory. The Treasury Department and the IRS 
have concluded that it would be appropriate to allow additional days of 
constructive presence subject to certain limitations. Accordingly, 
these proposed regulations provide an additional rule for calculating 
days of presence in the relevant U.S. territory for purposes of the 
presence test in Sec.  1.937-1(c)(1).
    Under the proposed amendment, an individual would be considered to 
be present in the relevant U.S. territory for up to 30 days during 
which the individual is outside of both the United States and the 
relevant U.S. territory. The proposed amendment would not apply, 
however, if the number of days that the individual is considered to be 
present in the United States during the taxable year equals or exceeds 
the number of days that the individual is considered to be present in 
the relevant U.S. territory during the taxable year, determined without 
taking into account any days for which the individual would be treated 
as present in the U.S. territory under this proposed amendment. 
Furthermore, the 30-day constructive presence rule would not apply for 
purposes of calculating the minimum 60 days of presence in the relevant 
U.S. territory that is required for the 549-day test under Sec.  1.937-
1(c)(1)(ii). Therefore, an individual invoking Sec.  1.937-1(c)(1)(ii) 
must otherwise be considered to have been present at least 60 days in 
the relevant U.S. territory in each of the three years in order to 
benefit from the 30-day constructive presence rule.

Proposed Effective/Applicability Date

    These amendments to the regulations are proposed to apply to 
taxable years beginning after the date these regulations are published 
as final regulations in the Federal Register.

Reliance on Proposed Regulations

    Until these regulations are published as final regulations in the 
Federal Register, taxpayers may rely on these proposed regulations with 
respect to taxable years beginning on or after the date these proposed 
regulations are published in the Federal Register.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because the regulations do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, this regulation has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the Addresses heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these proposed regulations is Cleve 
Lisecki, formerly of the Office of Associate Chief Counsel 
(International). However, other personnel from the Treasury Department 
and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.937-1 also issued under 26 U.S.C. 937(a). * * *


[[Page 51977]]


0
Par. 2. Section 1.937-1 is amended as follows:
0
1. Revising paragraph (c)(3)(i)(B) and paragraph (c)(3)(i)(C)(2).
0
2. Adding paragraph (c)(3)(i)(D).
0
3. Revising Example 1 of paragraph (g).
0
4. Redesignating Examples 2 through 10 of paragraph (g) as Examples 5 
through 13 respectively.
0
5. Adding new Examples 2, 3, and 4 to paragraph (g).
0
6. Revising newly re-designated Example 5 of paragraph (g).
0
7. Adding a new sentence to the end of paragraph (i).
    The revisions and additions read as follows:


Sec.  1.937-1  Bona fide residency in a possession.

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (B) Any day that an individual is outside of the relevant 
possession to receive, or to accompany on a full-time basis a parent, 
spouse, or child (as defined in section 152(f)(1)) who is receiving, 
qualifying medical treatment as defined in paragraph (c)(4) of this 
section;
    (C) * * *
    (1) * * *
    (2) Period for which a mandatory evacuation order is in effect for 
the geographic area in the relevant possession in which the 
individual's place of abode is located; and
    (D) Any day not described in paragraph (c)(3)(i)(B) or (C) of this 
section that an individual is outside of the United States and the 
relevant possession, except that an individual will not be considered 
present in the relevant possession under this paragraph (c)(3)(i)(D) 
for more than 30 days during the taxable year, and this paragraph 
(c)(3)(i)(D) does not apply for purposes of calculating the required 
minimum 60 days of presence in the relevant possession under paragraph 
(c)(1)(ii) of this section. Furthermore, this paragraph (c)(3)(i)(D) 
applies only if the number of days that the individual is considered to 
be present in the relevant possession during the taxable year, 
determined without regard to this paragraph (c)(3)(i)(D), exceeds the 
number of days that the individual is considered to be present in the 
United States during the taxable year.
* * * * *
    (g) * * *

    Example 1. Presence test. H, a U.S. citizen, is engaged in a 
profession that requires frequent travel. In each of the years 2016 
and 2017, H spends 195 days in Possession N and the balance of the 
year in the United States. In 2018, H spends 160 days in Possession 
N and the balance of the year in the United States. Thus, H spends a 
total of 550 days in Possession N for the three-year period 
consisting of years 2016, 2017, and 2018. Under paragraph (c)(1)(ii) 
of this section, H satisfies the presence test of paragraph (c) of 
this section with respect to Possession N for taxable year 2018 
because H is present in Possession N for more than the required 549 
days during the three-year period of 2016 through 2018 and is 
present in Possession N for at least 60 days during each of those 
taxable years. Assuming that in 2018 H does not have a tax home 
outside of Possession N and does not have a closer connection to the 
United States or a foreign country under paragraphs (d) and (e) of 
this section respectively, then regardless of whether H was a bona 
fide resident of Possession N in 2016 and 2017, H is a bona fide 
resident of Possession N for taxable year 2018.
    Example 2. Presence test. Same facts as Example 1, except that 
in 2018, H spends 130 days in Possession N, 110 days in foreign 
countries, and 125 days in the United States. Because H satisfies 
the requirements of paragraph (c)(3)(i)(D) of this section, 30 of 
the days spent in foreign countries during 2018 are treated as days 
of presence in Possession N. Thus, H will be treated as being 
present for 160 days in Possession N for 2018. Under paragraph 
(c)(1)(ii) of this section, H meets the presence test of paragraph 
(c) of this section with respect to Possession N for taxable year 
2018 because H is present in Possession N for 550 days (more than 
the required 549 days) during the three-year period of 2016 through 
2018 and is present in Possession N for at least 60 days in each of 
those taxable years. As in Example 1, assuming that in 2018 H does 
not have a tax home outside of Possession N and does not have a 
closer connection to the United States or a foreign country under 
paragraphs (d) and (e) of this section respectively, then regardless 
of whether H was a bona fide resident of Possession N in 2016 and 
2017, H is a bona fide resident of Possession N in 2018.
    Example 3. Presence test. Same facts as Example 1, except that 
in 2018, H spends 130 days in Possession N, 100 days in foreign 
countries, and 135 days in the United States. Under these facts, H 
does not satisfy paragraph (c)(1)(ii) of this section for taxable 
year 2018 because H is present in Possession N for only 520 days 
(less than the required 549 days) during the three-year period of 
2016 through 2018. The rule of paragraph (c)(3)(i)(D) of this 
section (treating up to 30 days spent in foreign countries as days 
of presence in Possession N) is not available because H fails to 
satisfy the condition that H be present more days in Possession N 
than in the United States during 2018, determined without regard to 
the application of paragraph (c)(3)(i)(D) of this section.
    Example 4. Presence test. Same facts as Example 1, except that 
in 2016, H spends 360 days in Possession N and six days in the 
United States; in 2017, H spends 45 days in Possession N, 290 days 
in foreign countries, and 30 days in the United States; and in 2018, 
H spends 180 days in Possession N and 185 days in the United States. 
Under these facts, H does not satisfy paragraph (c)(1)(ii) of this 
section for taxable year 2018. During the three-year period from 
2016 through 2018, H is present in Possession N for 615 days, 
including 30 of the days spent in foreign countries in 2017, which 
are treated under paragraph (c)(3)(i)(D) of this section as days of 
presence in Possession N. Although H is present in Possession N for 
more than the required 549 days during the three-year period, H is 
only present for 45 days in Possession N during one of the taxable 
years (2017) of the period, less than the 60 days of minimum 
presence required under paragraph (c)(1)(ii) of this section. The 
rule of paragraph (c)(3)(i)(D) of this section does not apply for 
purposes of determining whether H is present in Possession N for the 
60-day minimum required under paragraph (c)(1)(ii) of this section.
    Example 5. Presence test. W, a U.S. citizen, owns a condominium 
in Possession P where she spends part of the taxable year. W also 
owns a house in State N near her grown children and grandchildren. W 
is retired and her income consists solely of pension payments, 
dividends, interest, and Social Security benefits. For 2016, W 
spends 145 days in Possession P, 101 days in Europe and Asia on 
vacation, and 120 days in State N. For taxable year 2016, W is not 
present in Possession P for at least 183 days, is present in the 
United States for more than 90 days, and has a significant 
connection to the United States by reason of her permanent home. 
However, under paragraph (c)(1)(iv) of this section, W still 
satisfies the presence test of paragraph (c) of this section with 
respect to Possession P for taxable year 2016 because she has no 
earned income in the United States and is present for more days in 
Possession P than in the United States.
* * * * *
    (i) * * * Notwithstanding the foregoing, paragraph (c)(3)(i)(D) and 
Examples 1, 2, 3, 4, and 5 of paragraph (g) of this section apply for 
taxable years beginning after the date these regulations are published 
as final regulations in the Federal Register.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-21258 Filed 8-26-15; 8:45 am]
 BILLING CODE 4830-01-P