Royalties ECI or no?

Technical topics regarding tax preparation.
#1
NYCCPA  
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An answer with a reference would be nice, but mostly looking to be pointed in the right direction of where to look (prior case law, Codes, etc.)

Individual is a Nonresident Alien. US loan out Corp receives royalties on behalf of the individual. US Loan out Corp then pays royalties out to the individual. I am tasked with determining if those royalties are ECI. Note that the royalties relate to musical compositions made by the individual some decades ago, some recorded in the US and some overseas.
Last edited by NYCCPA on 5-Jul-2022 2:48pm, edited 1 time in total.
 

#2
deniz  
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Your facts are unclear which muddles the issue. What is a US NR? Are you asking can a US Individual taxpayer residing overseas create ECI from the foreign source portion of royalty income out of his US C Corp? How are you suggesting a UST residing overseas creates ECI through US Co?
 

#3
NYCCPA  
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Edited OP. Individual is a Nonresident for US tax purposes. To keep it simple, is royalty income ECI? Whether the artist receives it directly or through a loan out corp.
 

#4
deniz  
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It could be, it is a matter of whether the taxpayer is conducting an active trade or business in the US. I.E. Regular, Continuous, Ongoing.

(2) Business-Activities Test —
Under the business-activities test, investment income is ECI if the activities of the U.S. trade or business are a “material factor” in the realization of the income.360
360 §864(c)(2)(B); Reg. §1.864-4(c)(1).

Unlike the asset-use test, which is relevant primarily when the foreign corporation's trade or business-activities as such do not give rise directly to the investment income at issue, the business-activities test ordinarily applies to investment income that arises directly from the active conduct of the taxpayer's U.S. trade or business.362 The regulations set forth four examples of types of income to which the business activities test is applicable:
362 FITA House Rep., 1966-2 C.B. 965, 977, 1008 (income is ECI if there is an “immediate relationship” between the income and the U.S. business activities).

3. Royalties derived in the active conduct of a business consisting of the licensing of patents or similar intangible property; and

(a) Section 864(c)(4)(B)(i): Certain Income from Intangible Property —
Under §864(c)(4)(B)(i), foreign-source rents or royalties431 paid for the use or for the privilege of using certain intangible property may be ECI if they are derived in the active conduct of a U.S. trade or business and are attributable to an OFPB within the United States. The relevant types of intangible property are those described in §862(a)(4), including patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and “other like properties.”432
 


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