NONRESIDENT ALIEN INDIVIDUALS.

SEC. 103. NONRESIDENT ALIEN INDIVIDUALS. (a) Tax on Nonresident Alien Individuals.— (1) Section 871 (relating to tax on nonresident alien individuals) is amended to read as follows: “SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS. “(a) Income Not Connected With United States Business—30 Percent Tax.— “(1) Income other than capital gains.— There is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as— “(A) interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, “(B) gains described in section 402(a)(2), 403(a)(2), or 631 (b) or (c), and gains on transfers described in section 1235 made on or before October 4, 1966, “(C) in the case of bonds or other evidences of indebtedness issued after September 28, 1965, amounts which under section 1232 are considered as gains from the sale or exchange of property which is not a capital asset, and “(D) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged, or from payments which are treated as being so contingent under subsection (e), but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States. “(2) Capital gains of aliens present in the united states 183 days or more.—In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from the sale or exchange at any time during such year of capital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this paragraph, gams and losses shall be taken 80 Stat. 1548into account only if, and to the extent that, they would be recognized and taken into account if such gains and losses were effectively connected with the conduct of a trade or business within the United States, except that such gains and losses shall be determined without regard to section 1202 (relating to deduction for capital gains) and such losses shall be determined without the benefits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account in determining the tax under paragraph (1) or subsection (b) shall not be taken into account in determining the tax under this paragraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year. “(b) Income Connected With United States Business—Graduated Rate of Tax.— “(1) Imposition of tax.—A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 1201(b) on his taxable income which is effectively connected with the conduct of a trade or business within the United States. “(2) Determination of taxable income.—In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. “(c) Participants in Certain Exchange or Training Programs.—For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the Immigration and Nationality Act, as amended (8 U.S.C. 1101(a)(15)(F) or (J)), shall be treated as a nonresident alien individual engaged in trade or business within the United State, and any income described in section 1441(b)(1) or (2) which is received by such individual shall, to the extent derived from sources within the United States, be treated as effectively connected with the conduct of a trade or business within the United States. “(d) Election To Treat Real Property Income as Income Connected With United States Business.— “(1) In general.— A nonresident alien individual who during the taxable year derives any income— “(A) from real property held for the production of income and located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of such real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631 (b) or (c), and “(B) which, but for this subsection, would not be treated as income which is effectively connected with the conduct of a trade or business within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (b)(1) whether or not such individual is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the 80 Stat. 1549consent of the Secretary or his delegate with respect to any taxable year. “(2) Election after revocation.—If an election has been made under paragraph (1) and such election has been revoked, a new election may not be made under such paragraph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is effective, unless the Secretary or his delegate consents to such new election. “(3) Form and time of election and revocation.—An election under paragraph (1), and any revocation of such an election, may be made only in such manner and at such time as the Secretary or his delegate may by regulations prescribe. “(e) Gains From Sale or Exchange of Certain Intangible Property.— For purposes of subsection (a)(1)(D), and for purposes of sections881(a)(4), 1441(b), and 1442(a)— “(1) Payments treated as contingent on use, etc.—If more than 50 percent of the gain for any taxable year from the sale or exchange of any patent, copyright, secret process or formula, good will, trademark, trade brand, franchise, or other like property, or of any interest in any such property, is from payments which are contingent on the productivity, use, or disposition of such property or interest, all of the gain for the taxable year from the sale or exchange of such property or interest shall be treated as being from payments which are contingent on the productivity, use, or disposition of such property or interest. “(2) Source rule.—In determining whether gains described in subsection (a)(1)(D) and section 881(a)(4) are received from sources within the United States, such gains shall be treated as rentals or royalties for the use of, or privilege of using, property or an interest in property. “(f) Certain Annuities Received Under Qualified Plans.—For purposes of this section, gross income does not include any amount received as an annuity under a qualified annuity plan described in section 403(a)(1), or from a qualified trust described in section 401(a) which is exempt from tax under section 501(a), if— “(1) all of the personal services by reason of which such annuity is payable were either (A) personal services performed outside the United States by an individual who, at the time of performance of such personal services, was a nonresident alien, or (B) personal services described in section 864(b)(1) performed within the United States by such individual, and “(2) at the time the first amount is paid as such annuity under such annuity plan, or by such trust, 90 percent or more of the employees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which such trust is a part, are citizens or residents of the United States.” “(g) Cross References.— “(1) For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(a)(4). “(2) For taxation of nonresident alien individuals who are expatriate United States citizens, see section 877. “(3) For doubling of tax on citizens of certain foreign countries, see section 891. “(4) For adjustment of tax in case of nationals or residents of certain foreign countries, see section 896. “(5) For withholding of tax at source on nonresident alien individuals, see section 1441. “(6) For the requirement of making a declaration of estimated tax by certain nonresident alien individuals, see section 6015(i).” 80 Stat. 1550 (2) Section 1 (relating to tax on individuals) is amended by redesignating subsection (d) as subsection (e), and by inserting after subsection (c) the following new subsection: “(d) Nonresident Aliens.—In the case of a nonresident alien individual, the tax imposed by subsection (a) shall apply only as provided by section 871 or 877.” (b) Gross Income.— (1) Subsection (a) of section 872 (relating to gross income of nonresident alien individuals) is amended to read as follows: “(a) General Rule.— In the case of a nonresident alien individual, gross income includes only— “(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and “(2) gross income which is effectively connected with the conduct of a trade or business within the United States.” (2) Subparagraph (B) of section 872(b)(3) (relating to compensation of participants in certain exchange or training programs) is amended by striking out “by a domestic corporation” and inserting in lieu thereof “by a domestic corporation, a domestic partnership, or an individual who is a citizen or resident of the United States”. (3) Subsection (B) of section 872 (relating to exclusions from gross income) is amended by adding at the end thereof the following new paragraph: “(4) Certain bond income of residents of the ryukyu islands or the trust territory of the pacific islands.— Income derived by a nonresident alien individual from a series E or series H United States savings bond, if such individual acquired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.” (c) Deductions.— (1) Section 873 (relating to deductions allowed to nonresident alien individuals) is amended to read as follows: “SEC. 873. DEDUCTIONS. “(a) General Rule.—In the case of a nonresident alien individual, the deductions shall be allowed only for purposes of section 871 (b) and (except as provided by subsection (b) ) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary or his delegate. “(b) Exceptions.—The following deductions shall be allowed whether or not they are connected with income which is effectively connected with the conduct of a trade or business within the United States: “(1) Losses.—The deduction, for losses of property not connected with the trade or business if arising from certain casualties or theft, allowed by section 165(c)(3), but only if the loss is of property located within the United States. “(2) Charitable contributions.—The deduction for charitable contributions and gifts allowed by section 170. “(3) Personal exemption.—The deduction for personal exemptions allowed by section 151, except that in the case of a nonresident alien individual who is not a resident of a contiguous country only one exemption shall be allowed under section 151. 80 Stat. 1551 “(c) Cross References.— “(1) For disallowance of standard deduction, see section 142(b)(1). “(2) For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).” (2) Section 154(3) (relating to cross references in respect of deductions for personal exemptions) is amended to read as follows: “(3) For exemptions of nonresident aliens, see section 873(b)(3).” (d) Allowance of Deductions and Credits.—Subsection (a) of section 874 (relating to filing of returns) is amended to read as follows: “(a) Return Prerequisite to Allowance.—A nonresident alien individual shall receive the benefit of the deductions and credits allowed to him in this subtitle only by filing or causing to be filed with the Secretary or his delegate a true and accurate return, in the manner prescribed in subtitle F (sec. 6001 and following, relating to procedure and administration), including therein all the information which the Secretary or his delegate may deem necessary for the calculation of such deductions and credits. This subsection shall not be construed to deny the credits provided by sections 31 and 32 for tax withheld at source or the credit provided by section 39 for certain uses of gasoline and lubricating oil.” (e) Beneficiaries of Estates and Trusts.— (1) Section 875 (relating to partnerships) is amended to read as follows: “SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND TRUSTS. “For purposes of this subtitle— “(1) a nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged, and “(2) a nonresident alien individual or foreign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States.” (2) The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 875 and inserting in lieu thereof the following: “Sec. 875. Partnerships; beneficiaries of estates and trusts.” (f) Expatriation To Avoid Tax.— (1) Subpart A of part II of subchapter N of chapter 1 (relating to nonresident alien individuals) is amended by redesignating section 877 as section 878, and by inserting after section 876 the following new section: “SEC. 877. EXPATRIATION TO AVOID TAX. “(a) In General.— Every nonresident alien individual who at any time after March 8, 1965, and within the 10-year period immediately preceding the close of the taxable year lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B, shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection exceeds the tax which, without regard to this section, is imposed pursuant to section 871. “(b) Alternative Tax.—A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1 or section 1201(b), except that— 80 Stat. 1552 “(1) the gross income shall include only the gross income described in section 872(a)(as modified by subsection (c) of this section), and “(2) the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover provided by section 1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be determined as provided under regulations prescribed by the Secretary or his delegate. For purposes of paragraph (2), the deductions allowed by section 873(b) shall be allowed; and the deduction (for losses not connected with the trade or business if incurred in transactions entered into for profit) allowed by section 165(c)(2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be included in gross income under this section. “(c) Special Rules of Source.— For purposes of subsection (b), the following items of gross income shall be treated as income from sources within the United States: “(1) Sale of property.— Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States. “(2) Stock or debt obligations.—Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia. “(d) Exception for Loss of Citizenship for Certain Causes.—Subsection (a) shall not apply to a nonresident alien individual whose loss of United States citizenship resulted from the application of section 301(b), 350, or 355 of the Immigration and Nationality Act, as amended (8U.S.C. 1401(b), 1482, or 1487). “(e) Burden of Proof.—If the Secretary or his delegate establishes that it is reasonable to believe that an individual’s loss of United States citizenship would, but for this section, result in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual.” (2) The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by striking out the item relating to section 877 and inserting in lieu thereof the following: “Sec. 877. Expatriation to avoid tax. “Sec. 878. Foreign educational, charitable, and certain other exempt organizations.” (g) Partial Exclusion of Dividends.— Subsection (d) of section 116 (relating to certain nonresident aliens ineligible for exclusion) is amended to read as follows: “(d) Certain Nonresident Aliens Ineligible for Exclusion.— In the case of a nonresident alien individual, subsection (a) shall apply only— “(1) in determining the tax imposed for the taxable year pursuant to section 871(b)(1) and only in respect of dividends which are effectively connected with the conduct of a trade or business within the United States, or “(2) in determining the tax imposed for the taxable year pursuant to section 877(b).” 80 Stat. 1553 (h) Withholding of Tax on Nonresident Aliens.— Section 1441 (relating to withholding of tax on nonresident aliens) is amended— (1) by striking out “, or of any partnership not engaged in trade or business within the United States and composed in whole or in part of nonresident aliens,” in subsection (a) and inserting in lieu thereof “or of any foreign partnership”; (2) by striking out “(except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States)” in subsection (b); (3) by striking out “and amounts described in section 402(a)(2)” and all that follows in the first sentence of subsection (b) and inserting in lieu thereof “gains described in section 402(a)(2), 403(a)(2), or 631 (b) or (c), amounts subject to tax under section 871(a)(1)(C), gains subject to tax under section 871(a)(1)(D), and gains on transfers described in section 1235 made on or before October 4, 1966.”; (4) by adding at the end of subsection (b) the following new sentence: “In the case of a nonresident alien individual who is a member of a domestic partnership, the items of income referred to in subsection (a) shall be treated as referring to items specified in this subsection included in his distributive share of the income of such partnership.”; (5) by striking out paragraph (1) of subsection (c) and inserting in lieu thereof the following new paragraph: “(1) Income connected with united states business.—No deduction or withholding under subsection (a) shall be required in the case of any item of income (other than compensation for personal services) which is effectively connected with the conduct of a trade or business within the United States and which is included in the gross income of the recipient under section 871 (b)(2) for the taxable year.”; (6) by amending paragraph (4) of subsection (c) to read as follows: “(4) Compensation of certain aliens.—Under regulations prescribed by the Secretary or his delegate, compensation for personal services may be exempted from deduction and withholding under subsection (a).”; (7) by striking out “amounts described in section 402(a)(2), section 403(a)(2), section 631 (b) and (c), and section 1235, which are considered to be gains from the sale or exchange of capital assets,” in paragraph (5) of subsection (c) and inserting in lieu thereof “gains described in section 402(a)(2), 40.3(a)(2), or 631 (b) or (c), gains subject to tax under section 871(a)(1)(D), and gains on transfers described in section 1235 made on or before October 4, 1966,”, and by striking out “proceeds from such sale or exchange,” in such paragraph and inserting in lieu thereof “amount payable,”; (8) by adding at the end of subsection (c) the following new paragraph: “(7) Certain annuities received under qualified plans.—No deduction or withholding under subsection (a) shall be required in the case of any amount received as an annuity if such amount is, under section 871(f), exempt from the tax imposed by section 871 (a).”; and (9) by redesignating subsection (d) as (e), and by inserting after subsection (c) the following new subsection: “(d) Exemption of Certain Foreign Partnerships.— Subject to such terms and conditions as may be provided by regulations prescribed by the Secretary or his delegate, subsection (a) shall not apply 80 Stat. 1554in the case of a foreign partnership engaged in trade or business within the United States if the Secretary or his delegate determines that the requirements of subsection (a) impose an undue administrative burden and that the collection of the tax imposed by section 871(a) on the members of such partnership who are nonresident alien individuals will not be jeopardized by the exemption.” (i) Liability for Withheld Tax.— Section 1461 (relating to return and payment of withheld tax) is amended to read as follows: “SEC. 1461. LIABILITY FOR WITHHELD TAX. “Every person required to deduct and withhold any tax under this chapter is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this chapter.” (j) Declaration of Estimated Income Tax by Individuals.— Section 6015 (relating to declaration of estimated income tax by individuals) is amended— (1) by striking out that portion of subsection (a) which precedes paragraph (1) and inserting in lieu thereof the following: “(a) Requirement of Declaration.— Except as otherwise provided in subsection (i), every individual shall make a declaration of his estimated tax for the taxable year if—; (2) by redesignating subsection (i) as subsection (j); and (3) by inserting after subsection (h) the following new subsection: “(i) Nonresident Alien Individuals.— No declaration shall be required to be made under this section by a nonresident alien individual unless— “(1) withholding under chapter 24 is made applicable to the wages, as defined in section 3401 (a), of such individual, “(2) such individual has income (other than compensation for personal services subject to deduction and withholding under section 1441) which is effectively connected with the conduct of a trade or business within the United States, or “(3) such individual is a resident of Puerto Rico during the entire taxable year.” (k) Collection of Income Tax at Source on Wages.— Subsection (a) of section 3401 (relating to definition of wages for purposes of collection of income tax at source) is amended by striking out paragraphs (6) and (7) and inserting in lieu thereof the following: “(6) for such services, performed by a nonresident alien individual, as may be designated by regulations prescribed by the Secretary or his delegate; or”. (l) Definitions of Foreign Estate or Trust.— (1) Section 7701 (a)(31)(defining foreign estate or trust) is amended by striking out “from sources without the United States” and inserting in lieu thereof “, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States,”. (2) Section 1493 (defining foreign trust for purposes of chapter 5) is repealed. (m) Conforming Amendment.— The first sentence of section 932(a) (relating to citizens of possessions of the United States) is amended to read as follows: “Any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States shall be subject to taxation under this subtitle in the same manner and subject to the same conditions as in the case of a nonresident alien individual.” 80 Stat. 1555 (n) Effective Dates.— (1) The amendments made by this section (other than the amendments made by subsections (h), (i), and (k)) shall apply with respect to taxable years beginning after December 31, 1966. (2) The amendments made by subsection (h) shall apply with respect to payments made in taxable years of recipients beginning after December 31, 1966. (3) The amendments made by subsection (i) shall apply with respect to payments occurring after December 31, 1966. (4) The amendments made by subsection (k) shall apply with respect to remuneration paid after December 31, 1966.