[Federal Register Volume 72, Number 200 (Wednesday, October 17, 2007)]
[Proposed Rules]
[Pages 58787-58790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-20496]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-114125-07]
RIN 1545-BG57


Compensation for Labor or Personal Services: Artists and Athletes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed changes to existing final 
regulations regarding the source of compensation for labor or personal 
services. The proposed changes are needed to clarify the determination 
of source of compensation of a person, including an artist or athlete, 
who is compensated for labor or personal services performed at specific 
events. These proposed regulations affect such an individual.

DATES: Written or electronic comments and requests for a public hearing 
must be received by January 15, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-114125-07), room 
5203, Internal Revenue Service, PO 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-
114125-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS-REG-114125-07).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
David Bergkuist at (202) 622-3850; concerning the submissions of 
comments and requests for a hearing, Regina Johnson at (202) 622-7180 
(not toll free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments under 26 CFR part 1 
under section 861 of the Internal Revenue Code (Code). On July 14, 
2005, final regulations that revised and amended Sec.  1.861-4 were 
published in the Federal Register (70 FR 40663) as TD 9212. In these 
final regulations, Sec.  1.861-4(b)(2)(ii)(C)(3) was reserved with 
respect to compensation for labor or personal services performed partly 
within and partly without the United States by an artist or an athlete 
who is an employee.
    Section 861(a)(3) of the Internal Revenue Code provides that, 
subject to certain exceptions, compensation for labor or personal 
services performed in the United States is gross income from sources 
within the United States. See also Sec.  1.861-4(a) of the regulations. 
Section 862(a)(3) of the Code provides that compensation for labor or 
personal services performed without the United States is gross income 
from sources without the United States. Section 1.861-4(b) provides 
rules for determining the source of compensation for labor or personal 
services performed partly within and partly without the United States. 
Section 1.861-4(b)(2)(i) provides rules for determining the source of 
compensation for labor or personal services performed partly within and 
partly without the United States by an individual other than as an 
employee. Section 1.861-4(b)(2)(ii) provides rules for determining the 
source of compensation for labor or personal services performed partly 
within and partly without the United States by an individual as an 
employee.
    Under Sec.  1.861-4(b)(2)(ii), if an individual performs labor or 
personal services as an employee, the source of the individual's 
compensation is generally determined on a time basis, with certain 
fringe benefits sourced on a geographic basis. An individual may 
determine the source of his or her compensation as an employee for 
labor or personal services performed partly within and partly without 
the United States under an alternative basis if the individual 
establishes to the satisfaction of the Commissioner that, under the 
facts and circumstances of the particular case, the alternative basis 
more properly determines the source of the compensation than the 
general rules of Sec.  1.861-4(b)(2)(ii). See Sec.  1.861-
4(b)(2)(ii)(C)(1)(i). In addition, the Commissioner may, under the 
facts and circumstances of the particular case, determine the source of 
compensation that is received by an individual as an employee under an 
alternative basis if such compensation is not for a specific time 
period, provided that the Commissioner's alternative basis determines 
the source of compensation in a more reasonable manner than the basis 
used by the individual.
    The final regulations at Sec.  1.861-4(b)(2)(ii)(C)(3) provided a 
reservation with respect to the source of compensation for labor or 
personal services performed partly within and partly without the United 
States by an artist or athlete who is an employee. The preamble of TD 
9212 indicated that it was intended that the rule for artists and 
athletes who are employees, when issued, would require such individuals 
to determine the proper source of their compensation for labor or 
personal services on the basis that most correctly reflects the proper 
source of income under the facts and circumstances of the particular 
case, consistent with current law.

Explanation of Provisions

    The proposed regulations would set forth a new ``events basis'' 
rule in Sec.  1.861-4(b)(2)(ii)(G) and make certain other clarifying 
changes to the existing final regulations. The proposed regulations 
also would remove Sec.  1.861-4(b)(2)(ii)(C)(3), which reserved with 
respect to artists and athletes.
    The amount of income received by a person, including an individual 
who is an artist or an athlete, that is properly

[[Page 58788]]

treated as compensation from the performance of labor or personal 
services is determined based on all of the facts and circumstances of 
the particular case. Proposed Sec.  1.861-4(b)(2)(ii)(G) specifies that 
the amount of compensation for labor or personal services determined on 
an event basis is the amount of the person's compensation which, based 
on the facts and circumstances, is attributable to the labor or 
personal services performed at the location of a specific event.
    The IRS and the Treasury Department have determined that the proper 
source of compensation received by a person, including an individual 
who is an artist or athlete, specifically for performing labor or 
personal services at an event is the location of the event. A basis 
that purports to determine the source of compensation from the 
performance of labor or personal services at a specific event, whether 
on a time basis or otherwise, by taking into account the location of 
labor or personal services performed in preparation for the performance 
of labor or personal services at the specific event will generally not 
be the basis that most correctly determines the source of the 
compensation. This rule applies to situations covered by Sec.  1.861-
4(a) and (b).
    Under Sec.  1.861-4(a), the source of compensation for labor or 
personal services performed wholly within the United States is 
generally from sources within the United States. Therefore, if a 
person, including an individual who is an artist or an athlete, is 
specifically compensated for performing labor or personal services at 
an event in the United States, the source of such compensation is 
wholly within the United States because the labor or personal services 
were performed wholly at an event within the United States. The 
proposed regulations state that a basis that purports to determine the 
source of such income on a time basis by taking into account the 
location of labor or personal services performed in preparation for the 
performance of labor or personal services at the specific event will 
generally not be a more reasonable basis for determining source of the 
compensation. The proposed regulations add an example to Sec.  1.861-
4(c) to illustrate the application of this rule.
    Section 1.861-4(b) applies to instances in which a person is 
compensated for performing labor or personal services at multiple 
events, only some of which are within the United States, and at least a 
portion of the person's compensation cannot be specifically attributed 
to the person's performance of labor or personal services at a specific 
location. If the person is not an individual who is compensated as an 
employee, the source of compensation for labor or personal services is 
determined on the basis that most correctly reflects the proper source 
of that income under the facts and circumstances of the particular 
case. See Sec.  1.861-4(b)(1) and (2)(i). If a person is compensated 
specifically for labor or personal services performed at multiple 
events, the basis that most correctly reflects the proper source of 
that income under the facts and circumstances of the particular case 
will generally be the location of the events. In addition, a basis that 
purports to determine the source of such income on a time basis by 
taking into account the location of labor or personal services 
performed in preparation for the performance of labor or personal 
services at the specific event will generally not be the basis that 
most correctly reflects the proper source of the compensation under 
proposed Sec.  1.861-4(b)(2)(ii)(G).
    The Commissioner may, under the facts and circumstances of the 
particular case, determine the source of compensation that is received 
by an individual as an employee under an alternative basis if such 
compensation is not for a specific time period, provided that the 
Commissioner's alternative basis determines the source of compensation 
in a more reasonable manner than the basis used by the individual. 
Compensation specifically for labor or personal services performed at a 
specific event is not compensation for a specific time period. The 
basis that most correctly reflects the proper source of that income 
will generally be the location of the event under proposed Sec.  1.861-
4(b)(2)(ii)(G). In addition, a basis that purports to determine the 
source of such income on a facts and circumstances basis by taking into 
account the location of labor or personal services performed in 
preparation for the performance of labor or personal services at the 
specific event will generally not more properly determine the source of 
the compensation under proposed Sec.  1.861-4(b)(2)(ii)(G).
    These proposed regulations provide examples to illustrate the event 
basis for determining the source of compensation of an individual, 
including an artist or athlete, who is compensated specifically for 
performing labor or personal services at an event.
    The revisions to Sec.  1.861-4(b)(1), (b)(2)(i), and 
(b)(ii)(C)(1)(i) and (ii) which refer to the event basis; the revisions 
in Sec.  1.861-4(b)(2)(ii)(C)(3), (b)(2)(ii)(E), and (b)(2)(ii)(F), 
(b)(2)(ii)(G), and (c); and new Examples 7 through 11 of Sec.  1.861-
4(c) would be effective for taxable years beginning after the date 
final regulations are published in the Federal Register.

Special Analysis

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory 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. Because these 
regulations do not impose a collection of information on small 
entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply. Pursuant to section 7805(f) of the Internal 
Revenue Code, this notice of proposed rulemaking 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 a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comment that is submitted timely to the IRS. 
The Treasury Department and the IRS request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A 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 a public hearing will be published in the 
Federal Register.

Drafting Information

    The principal author of these proposed regulations is David 
Bergkuist, Office of the Associate Chief Counsel (International). 
However, other personnel from the IRS and the Treasury Department 
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:

[[Page 58789]]

PART 1--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.861-4 is amended by:
    1. Removing the heading for paragraph (b)(1)(i).
    2. Redesignating paragraph (b)(1)(i) as paragraph (b)(1).
    3. In the last sentence of newly designated paragraph (b)(1), 
adding the language ``or on the event basis as defined in paragraph 
(b)(2)(ii)(G) of this section,'' after the language ``paragraph 
(b)(2)(ii)(E) of this section,''.
    4. In the last sentence of paragraph (b)(2)(i), adding the language 
``or on the event basis as defined in paragraph (b)(2)(ii)(G) of this 
section,'' after the language ``paragraph (b)(2)(ii)(E) of this 
section,''.
    5. In the first sentence of paragraph (b)(2)(ii)(C)(1)(i), adding 
the language ``, including an event basis as defined in paragraph 
(b)(2)(ii)(G) of this section,'' after the language ``alternative 
basis'' wherever the language ``alternative basis'' appears in the 
sentence.
    6. In the first sentence of paragraph (b)(2)(ii)(C)(1)(ii), adding 
the language ``event basis as defined in paragraph (b)(2)(ii)(G) of 
this section or other'' after the language ``partly without the United 
States under an''.
    7. Removing paragraph (b)(2)(ii)(C)(3).
    8. In the first sentence of paragraph (b)(2)(ii)(E), removing the 
language ``individual's'' and adding the language ``person's'' in its 
place, removing the language ``individual'' and adding the language 
``person'' in its place, and removing the language ``his or hers'' and 
adding the language ``such person's'' in its place.
    9. In the second sentence of paragraph (b)(2)(ii)(F), removing the 
language ``an individual'' and adding the language ``a person'' in its 
place.
    10. Redesignating paragraphs (c) and (d) as new paragraphs (d) and 
(e), respectively.
    11. Redesignating paragraph (b)(2)(ii)(G) as new paragraph (c).
    12. Adding a new paragraph (b)(2)(ii)(G).
    13. In the introductory language of newly-designated paragraph (c), 
removing the language ``paragraph (b)(2)(ii)'' and adding the language 
``section'' in its place.
    14. Adding new Examples 7, 8, 9, and 10 to newly-designated 
paragraph (c).
    15. Redesignating paragraph (b)(1)(ii) Example, as new Example 11 
in newly-designated paragraph (c), revising the paragraph heading and 
removing paragraph (b)(1)(ii).
    16. Adding a new sentence at the end of newly-designated paragraph 
(e) and revising the paragraph heading.
    The additions read as follows:


Sec.  1.861-4  Compensation for labor or personal services.

* * * * *
    (b) * * *
    (2) * * *
    (ii) * * *
    (G) Event basis. The amount of compensation for labor or personal 
services determined on an event basis is the amount of the person's 
compensation which, based on the facts and circumstances, is 
attributable to the labor or personal services performed at the 
location of a specific event. The source of compensation for labor or 
personal services determined on an event basis is the location of the 
specific event. A basis that purports to determine the source of 
compensation from the performance of labor or personal services at a 
specific event, whether on a time basis or otherwise, by taking into 
account the location of labor or personal services performed in 
preparation for the performance of labor or personal services at the 
specific event will generally not be the basis that most correctly 
determines the source of the compensation.
    (c) Examples. * * *

    Example 7. P, a citizen and resident of Country A, is paid by 
Company Z to make a presentation in the United States in 2009. In 
2010, Company Z pays P to make 10 presentations, four of which are 
in the United States and six of which are outside the United States. 
P is compensated separately by Company Z for each presentation. For 
some presentations P receives a flat fee from Company Z. For the 
remaining presentations P receives compensation that is based on a 
formula. Under the facts and circumstances of the particular case, 
the source of the compensation for each presentation is most 
correctly reflected on an event basis, as defined in paragraph 
(b)(2)(ii)(G) of this section. Because P is compensated separately 
for each presentation, the source of P's compensation from Company Z 
for the 2009 presentation within the United States and the four 2010 
presentations in the United States will be from sources in the 
United States. The amounts will be determined based on the flat fee 
or the formula as contractually determined.
    Example 8. (i) Facts. Group B, a Country N corporation, is a 
musical group. All of the members of Group B are citizens and 
residents of Country N. Group B has an employment arrangement with 
Corp Y, a Country N corporation, to perform as directed by Corp Y. 
Corp Y and a tour promoter enter into a contract to provide the 
services of Group B to perform in musical concerts in the United 
States and Country M during a 45-day period. Under the contract, 
Group B performs concerts in 15 cities, 10 of which are in the 
United States. Prior to entering the United States, Group B spends 
60 days rehearsing and preparing in Country N. Under the contract 
with Corp Y, Group B receives a flat fee of $10,000,000 for 
performing in all 15 cities. The fee is based on expected revenues 
from the musical concerts. Each concert is expected to require a 
similar amount and type of labor or personal services by Group B. At 
the end of the tour, an analysis of the revenues from all of the 
concerts shows that 80% of the total revenues from the tour were 
from the performances within the United States.
    (ii) Analysis. Under the facts and circumstances basis of 
paragraph (b)(1) of this section, the source of the compensation 
received under the contract is most correctly reflected on an event 
basis, as defined in paragraph (b)(2)(ii)(G) of this section, with 
amounts determined based on the relative gross receipts attributable 
to the performances within and without the United States. Thus, of 
the $10,000,000 of compensation included in Group B's gross income, 
$8,000,000 ($10,000,000 x .80) is attributable to labor or personal 
services performed by Group B within the United States and 
$2,000,000 ($10,000,000 x .20) is attributable to the labor or 
personal services performed by Group B without the United States.
    Example 9. (i) Facts. A, a citizen and resident of Country M, is 
an employee of Corp X, a Country M corporation. During 2008, Corp X 
is contractually obligated to provide A's services to perform in a 
specific athletic event in the United States. Under A's employment 
contract with Corp X, A is required to perform at a professional 
level that requires training and other preparation prior to the 
event. A undertakes all of this preparation in Country M. Solely as 
a result of A's performance at the athletic event in the United 
States, A receives $2,000,000 from Corp X.
    (ii) Analysis. The entire $2,000,000 received by A for 
performing labor or personal services at the athletic event in the 
United States is income from sources within the United States on an 
event basis as defined in paragraph (b)(2)(ii)(G) of this section. 
A's compensation is attributable entirely to labor or personal 
services performed within the United States at the athletic event. 
It is inappropriate to conclude that the source of A's compensation 
for labor or personal services is performed partly within and partly 
without the United States simply because A's preparation for the 
athletic event involved activities in Country M.
    Example 10. (i) Facts. X, a citizen and resident of Country M, 
is employed under a standard player's contract by a professional 
sports team (Team) that plays its games both within and without the 
United States during its season. The term of the contract is for 
twelve months beginning on October 1. Under the contract, X's salary 
could be paid in semi-monthly installments beginning with the first 
game of the regular season and ending with the final game played by 
the Team. Alternatively, because the regular

[[Page 58790]]

playing season was shorter than the one-year period covered by the 
contract, X had the option to receive his salary over a twelve-month 
period. X elected this option. In addition, during the period of 
this employment contract, X, as an employee of Team, was required to 
practice at the direction of the Team as well as to participate in 
games. During 2008, X participated in all practices and games of 
Team and received a salary. Team qualified for postseason games in 
2008. X also received in 2008 additional amounts for playing in 
preseason and postseason games for the Team.
    (ii) Analysis. The salary paid to X by the Team is considered to 
be personal services compensation of X that X received as an 
employee of the Team. The source of this compensation within the 
United States is determined under the time basis method described in 
paragraph (b)(2)(ii)(A) of this section and accordingly is 
determined based upon the number of days X performed services for 
the Team within the United States during 2008 over the total number 
of days that X performed services for the Team during 2008. The 
source of the additional amounts X received for playing in preseason 
and postseason games is determined under the event basis method 
described in paragraph (b)(2)(ii)(G) of this section and accordingly 
is determined based on the location where each such preseason or 
postseason game was played.
    Example 11. * * *
* * * * *
    (e) Effective/applicability date. * * * The revisions in paragraphs 
(b)(1), (b)(2)(i), and (b)(2)(ii)(C)(1)(i) and (ii) of this section 
which refer to the event basis; the revisions of paragraphs 
(b)(2)(ii)(C)(3), (b)(2)(ii)(E), (b)(2)(ii)(F), (b)(2)(ii)(G), and (c) 
of this section; and Examples 7 through 11 of paragraph (c) of this 
section apply to taxable years beginning after the date final 
regulations are published in the Federal Register.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E7-20496 Filed 10-16-07; 8:45 am]
BILLING CODE 4830-01-P