Rev. Rul. 83-90
1983-1 C.B. 15.
Internal Revenue Service
Revenue Ruling
DUAL STATUS TAXPAYER; COMPUTATION OF TAXABLE INCOME
Published: June 27, 1983
SECTION 63. - -TAXABLE INCOME DEFINED, 26 CFR 1.63-1: Change of treatment with respect to the zero bracket amount and itemized deductions
(Also Sections 871, 873; 1.871-13, 1.873-1.)
Dual status taxpayer; computation of taxable income. The taxable income of a dual status taxpayer, who is both a nonresident alien in, and a resident of, the United States during the taxable year, is to be computed without using the zero bracket amount.
ISSUE
Whether the taxable income of a dual status taxpayer is to be computed using the zero bracket amount (ZBA)?
FACTS
During 1981, A, an unmarried individual 70 years of age, was a citizen and resident of a noncontiguous country for the first half of the year and a resident of the United States for the second half of the year, beginning on July 1. A received $26,000 of net income that was effectively connected the conduct of a trade or business in the United States, $13,000 of which was attributable to the first half of the year. During the taxable year, A made interest payments on a personal loan totalling $1000, $500 of which was paid during the first half of the year.
LAW AND ANALYSIS
Section 63(b) of the Internal Revenue Code provides that, in the case of an individual, the term "taxable income" means adjusted gross income reduced by the sum of the excess itemized deductions, the deductions for personal exemptions under section 151, and the direct charitable deduction, and increased (in the case of an individual for whom an unused zero bracket amount computation is required by section 63(e)) by the unused zero bracket amount (if any).
Section 63(e)(1)(B) of the Code requires nonresident alien individuals to compute an unused ZBA. Section 63(e)(2) provides that an individual's unused ZBA for the taxable year is an amount equal to the excess (if any) of the ZBA over the itemized deductions.
Section 63(g) of the Code provides that an individual who must compute an unused ZBA (as determined under section 63(e)) shall be treated as having made an election to itemize deductions for the taxable year.
Section 1.871-13(a) of the Income Tax Regulations provides that an individual who is a nonresident alien at the beginning of the taxable year but a resident alien at the end of the taxable year is taxable for such year as though the taxable year were comprised of two separate periods, one consisting of the time during which the individual is a resident of the United States and the other consisting of the time during which the individual is not a resident of the United States. Thus, for example, the income tax liability of an alien individual under chapter 1 of the Code for the taxable year in which he changes his residence will be computed under two different sets of rules, one relating to resident aliens for the period of residence and the other relating to nonresident aliens for the period of nonresidence. However, in determining the taxable income for such year which is subject to the graduated rate of tax imposed by section 1 of the Code, all income for the period of residence must be aggregated with the income for the period of nonresidence which is effectively connected for such year with the conduct of a trade or business in the United States.
Section 873(b) of the Code allows a nonresident alien individual deductions for certain casualty or theft losses allowed under section 165(c)(3), for charitable contributions and gifts allowed in section 170, and for only one of the personal exemptions allowed under section 151 (unless the taxpayer is a resident of a contiguous country or is a U.S. national in which case the taxpayer is entitled to a deduction for all the personal exemptions allowed by section 151). Section 874 provides that a nonresident alien individual receives the benefit of deductions only by filing a true and accurate return.
Section 873(a) of the Code provides that in the case of a nonresident alien individual, the deductions shall be allowed only for purposes of section 871(b). Section 871(b) provides for the taxation at graduated rates of the income of a nonresident alien individual that is effectively connected with the conduct of a trade or business within the United States. Accordingly, the deductions described in section 873(b) may be deducted only from the income of a nonresident alien individual that is effectively connected with the conduct of a trade or business within the United States.
Section 1.871-13(d)(2) of the regulations provides that a dual status taxpayer shall be entitled to deduct one personal exemption for the taxable year under section 151 of the Code. In addition, the individual is entitled to additional exemptions as are allowed as a deduction under section 151 but only to the extent that the amount of the additional exemptions does not exceed taxable income (determined without regard to any deduction for personal exemptions) for the period in the taxable year during which the individual is a resident of the United States.
The taxable income of an alien individual with a dual status tax year must be computed under two different sets of rules, one relating to nonresident aliens under subchapter N for the period of nonresidence, and the other relating to resident aliens under subchapter B for the period of residence. In computing taxable income for the period of nonresidence, the dual status taxpayer is limited to 1) the deductions described in section 873(a) of the Code and 2) the nonbusiness itemized deductions listed in section 873(b). (No deductions are allowed against the amount subject to tax under section 871(a)). Furthermore, section 63(e) provides that the nonresident alien individual is not entitled to claim the ZBA, but, under section 63(g), is deemed to have elected to itemize deductions for the taxable year. Therefore, the dual status taxpayer, who is a nonresident for a portion of the taxable year, is deemed to have elected to itemize deductions for the entire taxable year, by virtue of the application of section 63(g) to the period of nonresidence. In computing taxable income for the period of residence, the dual status taxpayer is entitled to all deductions other than the ZBA, including deductions for personal exemptions (as limited by section 1.871-13(d)(2) of the regulations) provided under section 151 and the other deductions generally provided in subchapter B.
This proscription on the use of the ZBA by a dual status taxpayer is consistent with long-standing Service position that a dual status taxpayer is not allowed to use the standard deduction or the optional tables incorporating the standard deduction. See Examples (1) through (3) of section 1.871-13(e) of the regulations; Rev. Rul. 64-60, 1964-1 (Part 1) C.B. 84; Rev. Rul. 73-62, 1973-1 C.B. 56, which updated and restated I.T. 3926, 1948-2 C.B. 48; and Rev. Rul. 74-239, 1974-1 C.B. 372.
The Service will not follow Nico v. Commissioner, 565 F.2d 1234 (2nd Cir. 1977), rev'g in relevant part, 67 T.C. 647 (1977), in which the court allowed a dual status taxpayer the full standard deduction, nor apply that decision to the ZBA.
HOLDING
Under the dual status circumstances described above, no ZBA is allowed and the taxpayer's taxable income for 1981 is computed as follows:
Business income (residence period) $13,000
Business income (nonresidence period) 13,000
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Total taxable income (without deduction for personal $26,000
exemptions or addition of unused ZBA)
Less: Deductions for personal exemptions:
Individual exemption $1,000
Additional exemption for age 65 or more 1,000
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(since it is not in excess of $12,500-residence $2,000
period taxable income) [FN1]
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Taxable income (without addition of unused ZBA) $24,000
Add: Unused ZBA:
ZBA (unmarried individual) $2,300
Less: Itemized interest deduction 500
-------- $1,800
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Taxable income (after subtracting personal exemptions and $25,800
adding unused ZBA)
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FN1. The residence period taxable income is computed as follows:
Business income $13,000
Less: Allowable itemized deduction 500 -------
Taxable income (without deductions for personal exemptions) $12,500
This 1981 taxable income amount of $25,800 is used to determine the U.S. income tax under the tax tables applicable for the 1981 taxable year pursuant to section 3 of the Code.
Rev. Rul. 83-90, 1983-1 C.B. 15.