IRS determines sourcing of credit card interest and ATM fees received from outside the U.S.

In Chief Counsel Advice (CCA), IRS has determined the sourcing of credit card interest and fees received by a financial services firm from U.S. citizen and resident alien customers living outside the U.S. and from ATM fees earned by the firm in connection with customer transactions made on third-party ATMs located outside the U.S.

The CCA concluded that the interest and OID income that Taxpayer received from Customers generally should be treated as foreign source income. However, interest and OID income that Taxpayer received from the following groups of Customers should be treated as U.S source income:

·        alien individuals (other than lawful permanent residents) who are treated as U.S. residents under the substantial presence test or first-year election in Code Sec. 7701(b).

·        U.S. citizens and lawful permanent residents who would be treated as U.S. residents under the substantial presence test in Code Sec. 7701(b). While noting that there is a question as to how interest should be sourced if it is paid by a lawful permanent resident who lives outside of the U.S. at the time of payment, the CCA concludes (by analogy to the rules for U.S. citizens) that sourcing of interest payments by such individual should be based on the individual's place of physical residence, determined under the substantial presence test at the time of the interest payment.

·        dual resident taxpayers who make an election under Reg. § 301.7701(b)-7 to be treated as nonresident aliens but who meet the substantial presence test in Code Sec. 7701(b). That is, the CCA concludes that for purposes of Code Sec. 861(a)(1), a dual resident taxpayer's election to be treated as a nonresident alien should be disregarded.

·        Servicemembers who, under the Servicemembers Civil Relief Act (SCRA), are residents of a state or D.C. but are stationed in a U.S. territory pursuant to military orders. Under SCRA, a servicemember retains his jurisdiction of residence, which may be a State, D.C., or a U.S. territory, notwithstanding his presence in or absence from such pursuant to military orders.

·        Beginning in 2009, spouses of servicemembers who, under the Military Spouses Residency Relief Act (MSRRA), are residents of a state or D.C. but are accompanying their servicemember spouses, who are serving pursuant to military orders, to a U.S. territory. Under MSRRA, the same rules as in SCRA apply beginning in 2009 to the spouse of a servicemember if the spouse is present in or absent from any State, D.C., or any U.S. territory solely to be with the servicemember, who is serving in compliance with military orders, and both spouses retain the same residence.

The CCA concluded that it appeared that Taxpayer's income from ATM fees should be treated as U.S. source income. Taxpayer's activities with regard to processing the ATM transactions appeared to have been solely in the nature of personal services—i.e., processing Customer withdrawals of funds made on third-party ATMs. There didn't appear to be any credit risk associated with these transactions since Customers could only withdraw available funds and no overdrawals seemed to have been allowed. Accordingly, the fees were compensation for Taxpayer's processing of the transactions through use of its computers, software, and other equipment located in the U.S. Under Code Sec. 861(a)(3), compensation for labor or personal services performed in the U.S. is treated as income from sources within the U.S.

Chief Counsel Advice 201205007