rp-04-37.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 1.861-4: Compensation for labor or personal services
(Also: Part I, Sections 861, 862, 871, 1441)

Rev. Proc. 2004-37

SECTION 1. PURPOSE
This revenue procedure provides a method for determining the source of a pension
payment to a nonresident alien individual from a defined benefit plan where the trust
forming part of the plan is a trust created or organized in the United States that
constitutes a qualified trust under § 401(a) of the Internal Revenue Code.

SECTION 2. BACKGROUND
Section 871(a) imposes a tax of 30 percent on amounts received by nonresident alien
individuals as interest (other than original issue discount as defined in § 1273),
dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, and other fixed or determinable annual or periodical gains, profits, and
income to the extent the amount so received is from sources within the United States
and is not effectively connected with the conduct of a trade or business within the
United States.

Section 1441(a) provides for the withholding of tax, generally at a 30 percent rate, on
certain income from sources within the United States paid to a nonresident alien
individual. Section 1441(b) lists salaries, wages, annuities, compensations,

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remunerations, or other fixed or determinable annual or periodical gains, among other
things, as items of income subject to the withholding of tax under § 1441(a).

Section 1.1441-4(b)(1)(ii) of the Income Tax Regulations provides generally that U.S.-
source payments to a nonresident alien individual from a trust described in § 401(a) are
subject to withholding under § 1441. But see § 871(f) (excluding from income certain
amounts received from certain qualified plans); § 1.1441-4(d) (excluding such amounts
from withholding).

Section 861(a)(3) provides generally that compensation for labor or personal services
performed in the United States is treated as income from sources within the United
States. Section 862(a)(3) provides that compensation for labor or personal services
performed outside the United States is treated as income from sources without the
United States.

Employer contributions to an annuity or pension plan constitute compensation for labor
or personal services. See, e.g., Rev. Rul. 56-82, 1956-1 C.B. 59. For purposes of
determining the source of pension payments from a qualified trust under § 401(a), the
portion of each payment that is attributable to employer contributions with respect to
services rendered within the United States is treated as income from sources within the
United States, the portion that is attributable to employer contributions with respect to
services rendered outside the United States is treated as income from sources without
the United States, and the portion that represents earnings and accretions to
contributions of either the employer or the employee is treated as income from sources
within the United States. Rev. Rul. 79-388, 1979-2 C.B. 270. See also
, Clayton v.
United States, 33 Fed. Cl. 628 (1995), aff’d without published opinion, 91 F.3d 170
(Fed. Cir. 1996), cert. denied, 519 U.S. 1040 (1996).

Employer contributions to a defined benefit plan qualified under § 401(a) covering more
than one individual participant are not made for the benefit of specific participants, but
are made based on aggregate liabilities to all participants. All funds held under the plan
are available to provide benefits to any participant. Accordingly, it is not possible in
such a case to allocate actual contributions to specific participants.

SECTION 3. SCOPE

.01 General application
. If a trust under a qualified defined benefit plan makes a
payment with respect to a participant who is a nonresident alien individual and the
actual amounts of employer contributions made to the plan for the benefit of such
participant are not known, the method set forth in section 4 of this revenue procedure
may be used to allocate the payment to sources within and without the United States.
The method set forth in section 4 is based on methods similar to those used for
purposes of §§ 1.403(b)-1(d)(4), 1.402(b)-1(a)(2), and 1.402(b)-1(b)(2)(ii) of the Income

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Tax Regulations when contributions for the benefit of a particular participant are not
known.

.02 Application to a possession of the United States
. The method set forth in section 4
of this revenue procedure also may be used for purposes of allocating a payment from a
trust under a qualified defined benefit plan to sources within and without a possession of
the United States. See § 1.863-6 (providing that the principles applied for determining
income from sources within and without the United States are generally applied for
purposes of determining income from sources within and without a possession). Thus,
for example, in the case of a payment from a trust under a qualified defined benefit plan
to a bona fide resident of Puerto Rico, the method set forth in section 4 may be used for
purposes of determining what portion of the payment is derived from sources within
Puerto Rico and therefore excludible from the recipient’s gross income under § 933(1).

SECTION 4. METHOD

.01 Determination of total contributions
. The amount of total contributions to a defined
benefit plan for the benefit of a particular individual is deemed to be the product of the
following three quantities multiplied by one another, each such quantity determined as
of the annuity starting date—

(i) the present value of the individual=s pension payable at the annuity starting
date, determined under section 4.02;

(ii) the amount from Table I below based on the number of years from the first
date the individual became a participant in the plan to the annuity starting date
(representing the amount that, when contributed on an annual level basis, will
accumulate to $1.00 at the annuity starting date); and

(iii) the number of years from the first date the individual became a participant in
the plan to the annuity starting date.

.02 Present value of pension
. (a) If payment is made in the form of a straight life
annuity commencing at the annuity starting date, then the present value of the
individual=s pension is the product of (i) the amount payable annually, multiplied by (ii)
the value from Table II below, based on the individual’s age at the annuity starting date,
of an annuity of $1.00 per annum payable in equal monthly installments during the life of
the individual.

(b) If payment is made in the form of a single-sum payment of the total benefit due to
the individual under the plan at the annuity starting date, then the present value of the
individual=s pension is equal to the amount of the single-sum payment.

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(c) If payment is made in a form not identified in either of the two preceding paragraphs,
then the present value of the individual=s pension is the actuarial present value of the
individual=s pension, determined on the annuity starting date based on a 7% rate of
interest and the mortality table in Rev. Rul. 2001-62, 2001-2 C.B. 632.

.03 Tables.

Table I.—Amount that, when contributed on an annual level basis, will
accumulate to $1.00 at the annuity starting date, based on the total
number of years from the first date the individual became a participant
in the plan to the annuity starting date

Number of
Years
Amount
1 $1.0000
2 0.4831
3 0.3111
4 0.2252
5 0.1739
6 0.1398
7 0.1156
8 0.0975
9 0.0835
10 0.0724
11 0.0634
12 0.0559
13 0.0497
14 0.0443
15 0.0398
16 0.0359
17 0.0324
18 0.0294
19 0.0268
20 0.0244
21 0.0223
22 0.0204
23 0.0187
24 0.0172
25 0.0158
26 0.0146
27 0.0134
28 0.0124

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29 0.0115
30 0.0106
31 0.0098
32 0.0091
33 0.0084
34 0.0078
35 0.0072
36 0.0067
37 0.0062
38 0.0058
39 0.0054
40 0.0050
41 0.0047
42 0.0043
43 0.0040
44 0.0038
45 0.0035
46 0.0033
47 0.0030
48 0.0028
49 0.0026
50 0.0025

Table II.— The value of an annuity of $1.00 per annum payable in equal monthly
installments during the life of the individual, based on the individual’s age at the annuity
starting date.

Age at
Annuity
Starting
Date
Value
40 13.61
41 13.54
42 13.46
43 13.38
44 13.29
45 13.20
46 13.11
47 13.00
48 12.89
49 12.78
50 12.66

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51 12.53
52 12.40
53 12.25
54 12.11
55 11.95
56 11.79
57 11.62
58 11.45
59 11.26
60 11.08
61 10.88
62 10.68
63 10.48
64 10.27
65 10.06
66 9.84
67 9.62
68 9.40
69 9.17
70 8.93
71 8.69
72 8.44
73 8.18
74 7.92
75 7.65
76 7.38
77 7.10
78 6.83
79 6.55
80 6.28

.04 Allocation of payments to sources within and without the United States
. (a) General
rule. The portion of each payment that is deemed to be attributable to contributions for
services rendered outside the United States, and thus treated as income from sources
without the United States, is equal to the quotient of (i) the product of (A) the total
deemed contributions (as determined under section 4.01 of this revenue procedure),
multiplied by (B) a fraction, the numerator of which is the months of service credited
under the plan that were rendered outside the United States and the denominator of
which is the total months of service credited under the plan as of the annuity starting
date (i.e., prorated based on months of service rendered within and without the United
States), divided by (ii) the present value of the pension at the annuity starting date (as
determined under section 4.02 of this revenue procedure). The remainder of the

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payment, which represents the sum of deemed contributions for services rendered
within the United States plus earnings on all contributions, is treated as income from
sources within the United States.

(b) Special rule for employee after-tax contributions
. If the participant has made any
employee after-tax contributions to the plan, then each payment is first reduced by the
employee after-tax contributions allocable to such payment under § 72. The portion of
the remainder of each payment that is treated as income from sources without the
United States is equal to the quotient of (i) the product of (A) the excess of the total
contributions (as determined under section 4.01 of this revenue procedure) over the
total employee after-tax contributions to the plan, multiplied by (B) a fraction, the
numerator of which is the number of months of service credited under the plan that were
rendered outside the United States and the denominator of which is the total months of
service credited under the plan at the annuity starting date, divided by (ii) the excess of
the present value of the pension at the annuity starting date (as determined under
section 4.02 of this revenue procedure) over the total employee after-tax contributions
to the plan. The portion of each payment that is allocable neither to employee after-tax
contributions nor to income from sources without the United States is treated as income
from sources within the United States.

SECTION 5. EXAMPLES

.01 Retirement at age 65
. (a) Facts. P, a nonresident alien individual, is a citizen and
resident of Country B. P will be age 65 on December 31, 2004. There is no income tax
treaty in force between the United States and Country B.

P has been an employee of Company X, a domestic corporation, since 1975 and is
retiring on December 31, 2004. P worked in Company X’s branch office in Country B
from January 1, 1975 through December 31, 1984. On January 1, 1985, P was
transferred to the United States to work at Company X’s headquarters. While P worked
in the United States, P was classified as a resident alien under § 7701(b)(1)(A)(ii). On
January 1, 1995, P was transferred back to Company X’s branch office in Country B,
where P will have worked until retiring on December 31, 2004. In total, P will have
worked 360 months for Company X, including 240 months worked in Country B and 120
months worked in the United States.

Throughout P’s employment by Company X, P has been a participant in a defined
benefit plan (“Plan A”) maintained by Company X. The trust forming part of Plan A is a
trust created or organized in the United States that constitutes a qualified trust under
§ 401(a). The normal form of retirement benefit under Plan A is a straight life annuity.
The amount payable under the straight life annuity form is an annual benefit of 1
percent of highest-five years’ pay multiplied by years of service credited under the plan,
payable monthly for life commencing at normal retirement age (age 65) or at actual

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retirement age, if later. Plan A provides for an actuarially reduced amount to be payable
if the participant has a severance from employment before normal retirement age, but
the reduction is smaller if the participant retires after age 55 with at least 20 years of
service (for example, only a 16.67% reduction applies at age 55). Contributions under
Plan A are not made on behalf of specific individual participants.

P is entitled to a monthly pension from Plan A beginning at age 65, the annual amount
of which will be $30,000 payable as a straight life annuity. P elects to receive payment
of that pension in the form of a straight life annuity commencing immediately. P has
never made any after-tax contributions to Plan A, and § 871(f), relating to an exclusion
from gross income for certain amounts received from certain qualified pension plans,
does not apply to any amounts received by P from Plan A.

(b) Application
. The total deemed contributions for the benefit of P under the method
set forth in section 4.01 of this revenue procedure equal $95,972, which is the product
of $301,800 (the present value of P’s pension benefit from Plan A under section 4.02(a),
computed as the product of $30,000 multiplied by 10.06, which is the applicable
adjustment factor under Table II of section 4.03), multiplied by 0.0106 (the number from
Table I that corresponds to the total number of years of accumulation for P before the
annuity starting date), multiplied by 30 (P’s total years of service credited under the
plan). Under section 4.04 of this revenue procedure, the portion of each payment that is
treated as income from sources without the United States is equal to the quotient of (i)
the product of 240/360 multiplied by $95,972, divided by (ii) $301,800, or 21 percent.
The remaining 79 percent is treated as income from sources within the United States
that is subject to withholding under § 1441(a).

.02 Early Retirement
. (a) Facts. The facts with respect to Plan A and Company X are
the same as in Example 5.01. Q, a nonresident alien individual, is a citizen and resident
of Country B. Q will be age 55 on December 31, 2004. There is no income tax treaty in
force between the United States and Country B.

Q has been an employee of Company X since 1985 and is retiring on December 31,
2004. Q worked in Company X’s branch office in Country B from January 1, 1985
through December 31, 1994. On January 1, 1995, Q was transferred to the United
States to work at Company X’s headquarters. While Q worked in the United States, Q
was classified as a resident alien under § 7701(b)(1)(A)(ii). On September 1, 2001, Q
was transferred back to Company X’s branch office in Country B, where Q will have
worked until retiring on December 31, 2004. In total, Q will have worked 240 months for
Company X, including 160 months worked in Country B and 80 months worked in the
United States.

Throughout Q’s employment by Company X, Q has been a participant in Plan A. Q is
entitled to a monthly pension from Plan A beginning at age 55, the annual amount of

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which will be $25,000 payable as a straight life annuity. Q elects to receive an
actuarially equivalent joint and contingent annuity option of $23,000 annually with a 50
percent continuation percentage (and Q’s designated contingent annuitant is age 55)
and the actuarial present value of that benefit under section 4.02(c) is $288,019. Q has
never made any after-tax contributions to Plan A, and § 871(f), relating to an exclusion
from gross income for amounts received from certain qualified pension plans, does not
apply to any amounts received by Q from Plan A.

(b) Application
. The total deemed contributions for the benefit of Q under the method
set forth in section 4.01 of this revenue procedure equal $140,553, which is the product
of $288,019 (the present value of Q’s $23,000 annual pension benefit from Plan A with
a 50-percent continuation percentage, as determined under the assumptions in section
4.02(c)), multiplied by 0.0244 (the number from Table I that corresponds to the total
number of years of accumulation for Q before the annuity starting date), multiplied by 20
(Q’s total years of service credited under the plan). Under section 4.04 of this revenue
procedure, the portion of each payment that is treated as income from sources without
the United States is equal to the quotient of (i) 160/240 multiplied by $140,553, divided
by (ii) $288,019, or 33 percent. The remaining 67 percent is treated as income from
sources within the United States that is subject to withholding under § 1441(a).

SECTION 6. LIMITATION ON ISSUANCE OF PRIVATE LETTER RULINGS

.01 The Service will not issue a private letter ruling regarding a method for determining
the source of a pension payment to a nonresident alien individual from a trust under a
defined benefit plan that is qualified under § 401(a) if the proposed method (including
the related assumptions) is inconsistent with sections 4.01, 4.02, and 4.03 of this
revenue procedure.

.02 Revenue Procedure 2004-7, 2004-1 I.R.B. 237, is amplified by adding the following
to section 3.01:

Section 861. Income from Sources Within the United States. A method
for determining the source of a pension payment to a nonresident alien
individual from a trust under a defined benefit plan that is qualified under
§ 401(a) if the proposed method is inconsistent with sections 4.01, 4.02,
and 4.03 of Revenue Procedure 2004-37, 2004-26 I.R.B. __.

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Section 862. Income from Sources Without the United States. A method
for determining the source of a pension payment to a nonresident alien
individual from a trust under a defined benefit plan that is qualified under
§ 401(a) if the proposed method is inconsistent with sections 4.01, 4.02,
and 4.03 of Revenue Procedure 2004-37, 2004-26 I.R.B. __.

SECTION 7. DRAFTING INFORMATION

The principal author of this revenue procedure is Michelle S. Lyon of the Office of
Associate Chief Counsel (International). However, other personnel from the IRS and
Treasury Department participated in its development. For further information regarding
this revenue procedure generally, contact Ms. Lyon on (202) 622-3880 (not a toll-free
call). For information regarding computations under the method set forth in section 4 of
this revenue procedure, contact Diane S. Bloom at (202) 283-9888 (not a toll-free call).