Proposed Regs Issued on Bona Fide Residency in U.S. Territories

On August 26, the Service and Treasury Department issued proposed amendments to the regulations under IRC Section 937 for determining whether an individual is a bona fide resident of a U.S. territory. [Preamble, REG-109813-11].

In general, IRC Section 937 defines a "bona fide resident" as a person who ---

   (1) is present for at least 183 days during the taxable year in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands, and
   (2) does not have a tax home outside such specified possession during the taxable year and does not have a closer connection to the U.S. or a foreign country than to such specified possession. [IRC § 937(a)].

As noted in the preamble of the notice of proposed rulemaking, several alternatives to the 183-day rule are provided in Regulation Section1.937-1. [Preamble, REG-109813-11]. Also, as noted in the preamble, after the original Section1.937-1 regulations were issued, commenters requested more flexibility in the presence test, including the allowance of days of constructive presence for business or personal travel outside of the relevant U.S. territory. [Preamble, REG-109813-11]. In response, the proposed regulations allow additional days of constructive presence for business or personal travel outside of the relevant U.S. territory. [Preamble, REG-109813-11].

As explained in the preamble, under the proposed regulations, “an individual would be considered to be present in the relevant U.S. territory for up to 30 days, during which the individual is outside of both the U.S. and the relevant U.S. territory.” [See Preamble, REG-109813-11, and Prop Treas Reg § 1.937-1(c)(3)(i)(D)]. However, under the proposed regulations, this provision will not apply if the number of days that the individual is considered to be present in the relevant possession during the taxable year, determined without regard to the provision, exceeds the number of days that the individual is considered to be present in the U.S. during the taxable year. [See Prop Treas Reg § 1.937-1(c)(3)(i)(D)]. Furthermore, under the proposed regulations, the provision does not apply for purposes of calculating the required minimum 60 days of presence in the relevant possession under Treas Reg § 1.937-1(c)(1)(ii). [See Prop Treas Reg § 1.937-1(c)(3)(i)(D)]. As explained in the preamble: “Therefore, an individual invoking section 1.937-1(c)(1)(ii) must otherwise be considered to have been present at least 60 days in the relevant U.S. territory in each of the three years in order to benefit from the 30-day constructive presence rule.” [Preamble, REG-109813-11].

The proposed regulations also provide six examples of application of the presence test under Section1.937-1.