Attorney-at-Law

COMPENSATED, NOT REMUNERATED

In Uncategorized on 10/02/2017 at 20:30

That’s the bad news for Pei Fang Guo, 149 T. C. 14, filed 10/2/17. Pei got unemployment compensation from the State of Ohio after she lost her job as a post-doctoral fellow at the University of Cincinnati.

Pei was in the USA as a nonimmigrant professional, and never claimed US citizenship, being a Canadian citizen all the while. Pei claims Article XV of the Convention With Respect to Taxes on Income and on Capital, Can.-U.S., Sept. 26, 1980, T.I.A.S. No. 11087 (the “treaty”) exempts the payment from US income tax (and Pei’s below the radar for Canadian income tax).

Well, the magic language for exemption in Article XV is “Dependent Personal Services,” which Pei claims her unemployment compensation is. IRS claims that this is “Other Income,” per Article XXII, thus US taxable.

Judge Lauber has this one.

“Nonresident alien individuals generally are taxed on their U.S.-source income. See secs. 871, 872. The parties agree that petitioner’s unemployment compensation, by analogy to other items of income specified in section 861, was U.S.-source income. They agree that ‘gross income includes unemployment compensation,’ section 85(a), and that this income was ‘effectively connected’ with the conduct by petitioner of a U.S. trade or business, see section 871(b). The sole question presented is whether petitioner’s unemployment compensation was exempt from Federal income tax under the treaty.” 149 T. C. 14, at pp. 5-6.

This is a case of first instance, thus it gets a full-dress T. C. opinion.

Treaties get broadly interpreted, as they are deals between sovereigns. Dictionary approaches are out, although plain meaning is in. See my blogpost “Revenez, Enfants de la Patrie,” 9/21/16.

The treaty never mentions unemployment compensation, except to say that it isn’t social security. Article XV, the underpinning of Pei’s argument, talks about “remuneration,” but the treaty doesn’t define that word. So the general rule of Art. III(2) that the definition comes from the government that taxes the income applies.

“Remuneration” is mentioned only twice in the IRC, and then in connection with FICA. There, it’s any payment for labor or services, with 23 (count ‘em, 23) exceptions.

Ya gotta love this stuff, you really do.

Pei didn’t get unemployment compensation from her former employer, U of Cincy. She got it from the State of Ohio.

“Even if unemployment compensation were thought to be ‘remuneration derived * * * in respect of an employment,’ article XV(1) would not help petitioner. Paragraph 1 thereof provides that ‘salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.’ If the employment is so exercised, ‘such remuneration as is derived therefrom may be taxed in that other State.’ Ibid.

“If petitioner’s unemployment compensation were thought to be ‘remuneration derived * * * in respect of an employment,’ it would have to be regarded as remuneration derived in respect of her former employment with UC. See ibid. That employment was ‘exercised’ in the United States. Paragraph 1 accordingly provides that such remuneration may be taxed in the United States.” 149 T. C. 14, at p. 10.

Pei is over the $10K limit for the exception in Art XV(2), and anyway she wasn’t paid by a Canadian entity, but by Ohio.

This is a deficiency case, so Tax Court can’t abate interest, as Pei asked. Section 6404(a)(1)(E) bars that door.

Canada can allow Pei a deduction or credit for the US income tax she pays, per Article XXIV(2)(a), but as this is the US Tax Court, Judge Lauber can’t tell Canada Revenue Agency, a/k/a Agence du Revenue du Canada, to do anything.

US unemployment compensation may be compensation, but it isn’t remuneration.

 

 

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