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Tax Dispute Resolution
US Regs on Artists' and Athletes' Compensation
Originally published in Canadian Tax Highlights, Volume 16, Number 2, February, 2008. Reprinted with permission.  On October 16, 2007, the IRS issued proposed regulations addressing the application of sourcing rules to artists or athletes who receive compensation for performances at specific events. The proposed regs, which are effective when finalized, generally adopt an event-based approach for the purposes of sourcing compensation paid to artists or athletes, but they leave many questions unanswered. The IRS also recently launched an initiative focused on improving US income reporting and compliance by foreign athletes and entertainers who work in the United States; the initial focus is on performers engaged in tennis, golf, and music.
Internal Revenue Code sections 861(a)(3) and 862(a)(3) generally provide that compensation for services performed in the United States is considered US-source, whereas compensation for services performed outside the United States is considered foreign-source. When the services are performed both inside and outside the United States, the current regs indicate that the taxpayer must determine the source of such income in a manner that most correctly reflects the proper source of the income on the basis of each case's facts and circumstances. In most cases, a time basis approach is acceptable; the amount of compensation for services performed within the United States is based on the ratio that the number of days the individual works within the United States bears to his total number of work days.
The proposed regs provide new event-based rules for determining the source of compensation for services performed both inside and outside the United States. The existing regs reserve guidance only for artists and athletes, but the proposed regs, read literally, apply to other persons too. The preamble to the proposed regs supports the contention that the regs apply to employees in addition to artists or athletes: the IRS and Treasury are said to have determined that compensation received by a person (including an individual who is an artist or athlete) who specifically performs services at an event is properly sourced to the event's location. Thus, the new rule in the proposed regs appears to apply to any compensation determined on an event basis.
 The amount of compensation determined on an event basis is the amount, based on the facts and circumstances, that is attributable to the work performed at the location of the particular event. The examples in the proposed regs indicate that income determined on an event basis means any amount, whether fixed or determined by a formula, that is contingent on a person's making a specific appearance or performance; it does not encompass a fixed salary earned for a fixed period by an employee.
The proposed regs suggest that the source of event-based compensation for services is the event's location. It is not clear whether this new approach is mandatory or permissive, but the proposed regs' wording suggests that this new sourcing rule is mandatory for individuals treated as employees and elective for non-employee individuals and for all entities. The preamble also states that the IRS has discretion to determine source on a different basis. The proposed regs also state that time spent by the taxpayer to prepare for the performance of services at a specified event is generally not taken into account in determining the source of this type of compensation, because doing so generally does not lead to the best determination of source. However, the proposed regs do not preclude consideration of preparation time.
The proposed regs and the IRS's compliance initiative suggest that the IRS is paying closer attention to foreign athletes and entertainers who work and perform in the United States, including Canadian athletes and entertainers. The proposed regs make several changes to the existing source-of-compensation rules for artists and athletes, but many questions regarding the implications of the event-basis rule remain unanswered.
Marla Waiss and James M. Bandoblu
Hodgson Russ LLP, Buffalo
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