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US Airspace and the Definition of the United States | US Tax Lawyers

This article is a continuation of a recent series of articles on the exploration of the definition of the United States. As it was mentioned in a prior article, the general definition of the United States found in IRC § 7701(a)(9) has numerous exceptions throughout the Internal Revenue Code (“IRC”). The US airspace is another example of such exceptions. In this article, I would like to outline some of the ways in which the borders of the United States are defined in the context of the US airspace.

General Tax Definition of the United States Does Not Mention US Airspace

The general tax definition of the United States is found in IRC § 7701(a)(9). According to IRC § 7701(a)(9), the United States is comprised of the 50 states, the District of Columbia and the territorial waters. There is no mention of the US airspace.

This, of course, does not mean that US airspace never constitutes part of the United States. Rather, as I had explained it in a prior article, one needs to look at the specific tax provisions and determine if there is a special definition of the United States that applies to them.

Examples of Various IRC Provisions Including and Excluding US Airspace from the Definition of the United states

Indeed, there is a rich variety of treatment of US airspace that can be found within the IRC. Here, I will just mentioned three examples that demonstrate how differently the IRC provisions define the United States with respect to its airspace.

1. There is an esoteric but important IRC § 965 which deals with the Dividends Received deduction for repatriated corporate earnings. IRS Notice 2005-64 provides foreign tax credit guidance under IRC § 965 and specifically follows the general definition of the United States with the addition of the Continental Shelf. Then, the Notice states: “the term ‘United States’ does not include possessions and territories of the United States or the airspace over the United States and these areas”. Thus, the US airspace is excluded from the tax definition of the United States under IRC § 965.

2. The treatment of the US airspace is the opposite for the purposes of the Foreign Earned Income Exclusion (“FEIE”). Since FEIE allows a taxpayer to exclude only “foreign” earned income, the tax definition of the United States is crucial for this part of the IRC.

In general, the courts have ruled that the airspace over the United States is included within the definition of the United States with respect to IRC § 911. This means that, if you are flying over the United States, you are considered to be within the United States for the purposes of FEIE.

3. When we are dealing with the analysis of whether an individual is a US tax resident under the Substantial Presence Test, we are again back to the same situation as in example 1 – the US airspace is not included in the definition of the United States.

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Indians working on H1 Visa Need to Pay US Taxes on Indian Income

US taxes on Indian income is one of the most important topics relevant to the everyday life of Indian-Americans and Indians who reside and work in the United States. In this article, I will focus on the issue of US taxes on Indian Income earned by H1 (mostly H1B) visa holders.

US Taxes on Indian Income and US Tax Residency

Whether an Indian working in the United States needs to pay US taxes on Indian income primarily depends on whether he is a US tax resident. There are three categories of US tax residents – US citizens, US Permanent Residents (i.e. green-card holders), and the individuals who satisfied the Substantial Presence Test.

Any person who is considered to be a US tax resident is required to report his worldwide income on his US tax return and pay US taxes on this income. Hence, if an Indian working in the United States on H1 visa has Indian-source income and he satisfied the Substantial Presence Test, he would be required to pay US taxes on his Indian income, not just income earned in the United States.

US Taxes on Indian Income: the Substantial Presence Test

The Substantial Presence Test is very important in US tax law because it affects millions of foreigners who reside in or visit the United States. The Substantial Presence Test basically states that any individual who is physically present in the United States for 183 days or more within the most recent three-year period is considered to be a US tax resident.

The 183 days are calculated as follows: all days spent in the current year + one-third of the days spent in the year immediately prior to the current year + one-sixth of the days spent in the year right before the prior year (in other words, the second year before the current year) “Current year” here means the year for which you are trying to figure out whether you were a tax resident.

Failure to Pay US Taxes on Indian Income May Result in IRS Penalties and Endangerment of Your Immigration Status

Any Indian who is a US tax resident and fails to pay US taxes on Indian income runs a great risk of the imposition of IRS penalties. If the failure to pay US taxes on Indian income is combined with the failure to file information returns, such as FBARs, then his legal situation in the United States becomes extremely precarious.

Not only are the IRS penalties extremely high (such a person may owe to the IRS more than the balance on your unreported accounts), including criminal penalties with potential jail time, but his immigration status may be endangered as a result of his US tax noncompliance.

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Given these extreme risks, an Indian working in the United States on H1 visa should contact Sherayzen Law Office for professional legal and tax help as soon as possible.

We have helped numerous clients from India to reduce and even, in some cases, completely eliminate their IRS penalties and bring their US tax affairs into full compliance with US tax laws, thereby preserving their immigration status.

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