The term "personal service" is nowhere defined in 26 U.S.C. and defined
only once in the Treasury Regulations. Below is the only definition,
and note that it is connected with a "trade
or business", which is defined in 26 U.S.C.
§7701(a)(26) to include the performance of the functions of a public office.
26 C.F.R. §1.469-9 Rules for certain rental real estate activities.
SERVICES. Personal services means any work performed by an individual in connection with a trade or business. However,
personal services do not include any work performed by an individual
in the individual's capacity as an investor as described in section
for labor or personal services performed in the United States shall not be deemed to
be income from sources within the United States if-
(C) the compensation for
labor or services performed as an employee of or under contract with--
(i) a nonresident alien..not engaged in
a trade or business in
the United States..."
TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter N > PART I > § 864
§ 864. Definitions and special rules
(b) Trade or business within
the United States
For purposes of this
part, part II, and chapter 3, the term “trade
or business within the United States” includes the performance of personal services
within the United States at any time within the taxable year, but does
(1) Performance of personal services for foreign employer
The performance of personal services—
(A) for a
nonresident alien individual, foreign partnership, or foreign
corporation, not engaged in trade
or business within the United
(B) for an office or place of business
maintained in a foreign country or in a possession of the United
States by an individual who is a citizen or resident of the
United States or by a domestic partnership or a domestic corporation,
by a nonresident alien individual temporarily present in the United States for a period or
periods not exceeding a total of 90 days during the taxable
year and whose compensation for such services does not exceed
in the aggregate $3,000.
[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2006]
From the U.S.
Government Printing Office via GPO Access
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE
SERVICE, DEPARTMENT OF THE TREASURY
PART 1_INCOME TAXES--Table of Contents
1.864-2 Trade or business within the United States.
(a) In general.
As used in part I (section
861 and following) and part II (section 871 and following), subchapter
N, chapter 1 of the Code, and chapter 3 (section 1441 and following)
of the Code, and the regulations thereunder, the term ``engaged in trade or business within the United States'' does not include the activities described in paragraphs (c) and (d)
of this section, but includes the performance
of personal services within the United States at any time within the
taxable year except to the extent otherwise provided
in this section.
(b) Performance of personal
services for foreign employer--
(1) Excepted services.
For purposes of paragraph (a) of this section, the term ``engaged in trade or business within
the United States'' does not include the performance of personal services--
(i) For a nonresident alien individual, foreign partnership, or
foreign corporation, not engaged in trade or business within the United
States at any time during the taxable year, or
26 C.F.R. §1.162-7 Compensation for personal services.
(a) There may be included
among the ordinary and necessary expenses paid or incurred in carrying
on any trade or business a reasonable
allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation payments
is whether they are reasonable and are in fact payments purely for services.
(b) The test set forth
in paragraph (a) of this section and its practical application may be
further stated and illustrated as follows:
(1) Any amount paid in
the form of compensation, but not in fact as the purchase price of services,
is not deductible. An ostensible salary paid by a corporation may be
a distribution of a dividend on stock. This is likely to occur in the
case of a corporation having few shareholders, practically all of whom
draw salaries. If in such a case the salaries are in excess of those
ordinarily paid for similar services and the excessive payments correspond
or bear a close relationship to the stockholdings of the officers or
employees, it would seem likely that the salaries are not paid wholly
for services rendered, but that the excessive payments are a distribution
of earnings upon the stock. An ostensible salary may be in part payment
for property. This may occur, for example, where a partnership sells
out to a corporation, the former partners agreeing to continue in the
service of the corporation. In such a case it may be found that the
salaries of the former partners are not merely for services, but in
part constitute payment for the transfer of their business.
(2) The form or method
of fixing compensation is not decisive as to deductibility. While any
form of contingent compensation invites scrutiny as a possible distribution
of earnings of the enterprise, it does not follow that payments on a
contingent basis are to be treated fundamentally on any basis different
from that applying to compensation at a flat rate. Generally speaking,
if contingent compensation is paid pursuant to a free bargain between
the employer and the individual made before the services are rendered,
not influenced by any consideration on the part of the employer other
than that of securing on fair and advantageous terms the services of
the individual, it should be allowed as a deduction even though in the
actual working out of the contract it may prove to be greater than the
amount which would ordinarily be paid.
(3) In any event the allowance
for the compensation paid may not exceed what is reasonable under all
the circumstances. It is, in general, just to assume that reasonable
and true compensation is only such amount as would ordinarily be paid
for like services by like enterprises under like circumstances. The
circumstances to be taken into consideration are those existing at the
date when the contract for services was made, not those existing at
the date when the contract is questioned.
(4) For disallowance of
deduction in the case of certain transfers of stock pursuant to employees
stock options, see section 421 and the regulations thereunder.