The Internal Revenue Service has published a ruling that could increase income taxes for some noncitizens who buy life insurance policies and annuities from foreign branches of U.S. insurers.[@@]

Revenue Ruling 2004-75 holds that nonresident alien individuals who get income from life insurance policies or annuities issued by foreign branches of U.S. life insurance companies are getting U.S.-source income.

That income is subject to 30% tax and withholding requirements, according to the ruling, which was written by Gregory Spring, an IRS international tax specialist.

The ruling also holds that residents of Puerto Rico who get income from life insurance policies and annuities issued by Puerto Rican branches of U.S. life insurers are subject to the 30% tax and withholding requirements.

Internal Revenue Code Section 861(a), the section of the code that defines which sources of income are forms of U.S.-source income, mentions pension income but does not specifically mention income from life insurance policies and annuities, Spring writes.

“When the source of an item of income is not specified by statute or by regulation, courts have determined the source of the item by comparison and analogy to classes of income specified within the statute,” Spring writes.

Life insurance policy and annuity income appears to be analogous to interest on a debt obligation, dividends on a stock and earnings on pension fund assets, Spring writes.

“Accordingly,” Spring writes, “income received under a life insurance or annuity contract is U.S. source when the issuer of the contract is a domestic corporation.”

Other regulations hold that nonresident alien individuals who are getting U.S.-source income for reasons other than business purposes are subject to the 30% withholding requirements, Spring writes.

Spring argues that the same principles apply to Puerto Ricans who are getting income from Puerto Rican branches of U.S. life insurers.

Spring notes that different rules might apply to residents of countries that have tax treaties with the United States that deal with tax treatment of life insurance or annuity income.

The IRS has posted a copy of Revenue Ruling 2004-75 at http://www.irs.gov/pub/irs-drop/rr-04-75.pdf