A domestic LLC organized in New Jersey is classified as a partnership for U.S. federal tax purposes. It has two 50/50 nonresident alien partners (Pakistan residents) who were never physically present in the United States during the tax year.
The partnership provides consulting/services exclusively performed outside the United States (all services performed in Pakistan). All clients are U.S. customers, and payments are remitted to a U.S. bank account held in the LLC’s name.
The LLC has no U.S. employees and no leased office space. However, a U.S.-based individual (0% ownership interest) is listed as the “responsible party” on Form SS-4, manages the U.S. bank account, and performs bookkeeping/administrative functions from a home office in the U.S. This individual does not negotiate contracts, perform services, make strategic business decisions, or participate in income-generating activities. Client contracts are executed in the LLC’s name.
Given these facts:
- Would the partnership be considered engaged in a U.S. trade or business under §864(b)?
- Would the service income be considered U.S.-source under §861(a)(3), given that all services are physically performed outside the United States?
- If the income is foreign-source and no income-producing activities occur in the U.S., would the partnership nevertheless have Effectively Connected Income (ECI)?
- Under these facts, is Section 1446 withholding required on the foreign partners’ distributive shares?
In other words, does the administrative/banking presence in the U.S. create a U.S. trade or business sufficient to treat the partnership’s foreign-performed service income as ECI?
