Nonresident Aliens A nonresident alien's income that is subject to U.S. income taxmust be divided into two categories: Income that is effectively connected with a tradeor business in the United States, and Income that is not effectively connected with atrade or business in the United States (discussed under The 30%Tax, later). The difference between these two categories is that effectivelyconnected income, after allowable deductions, is taxed atgraduated rates. These are the same rates that apply toU.S. citizens and residents. Income that is not effectively connectedis taxed at a flat 30% (or lower treaty) rate. Caution: If you were formerly a U.S. citizen or resident alien, these rulesmay not apply. See Expatriation Tax, later, in thischapter. Trade or Businessin the United States Generally, you must be engaged in a trade or business during thetax year to be able to treat income received in that year aseffectively connected with that trade or business. Whether you areengaged in a trade or business in the United States depends on thenature of your activities. The discussions that follow will help youdetermine whether you are engaged in a trade or business in the UnitedStates. Personal Services If you perform personal services in the United States at any timeduring the tax year, you usually are considered engaged in a trade orbusiness in the United States. TaxTip: Certain compensation paid to a nonresident alien by a foreignemployer is not included in gross income. For more information, seeServices Performed for Foreign Employer in chapter 3. Other Trade or Business Activities Other examples of being engaged in a trade or business in theUnited States follow. Students and trainees.You are considered engaged in a trade or business in the UnitedStates if you are temporarily present in the United States as anonimmigrant under subparagraphs (F), (J), (M), or (Q) of section101(a)(15) of the Immigration and Nationality Act. Subparagraph (J)includes a nonresident alien individual admitted to the United Statesas an exchange visitor under the Mutual Educational andCultural Exchange Act of 1961. The taxable part of any scholarship orfellowship grant that is U.S. source income is treated as effectivelyconnected with a trade or business in the United States. Business operations.If you own and operate a business in the United States sellingservices, products, or merchandise, you are, with certain exceptions,engaged in a trade or business in the United States. Partnerships.If you are a member of a partnership that at any time during thetax year is engaged in a trade or business in the United States, youare considered to be engaged in a trade or business in the UnitedStates. Beneficiary of an estate or trust.If you are the beneficiary of an estate or trust that is engaged ina trade or business in the United States, you are treated as beingengaged in the same trade or business. Trading in stocks, securities, and commodities.If your only U.S. business activity is trading in stocks,securities, or commodities (including hedging transactions) through aU.S. resident broker or other agent, you are not engaged in a trade orbusiness in the United States. For transactions in stocks or securities, this applies to anynonresident alien, including a dealer or broker in stocks andsecurities. For transactions in commodities, this applies to commodities thatare usually traded on an organized commodity exchange and totransactions that are usually carried out at such an exchange. This discussion does not apply if you have a U.S. office or otherfixed place of business at any time during the tax year through which,or by the direction of which, you carry out your transactions instocks, securities, or commodities. Trading for a nonresident alien's own account.You are not engaged in a trade or business in the United States iftrading for your own account in stocks, securities, or commodities isyour only U.S. business activity. This applies even if the tradingtakes place while you are present in the United States or is done byyour employee or your broker or other agent. This does not apply to trading for your own account if you are adealer in stocks, securities, or commodities. This does notnecessarily mean, however, that as a dealer you are considered to beengaged in a trade or business in the United States. Determine thatbased on the facts and circumstances in each case or under the rulesgiven above in Trading in stocks, securities, and commodities. EffectivelyConnected Income If you are engaged in a U.S. trade or business, all income, gain,or loss for the tax year that you get from sources within theUnited States (other than certain investment income) is treatedas effectively connected income. This applies whether or not there isany connection between the income and the trade or business beingcarried on in the United States during the tax year. Two tests, described later, determine whether certain items ofinvestment income (such as interest, dividends, and royalties) aretreated as effectively connected with that business. In limited circumstances, some kinds of foreign source income maybe treated as effectively connected with a trade or business in theUnited States. For a discussion of these rules, see ForeignIncome, later. Investment Income Investment income from U.S. sources that may or may not be treatedas effectively connected with a U.S. trade or business generally fallsinto the following three categories. Fixed or determinable income (interest, dividends, rents,royalties, premiums, annuities, etc.). Gains (some of which are considered capital gains) from thesale or exchange of the following types of property. Timber, coal, or domestic iron ore with a retained economicinterest. Patents, copyrights, and similar property on which youreceive contingent payments after October 4, 1966. Patents transferred before October 5, 1966. Original issue discount obligations. Capital gains (and losses). Use the two tests, described next, to determine whether an item ofU.S. source income falling in one of the three categories above andreceived during the tax year is effectively connected with your U.S.trade or business. If the tests indicate that the item of income iseffectively connected, you must include it with your other effectivelyconnected income. If the item of income is not effectively connected,include it with all other income discussed under The 30% Tax,later, in this chapter. Asset-use test.This test usually applies to income that is not directly producedby trade or business activities. Under this test, if an item of incomeis from assets (property) used in, or held for use in, the trade orbusiness in the United States, it is considered effectively connected. An asset is used in, or held for use in, the trade or business inthe United States if the asset is: Held for the principal purpose of promoting the conduct of atrade or business in the United States, Acquired and held in the ordinary course of the trade orbusiness conducted in the United States (for example, an accountreceivable or note receivable arising from that trade or business), or Otherwise held to meet the present needs of the trade orbusiness in the United States and not its anticipated futureneeds. Generally, stock of a corporation is not treated as an assetused in, or held for use in, a trade or business in the United States. Business-activities test.This test usually applies when income, gain, or loss comes directlyfrom the active conduct of the trade or business. Thebusiness-activities test is most important when: Dividends or interest are received by a dealer in stocks orsecurities, Royalties are received in the trade or business of licensingpatents or similar property, or Service fees are earned by a servicing business. Under this test, if the conduct of the U.S. trade or businesswas a material factor in producing the income, the income isconsidered effectively connected. Personal Service Income You usually are engaged in a U.S. trade or business when youperform personal services in the United States. Personal serviceincome you receive in a tax year in which you are engaged in a U.S.trade or business is effectively connected with a U.S. trade orbusiness. Income received in a year other than the year you performedthe services is also effectively connected if it would have beeneffectively connected if received in the year you performed theservices. Personal service income includes wages, salaries,commissions, fees, per diem allowances, and employee allowances andbonuses. The income may be paid to you in the form of cash, services,or property. If you engaged in a U.S. trade or business only because you performpersonal services in the United States during the tax year, income andgains from assets, and gains and losses from the sale or exchange ofcapital assets are generally not effectively connected with your tradeor business. However, if there is a direct economic relationshipbetween your holding of the asset and your trade or business ofperforming personal services, the income, gain, or loss is effectivelyconnected. Pensions.If you were engaged in a U.S. trade or business in a tax yearbecause you performed personal services in the United States, and youlater receive a pension or retirement pay as a result of theseservices, the retirement pay is effectively connected income in eachyear you receive it. This is true whether or not you are engaged in aU.S. trade or business in the year you receive the retirement pay. Transportation Income Transportation income is effectively connected if you meet thefollowing two conditions. You had a fixed place of business in the United Statesinvolved in earning the income. At least 90% of your U.S. source transportation income isattributable to regularly scheduled transportation. "Fixed place of business" generally means a place, site,structure, or other similar facility through which you engage in atrade or business. "Regularly scheduled transportation" meansthat a ship or aircraft follows a published schedule with repeatedsailings or flights at regular intervals between the same points forvoyages or flights that begin or end in the United States. Thisdefinition applies to both scheduled and chartered air transportation. If you do not meet the two conditions above, the income is noteffectively connected and different rules apply. SeeTransportation Tax, later, in this chapter. Business Profits and Lossesand Sales Transactions All profits or losses from U.S. sources that are from the operationof a business in the United States are effectively connected with atrade or business in the United States. For example, profit from thesale in the United States of inventory property purchased either inthis country or in a foreign country is effectively connected trade orbusiness income. A share of U.S. source profits or losses of apartnership that is engaged in a trade or business in the UnitedStates is also effectively connected with a trade or business in theUnited States. Real Property Gain or Loss Gains and losses from the sale or exchange of U.S. real propertyinterests (whether or not they are capital assets) are taxed as if youare engaged in a trade or business in the United States. You musttreat the gain or loss as effectively connected with that trade orbusiness. U.S. real property interest.This is any interest in real property located in the United Statesor the Virgin Islands or any interest in a domestic corporation thatis a U.S. real property holding corporation. Real property includes: Land and unsevered natural products of the land, such asgrowing crops and timber, and mines, wells, and other naturaldeposits, Improvements on land, including buildings, other permanentstructures, and their structural components, and Personal property associated with the use of real property,such as equipment used in farming, mining, forestry, or constructionor property used in lodging facilities or rented office space, unlessthe personal property is: Disposed of more than one year before or after thedisposition of the real property, or Separately sold to persons unrelated either to the seller orto the buyer of the real property. U.S. real property holding corporation.A corporation is a U.S. real property holding corporation if thefair market value of the corporation's U.S. real property interestsare at least 50% of the total fair market value of: The corporation's U.S. real property interests, plus The corporation's interests in real property located outsidethe United States, plus The corporation's other assets that are used in, or held foruse in, a trade or business. You generally are subject to tax on the sale of the stock in anydomestic corporation unless you establish that the corporation isnot a U.S. real property holding corporation. A U.S. real property interest does not include a class of stock ofa corporation that is regularly traded on an established securitiesmarket, unless you hold more than 5% of the fair market value of thatclass of stock. An interest in a foreign corporation owning U.S. realproperty generally is not a U.S. real property interest unless thecorporation chooses to be treated as a domestic corporation. Alternative minimum tax.There may be a minimum tax on your net gain from the disposition ofU.S. real property interests. Figure the amount of this tax, if any,on Form 6251. Withholding of tax.If you dispose of a U.S. real property interest, the buyer may haveto withhold tax. See the discussion of Tax Withheld on RealProperty Sales, in chapter 8. Foreign Income Under limited circumstances, you must treat three kinds of foreignsource income as effectively connected with a trade or business in theUnited States. These circumstances are: You have an office or other fixed place of business in theUnited States to which the income can be attributed, That office or place of business is a material factor inproducing the income, and The income is produced in the ordinary course of the tradeor business carried on through that office or other fixed place ofbusiness. An office or other fixed place of business is a materialfactor if it significantly contributes to, and is an essentialeconomic element in, the earning of the income. The three kinds of foreign source income are: Rents and royalties for the use of, or for the privilege ofusing, intangible personal property located outside the United Statesor from any interest in such property. Included are rents or royaltiesfor the use, or for the privilege of using, outside the United States,patents, copyrights, secret processes and formulas, goodwill,trademarks, trade brands, franchises, and similar properties if therents or royalties are from the active conduct of a trade or businessin the United States. Dividends or interest from the active conduct of a banking,financing, or similar business in the United States. A substitutedividend or interest payment received under a securities lendingtransaction or a sale-repurchase transaction is treated the same asthe amounts received on the transferred security. Income, gain, or loss from the sale outside the UnitedStates, through the U.S. office or other fixed place of business, ofstock in trade, property that would be included in inventory if onhand at the end of the tax year, or property held primarily for saleto customers in the ordinary course of business. This will not applyif you sold the property for use, consumption, or disposition outsidethe United States and an office or other fixed place of business in aforeign country was a material factor in the sale. Tax on EffectivelyConnected Income Income you receive during the tax year that is effectivelyconnected with your trade or business in the United States is, afterallowable deductions, taxed at the rates that apply to U.S. citizensand residents. Generally, you can receive effectively connected income only if youare a nonresident alien engaged in trade or business in the UnitedStates during the tax year. However, income you receive from the saleor exchange of property, the performance of services, or any othertransaction in another tax year is treated as effectively connected inthat year if it would have been effectively connected in the year thetransaction took place or you performed the services. Example.Ted Richards, a nonresident alien, entered the United States inAugust 1998, to perform personal services in the U.S. office of hisoverseas employer. He worked in the U.S. office until December 25,1998, but did not leave this country until January 11, 1999. OnJanuary 7, 1999, he received his final paycheck for services performedin the United States during 1998. All of Ted's income during his stayhere is U.S. source income. During 1998, Ted was engaged in the trade or business of performingpersonal services in the United States. Therefore, all amounts paid tohim in 1998 for services performed in the United States during 1998are effectively connected with that trade or business during 1998. The salary payment Ted received in January 1999 is U.S. sourceincome to him in 1999. It is effectively connected with a trade orbusiness in the United States because he was engaged in a trade orbusiness in the United States during 1998 when he performed theservices that earned the income. Real property income.You may be able to choose to treat all income from real property aseffectively connected. See Income From Real Property,later, in this chapter. The 30% Tax Tax at a 30% (or lower treaty) rate applies to certain items ofincome or gains from U.S. sources but only if the items are noteffectively connected with your U.S. trade or business. Fixed or Determinable Income The 30% (or lower treaty) rate applies to the gross amount of U.S.source fixed or determinable annual or periodic gains, profits, orincome. Income is fixed when it is paid in amounts known aheadof time. Income is determinable whenever there is a basisfor figuring the amount to be paid. Income can be periodicif it is paid from time to time. It does not have to be paidannually or at regular intervals. Income can be determinable orperiodic even if the length of time during which the payments are madeis increased or decreased. Items specifically included as fixed or determinable income areinterest (other than original issue discount), dividends, rents,premiums, annuities, salaries, wages, and other compensation. Asubstitute dividend or interest payment received under a securitieslending transaction or a sale-repurchase transaction is treated thesame as the amounts received on the transferred security. Other itemsof income, such as royalties, also may be subject to the 30% tax. TaxTip: Some fixed or determinable income may be exempt from U.S. tax. Seechapter 3if you are not sure whether the income is taxable. Original issue discount.If you sold, exchanged, or received a payment on a bond or otherdebt instrument that was issued at a discount after March31, 1972, all or part of the original issue discount (OID) (other thanportfolio interest) may be subject to the 30% tax. The amount of OIDis the difference between the stated redemption price at maturity andthe issue price of the debt instrument. The 30% tax applies in thefollowing circumstances. You received a payment on an obligation. In this case, theamount of OID subject to tax is the OID that accrued while you heldthe obligation minus the OID previously taken into account. But thetax on the OID cannot be more than the payment minus the tax on theinterest payment on the obligation. You sold or exchanged the obligation. The amount of OIDsubject to tax is the OID that accrued while you held the obligationminus the amount already taxed in (1) above. Report on your return the amount of OID shown on Form 1042-S,Foreign Person's U.S. Source Income Subject to Withholding,if you bought the debt instrument at original issue. However, you mustrecompute your proper share of OID shown on Form 1042-S if anyof the following apply. You bought the obligation at a premium or paid anacquisition premium. The obligation is a stripped bond or a stripped coupon(including zero coupon instruments backed by U.S. Treasurysecurities). You receive a Form 1042-S as a nominee recipient. For the definition of premium and acquisitionpremium and instructions on how to recompute OID, getPublication 1212. If you held a bond or other debt instrument that was issued at adiscount before April 1, 1972, write to the IRS for furtherinformation. See chapter 12. Social Security Benefits A nonresident alien must include 85% of any U.S. social securitybenefit (and the social security equivalent part of a tier 1 railroadretirement benefit) in U.S. source fixed or determinable annual orperiodic income. This income is exempt under some tax treaties. Sales or Exchangesof Capital Assets These rules apply only to those capital gains and losses fromsources in the United States that are not effectivelyconnected with a trade or business in the United States. They applyeven if you are engaged in a trade or business in the United States.These rules do not apply to the sale or exchange of a U.S. realproperty interest or to the sale of any property that is effectivelyconnected with a trade or business in the United States. See RealProperty Gain or Loss, earlier, under Effectively ConnectedIncome. A capital asset is everything you own except: inventory,business accounts or notes receivable, depreciable property used in atrade or business, real property used in a trade or business, certaincopyrights, literary or musical or artistic compositions, letters ormemoranda, or similar property, and certain U.S. Governmentpublications. A capital gain is a gain on the sale or exchange of acapital asset. A capital loss is a loss on the sale orexchange of a capital asset. You may want to read Publication 544.However, use Publication 544only to determine what is a sale or exchange of a capital asset, orwhat is treated as such. Specific tax treatment that applies to U.S.citizens or residents generally does not apply to you. The following gains are subject to the 30% (or lower treaty) ratewithout regard to the 183-day rule, discussed later. Gains on the disposal of timber, coal, or domestic iron orewith a retained economic interest. Gains on contingent payments received from the sale orexchange of patents, copyrights, and similar property after October 4,1966. Gains on certain transfers of all substantial rights to, oran undivided interest in, patents if the transfers were made beforeOctober 5, 1966. Gains on the sale or exchange of original issue discountobligations. Gains in (1) are not subject to the 30% (or lower treaty) rate ifyou choose to treat the gains as effectively connected with a U.S.trade or business. See Income From Real Property, later. 183-day rule.If you were in the United States for 183 days or more during thetax year, your net gain from sales or exchanges of capital assets istaxed at a 30% (or lower treaty) rate. For purposes of the 30% (orlower treaty) rate, net gain is the excess of your capital gains fromU.S. sources over your capital losses from U.S. sources. This ruleapplies even if any of the transactions occurred while you were not inthe United States. To determine your net gain, consider the amount of your gains andlosses that would be recognized and taken into account only if, and tothe extent that, they would be recognized and taken into account ifyou were in a U.S. trade or business during the year and the gains andlosses were effectively connected with that trade or business duringthe tax year. Also take into account, in arriving at your net gain,all gains and losses treated under U.S. tax laws as gains or lossesfrom the sales or exchanges of capital assets. In arriving at your net gain, do not take the followinginto consideration. The four types of gains listed earlier. The deduction for a capital loss carryover. Capital losses in excess of capital gains. Exclusion for gain from the sale or exchange of qualifiedsmall business stock (section 1202 exclusion). Losses from the sale or exchange of property held forpersonal use. However, losses resulting from casualties or thefts maybe deductible on Schedule A (Form 1040NR). See ItemizedDeductions in chapter 5. If you are not engaged in a trade or business in the United Statesand have not established a tax year for a prior period, your tax yearwill be the calendar year for purposes of the 183-day rule. Also, youmust file your tax return on a calendar-year basis. If you were in the United States for less than 183 daysduring the tax year, capital gains (other than gains listedearlier) are tax exempt unless they are effectively connected with atrade or business in the United States during your tax year. Reporting.Report your gains and losses from the sales or exchanges of capitalassets that are not connected with a trade or business in the UnitedStates on page 4 of Form 1040NR. Report gains and losses from sales orexchanges of capital assets (including real property) that areconnected with a trade or business in the United States on a separateSchedule D (Form 1040) and attach it to Form 1040NR. Income From Real Property If you have income from real property located in the United Statesthat you own or have an interest in and hold for the production ofincome, you can choose to treat all income from that property asincome effectively connected with a trade or business in the UnitedStates. The choice applies to all income from real property located inthe United States and held for the production of income and to allincome from any interest in such property. This includes income fromrents, royalties from mines, oil or gas wells, or other naturalresources. It also includes gains from the sale or exchange of realproperty and from the sale or exchange of timber, coal, or domesticiron ore with a retained economic interest. You can make this choice only for real property income that is nototherwise connected with your U.S. trade or business. If you make the choice, you can claim deductions attributable tothe real property income and only your net income from real propertyis taxed. This choice does not treat a nonresident alien, who is nototherwise engaged in a U.S. trade or business, as being engaged in atrade or business in the United States during the year. Making the choice.Make the initial choice by attaching a statement to your return, oramended return, for the year of the choice. Include in your statement: A complete list of all your real property, or any interestin real property, located in the United States, The extent of your ownership in the property, The location of the property, A description of any major improvements to the property, and Details of any previous choices and revocations of the realproperty income choice. This choice stays in effect for all later tax years unless yourevoke it with the consent of the Internal Revenue Service. Transportation Tax If you have transportation income that is not effectively connected(see Transportation Income, earlier in this chapter), a 4%tax rate applies. If you receive transportation income subject to the4% tax, you should figure the tax and show it on line 51 of Form1040NR. Attach a statement to your return that includes the followinginformation (if applicable): Your name, taxpayer identification number, and tax year, A description of the types of services performed (whether onor off board), Names of vessels or registration numbers of aircraft onwhich you performed the services, Amount of U.S. source transportation income derived fromeach type of service for each vessel or aircraft for the calendaryear, and Total amount of U.S. source transportation income derivedfrom all types of services for the calendar year. This 4% tax applies to your U.S. source gross transportationincome. This only includes transportation income that is treated asderived from sources in the United States if the transportation beginsor ends in the United States. For transportation incomefrom personal services, the transportation must be between the UnitedStates and a U.S. possession. For personal services of a nonresidentalien, this only applies to income derived from, or in connectionwith, an aircraft. Expatriation Tax The expatriation tax provisions apply to U.S. citizens who haverenounced their citizenship and long-term residents who have endedtheir residency, if one of the principal purposes of the action is theavoidance of U.S. taxes. The expatriation tax applies to the 10-yearperiod following the date of the action. If you expatriated in 1999, you are presumed to have tax avoidanceas a principal purpose if: Your average annual net income tax for the last five taxyears ending before the date of the action is more than $110,000,or Your net worth on the date of the action is $552,000 ormore. Ruling request.If you are presumed to have tax avoidance as a principal purposebecause you meet either of the previous tests, you may be eligible torequest a ruling from the IRS that you did not expatriate to avoidU.S. taxes. You must request this ruling within one year from the dateof expatriation. For information that must be included in your rulingrequest, see section IV of Notice 97-19 in Cumulative Bulletin1997-1 and Notice 98-34 in Internal Revenue Bulletin1998-27. Former U.S. citizen.If you are a former U.S. citizen, you are eligible to request aruling if you are in one of the following categories: You became at birth a U.S. citizen and a citizen of anothercountry and continue to be a citizen of that other country, You become (within a reasonable period after loss of U.S.citizenship) a citizen of the country in which you, your spouse, orone of your parents were born, You were present in the United States for no more than 30days during each year of the 10-year period ending on the date ofexpatriation, or You lost your U.S. citizenship before reaching age 18 1/2. Former long-term resident.If you are a former long-term resident, you are eligible to requesta ruling if you are in one of the following categories: You become (within a reasonable period after yourexpatriation) a resident fully liable to income tax in one of thefollowing countries: The country in which you were born, The country where your spouse was born, or The country where either of your parents was born. You were present in the United States for no more than 30days during each year of the 10-year period prior to expatriation, or You ceased to be a long-term resident before reaching age 18 1/2. You will not qualify under category (1) if you are not domiciled inthat country unless your income is taxed in the same manner as aresident domiciled in that country. Long-term residents.You are a long-term resident if you were a lawful permanentresident of the United States in at least 8 of the last 15 tax yearsending with the year your residency ends. In determining if you meetthe 8-year requirement, do not count any year that you are treated asa resident of a foreign country under a tax treaty and do not waivetreaty benefits. Your U.S. residency is considered to have ended when you cease tobe a lawful permanent resident or you commence to be treated as aresident of another country under a tax treaty and do not waive treatybenefits. Tax.If the expatriation tax applies to you, you are generally subjectto tax on your U.S. source gross income and gains on a net basis atthe graduated rates applicable to individuals (with allowabledeductions), unless you would be subject to a higher tax under the 30%tax (discussed earlier) on income not connected with a U.S. trade orbusiness. In making this determination, you may not claim that anincome tax treaty in effect on August 21, 1996, reduces your taxliability under the 30% tax on any items of U.S. source income. For this purpose, U.S. source gross income (defined in chapter 2)includes gains from the sale or exchange of: Property (other than stock or debt obligations) located inthe United States, Stock issued by a U.S. domestic corporation, and Debt obligations of U.S. persons or of the United States, astate or political subdivision thereof, or the District of Columbia. It also includes any income or gain derived from stock in certaincontrolled foreign corporations if you owned, or were considered toown, at any time during the 2-year period ending on the date ofexpatriation, more than 50% of: The total combined voting power of all classes of thatcorporation's stock, or The total value of the stock. The income or gain is considered U.S. source income only to theextent of your share of earnings and profits earned or accumulatedbefore the date of expatriation. Any exchange of property is treated as a sale of the property atits fair market value on the date of the exchange and any gain istreated as U.S. source gross income in that tax year unless you enterinto a gain recognition agreement under Notice 97-19. Other information.For more information on the expatriation tax provisions, includingexceptions to the tax and special U.S. source rules, see section 877of the Internal Revenue Code. Reporting Requirements If you lost your U.S. citizenship, you must file Form 8854,Expatriation Information Statement, with a consular office,or a federal court at the time of loss of citizenship. If you end yourlong-term residency, you must file Form 8854 with the Internal RevenueService when you file your tax return for the year your residencyends. Penalties.If you fail to file Form 8854, you may have to pay a penalty equalto the greater of 5% of the expatriation tax or $1,000. The penaltywill be assessed for each year during which your failure to filecontinues for the 10-year period. The penalty will not be imposed ifyou can show that the failure is due to reasonable cause and notwillful neglect. Expatriation tax return.If you are subject to the expatriation tax, you must file Form1040NR for each year of the 10-year period following expatriation.Complete line "P" on page 5 of Form 1040NR. See SpecialRules for Former U.S. Citizens and Former Long-Term U.S. Residentsin the instructions for Form 1040NR. You must attach a statementto Form 1040NR listing, by category (dividends, interest, etc.), allitems of U.S. and foreign source income, whether or not taxable in theUnited States. If you are a former citizen and you have not filed Form8854 or a statement containing the information set forth in Section IXof Notice 97-19, you should attach Form 8854 to your first Form1040NR following expatriation. If you do not attach a complete statement in any year you areliable for any U.S. taxes, you will not be considered to have filed atrue and accurate return. You will not be entitled to any taxdeductions or credits if your tax liability for that year is lateradjusted. Interrupted Periodof Residence You are subject to tax under a special rule if you interrupt yourperiod of U.S. residence with a period of nonresidence. The specialrule applies if you meet all of the following conditions. You were a U.S. resident for a period that includes at least3 consecutive calendar years. You were a U.S. resident for at least 183 days in each ofthose years. You ceased to be treated as a U.S. resident. You then again became a U.S. resident before the end of thethird calendar year after the period described in (1) above. Under this special rule, you are subject to tax on your U.S. sourcegross income and gains on a net basis at the graduated ratesapplicable to individuals (with allowable deductions) for the periodyou were a nonresident alien, unless you would be subject to a highertax under the 30% tax (discussed earlier) on income not connected witha U.S. trade or business. Example.John Willow, a citizen of New Zealand, entered the United States onApril 1, 1994, as a lawful permanent resident. On August 1, 1996, Johnceased to be a lawful permanent resident and returned to New Zealand.During his period of residence, he was present in the United Statesfor at least 183 days in each of three consecutive years (1994, 1995,and 1996). He returned to the United States on October 5, 1999, as alawful permanent resident. He became a resident before the close ofthe third calendar year (1999) beginning after the end of his firstperiod of residence (August 1, 1996). Therefore, he is subject to taxunder the special rule for the period of nonresidence (August 2, 1996,through October 4, 1999) if it is more than the tax that wouldnormally apply to him as a nonresident alien. Reporting requirements.If you are subject to this tax for any year in the period you werea nonresident alien, you must file Form 1040NR for that year. Thereturn is due by the due date (including extensions) for filing yourU.S. income tax return for the year that you again become a U.S.resident. If you already filed returns for that period, you must fileamended returns. You must attach a statement to your return thatidentifies the source of all of your U.S. and foreign gross income andthe items of income subject to this special rule.