The IRS has issued proposed regulations (REG-109813-11) on which taxpayers may rely for new tax years that would allow additional days to count toward establishing bona fide residency for certain taxpayers in a U.S. territory.

Those qualifying as a bona fide resident of the following U.S. territories under IRC §937 are treated differently under a number of tax provisions:

Guam
American Samoa
The Northern Mariana Islands
Puerto Rico
The Virgin Islands [IRC §937(a)]

One of the methods of qualifying as a bona fide resident of those territories is by meeting the presence test found at Reg. §1.937-1(c).

One way to meet that test is to show the individual was present in the relevant possession for 183 days during the taxable year. [Reg. §1.937-1(c)(1)(i)] The regulation provides rules where, under a constructive presence test, the individual is deemed to be present in the territory for a day when the taxpayer is not actually physically present in the territory on that day.

The proposed changes would add to the days that count under the constructive presence test.

Generally any day the individual is outside of both the relevant possession and the Untied States for no more than 30 days would count for most constructive presence purposes (“30 day rule”).

However there are some conditions:

If the individual is actually considered to be present in the United States more days than the individual is considered to be present in the territory (without regard to the new 30 day rule), the then 30 day rule is not available to that taxpayer
Days counted under the 30 day rule may not be counted for purposes of calculating the minimum 60 days of presence in the territory for purposes of meeting the 549-day test [Reg. §1.937-1(c)(1)(ii)], meaning the individual must be considered to have been present in the territory for at least 60 days in each of the current and prior 2 years before apply the 30 day rule for the taxpayer to take advantage of the 30 day rule.

The proposed regulation provides the following five examples to illustrate the application of these revised constructive presence rules:

Example 1. Presence test. H, a U.S. citizen, is engaged in a profession that requires frequent travel. In each of the years 2016 and 2017, H spends 195 days in Possession N and the balance of the year in the United States. In 2018, H spends 160 days in Possession N and the balance of the year in the United States. Thus, H spends a total of 550 days in Possession N for the three-year period consisting of years 2016, 2017, and 2018. Under paragraph (c)(1)(ii) of this section, H satisfies the presence test of paragraph (c) of this section with respect to Possession N for taxable year 2018 because H is present in Possession N for more than the required 549 days during the three-year period of 2016 through 2018 and is present in Possession N for at least 60 days during each of those taxable years. Assuming that in 2018 H does not have a tax home outside of Possession N and does not have a closer connection to the United States or a foreign country under paragraphs (d) and (e) of this section respectively, then regardless of whether H was a bona fide resident of Possession N in 2016 and 2017, H is a bona fide resident of Possession N for taxable year 2018.

Example 2. Presence test. Same facts as Example 1, except that in 2018, H spends 130 days in Possession N, 110 days in foreign countries, and 125 days in the United States. Because H satisfies the requirements of paragraph (c)(3)(i)(D) of this section, 30 of the days spent in foreign countries during 2018 are treated as days of presence in Possession N. Thus, H will be treated as being present for 160 days in Possession N for 2018. Under paragraph (c)(1)(ii) of this section, H meets the presence test of paragraph (c) of this section with respect to Possession N for taxable year 2018 because H is present in Possession N for 550 days (more than the required 549 days) during the three-year period of 2016 through 2018 and is present in Possession N for at least 60 days in each of those taxable years. As in Example 1, assuming that in 2018 H does not have a tax home outside of Possession N and does not have a closer connection to the United States or a foreign country under paragraphs (d) and (e) of this section respectively, then regardless of whether H was a bona fide resident of Possession N in 2016 and 2017, H is a bona fide resident of Possession N in 2018.

Example 3. Presence test. Same facts as Example 1, except that in 2018, H spends 130 days in Possession N, 100 days in foreign countries, and 135 days in the United States. Under these facts, H does not satisfy paragraph (c)(1)(ii) of this section for taxable year 2018 because H is present in Possession N for only 520 days (less than the required 549 days) during the three-year period of 2016 through 2018. The rule of paragraph (c)(3)(i)(D) of this section (treating up to 30 days spent in foreign countries as days of presence in Possession N) is not available because H fails to satisfy the condition that H be present more days in Possession N than in the United States during 2018, determined without regard to the application of paragraph (c)(3)(i)(D) of this section.

Example 4. Presence test. Same facts as Example 1, except that in 2016, H spends 360 days in Possession N and six days in the United States; in 2017, H spends 45 days in Possession N, 290 days in foreign countries, and 30 days in the United States; and in 2018, H spends 180 days in Possession N and 185 days in the United States. Under these facts, H does not satisfy paragraph (c)(1)(ii) of this section for taxable year 2018. During the three-year period from 2016 through 2018, H is present in Possession N for 615 days, including 30 of the days spent in foreign countries in 2017, which are treated under paragraph (c)(3)(i)(D) of this section as days of presence in Possession N. Although H is present in Possession N for more than the required 549 days during the three-year period, H is only present for 45 days in Possession N during one of the taxable years (2017) of the period, less than the 60 days of minimum presence required under paragraph (c)(1)(ii) of this section. The rule of paragraph (c)(3)(i)(D) of this section does not apply for purposes of determining whether H is present in Possession N for the 60-day minimum required under paragraph (c)(1)(ii) of this section.

Example 5. Presence test. W, a U.S. citizen, owns a condominium in Possession P where she spends part of the taxable year. W also owns a house in State N near her grown children and grandchildren. W is retired and her income consists solely of pension payments, dividends, interest, and Social Security benefits. For 2016, W spends 145 days in Possession P, 101 days in Europe and Asia on vacation, and 120 days in State N. For taxable year 2016, W is not present in Possession P for at least 183 days, is present in the United States for more than 90 days, and has a significant connection to the United States by reason of her permanent home. However, under paragraph (c)(1)(iv) of this section, W still satisfies the presence test of paragraph (c) of this section with respect to Possession P for taxable year 2016 because she has no earned income in the United States and is present for more days in Possession P than in the United States.

The preamble to the proposed regulations provides that taxpayers may rely on these proposed regulations for any taxable year beginning on or after August 27, 2015.