Rev. Rul. 78-216

Advice has been requested whether, under the circumstances described below, amounts paid to nonresident alien individuals are "wages" for purposes of section 3401(a) of the Internal Revenue Code of 1954 and whether the services the individuals perform are "employment" for purposes of sections 3121(b) and 3306(c).

A domestic corporation is engaged in the commercial catching, canning, and selling of fish. It operates American fishing vessels of more than 10 net tons that go on fishing trips on the high seas for periods of time ranging up to three or four months.

The vessels depart from a U.S. port and stop in a foreign country to hire citizen-residents of that country as crew members. All services of the crew are performed outside the United States although the vessels do stop at U.S. ports during their voyages for fuel and supplies. Each vessel usually has a crew of about 16 members, including the nonresident aliens hired in the foreign country.

The remuneration paid to nonresident aliens in this case is excepted from wages for purposes of income tax withholding pursuant to section 31.3401(a)(6)-1(b) of the Employment Tax Regulations. That section provides that remuneration paid to a nonresident alien individual (other than a resident of Puerto Rico) for services performed outside the United States is excepted from wages.

Sections 3121(b) and 3306(c) of the Code provide that employment includes any service performed by an employee for an employer, irrespective of the citizenship or residence of either, on or in connection with an American vessel, if the employee is employed on or in connection with such vessel when outside the United States, and if during the performance of the contract for such services and while the employee is employed on the vessel it touches a port in the United States.

The services performed by the nonresident alien crew members are on American vessels that touch U.S. ports during their voyages. Accordingly, the services are included in employment for purposes of sections 3121(b) and 3306(c) of the Code and liability is incurred for the taxes imposed by sections 3101, 3111, and 3301, even though no liability is incurred for income tax withholding pursuant to sections 3401 and 3402.