Sourcing – Personal Property

Generally, income from the sale of personal property is "sourced" to the residence of the seller. If the seller is a U.S. tax resident the source of the income is deemed to be the United States I.R.C. § 865(a)(1). On the other hand, if the seller is a nonresident, the income is generally foreign sourced. I.R.C. § 865(a)(2).

The policy behind the residence rule applicable to determine the source of income from the sale of noninventory personal property was clearly stated by Congress as follows:

Source rules for sales of personal property should reflect the location of the economic activity generating the income at issue or the place of utilization of the assets generating that income. In addition, source rules should operate clearly without the necessity for burdensome factual determinations, limit erosion of the U.S. tax base and, in connection with the foreign tax credit limitation, generally not treat as foreign income any income that foreign countries do not or should not tax.

[...]

Because the residence of the seller generally is the location of much of the underlying activity that generates income derived from sales of personal property, the committee believes that sales income generally should be sourced there.

Rept. 99–426, at 360 (1985), 1986–3 C.B. (Vol.2) 1, 360. Courts have recognized the policy behind the residence rule established in section 865, "In enacting section 865, Congress determined that "the residence of the seller generally is the location of much of the underlying activity that generates income derived from sales of personal property". See Int'l Multifoods Corp. v. Comm'r of Internal Revenue, 108 T.C. 579, 589 (U.S.T.C. 1997).In this regard, the term "sale" includes any exchange or other disposition. I.R.C. § 865(i)(2).

For income sourcing purposes, the concept of residency is modified from the general tax definition of residency and is based on the location of the seller's "tax home". A U.S. citizen or resident alien is deemed to be a U.S. resident for purposes of determining the source of personal property, if such individual does not have a tax home outside the United States. A nonresident alien is also deemed to be a United States resident if he has a tax home within the United States. I.R.C. § 865(g)(1)(A). For these purposes, the concept of "tax home" is defined as the individual's home for purposes of section § 162(a)(2). I.R.C. § 865(g)(1)(A)(i)(I), I.R.C. § 911(d)(3) and I.R.C. § 162(a)(2). However, an individual may not be treated as having a tax home in a foreign country for any period for which he has an abode in the United States. I.R.C. § 911(d)(3).

In applying the sourcing rule based on the residence of the seller under section § 865(a), for example, the Courts have ruled that a stock loss realized by a U.S. resident on the sale of stock of a foreign corporation constituted U.S. source loss based under the residence of the seller. See International Multifoods Corp., et al., 108 TC 579, 589. In other cases not directly related to section § 865(a), the Courts have mentioned that if "a U.S. resident receives dividends from foreign corporations or gains from sales of stocks in such corporations, any such income is generally taxed. See secs. 862(a)(2), 865(a)(1).", referring to the applicability of section § 865(a) to the sales of stock in foreign corporations. See Roberto Toso, et al. v. Commissioner, 151 TC 27, 35.

Following the residence rule, for example, in cases where exists losses with respect to stock, the loss is allocated to the class of gross income and with respect to which gain from a sale of such stock would give rise in the hands of the seller. For example, loss recognized by a U.S. resident on the sale of stock generally is allocated to reduce U.S. source income. Treas. Reg. § 1.865-2(a)(1).

In a partnership, the partner's distributive share of loss recognized by the partnership with respect to stock is allocated and apportioned as if the partner had recognized the loss. If the loss is attributed to an office or fixed place of business of the partnership, such office or fixed place of business is considered to be the office of the partner for purposes of allocating the loss. Treas. Reg. § 1.865-2(c).

The general rule for sourcing income from the sale of personal property has several exceptions, including the following:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.