26 U.S.C. § 865 : US Code - Section 865: Source rules for personal property sales

Search 26 U.S.C. § 865 : US Code - Section 865: Source rules for personal property sales

(a) General rule
Except as otherwise provided in this section, income from the
sale of personal property -
(1) by a United States resident shall be sourced in the United
States, or
(2) by a nonresident shall be sourced outside the United
States.
(b) Exception for inventory property
In the case of income derived from the sale of inventory property
-
(1) this section shall not apply, and
(2) such income shall be sourced under the rules of sections
861(a)(6), 862(a)(6), and 863.
Notwithstanding the preceding sentence, any income from the sale of
any unprocessed timber which is a softwood and was cut from an area
in the United States shall be sourced in the United States and the
rules of sections 862(a)(6) and 863(b) shall not apply to any such
income. For purposes of the preceding sentence, the term
"unprocessed timber" means any log, cant, or similar form of
timber.
(c) Exception for depreciable personal property
(1) In general
Gain (not in excess of the depreciation adjustments) from the
sale of depreciable personal property shall be allocated between
sources in the United States and sources outside the United
States -
(A) by treating the same proportion of such gain as sourced
in the United States as the United States depreciation
adjustments with respect to such property bear to the total
depreciation adjustments, and
(B) by treating the remaining portion of such gain as sourced
outside the United States.
(2) Gain in excess of depreciation
Gain (in excess of the depreciation adjustments) from the sale
of depreciable personal property shall be sourced as if such
property were inventory property.
(3) United States depreciation adjustments
For purposes of this subsection -
(A) In general
The term "United States depreciation adjustments" means the
portion of the depreciation adjustments to the adjusted basis
of the property which are attributable to the depreciation
deductions allowable in computing taxable income from sources
in the United States.
(B) Special rule for certain property
Except in the case of property of a kind described in section
168(g)(4), if, for any taxable year -
(i) such property is used predominantly in the United
States, or
(ii) such property is used predominantly outside the United
States,
all of the depreciation deductions allowable for such year
shall be treated as having been allocated to income from
sources in the United States (or, where clause (ii) applies,
from sources outside the United States).
(4) Other definitions
For purposes of this subsection -
(A) Depreciable personal property
The term "depreciable personal property" means any personal
property if the adjusted basis of such property includes
depreciation adjustments.
(B) Depreciation adjustments
The term "depreciation adjustments" means adjustments
reflected in the adjusted basis of any property on account of
depreciation deductions (whether allowed with respect to such
property or other property and whether allowed to the taxpayer
or to any other person).
(C) Depreciation deductions
The term "depreciation deductions" means any deductions for
depreciation or amortization or any other deduction allowable
under any provision of this chapter which treats an otherwise
capital expenditure as a deductible expense.
(d) Exception for intangibles
(1) In general
In the case of any sale of an intangible -
(A) this section shall apply only to the extent the payments
in consideration of such sale are not contingent on the
productivity, use, or disposition of the intangible, and
(B) to the extent such payments are so contingent, the source
of such payments shall be determined under this part in the
same manner as if such payments were royalties.
(2) Intangible
For purposes of paragraph (1), the term "intangible" means any
patent, copyright, secret process or formula, goodwill,
trademark, trade brand, franchise, or other like property.
(3) Special rule in the case of goodwill
To the extent this section applies to the sale of goodwill,
payments in consideration of such sale shall be treated as from
sources in the country in which such goodwill was generated.
(4) Coordination with subsection (c)
(A) Gain not in excess of depreciation adjustments sourced
under subsection (c)
Notwithstanding paragraph (1), any gain from the sale of an
intangible shall be sourced under subsection (c) to the extent
such gain does not exceed the depreciation adjustments with
respect to such intangible.
(B) Subsection (c)(2) not to apply to intangibles
Paragraph (2) of subsection (c) shall not apply to any gain
from the sale of an intangible.
(e) Special rules for sales through offices or fixed places of
business
(1) Sales by residents
(A) In general
In the case of income not sourced under subsection (b), (c),
(d)(1)(B) or (3), or (f), if a United States resident maintains
an office or other fixed place of business in a foreign
country, income from sales of personal property attributable to
such office or other fixed place of business shall be sourced
outside the United States.
(B) Tax must be imposed
Subparagraph (A) shall not apply unless an income tax equal
to at least 10 percent of the income from the sale is actually
paid to a foreign country with respect to such income.
(2) Sales by nonresidents
(A) In general
Notwithstanding any other provisions of this part, if a
nonresident maintains an office or other fixed place of
business in the United States, income from any sale of personal
property (including inventory property) attributable to such
office or other fixed place of business shall be sourced in the
United States. The preceding sentence shall not apply for
purposes of section 971 (defining export trade corporation).
(B) Exception
Subparagraph (A) shall not apply to any sale of inventory
property which is sold for use, disposition, or consumption
outside the United States if an office or other fixed place of
business of the taxpayer in a foreign country materially
participated in the sale.
(3) Sales attributable to an office or other fixed place of
business
The principles of section 864(c)(5) shall apply in determining
whether a taxpayer has an office or other fixed place of business
and whether a sale is attributable to such an office or other
fixed place of business.
(f) Stock of affiliates
If -
(1) a United States resident sells stock in an affiliate which
is a foreign corporation,
(2) such sale occurs in a foreign country in which such
affiliate is engaged in the active conduct of a trade or
business, and
(3) more than 50 percent of the gross income of such affiliate
for the 3-year period ending with the close of such affiliate's
taxable year immediately preceding the year in which the sale
occurred was derived from the active conduct of a trade or
business in such foreign country,
any gain from such sale shall be sourced outside the United States.
For purposes of paragraphs (2) and (3), the United States resident
may elect to treat an affiliate and all other corporations which
are wholly owned (directly or indirectly) by the affiliate as one
corporation.
(g) United States resident; nonresident
For purposes of this section -
(1) In general
Except as otherwise provided in this subsection -
(A) United States resident
The term "United States resident" means -
(i) any individual who -
(I) is a United States citizen or a resident alien and
does not have a tax home (as defined in section 911(d)(3))
in a foreign country, or
(II) is a nonresident alien and has a tax home (as so
defined) in the United States, and
(ii) any corporation, trust, or estate which is a United
States person (as defined in section 7701(a)(30)).
(B) Nonresident
The term "nonresident" means any person other than a United
States resident.
(2) Special rules for United States citizens and resident aliens
For purposes of this section, a United States citizen or
resident alien shall not be treated as a nonresident with respect
to any sale of personal property unless an income tax equal to at
least 10 percent of the gain derived from such sale is actually
paid to a foreign country with respect to that gain.
(3) Special rule for certain stock sales by residents of Puerto
Rico
Paragraph (2) shall not apply to the sale by an individual who
was a bona fide resident of Puerto Rico during the entire taxable
year of stock in a corporation if -
(A) such corporation is engaged in the active conduct of a
trade or business in Puerto Rico, and
(B) more than 50 percent of its gross income for the 3-year
period ending with the close of such corporation's taxable year
immediately preceding the year in which such sale occurred was
derived from the active conduct of a trade or business in
Puerto Rico.
For purposes of the preceding sentence, the taxpayer may elect to
treat a corporation and all other corporations which are wholly
owned (directly or indirectly) by such corporation as one
corporation.
(h) Treatment of gains from sale of certain stock or intangibles
and from certain liquidations
(1) In general
In the case of gain to which this subsection applies -
(A) such gain shall be sourced outside the United States, but
(B) subsections (a), (b), and (c) of section 904 and sections
902, 907, and 960 shall be applied separately with respect to
such gain.
(2) Gain to which subsection applies
This subsection shall apply to -
(A) Gain from sale of certain stock or intangibles
Any gain -
(i) which is from the sale of stock in a foreign
corporation or an intangible (as defined in subsection
(d)(2)) and which would otherwise be sourced in the United
States under this section,
(ii) which, under a treaty obligation of the United States
(applied without regard to this section), would be sourced
outside the United States, and
(iii) with respect to which the taxpayer chooses the
benefits of this subsection.
(B) Gain from liquidation in possession
Any gain which is derived from the receipt of any
distribution in liquidation of a corporation -
(i) which is organized in a possession of the United
States, and
(ii) more than 50 percent of the gross income of which
during the 3-taxable year period ending with the close of the
taxable year immediately preceding the taxable year in which
the distribution is received is from the active conduct of a
trade or business in such possession.
(i) Other definitions
For purposes of this section -
(1) Inventory property
The term "inventory property" means personal property described
in paragraph (1) of section 1221(a).
(2) Sale includes exchange
The term "sale" includes an exchange or any other disposition.
(3) Treatment of possessions
Any possession of the United States shall be treated as a
foreign country.
(4) Affiliate
The term "affiliate" means a member of the same affiliated
group (within the meaning of section 1504(a) without regard to
section 1504(b)).
(5) Treatment of partnerships
In the case of a partnership, except as provided in
regulations, this section shall be applied at the partner level.
(j) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purpose of this section,
including regulations -
(1) relating to the treatment of losses from sales of personal
property,
(2) applying the rules of this section to income derived from
trading in futures contracts, forward contracts, options
contracts, and other instruments, and
(3) providing that, subject to such conditions (which may
include provisions comparable to section 877) as may be provided
in such regulations, subsections (e)(1)(B) and (g)(2) shall not
apply for purposes of sections 931, 933, and 936.
(k) Cross references
(1) For provisions relating to the characterization as
dividends for source purposes of gains from the sale of stock
in certain foreign corporations, see section 1248.
(2) For sourcing of income from certain foreign currency
transactions, see section 988.