The source of income from the sale of personal property
Typically, income from the sale of personal property is “derived” from the seller’s residence. If the seller is a US tax resident, the source of income is deemed to be the United States. On the other hand, if the seller is a non-resident, the income is generally from a foreign source.
The Congressional policy behind this residency rule provides the following:
Rules of origin applicable to sales of personal property should reflect the location of the economic activity generating the income in question or the place of use of the assets generating that income. In addition, the source rules should operate clearly without the need for binding factual determinations, limit the erosion of the U.S. tax base and, as part of the foreign tax credit limitation , do not generally treat as foreign income any income that foreign countries do not or should not tax.
Since the seller’s residence is generally the location of much of the underlying activity that generates income from the sale of personal property, the committee believes that sales income should generally come from there.
Rep. 99-426, at 360 (1985), 1986-3 CB (Vol.2) 1, 360. Courts have also acknowledged the policy underlying the residency rule, acknowledging that “Congress has determined that” the vendor’s residence is generally the location of much of the underlying business that generates revenue from of the sale of personal property”. See Int’l Multifoods Corp. vs. Comm’r of Internal Revenue, 108 TC 579, 589 (USTC 1997). In this regard, the term “sale” includes any exchange or other disposition.
For purposes of source of income, the concept of residence is modified from the general tax definition of residence and is based on the location of the seller’s “tax domicile”. 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 he or she does not have a tax domicile outside the United States. Similarly, a nonresident alien is considered a resident of the United States if they have a tax domicile in the United States. For these purposes, the concept of “tax household” is defined as the domicile of the individual for the purposes of § 162(a)(2). However, a natural person cannot be considered to have a tax domicile in a foreign country for any period during which he resides in the United States.
Applying the source rule based on the residency of the seller, for example, courts have ruled that a stock loss realized by a U.S. resident on the sale of shares of a foreign corporation is a source loss. American based on the residency of the seller. seller.
Exceptions to the General Procurement Rule
The general rule for earning income from the sale of personal property is subject to several exceptions. The following list, while not an exhaustive list of such exceptions, contains several of the most common exceptions to the source of income rules:
- 10% foreign income. If a U.S. citizen or resident alien pays foreign income tax of 10% or more on the gain from the sale of personal property, that individual will be treated as a non-resident of the United States and the gain on the sale will be from a foreign source. .
- Inventory sales. Inventory sales are subject to additional rules that may vary depending on several factors.
- Sales of depreciable property. If there is a gain on the sale of depreciable or depreciable tangible personal property, any deduction for depreciation or amortization that was charged against US source income must be recaptured and treated as US source income. The remaining portion of this gain (not exceeding capital cost allowances) is treated as a foreign source. Any gain in excess of capital cost allowances arises as if the property were “inventory property” under IRC 861 to 863. This rule prevents a taxpayer from taking deductions from U.S. source income (which reduces his base in the property) and later avoid tax on the sale of the property through procurement rules.
- Sales of personal property through a US or foreign office or fixed place of business. If a resident of the United States maintains an office or other fixed place of business in a foreign country, the income from the sale of personal property attributable to such office or other fixed place of business arises outside the United States. United. 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 the office or other fixed place of business comes from the United States. However, this does not apply for certain purposes, such as those relating to an export trading company.
- Sales of personal property by a partnership. In the case of a partnership or trust, the source of income is generally determined at the entity level and the characterization applies to the distributive share of the income of the partner or beneficiary. An exception is the sale of personal property by the partnership, in which case the applicable source rule is applied at the partner level rather than at the partnership level.
- Intellectual Property Sales. The source of the gain realized on the sale of intangible property is generally determined by the residence of the taxpayer if there is a fixed price. If the payments depend on the productivity, use or disposition of the intangible, the source of income is determined using the source rules for royalties under IRC 861(a)(4) and 862 (a)(4). To the extent that depreciation deductions have been taken from U.S. or foreign source income from intangible assets (excluding goodwill), the gain that does not exceed the deductions taken is treated as U.S. or foreign source income under IRC 865(c). The gain realized on the sale of goodwill is generally deemed to arise from sources located in the country where the goodwill was generated.
Remember that other exceptions to the general may apply, depending on the circumstances and the type of income.
The United States is a signatory to more than 60 tax treaties. Tax treaties often modify the otherwise applicable source of income rules.
Our interactive Freeman Law tax treaty map provides a link to tax treaty documents for each U.S. partner:
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.