Sourcing ' Personal Property

• Published date: 18 March 2022
• Subject Matter: Tax, Income Tax, Tax Authorities
• Law Firm: Freeman Law
• Author: Jason Freeman

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.

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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...