The Source Of Income From The Sale Of Personal Property

• Published date: 13 April 2022
• Subject Matter: Tax, Tax Treaties, Income Tax
• Law Firm: Freeman Law
• Author: Jason Freeman

The Source of Income from the Sale of 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. On the other hand, if the seller is a nonresident, the income is generally foreign-sourced.

The Congressional policy behind this residence rule provides 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 likewise recognized the policy behind the residence rule, acknowledging that "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.

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 they do not have a tax home outside the United States. Likewise, a nonresident alien is deemed to be a United States resident if he has a tax home within the United States. For these purposes, the concept of "tax home" is defined as the individual's home for purposes of section ' 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.

In applying the sourcing rule based on the residence of the seller, for example, the Courts have ruled that a...