I.R.C. § 865(a) General Rule —
Except as otherwise provided in this section, income from the sale of personal property—
I.R.C. § 865(a)(1) —
by a United States resident shall be sourced in the United States, or
I.R.C. § 865(a)(2) —
by a nonresident shall be sourced outside the United States.
I.R.C. § 865(b) Exception For Inventory Property —
In the case of income derived from the sale of inventory property—
I.R.C. § 865(b)(1) —
this section shall not apply, and
I.R.C. § 865(b)(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. 1
1 Amendments:
Section 13239(c) of the Revenue Reconciliation Act of 1993 amended subsection
(b) of section 865 by adding at the end the following: “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.”
I.R.C. § 865(c) Exception For Depreciable Personal Property
I.R.C. § 865(c)(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—
I.R.C. § 865(c)(1)(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
I.R.C. § 865(c)(1)(B) —
by treating the remaining portion of such gain as sourced outside the United States.
I.R.C. § 865(c)(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.
I.R.C. § 865(c)(3) United States Depreciation Adjustments —
For purposes of this subsection—
I.R.C. § 865(c)(3)(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.
I.R.C. § 865(c)(3)(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.R.C. § 865(c)(3)(B)(i) —
such property is used predominantly in the United States, or
I.R.C. § 865(c)(3)(B)(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).
I.R.C. § 865(c)(4) Other Definitions —
For purposes of this subsection—
I.R.C. § 865(c)(4)(A) Depreciable Personal Property —
The term “depreciable personal property” means any personal property if the adjusted
basis of such property includes depreciation adjustments.
I.R.C. § 865(c)(4)(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).
I.R.C. § 865(c)(4)(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.
I.R.C. § 865(d) Exception For Intangibles
I.R.C. § 865(d)(1) In General —
In the case of any sale of an intangible—
I.R.C. § 865(d)(1)(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
I.R.C. § 865(d)(1)(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.
I.R.C. § 865(d)(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.
I.R.C. § 865(d)(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.
I.R.C. § 865(d)(4) Coordination With Subsection (c)
I.R.C. § 865(d)(4)(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.
I.R.C. § 865(d)(4)(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.
I.R.C. § 865(e) Special Rules For Sales Through Offices Or Fixed Places Of Business
I.R.C. § 865(e)(1) Sales By Residents
I.R.C. § 865(e)(1)(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.
I.R.C. § 865(e)(1)(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.
I.R.C. § 865(e)(2) Sales By Nonresidents
I.R.C. § 865(e)(2)(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).
I.R.C. § 865(e)(2)(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.
I.R.C. § 865(e)(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.
I.R.C. § 865(f) Stock Of Affiliates —
If—
I.R.C. § 865(f)(1) —
a United States resident sells stock in an affiliate which is a foreign corporation,
I.R.C. § 865(f)(2) —
such sale occurs in a foreign country in which such affiliate is engaged in the active
conduct of a trade or business, and
I.R.C. § 865(f)(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.
I.R.C. § 865(g) United States Resident; Nonresident —
For purposes of this section—
I.R.C. § 865(g)(1) In General —
Except as otherwise provided in this subsection—
I.R.C. § 865(g)(1)(A) United States Resident —
The term “United States resident” means—
I.R.C. § 865(g)(1)(A)(i) —
any individual who—
I.R.C. § 865(g)(1)(A)(i)(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
I.R.C. § 865(g)(1)(A)(i)(II) —
is a nonresident alien and has a tax home (as so defined) in the United States, and
I.R.C. § 865(g)(1)(A)(ii) —
any corporation, trust, or estate which is a United States person (as defined in
section 7701(a)(30)).
I.R.C. § 865(g)(1)(B) Nonresident —
The term “nonresident” means any person other than a United States resident.
I.R.C. § 865(g)(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.
I.R.C. § 865(g)(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—
I.R.C. § 865(g)(3)(A) —
such corporation is engaged in the active conduct of a trade or business in Puerto
Rico, and
I.R.C. § 865(g)(3)(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.
I.R.C. § 865(h) Treatment Of Gains From Sale Of Certain Stock Or Intangibles And From Certain Liquidations
I.R.C. § 865(h)(1) In General —
In the case of gain to which this subsection applies—
I.R.C. § 865(h)(1)(A) —
such gain shall be sourced outside the United States, but
I.R.C. § 865(h)(1)(B) —
subsections
(a), (b), and (c) of section 904 and
sections 907 and 960 shall be applied separately with respect to such gain.
I.R.C. § 865(h)(2) Gain To Which Subsection Applies —
This subsection shall apply to—
I.R.C. § 865(h)(2)(A) Gain From Sale Of Certain Stock Or Intangibles —
Any gain—
I.R.C. § 865(h)(2)(A)(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,
I.R.C. § 865(h)(2)(A)(ii) —
which, under a treaty obligation of the United States (applied without regard to
this section), would be sourced outside the United States, and
I.R.C. § 865(h)(2)(A)(iii) —
with respect to which the taxpayer chooses the benefits of this subsection.
I.R.C. § 865(h)(2)(B) Gain From Liquidation In Possession —
Any gain which is derived from the receipt of any distribution in liquidation of
a corporation—
I.R.C. § 865(h)(2)(B)(i) —
which is organized in a possession of the United States, and
I.R.C. § 865(h)(2)(B)(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.R.C. § 865(i) Other Definitions —
For purposes of this section—
I.R.C. § 865(i)(1) Inventory Property —
The term “inventory property” means personal property described in paragraph (1)
of section 1221(a).
I.R.C. § 865(i)(2) Sale Includes Exchange —
The term “sale” includes an exchange or any other disposition.
I.R.C. § 865(i)(3) Treatment Of Possessions —
Any possession of the United States shall be treated as a foreign country.
I.R.C. § 865(i)(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)).
I.R.C. § 865(i)(5) Treatment Of Partnerships —
In the case of a partnership, except as provided in regulations, this section shall
be applied at the partner level.
I.R.C. § 865(j) Regulations —
The Secretary shall prescribe such regulations as may be necessary or appropriate
to carry out the purpose of this section, including regulations—
I.R.C. § 865(j)(1) —
relating to the treatment of losses from sales of personal property,
I.R.C. § 865(j)(2) —
applying the rules of this section to income derived from trading in futures contracts,
forward contracts, options contracts, and other instruments, and
I.R.C. § 865(j)(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 and 933.
I.R.C. § 865(k) Cross References
I.R.C. § 865(k)(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.
I.R.C. § 865(k)(2) —
For sourcing of income from certain foreign currency transactions, see section 988.
(Added Pub. L. 99-514, title XII, Sec. 1211(a), Oct. 22, 1986, 100 Stat. 2533, and amended Pub. L. 100-647, title I, Sec. 1012(d)(1)-(6), (8), (9), (11),
(12), Nov. 10, 1988, 102 Stat. 3497-3499;
Pub. L. 101-508, title XI, Sec. 11813(b)(18), Nov. 5, 1990, 104 Stat.
1388-555; Pub. L. 104-188, title I, Sec. 1704(f)(4)(A), Aug. 20, 1996, 110
Stat. 1755; Pub. L. 106-170, title V, Sec. 532(c), Dec. 17, 1999, 113 Stat 1860; Pub. L. 115-97, title I, Sec. 14301(c)(6), Dec. 22, 2017, 131 Stat. 2054; Pub. L. 115-141, Div. U, title IV, Sec. 401(d)(1)(D)(xi), Mar. 23, 2018, 132 Stat. 348.)
BACKGROUND NOTES
AMENDMENTS
2018--Subsec. (j)(3). Pub. L. 115-141, Div. U, Sec. 401(d)(1)(D)(xi), amended par. (3) by substituting “and 933” for “,
933, and 936”.
2017--Subsec.
(h)(1)(B). Pub. L. 115-97, Sec. 14301(c)(6), amended subpar. (B) by substituting “907”
for “902, 907,”.
1999--Subsec. (i)(1). Pub. L. 106-170, Sec. 532(c)(1), substituted “section 1221(a)” for “section 1221”.
1996--Subsec. (b)(2). Pub. L. 104-188 substituted “863” for “863(b)”.
1990--Subsec. (c)(3)(B). Pub. L. 101-508 substituted ‘section 168(g)(4)’
for ‘section 48(a)(2)(B)’.
1988--Subsec. (d)(2). Pub. L. 100-647, Sec. 1012(d)(12), inserted ‘franchise,’ after ‘trade brand,’.
Subsec. (d)(4). Pub. L. 100-647, Sec. 1012(d)(1), added par. (4).
Subsec. (e)(1)(A). Pub. L. 100-647, Sec. 1012(d)(2),
(9), substituted ‘(d)(1)(B) or (3)’ for ‘(d)’ and ‘in a foreign country’
for first reference to ‘outside the United States’.
Subsec. (e)(2)(B). Pub. L. 100-647, Sec. 1012(d)(5), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows:
‘Subparagraph (A) shall not apply to -
‘(i) 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
outside the United States materially participated in the sale, or
‘(ii) any amount included in gross income under section 951(a)(1)(A).’
Subsec. (f). Pub. L. 100-647, Sec. 1012(d)(4), amended subsec. (f) generally. Prior to amendment, subsec. (f) read as follows:
‘If -
‘(1) a United States resident sells stock in an affiliate which is a foreign corporation,
‘(2) such affiliate is engaged in the active conduct of a trade or business, and
‘(3) such sale occurs in the foreign country in which the affiliate derived more than
50 percent of its gross income for the 3-year period ending with the close of the
affiliate's taxable year immediately preceding the year during which such sale occurred,
any gain from such sale shall be sourced outside the United States.'
Subsec. (g)(1)(A)(i). Pub. L. 100-647, Sec. 1012(d)(11), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows:
‘any individual who has a tax home (as defined in section 911(d)(3))
in the United States, and’.
Subsec. (g)(1)(A)(ii). Pub. L. 100-647, Sec. 1012(d)(3)(A), struck out ‘partnership,’ after ‘corporation,’.
Subsec. (g)(3). Pub. L. 100-647, Sec. 1012(d)(6)(A), added par. (3).
Subsec. (h). Pub. L. 100-647, Sec. 1012(d)(8), added subsec. (h) and redesignated former subsec. (h) as (i).
Pub. L. 100-647, Sec. 1012(d)(3)(B), added par. (5) to subsec. (h)
prior to redesignation as subsec. (i).
Subsec. (i). Pub. L. 100-647, Sec. 1012(d)(8), redesignated former subsec.
(h) as (i). Former subsec. (i) redesignated (j).
Pub. L. 100-647, Sec. 1012(d)(6)(B), added par. (3) to subsec. (i)
prior to redesignation as subsec. (j).
Subsec. (i)(5). Pub. L. 100-647, Sec. 1012(d)(3)(B), added par. (5) to subsec. (h) prior to redesignation as subsec. (i).
Subsec. (j). Pub. L. 100-647, Sec. 1012(d)(8), redesignated former subsec.
(i) as (j). Former subsec. (j) redesignated (k).
Subsec. (j)(3). Pub. L. 100-647, Sec. 1012(d)(6)(B), added par. (3) to subsec. (i) prior to redesignation as subsec. (j).
Subsec. (k). Pub. L. 100-647, Sec. 1012(d)(8), redesignated former subsec.
(j) as (k).
EFFECTIVE DATE OF 2018 AMENDMENTS
Amendment by Pub. L. 115-141, Div. U, Sec. 401(d), effective March 23, 2018. Section 401(e) of Pub. L. 115-141, Div. U, provided the following savings provision:
“(e) GENERAL SAVINGS PROVISION WITH RESPECT TO DEADWOOD PROVISIONS.—If—
“(1) any provision amended or repealed by the amendments made by subsection (b) or
(d)
applied to—
“(A) any transaction occurring before the date of the enactment of this Act,
“(B) any property acquired before such date of enactment, or
“(C) any item of income, loss, deduction, or credit taken into account before such
date of enactment, and
“(2) the treatment of such transaction, property, or item under such provision would
(without regard to the amendments or repeals made by such subsection)
affect the liability for tax for periods ending after such date of enactment,
“nothing in the amendments or repeals made by this section shall be construed to affect
the treatment of such transaction, property, or item for purposes of determining liability
for tax for periods ending after such date of enactment.”
EFFECTIVE DATE OF 2017 AMENDMENTS
Amendment by Pub. L. 115-97, Sec. 14301(c)(6), effective for taxable years of foreign corporations beginning after December 31,
2017, and for taxable years of U.S. shareholders in which or with which such taxable
years of foreign corporations end.
EFFECTIVE DATE OF 1999 AMENDMENTS
Amendment by Pub. L. 106-170 applicable to any instrument held, acquired, or entered into, any transaction entered
into, and supplies held or acquired on or after the date of the enactment of this
Act [Enacted: Dec. 17, 1999].
EFFECTIVE DATE OF 1996 AMENDMENTS
Amendment by Pub. L. 104-188 applicable as if included in the amendments made by section 1211 of the Tax Reform
Act of 1986.
EFFECTIVE DATE OF 1990 AMENDMENTS
Amendment by Pub. L. 101-508 applicable to property placed in service after Dec. 31, 1990, but not applicable
to any transition property (as defined in section 49(e) of this title), any property
with respect to which qualified progress expenditures were previously taken into account
under section 46(d) of this title, and any property described in section 46(b)(2)(C)
of this title, as such sections were in effect on Nov. 4, 1990, see section 11813(c)
of Pub. L. 101-508, set out as a note under section 29 of this title.
EFFECTIVE DATE OF 1988 AMENDMENTS
Section 1012(d)(5) of Pub. L. 100-647 provided that the amendment made by that section is effective with respect to taxable
years beginning after Dec. 31, 1987.
Amendment by section 1012(d)(1)-(4), (6), (8),
(9), (11), (12) of Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax
Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.
EFFECTIVE DATE
Section 1211(c) of Pub. L. 99-514 provided that:
‘(1) In general. - Except as provided in paragraph
(2), the amendments made by this section (enacting this section, amending sections
861 to 864, 871, 881, and 904 of this title, and enacting provisions set out below)
shall apply to taxable years beginning after December 31, 1986.
‘(2) Special rule for foreign persons. - In the case of any foreign person other than
any controlled foreign corporations
(within the meaning of section 957(a)
of the Internal Revenue Codeof 1954 (now 1986)), the amendments made by this section shall apply to transactions
entered into after March 18, 1986.'
SAVINGS PROVISION
For provisions that nothing in amendment by Pub. L. 101-508 be construed to affect treatment of certain transactions occurring, property acquired,
or items of income, loss, deduction, or credit taken into account prior to Nov. 5,
1990, for purposes of determining liability for tax for periods ending after Nov.
5, 1990, see section 11821(b) of Pub. L. 101-508, set out as a note under section 29 of this title.
APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99-514 IN RELATION TO TREATY OBLIGATIONS OF UNITED STATES
For nonapplication of amendment by section 1211(a)
of Pub. L. 99-514 (enacting this section) to the extent application of such amendment would be contrary
to any treaty obligation of the United States in effect on Oct. 22, 1986, with provision
that for such purposes any amendment by title I of Pub. L. 100-647 be treated as if it had been included in the provision of Pub. L. 99-514 to which such amendment relates, see section 1012(aa)(3),
(4) of Pub. L. 100-647, set out as a note under section 861 of this title.
STUDY OF SOURCE RULES FOR SALES OF INVENTORY PROPERTY
Section 1211(d) of Pub. L. 99-514 provided that: ‘The Secretary of the Treasury or his delegate shall conduct a study
of the source rules for sales of inventory property. Not later than September 30,
1987, the Secretary of the Treasury or his delegate shall submit to the Committee
on Ways and Means of the House of Representatives and the Committee on Finance of
the Senate a report of such study (together with such recommendations as he may deem
advisable).’
(The due date for the report referred to in section 1211(d) of Pub. L. 99-514, set out above, extended to Jan. 1, 1992, by Pub. L. 101-508, title XI, Sec. 11831(b), Nov. 5, 1990, 104 Stat. 1388-559.)
