Frequently Asked Questions
Who is eligible for the Treaty-Based Sourcing Election?
Applies to sales of stock in foreign corporations or intangibles where a U.S. treaty provides favorable sourcing rules.
How does the Treaty-Based Sourcing Election work?
Taxpayers can elect to source gain from the sale of certain stock or intangibles outside the U.S. if a treaty obligation would otherwise source it that way.
What law authorizes the Treaty-Based Sourcing Election?
The Treaty-Based Sourcing Election is authorized under IRC §865(h) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §865
Source: Internal Revenue Code, Title 26, United States Code
§ 865. Source rules for personal property sales(a) General ruleExcept 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 propertyIn 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 generalGain (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 depreciationGain (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 adjustmentsFor purposes of this subsection—(A) In generalThe 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 propertyExcept 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 definitionsFor purposes of this subsection—(A) Depreciable personal propertyThe term “depreciable personal property” means any personal property if the adjusted basis of such property includes depreciation adjustments.
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