
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC865]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
  Subchapter N--Tax Based on Income From Sources Within or Without the 
                              United States
 
 PART I--SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME
 
Sec. 865. Source rules for personal property sales


(a) General rule

    Except 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 property

    In 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 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--
            (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 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.

             (3) United States depreciation adjustments

        For purposes of this subsection--

        (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.

        (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) 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 definitions

        For purposes of this subsection--

        (A) Depreciable personal property

            The term ``depreciable personal property'' means any 
        personal property if the adjusted basis of such property 
        includes depreciation adjustments.

        (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).

        (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.

(d) Exception for intangibles

                           (1) In general

        In the case of any sale of an intangible--
            (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
            (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.

                           (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.

              (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.

                (4) Coordination with subsection (c)

        (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.

        (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.

(e) Special rules for sales through offices or fixed places of business

                       (1) Sales by residents

        (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.

        (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.

                      (2) Sales by nonresidents

        (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).

        (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.

    (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.

(f) Stock of affiliates

    If--
        (1) a United States resident sells stock in an affiliate which 
    is a foreign corporation,
        (2) such sale occurs in a foreign country in which such 
    affiliate is engaged in the active conduct of a trade or business, 
    and
        (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.

(g) United States resident; nonresident

    For purposes of this section--

                           (1) In general

        Except as otherwise provided in this subsection--

        (A) United States resident

            The term ``United States resident'' means--
                (i) any individual who--
                    (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
                    (II) is a nonresident alien and has a tax home (as 
                so defined) in the United States, and

                (ii) any corporation, trust, or estate which is a United 
            States person (as defined in section 7701(a)(30)).

        (B) Nonresident

            The term ``nonresident'' means any person other than a 
        United States resident.

     (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.

      (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--
            (A) such corporation is engaged in the active conduct of a 
        trade or business in Puerto Rico, and
            (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.

(h) Treatment of gains from sale of certain stock or intangibles and 
        from certain liquidations

                           (1) In general

        In the case of gain to which this subsection applies--
            (A) such gain shall be sourced outside the United States, 
        but
            (B) subsections (a), (b), and (c) of section 904 and 
        sections 902, 907, and 960 shall be applied separately with 
        respect to such gain.

                (2) Gain to which subsection applies

        This subsection shall apply to--

        (A) Gain from sale of certain stock or intangibles

            Any gain--
                (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,
                (ii) which, under a treaty obligation of the United 
            States (applied without regard to this section), would be 
            sourced outside the United States, and
                (iii) with respect to which the taxpayer chooses the 
            benefits of this subsection.

        (B) Gain from liquidation in possession

            Any gain which is derived from the receipt of any 
        distribution in liquidation of a corporation--
                (i) which is organized in a possession of the United 
            States, and
                (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) Other definitions

    For purposes of this section--

                       (1) Inventory property

        The term ``inventory property'' means personal property 
    described in paragraph (1) of section 1221(a).

                     (2) Sale includes exchange

        The term ``sale'' includes an exchange or any other disposition.

                    (3) Treatment of possessions

        Any possession of the United States shall be treated as a 
    foreign country.

                            (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)).

                    (5) Treatment of partnerships

        In the case of a partnership, except as provided in regulations, 
    this section shall be applied at the partner level.

(j) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purpose of this section, including 
regulations--
        (1) relating to the treatment of losses from sales of personal 
    property,
        (2) applying the rules of this section to income derived from 
    trading in futures contracts, forward contracts, options contracts, 
    and other instruments, and
        (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, 933, and 936.

(k) Cross references

            (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.
            (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; 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. 103-66, 
title XIII, Sec. 13239(c), Aug. 10, 1993, 107 Stat. 509; Pub. L. 104-
188, title I, Sec. 1704(f)(4)(A), Aug. 20, 1996, 110 Stat. 1880; Pub. L. 
106-170, title V, Sec. 532(c)(1)(E), Dec. 17, 1999, 113 Stat. 1930.)


                               Amendments

    1999--Subsec. (i)(1). Pub. L. 106-170 substituted ``section 
1221(a)'' for ``section 1221''.
    1996--Subsec. (b)(2). Pub. L. 104-188 substituted ``863'' for 
``863(b)''.
    1993--Subsec. (b). Pub. L. 103-66 inserted at end ``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.''
    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 1999 Amendment

    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 Dec. 17, 1999, see section 532(d) of Pub. 
L. 106-170, set out as a note under section 170 of this title.


                    Effective Date of 1996 Amendment

    Section 1704(f)(4)(B) of Pub. L. 104-188 provided that: ``The 
amendment made by subparagraph (A) [amending this section] shall take 
effect as if included in the amendments made by section 1211 of the Tax 
Reform Act of 1986 [Pub. L. 99-514].''


                    Effective Date of 1993 Amendment

    Section 13239(e) of Pub. L. 103-66 provided that: ``The amendments 
made by this section [amending this section and sections 927, 954, and 
993 of this title] shall apply to sales, exchanges, or other 
dispositions after the date of the enactment of this Act [Aug. 10, 
1993].''


                    Effective Date of 1990 Amendment

    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 Amendment

    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 Code of 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 directed Secretary of the Treasury 
or his delegate to conduct a study of source rules for sales of 
inventory property and, not later than Sept. 30, 1987 (due date extended 
to Jan. 1, 1992, by Pub. L. 101-508, title XI, Sec. 11831(b), Nov. 5, 
1990, 104 Stat. 1388-559), to submit to Committee on Ways and Means of 
House of Representatives and Committee on Finance of Senate a report of 
such study (together with recommendations he deemed advisable).

                  Section Referred to in Other Sections

    This section is referred to in sections 861, 862, 863, 954 of this 
title.
