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Proposed regulations: Source of income for certain sales of personal property, inventory

Source of income for certain sales of personal property

The U.S. Treasury Department and IRS this afternoon released for publication in the Federal Register proposed regulations (REG-100956-19) concerning the source of income for certain sales of personal property.

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The 2017 U.S. tax law (Pub. L. No. 115-97)—the law that is often referred to as the “Tax Cuts and Jobs Act”—amended section 863 regarding special rules for determining the source of income, including income partly from within and partly from without (outside) the United States. Specifically, section 863(b) provides for allocation or apportionment of income from the sale or exchange of inventory property produced (in whole or in part) by a taxpayer within and sold or exchanged outside the United States or produced (in whole or in part) by the taxpayer outside and sold or exchanged within the United States solely on the basis of production activities with respect to that inventory. Before the 2017 tax law changes, section 863(b) provided that income from section 863(b)(2) sales would be treated as derived partly from sources within and partly from sources outside the United States but without providing the basis for such allocation or apportionment.

The proposed regulations [PDF 326 KB] (16 pages as published in the Federal Register) include:

  • Measures to modify the rules for determining the source of income from sales of inventory produced within the United States and sold outside the United States or vice versa
  • New rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the United States
  • Modifications to the rules for determining whether foreign-source income is effectively connected with the conduct of a trade or business within the United States

The proposed regulations were published in the Federal Register on December 30, 2019. The purpose of this report is to provide text of the proposed regulations.

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