Irc 861
and a foreign office of the nonresident materially participated in the sale. office or other fixed place of business except when the inventory is sold for use, disposition, or consumption outside the U.S. source to the extent attributable to the U.S. This would add foreign manufacturing assets to the numerator of the Section 863(b) test and add foreign source income.Ī special rule under Section 865(e)(2) applies to sales of personal property, including inventory, by foreign residents attributable to an office or other fixed place of business maintained in the U.S. If tax treaties aren’t available, taxpayers may consider checking the box of foreign manufacturing subsidiaries (such as maquiladoras) to treat them as DREs. The preamble to the final regulations clarifies that taxpayers may resort to treaty re-sourcing rules or competent authority to avoid double taxation. While that income would generally fall within the foreign branch basket, there would be no foreign source income to support the foreign tax credit. The distribution branch is likely to be taxed in the foreign country. Note that the revised Section 863(b) test causes issues with foreign distribution branches that sell inventory produced in the U.S. The component part test is met if the property purchased by the taxpayer is used as a component part of the property that is sold by the taxpayer and the assembly or conversion of the component parts into the final product involves activities that are substantial in nature and generally are considered to constitute the manufacture, production, or construction of property. The substantial transformation test requires that the property be substantially transformed by the taxpayer under a mechanical formula. Under these principles, a taxpayer will be considered to have produced the inventory if it meets the substantial transformation test or the component part test (but not the substantial contribution test). Such adjusted basis is to be measured using the alternative depreciation system under Section 168(g)(2) – bonus depreciation is not allowed because of its distortive effects.Īdditionally, the final regulations incorporate rules to determine when the taxpayer “produces” the inventory by reference to the principles of Treas. The final regulations further maintained the proposed regulations’ position that when production activity takes place both within and without the U.S., income is sourced based on the relative average (beginning and end of year) adjusted basis of production assets located within and without the U.S.
#Irc 861 code#
The final regulations followed the proposed regulations to modify the source rules for 863(b) sales consistent with the changes made to the Code by the TCJA. The TCJA amended Section 863(b) to say that income from 863(b) sales are sourced solely based on the location of production activities. and sold outside the U.S., or vice versa, (an “863(b) sale”) was treated as partly U.S. Before the TCJA, Section 863(b)(2) provided that the source of income from sales of inventory produced within the U.S. The rules for inventory produced by the taxpayer, as opposed to purchased, are a bit different. is foreign source (also under the title passage test). Likewise, under Section 862(a)(6) income from inventory purchased inside the U.S. (under the so-called “title passage” test) is U.S. Under Section 861(a)(6), income from inventory purchased outside the U.S. Income from inventory property is subject to an exception and is instead sourced under the general rules of Sections 861, 862, and 863. Generally, under Section 865, income from the sale of personal property is sourced in the seller’s country of residence. These final regulations generally follow the proposed regulations released in December 2019 with some revisions. The IRS released final regulations on September 29, 2020, addressing changes to the source-of-income rules applicable to sales of personal property, including inventory, made by the Tax Cuts and Jobs Act (TCJA) in 2017.