What Sourcing Rules Turn on an Asset's Location?
The following source rules determine source according to an asset's location, rather than the location of the payor or the payee.
Inventory Sales: General Rules -
There are two basic rules for determining the source of income from gains on the sale of inventory property. Which of these applies turns on whether the inventory was (a) bought by the seller to resell it, or (b) it was manufactured by the seller. A good basic definition of inventory for this purpose is personal property held for sale to customers in the ordinary course of the seller's business.
Inventory Purchased by Seller to Resell
Generally, when the seller purchases inventory rather than manufacturing it, the location where the title to the goods passes from buyer to seller is where the sale is sourced. Often, this location will be identified by the commercial shipping terms; however, that identified location may change if the risk of loss of the goods that passes from seller to buyer lies elsewhere which is a factual determination.
Inventory Manufactured by Seller
Typically, the income from gain on the sale of inventory property that was produced or manufactured by the seller in one jurisdiction and later sold in another is mixed source income (i.e. manufactured in U.S. and sold in Non U.S. locals or manufactured in Non U.S. locals and sold in U.S.). Mixed sourced income is both U.S. and foreign sourced income.
Depreciable Property -
Income from gain on a sale of tangible personal property that was depreciated to any extent for U.S. tax purposes is presumptively at least partially U.S. source income to the extent of the depreciation taken. Part of the gain is allocated according to the depreciation deductions taken by the seller (or other person / entity). The source for the remaining portion of the gain is determined according to the general rules (above) governing the source of gain from the sale of personal property.
Real Property -
The source for income from the gain on selling any "United States real property interest" (IRC §897)-which includes any interest in real property other than that of a creditor-is the location of the real property. Unless certain exceptions are present, the term "United States real property interest" includes shares of stock in any domestic corporation if more than ½ the corporations assets consisted of U.S. real property interests. IRC §897(c)(1)(A)(ii).
Tangible Property Rent-
Income from rent paid for the use of tangible property is sourced the location of the property where it was used. It will have a mixed source if the property is shifted between the U.S. and Non U.S. locals at different time during the calendar of fiscal year.
