Recent Developments: Sourcing Rules for Personal Property and Dispositions of Partnership Interests

Description

U.S. taxpayers are often required to determine the "source" of their gross income items--a threshold determination that can have a dramatic impact on U.S. tax outcomes. The historic determination is evolving to embrace a geographically mobile economy and one not tied to a physical location.

The 2017 Tax Act changed the source-of-income rules for the sale of personal property and inventory. Final regulations released in September 2020 explain the application of these rules. The rules vary for inventory purchased versus produced and rely on existing Treasury Regulation Section 1.954-3(a)(4) for its definition of produced property. These regulations are particularly crucial for businesses manufacturing property overseas for sale in the U.S. and foreign entities with U.S. locations.

For dispositions of partnership interests, IRC 864(c)(8) stipulates that the gain or (loss) from a disposition is treated as effectively connected income (ECI) to the extent it would have been ECI had the assets been sold at fair market value. The regulations provide a three-step process to calculate this amount.

Sourcing income under these new regulations is extremely complex. The interplay of the new regulations with existing sourcing rules and U.S. income tax treaties makes them more so.

Listen as our panel of international tax experts provides practical advice and illustrative examples explaining the sourcing-of-income rules. Particularly, they will discuss applying complex and overlapping guidance to sales of personal property, inventory, and the disposition of partnership interests.