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Enacted as part of the Tax Reform Act of 1986, Pub. L. 99-
514, sec. 1211(a), 100 Stat. 2085, 2533, section 865 provides
that income from the sale of noninventory personal property
generally will be sourced at the residence of the seller.4 In
explaining the purpose behind the passage of section 865, the
House report stated:
Source rules for sales of personal property should
reflect the location of the economic activity
generating the income at issue or the place of
utilization of the assets generating that income. In
addition, source rules should operate clearly without
the necessity for burdensome factual determinations,
limit erosion of the U.S. tax base and, in connection
with the foreign tax credit limitation, generally not
treat as foreign income any income that foreign
countries do not or should not tax.
Although the title passage rule operates clearly,
it is manipulable. It allows taxpayers to treat sales
income as foreign source income simply by passing title
to the property sold offshore even though the sales
activities may have taken place in the United States.
In such cases, the foreign tax credit limitation may be
artificially inflated. In addition, foreign countries
are unlikely to tax income on a title passage basis.
Thus, the title passage rule gives U.S. persons the
ability to create foreign source income that is not
subject to any foreign tax, and that may ultimately be
sheltered from U.S. tax with unrelated excess foreign
tax credits. In addition, it gives foreign persons the
ability to generate income that should be subject to
U.S. tax.
4Sec. 1211(a) is generally effective for taxable years
beginning after Dec. 31, 1986. See Tax Reform Act of 1986, Pub.
L. 99-514, sec. 1211(c)(1), 100 Stat. 2085, 2536.
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Last modified: May 25, 2011