Title 26 — Internal Revenue CodeRelease 119-73
§865 Source rules for personal property sales
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter N— - Tax Based on Income From Sources Within or Without the United States › Part PART I— - SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME › § 865
Summary
Says where money from selling personal property is treated as coming from. If a person is a United States resident, the sale is treated as U.S.-sourced. If a person is a nonresident, the sale is treated as foreign-sourced. Sales of inventory are not covered here and follow other specific sourcing rules. For property that was depreciated, any gain up to the amount of depreciation adjustments is split between U.S. and foreign based on how much depreciation was taken for U.S. use; any gain above that is treated like inventory. Depreciable personal property = property whose basis includes depreciation adjustments. Depreciation adjustments = changes in basis from depreciation deductions. Depreciation deductions = deductions for depreciation, amortization, or similar write-offs. Special rules cover intangibles, offices, and other cases. Sales of intangibles count under this rule only when payments are fixed; payments that depend on how the intangible is used are treated like royalties. Intangibles include patents, copyrights, goodwill, trademarks, franchises, and similar items; goodwill is sourced to the country where it was created. If a U.S. resident has a foreign office, sales tied to that office are foreign-sourced only if at least 10 percent of the income was actually paid as foreign income tax. If a nonresident has a U.S. office, sales tied to that office are U.S.-sourced, with some exceptions (including certain exports and material participation). The law also includes rules about stock sales in affiliates, treaty choices that can change sourcing, a Puerto Rico exception, definitions (inventory, sale, U.S. possessions as foreign countries, affiliate, and partners), and gives the Treasury authority to write needed regulations.
Full Legal Text
Title 26, §865
Internal Revenue Code — Source: USLM XML via OLRC
(a)Except as otherwise provided in this section, income from the sale of personal property—
(1)by a United States resident shall be sourced in the United States, or
(2)by a nonresident shall be sourced outside the United States.
(b)In the case of income derived from the sale of inventory property—
(1)this section shall not apply, and
(2)such income shall be sourced under the rules of section 861(a)(6), 862(a)(6), and 863.
(c)(1)Gain (not in excess of the depreciation adjustments) from the sale of depreciable personal property shall be allocated between sources in the United States and sources outside the United States—
(A)by treating the same proportion of such gain as sourced in the United States as the United States depreciation adjustments with respect to such property bear to the total depreciation adjustments, and
(B)by treating the remaining portion of such gain as sourced outside the United States.
(2)Gain (in excess of the depreciation adjustments) from the sale of depreciable personal property shall be sourced as if such property were inventory property.
(3)For purposes of this subsection—
(A)The term “United States depreciation adjustments” means the portion of the depreciation adjustments to the adjusted basis of the property which are attributable to the depreciation deductions allowable in computing taxable income from sources in the United States.
(B)Except in the case of property of a kind described in section 168(g)(4), if, for any taxable year—
(i)such property is used predominantly in the United States, or
(ii)such property is used predominantly outside the United States,
(4)For purposes of this subsection—
(A)The term “depreciable personal property” means any personal property if the adjusted basis of such property includes depreciation adjustments.
(B)The term “depreciation adjustments” means adjustments reflected in the adjusted basis of any property on account of depreciation deductions (whether allowed with respect to such property or other property and whether allowed to the taxpayer or to any other person).
(C)The term “depreciation deductions” means any deductions for depreciation or amortization or any other deduction allowable under any provision of this chapter which treats an otherwise capital expenditure as a deductible expense.
(d)(1)In the case of any sale of an intangible—
(A)this section shall apply only to the extent the payments in consideration of such sale are not contingent on the productivity, use, or disposition of the intangible, and
(B)to the extent such payments are so contingent, the source of such payments shall be determined under this part in the same manner as if such payments were royalties.
(2)For purposes of paragraph (1), the term “intangible” means any patent, copyright, secret process or formula, goodwill, trademark, trade brand, franchise, or other like property.
(3)To the extent this section applies to the sale of goodwill, payments in consideration of such sale shall be treated as from sources in the country in which such goodwill was generated.
(4)(A)Notwithstanding paragraph (1), any gain from the sale of an intangible shall be sourced under subsection (c) to the extent such gain does not exceed the depreciation adjustments with respect to such intangible.
(B)Paragraph (2) of subsection (c) shall not apply to any gain from the sale of an intangible.
(e)(1)(A)In the case of income not sourced under subsection (b), (c), (d)(1)(B) or (3), or (f), if a United States resident maintains an office or other fixed place of business in a foreign country, income from sales of personal property attributable to such office or other fixed place of business shall be sourced outside the United States.
(B)Subparagraph (A) shall not apply unless an income tax equal to at least 10 percent of the income from the sale is actually paid to a foreign country with respect to such income.
(2)(A)Notwithstanding any other provisions of this part, if a nonresident maintains an office or other fixed place of business in the United States, income from any sale of personal property (including inventory property) attributable to such office or other fixed place of business shall be sourced in the United States. The preceding sentence shall not apply for purposes of section 971 (defining export trade corporation).
(B)Subparagraph (A) shall not apply to any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer in a foreign country materially participated in the sale.
(3)The principles of section 864(c)(5) shall apply in determining whether a taxpayer has an office or other fixed place of business and whether a sale is attributable to such an office or other fixed place of business.
(f)If—
(1)a United States resident sells stock in an affiliate which is a foreign corporation,
(2)such sale occurs in a foreign country in which such affiliate is engaged in the active conduct of a trade or business, and
(3)more than 50 percent of the gross income of such affiliate for the 3-year period ending with the close of such affiliate’s taxable year immediately preceding the year in which the sale occurred was derived from the active conduct of a trade or business in such foreign country,
(g)For purposes of this section—
(1)Except as otherwise provided in this subsection—
(A)The term “United States resident” means—
(i)any individual who—
(I)is a United States citizen or a resident alien and does not have a tax home (as defined in section 911(d)(3)) in a foreign country, or
(II)is a nonresident alien and has a tax home (as so defined) in the United States, and
(ii)any corporation, trust, or estate which is a United States person (as defined in section 7701(a)(30)).
(B)The term “nonresident” means any person other than a United States resident.
(2)For purposes of this section, a United States citizen or resident alien shall not be treated as a nonresident with respect to any sale of personal property unless an income tax equal to at least 10 percent of the gain derived from such sale is actually paid to a foreign country with respect to that gain.
(3)Paragraph (2) shall not apply to the sale by an individual who was a bona fide resident of Puerto Rico during the entire taxable year of stock in a corporation if—
(A)such corporation is engaged in the active conduct of a trade or business in Puerto Rico, and
(B)more than 50 percent of its gross income for the 3-year period ending with the close of such corporation’s taxable year immediately preceding the year in which such sale occurred was derived from the active conduct of a trade or business in Puerto Rico.
(h)(1)In the case of gain to which this subsection applies—
(A)such gain shall be sourced outside the United States, but
(B)subsections (a), (b), and (c) of section 904 and section 907 and 960 shall be applied separately with respect to such gain.
(2)This subsection shall apply to—
(A)Any gain—
(i)which is from the sale of stock in a foreign corporation or an intangible (as defined in subsection (d)(2)) and which would otherwise be sourced in the United States under this section,
(ii)which, under a treaty obligation of the United States (applied without regard to this section), would be sourced outside the United States, and
(iii)with respect to which the taxpayer chooses the benefits of this subsection.
(B)Any gain which is derived from the receipt of any distribution in liquidation of a corporation—
(i)which is organized in a possession of the United States, and
(ii)more than 50 percent of the gross income of which during the 3-taxable year period ending with the close of the taxable year immediately preceding the taxable year in which the distribution is received is from the active conduct of a trade or business in such possession.
(i)For purposes of this section—
(1)The term “inventory property” means personal property described in paragraph (1) of section 1221(a).
(2)The term “sale” includes an exchange or any other disposition.
(3)Any possession of the United States shall be treated as a foreign country.
(4)The term “affiliate” means a member of the same affiliated group (within the meaning of section 1504(a) without regard to section 1504(b)).
(5)In the case of a partnership, except as provided in regulations, this section shall be applied at the partner level.
(j)The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section, including regulations—
(1)relating to the treatment of losses from sales of personal property,
(2)applying the rules of this section to income derived from trading in futures contracts, forward contracts, options contracts, and other instruments, and
(3)providing that, subject to such conditions (which may include provisions comparable to section 877) as may be provided in such regulations, subsections (e)(1)(B) and (g)(2) shall not apply for purposes of section 931 and 933.
(k)(1)For provisions relating to the characterization as dividends for source purposes of gains from the sale of stock in certain foreign corporations, see section 1248.
(2)For sourcing of income from certain foreign currency transactions, see section 988.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2018—Subsec. (j)(3). Pub. L. 115–141 substituted “and 933” for “, 933, and 936”. 2017—Subsec. (h)(1)(B). Pub. L. 115–97 substituted “907” for “902, 907,”. 1999—Subsec. (i)(1). Pub. L. 106–170 substituted “section 1221(a)” for “section 1221”. 1996—Subsec. (b)(2). Pub. L. 104–188 substituted “863” for “863(b)”. 1993—Subsec. (b). Pub. L. 103–66 inserted at end “Notwithstanding the preceding sentence, any income from the sale of any unprocessed timber which is a softwood and was cut from an area in the United States shall be sourced in the United States and the rules of section 862(a)(6) and 863(b) shall not apply to any such income. For purposes of the preceding sentence, the term ‘unprocessed timber’ means any log, cant, or similar form of timber.” 1990—Subsec. (c)(3)(B). Pub. L. 101–508 substituted “section 168(g)(4)” for “section 48(a)(2)(B)”. 1988—Subsec. (d)(2). Pub. L. 100–647, § 1012(d)(12), inserted “franchise,” after “trade brand,”. Subsec. (d)(4). Pub. L. 100–647, § 1012(d)(1), added par. (4). Subsec. (e)(1)(A). Pub. L. 100–647, § 1012(d)(2), (9), substituted “(d)(1)(B) or (3)” for “(d)” and “in a foreign country” for first reference to “outside the United States”. Subsec. (e)(2)(B). Pub. L. 100–647, § 1012(d)(5), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “Subparagraph (A) shall not apply to— “(i) any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer outside the United States materially participated in the sale, or “(ii) any amount included in gross income under section 951(a)(1)(A).” Subsec. (f). Pub. L. 100–647, § 1012(d)(4), amended subsec. (f) generally. Prior to amendment, subsec. (f) read as follows: “If— “(1) a United States resident sells stock in an affiliate which is a foreign corporation, “(2) such affiliate is engaged in the active conduct of a trade or business, and “(3) such sale occurs in the foreign country in which the affiliate derived more than 50 percent of its gross income for the 3-year period ending with the close of the affiliate’s taxable year immediately preceding the year during which such sale occurred, any gain from such sale shall be sourced outside the United States.” Subsec. (g)(1)(A)(i). Pub. L. 100–647, § 1012(d)(11), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: “any individual who has a tax home (as defined in section 911(d)(3)) in the United States, and”. Subsec. (g)(1)(A)(ii). Pub. L. 100–647, § 1012(d)(3)(A), struck out “partnership,” after “corporation,”. Subsec. (g)(3). Pub. L. 100–647, § 1012(d)(6)(A), added par. (3). Subsec. (h). Pub. L. 100–647, § 1012(d)(8), added subsec. (h) and redesignated former subsec. (h) as (i). Pub. L. 100–647, § 1012(d)(3)(B), added par. (5) to subsec. (h) prior to redesignation as subsec. (i). Subsec. (i). Pub. L. 100–647, § 1012(d)(8), redesignated former subsec. (h) as (i). Former subsec. (i) redesignated (j). Pub. L. 100–647, § 1012(d)(6)(B), added par. (3) to subsec. (i) prior to redesignation as subsec. (j). Subsec. (i)(5). Pub. L. 100–647, § 1012(d)(3)(B), added par. (5) to subsec. (h) prior to redesignation as subsec. (i). Subsec. (j). Pub. L. 100–647, § 1012(d)(8), redesignated former subsec. (i) as (j). Former subsec. (j) redesignated (k). Subsec. (j)(3). Pub. L. 100–647, § 1012(d)(6)(B), added par. (3) to subsec. (i) prior to redesignation as subsec. (j). Subsec. (k). Pub. L. 100–647, § 1012(d)(8), redesignated former subsec. (j) as (k).
Statutory Notes and Related Subsidiaries
Effective Date
of 2017 AmendmentAmendment by Pub. L. 115–97 applicable to taxable years of foreign corporations beginning after Dec. 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 14301(d) of Pub. L. 115–97, set out as a note under section 78 of this title.
Effective Date
of 1999 AmendmentAmendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.
Effective Date
of 1996 Amendment Pub. L. 104–188, title I, § 1704(f)(4)(B), Aug. 20, 1996, 110 Stat. 1880, provided that: “The amendment made by subparagraph (A) [amending this section] shall take effect as if included in the
Amendments
made by section 1211 of the Tax Reform Act of 1986 [Pub. L. 99–514].”
Effective Date
of 1993 Amendment Pub. L. 103–66, title XIII, § 13239(e), Aug. 10, 1993, 107 Stat. 509, provided that: “The
Amendments
made by this section [amending this section and section 927, 954, and 993 of this title] shall apply to sales, exchanges, or other dispositions after the date of the enactment of this Act [Aug. 10, 1993].”
Effective Date
of 1990 AmendmentAmendment by Pub. L. 101–508 applicable to property placed in service after Dec. 31, 1990, but not applicable to any transition property (as defined in section 49(e) of this title), any property with respect to which qualified progress expenditures were previously taken into account under section 46(d) of this title, and any property described in section 46(b)(2)(C) of this title, as such sections were in effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 101–508, set out as a note under section 45K of this title.
Effective Date
of 1988 Amendment Pub. L. 100–647, title I, § 1012(d)(5), Nov. 10, 1988, 102 Stat. 3497, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1987. Amendment by section 1012(d)(1)–(4), (6), (8), (9), (11), (12) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date
Pub. L. 99–514, title XII, § 1211(c), Oct. 22, 1986, 100 Stat. 2536, provided that: “(1) In general.—Except as provided in paragraph (2), the
Amendments
made by this section [enacting this section, amending sections 861 to 864, 871, 881, and 904 of this title, and enacting provisions set out below] shall apply to taxable years beginning after December 31, 1986. “(2) Special rule for foreign persons.—In the case of any foreign person other than any controlled foreign corporations (within the meaning of section 957(a) of the Internal Revenue Code of 1954 [now 1986]), the
Amendments
made by this section shall apply to transactions entered into after March 18, 1986.”
Savings Provision
For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining liability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. Applicability of Certain
Amendments
by Pub. L. 99–514 in Relation to Treaty Obligations of United StatesFor nonapplication of amendment by section 1211(a) of Pub. L. 99–514 (enacting this section) to the extent application of such amendment would be contrary to any treaty obligation of the United States in effect on Oct. 22, 1986, with provision that for such purposes any amendment by title I of Pub. L. 100–647 be treated as if it had been included in the provision of Pub. L. 99–514 to which such amendment relates, see section 1012(aa)(3), (4) of Pub. L. 100–647, set out as a note under section 861 of this title. Study of Source Rules for Sales of Inventory Property Pub. L. 99–514, title XII, § 1211(d), Oct. 22, 1986, 100 Stat. 2536, directed Secretary of the Treasury or his delegate to conduct a study of source rules for sales of inventory property and, not later than Sept. 30, 1987 (due date extended to Jan. 1, 1992, by Pub. L. 101–508, title XI, § 11831(b), Nov. 5, 1990, 104 Stat. 1388–559), to submit to Committee on Ways and Means of House of Representatives and Committee on Finance of Senate a report of such study (together with recommendations he deemed advisable).
Reference
Citations & Metadata
Citation
26 U.S.C. § 865
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73