Alternative wording offered for sourcing inventory sales

Plain-English summary

Chief Counsel reviewed proposed Form 5074 instructions concerning the source of gain from personal property and inventory sales. The existing language was considered defensible, but the advice offered a more detailed alternative. It stated that inventory income is generally sourced where title passes, while allocation rules may apply when the taxpayer produces the inventory or purchases it in a U.S. territory and sells it in the United States. The choice between versions was described as a publication-drafting and policy decision rather than a difference in legal defensibility.

Ruling snapshot

• Question: Should publication language explain in more detail how inventory-sale income is sourced between a U.S. territory and the United States?
• Outcome: Advice given, either version is defensible and a more descriptive alternative was supplied
• Key authorities: IRC §§ 863 and 865

Full text (IRS public release)

 ID:         CCA_2023062310002617                                [Third Party Communication:

 UILC:       863.00-00                                           Date of Communication: Month DD, YYYY]

Number: 202346020
Release Date: 11/17/2023
From: --------------------
Sent: Friday, June 23, 2023 10:00:26 AM
To: -----------------------------------
Cc: ---------------------------------------------------------------------------------------------------------------------------
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Bcc:
Subject: RE: Comments due 6/26 for URGENT: TPC 2023 Form 5074 - 2nd Cir


Hi --------,

After reviewing, I still think the language is okay as it stands. I do understand Joanne’s
point that the language could be more descriptive, so I will offer this alternative version
as well:

“For example, if you are a U.S. citizen or resident alien and not a bona fide resident of
Guam or the CNMI, gain from the sale or disposition of personal property is generally
treated as U.S. source. Income from the sale of inventory is generally sourced where
the title to the property passes. However, in some cases, such as where the taxpayer
produces the inventory, or where the taxpayer purchases the inventory within a U.S.
territory and sells the inventory within the United States, source is based on an
allocation. the income from the sale of inventory purchased or produced by a seller
within a U.S. territory and sold within the United States is sourced based on an
allocation. See section 865 for details.”

Both approaches are defensible. The choice is a matter of publication drafting and
policies and whether you want to keep changes to a minimum or prefer to be more
descriptive and particular.

Best,
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