120 days granted for a late section 865(h)(2) election to treat foreign-corporation stock-sale gain as foreign-source income under a treaty

Plain-English summary

When a U.S. resident sells stock, the gain is normally treated as U.S.-source
income. But § 865(h) lets a taxpayer elect to treat gain from selling stock
in a foreign corporation as foreign-source income if a tax treaty would
source it abroad. That matters because foreign-source treatment can free up
foreign tax credits to offset the foreign country's tax on the same gain,
avoiding double taxation. Here, a married couple's partnerships sold stock in
foreign corporations, and the couple paid foreign tax on the gain, but their
accounting firm never told them about the § 865(h)(2)(A) election and reported
the gain as U.S.-source. They learned of the option later and asked the IRS
for more time under Treasury Regulation § 301.9100-3, which allows an
extension where the taxpayer acted reasonably and in good faith (including
reasonable reliance on a tax professional) and relief will not prejudice the
government. The IRS granted 120 days to file the late election for both tax
years, after which the couple may apply the treaty sourcing rule to treat the
gain as foreign-source, provided the treaty's conditions for benefits are met.

Ruling snapshot

• Question: May taxpayers whose accountant never raised the option get an
  extension of time to make a late section 865(h)(2)(A) election to source
  foreign-stock-sale gain abroad under a treaty?
• Outcome: Approved (120-day extension granted for both tax years)
• Key authorities: IRC § 865(a), (h), (i); U.S.-Country X Treaty
  Articles 13 and 25; Treas. Reg. § 301.9100-8; Treas. Reg. §§ 301.9100-1
  through 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202613004                                            Third Party Communication: None
 Release Date: 3/27/2026                                      Date of Communication: Not Applicable
 Index Number: 865.01-05
                                                              Person To Contact:
 ----------------------------------                           --------------------------, ID No. ---------------
 ------------------------
 -----------------------------                                Telephone Number:
                                                              --------------------
 In Re: Request for Extension of Time under                   Refer Reply To:
 § 301.9100-3                                                 CC:INTL:B03
                                                              PLR-112122-25
                                                              Date:
                                                              December 22, 2025




Legend

 Individual A                     =   --------------------
 Individual B                     =   ------------------
 Country X                        =   ------
 U.S.-Country X Treaty            =   -----------------------
 Date 1                           =   -----------------
 Date 2                           =   -----------------------
 Date 3                           =   ----------------------
 Tax Year 1                       =   ------------------------------------------------------
 Tax Year 2                       =   ------------------------------------------------------
 Year 3                           =   -------
 Year 4                           =   -------
 Firm O                           =   --------------------------
 Firm P                           =   ---------------


Dear ---------------------------:

This is in response to the request dated Date 1, requesting an extension of time under
Treas. Reg. § 301.9100-3 to file an election under section 865(h)(2)(A) to apply the
sourcing rule in paragraph 3 of Article 25 (Relief from Double Taxation) under the U.S.-
Country X Treaty to treat gain from the sale of stock of Country X corporations as
foreign source income.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayers and accompanied by a penalty of perjury statement
executed by the appropriate parties. As this office has not verified any of the material
submitted in support of the request for a ruling, it remains subject to verification on
PLR-112122-25                                2

examination. The information submitted in the request is substantially as set forth
below. Unless otherwise provided, all section references are to the Internal Revenue
Code of 1986, as amended.

I.    FACTS

Individual A and Individual B (collectively, Taxpayers) are married individuals who file
jointly on a calendar year basis. At all relevant times, Taxpayers were U.S. citizens who
had their tax home in the United States.

In Tax Year 1 and Tax Year 2, Individual A held interests in several partnerships. These
partnerships held stock in foreign corporations established in Country X. In Tax Year 1
and Tax Year 2, the partnerships sold stock in these foreign corporations. Individual A
was allocated capital gain from these sales for U.S. tax purposes and was subject to tax
in Country X with respect to the sales.

Taxpayers have engaged Firm O since Year 3 to provide them with U.S. tax compliance
services, including preparing and filing Taxpayers’ joint return. For Tax Year 1 and Tax
Year 2, Taxpayers provided Firm O with information concerning the sales made by the
partnerships in each year and the Country X tax imposed on Individual A. Firm O did not
advise Taxpayers whether an election under section 865(h)(2)(A) could have been
made to apply the sourcing rule in Article 25(3) of the U.S.-Country X Treaty to treat the
gain from the sales as foreign source income. Firm O prepared Taxpayers’ returns for
Tax Year 1 and Tax Year 2, treating the gain from the sales as U.S. source income.

Taxpayers filed their income tax return for Tax Year 1 on Date 2 and filed their income
tax return for Tax Year 2 on Date 3.

During Year 4, Individual A for the first time learned of the possibility of making an
election under section 865(h)(2)(A) to treat the gain from the Tax Year 1 and Tax Year 2
sales as foreign source income. Taxpayers contacted Firm O, which advised Taxpayers
that upon further review an election under section 865(h)(2)(A) would permit Taxpayers
to treat the gain from the Tax Year 1 and Tax Year 2 sales as foreign source income
and Taxpayers should submit a request for late election relief. Taxpayers engaged Firm
P, which similarly recommended that Taxpayers submit a request for late election relief.

Taxpayers represent that no facts have changed since the Tax Year 1 and Tax Year 2
sales that make the election under section 865(h)(2)(A) more advantageous in
hindsight.
PLR-112122-25                                3

II.   LAW

Section 865(a) provides that, except as otherwise provided in section 865, income from
the sale of personal property by a United States resident shall be sourced in the United
States.

Section 865(h) provides that, in the case of gain to which the subsection applies, such
gain shall be sourced outside the United States, but section 904(a), (b), and (c), and
sections 907 and 960 shall be applied separately with respect to such gain.

Section 865(h)(2) states, in relevant part, that section 865(h) applies to any gain:
(i) which is from the sale of stock in a foreign corporation and which would otherwise be
sourced in the United States under section 865; (ii) which, under a treaty obligation of
the United States (applied without regard to section 865), would be sourced outside the
United States; and (iii) with respect to which the taxpayer chooses the benefits of
section 865(h).

Section 865(i)(5) provides that, except as provided in regulations, section 865 shall be
applied at the partner level.

Article 13 (Gains) of the U.S.-Country X Treaty states that, in general, each Contracting
State may tax capital gains in accordance with the provisions of its domestic law.

Paragraph 3 of Article 25 (Relief from Double Taxation) of the U.S.-Country X Treaty
provides that:

      For the purposes of allowing relief from double taxation pursuant to this
      Article, income shall be deemed to arise as follows:

              (a) income derived by a resident of a Contracting State which may
      be taxed in the other Contracting State in accordance with this Convention
      (other than solely by reason of citizenship in accordance with paragraph 3
      of Article 1 (General Scope)) shall be deemed to arise in that other State;

            (b) income derived by a resident of a Contracting State which may
      not be taxed in the other Contracting State in accordance with the
      Convention shall be deemed to arise in the first-mentioned State.

      Notwithstanding the proceeding sentence, the determination of the source
      of income for purposes of this Article shall be subject to such source rules
      in the domestic laws of the Contracting States as apply for the purpose of
      limiting the foreign tax credit. The preceding sentence shall not apply with
      respect to income dealt with in Article 12 (Royalties and Fees for Included
      Services). The rules of this paragraph shall not apply in determining credits
PLR-112122-25                                  4

       against United States tax for foreign taxes other than the taxes referred to
       in paragraphs 1(b) and 2 of Article 2 (Taxes Covered).


Treas. Reg. § 301.9100-8(a) provides the rules applicable to elections provided by the
Technical and Miscellaneous Revenue Act of 1988, including section 865(h)(2).

Treas. Reg. § 301.9100-8(a)(2) provides that an election under Treas. Reg. § 301.9100-
8(a) must be made by the later of (i) the due date (taking into account any extensions of
time to file obtained by the taxpayer) of the tax return for the first taxable year for which
the election is effective, or (ii) January 22, 1990.

Treas. Reg. § 301.9100-1(c) provides, in relevant part, that the Commissioner may
grant a reasonable extension of time under the rules in Treas. Reg. §§ 301.9100-2 and
301.9100-3 to make a regulatory election under all subtitles of the Internal Revenue
Code except subtitles E, G, H, and I.

Treas. Reg. § 301.9100-1(b) defines the term “regulatory election” as an election whose
due date is prescribed by a regulation, revenue ruling, revenue procedure, notice, or
announcement.

Treas. Reg. § 301.9100-2 provides automatic extensions of time for making certain
elections.

Treas. Reg. § 301.9100-3(a) provides rules for requesting extensions of time for
regulatory elections that do not meet the requirements of Treas. Reg. § 301.9100-2. It
provides that requests for relief subject to the section will be granted when the taxpayer
provides the evidence (including affidavits) to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the Government.

Treas. Reg. § 301.9100-3(b)(1)(v) provides that a taxpayer is generally deemed to have
acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax
professional and the taxpayer professional failed to make, or advise the taxpayer to
make, the election.

Treas. Reg. § 301.9100-3(c)(1)(i) provides that the interests of the Government are
prejudiced if the granting of relief would result in the taxpayer (and other affected
taxpayers, if applicable) having lower tax liability in the aggregate for all taxable years
affected by the election than the taxpayer(s) would have had if the election had been
timely made.
PLR-112122-25                                  5

III.   Conclusion

Based on the facts provided and the representations made, we conclude that the
requirements of Treas. Reg. §§ 301.9100-1 and 301.9100-3 have been satisfied.
Taxpayers are hereby granted an extension of time of one hundred twenty (120) days
from the date of this letter to file the election described in Treas. Reg. § 301.9100-
8(a)(1) with respect to section 865(h)(2)(A) for Tax Year 1 and Tax Year 2. Upon filing
the section 865(h)(2)(A) election, under section 865(h), Taxpayers may apply the
sourcing rule in Article 25(3) of the U.S.-Country X Treaty to treat the gain allocated to
Individual A from the Tax Year 1 and Tax Year 2 sales of stock of Country X foreign
corporations as foreign source income, provided that the U.S.-Country X Treaty
conditions for obtaining treaty benefits are satisfied.

Except as expressly provided herein, no opinion is express or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (International)

                                        By: Tracy M. Villecco
                                        Tracy M. Villecco
                                        Senior Technical Reviewer, Branch 3
                                        Office of Associate Chief Counsel (International)

Enclosure
      Copy for § 6110 purposes.
PLR-112122-25                                     6

cc:
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