Academic journal article Journal of Accountancy

Rulings Clarify Income Sourcing Regulations

Academic journal article Journal of Accountancy

Rulings Clarify Income Sourcing Regulations

Article excerpt

Two recent Tax Court decisions clarified (to some extent) the interpretation of income sourcing regulations under Internal Revenue Code section 863(b).

Both Intel Corp. v. Commissioner, 100 TC no. 39 (1993), and Phillips Petroleum Co. v. Commissioner, 101 TC no. 6 (1993), concerned how to apportion income between domestic and foreign sources for goods produced in the United States but sold abroad.

Determining the income source is crucial for foreign tax credit purposes because such credits generally are limited to the pre-credit U.S. tax that would be imposed on foreign source income. Therefore, the greater the amount of income allocated to foreign sources is, the greater the limitation or the amount of foreign taxes that may be credited against U.S. tax.

IRC section 863(b)(2) and regulations section 1.863-3(b)2) provide rules, in the form of examples, for apportioning income. Example 1 provides that when (1) the manufacturer regularly sells part of its output to independent distributors in a way that establishes an independent factory price (IFP) for the products sold and (2) the selling or distributing branch of the manufacturer is not located in the same country as the manufacturer's factory, income from sales to customers is allocated between U.S. and foreign source income based on a deemed sale of products by the production department to the sales branch at the IFP. This method generally results in allocating all or most of the income from the sale to U.S.sources.

Example 2 treats one-half the income as manufacturing income and apportions it according to the location of the taxpayer's property. …

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