Call Now (800) 681-1295

What other Source Rules Focus on the Payee’s Residence?

Table of Contents


    Income from an exchange gain (or loss) from a taxpayer’s dealings in “nonfunctional currency” is usually sourced to the taxpayer’s “residence.” “Nonfunctional currency” is currency other than the official currency of the taxpayer’s country where she/it performs most of her/its activities. The term “residence” in this context refers to and individual’s “tax home” (or, if she has no tax home, country of citizenship). IRC §911(d). Entities are residents in the U.S. if they are formed in any state in the union.


    Income from “notional principal contracts” (NPCs) or swaps is generally sourced by the residence of the recipient. (Note: This rule excludes foreign currency swaps, which are governed by IRC §988). Thus, if a nonresident alien receives income from a swap or under an NPC the income is foreign source. However, it is presumed that income from NPCs that is “effectively connected” with the recipient’s U.S. trade or business has a U.S. source.


    The income from activities conducted in space (e.g. satellites) has a U.S. source if it is derived by a U.S. person or entity, and a foreign source if derived by a foreign person or entity. Similarly, income from activities conducted on or under water outside U.S. jurisdiction, a U.S. possession, or a foreign country, or Antarctica has a U.S. source if derived by a U.S. person or a foreign source if derived by a foreign person or entity.


    The rules for sales of personal property are complex but generally, the source for income from the sale of personal property (excluding inventory but including shares of corporate stock) is determined by the seller’s residence (seller can be entity or person). However, a citizen or resident alien is a “non-resident” under IRC §865 if the income derived from selling the personal property is subject to a foreign tax amount of at least 10% of the gain. In this context, for individuals, a seller is a “resident” of the U.S. when she is either a citizen or resident alien of the U.S. without a “tax home” (IRC § 911(d)) outside the U.S., or is a nonresident alien with a tax home within the U.S. Also, a corporation, trust, or estate that is a U.S. person is a “resident” within this context (IRC §865).

    A special source rule exists for selling certain foreign affiliate stock. Income from the sale of foreign affiliate stock has a foreign source if the foreign affiliate derives more than 50% of its income from an active trade or business in a foreign country in the three years leading up to its sale.

    Note: the source rules for income from inventory, intangible property (e.g. a license), and depreciable property have different-“location”- rules. See next section.

    Tax Help Videos

    Representing Clients from U.S. and International Locations Regarding Federal and California Tax Issues

    Main Office

    Orange County
    2601 Main St. Penthouse Suite
    Irvine, CA 92614
    (949) 681-3502

    Our headquarters is located in Irvine, CA. Our beautiful 19,700 office space is staffed full-time and always available for our clients to meet with our highly qualified and experienced staff of Attorneys, Certified Public Accountants and Enrolled Agents. We also offer virtual consultations and can travel to meet with clients in one of our satellite offices.

    Outside of our 4 hour initial consultation option, we do not charge travel time or travel expenses when traveling to one of our Satellite offices, or surrounding business districts, where it is necessary to meet personally with taxing authority personnel, make court appearances, or any in person meeting deemed necessary for the effective representation of a client. To make this as flexible, efficient, and convenient as possible, David W. Klasing is an Instrument Rated Private Pilot and Utilizes the Firms Cirrus SR22 to service client’s in California and in the Southwest by air. Offices outside these areas are serviced via commercial jet airlines. None of these costs are charged to our clients.

    Satellite Offices

    (310) 492-5583
    (760) 338-7035
    (916) 290-6625
    (415) 287-6568
    (909) 991-7557
    (619) 780-2538
    (661) 432-1480
    (818) 935-6098
    (805) 200-4053
    (510) 764-1020
    (408) 643-0573
    (760) 338-7035
    (602) 975-0296
    New Mexico
    (505) 206-5308
    New York
    (332) 224-8515
    (512) 828-6646
    Washington, DC
    (202) 918-9329
    (702) 997-6465
    (786) 999-8406
    (385) 501-5934