Proposed regulations affect form of funding international operations.

• Jurisdiction: United States
• Author: Kingsley, William P.
• Date: 01 May 1997

Recently proposed regulations under Sec. 865(j) generally provide that any loss on the sale of stock in a foreign affiliate by a U.S. shareholder will be considered a U.S. loss. This is a dramatic reversal from the characterization of the loss under existing regulations. However, the U.S.-source treatment for the loss applies only to stock investments in foreign affiliates and does not presently extend to debt, derivative financial products and other common financing arrangements used to fund overseas operations.

Since 1986, Sec. 865 has provided for sourcing gains on the disposition of personal property (including stock), but no guidance had been provided for sourcing losses. Rather, the determination of the source of losses has been based on pre-1987 Regs. Sec. 1.861-8 and affirmed by the courts in Black & Decker, TC Memo 1991-557, aff'd, 4th Cir., 1993.

Gains from personal property sales are sourced to the seller's residence under...