Sourcing of capital losses.

On April 29, 1996, Tax Executives Institute submitted the following comments to Michael Danilack, IRS Assistant Chief Counsel (International), concerning regulations to be issued under section 865(j) of the Internal Revenue Code. The comments were prepared under the aegis of TEI's International Tax Committee whose chair is Joseph S. Tann, Jr. of Ameritech Inc.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on the regulations to be issued under section 865(j) of the Internal Revenue Code, relating to the sourcing of losses from the disposition of stock. TEI commends the IRS for including this project on their priorities list for 1996.

Background

The United States imposes tax on a taxpayer's worldwide income and the U.S.-source rules play an important role in the computation of a taxpayer's foreign tax credit limitation. The limitation is applied to carry out the underlying purpose of the credit - to eliminate what otherwise would be anti-competitive double taxation of foreign income without unduly reducing a taxpayer's tax on its U.S. income. For the foreign tax credit mechanism to function properly, each item of income must have a source either within or outside the United States. Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, at 916 (1987) (hereinafter cited as the "General Explanation").

Enacted as part of the Tax Reform Act of 1986, section 865 of the Code provides a general sourcing rule for sales of personal property. The statute states that income from such sales by a U.S. resident shall be sourced in the United States, whereas income from sales by a nonresident are sourced outside the United States. Section 865(j)(1) authorizes the Secretary "to prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section," including regulations relating to the treatment of losses from sales of personal property.

A. The Legislative History of Section 865 Supports Symmetrical Sourcing of Gains and Losses. Logically, losses on the sale of stock of a foreign subsidiary should be allocated and apportioned to the same class of income that would have resulted if a gain had been recognized on the sale of the stock. The Joint Committee report supports symmetrical treatment of gains and losses:

It is anticipated that regulations will provide that losses from sales of personal property generally will be allocated consistently with the...