On September 29, 2020, Treasury and
the IRS issued final regulations on how to source gain from
inventory sales. The question of sourcing is relevant to (1)
non-U.S. persons in calculating the amount of gain that is taxable
by the United States (for example, U.S.-source gain from the sale
of inventory is always taxable) and (2) U.S. persons in calculating
their foreign tax credit limitations.
Background
In 2017, the Tax Cuts and Jobs Act (TCJA) amended section 863 of
the tax code, which provides rules for determining the source of
gain from personal property sales. Before the TCJA, section 863(b)
provided that gain from the sale of inventory property produced by
a taxpayer within the United States and sold outside the United
States or vice versa would be treated as part-U.S. and part-foreign
source, but did not outline a basis for the allocation. The TCJA
amended section 863(b) to require the allocation to be made based
on the taxpayer's production activities with
