IRS Guidance On Source Of Gain Under Section 937

The IRS has issued definitive advice on the sourcing of capital gains to a bona fide resident of Puerto Rico (a "BFR") who own S corporation stock or interests in partnerships. In Chief Counsel's Memorandum AM2024-005 (the "CCM"), released December 17, 2024, the IRS addressed the taxation of a U.S. citizen (the "Taxpayer") who owns a portfolio of securities that the Taxpayer transfers to an S corporation before becoming a BFR. The CCM discusses both (i) the BFR's subsequent sale of the shares in the S corporation; and (ii) the BFR's receipt of an allocation of gain from the S corporation's sale of the securities. The IRS ruled that gain on the BFR's sale of S corporation shares is subject to the ten-year rule of Treasury Regulation Section 1.937-2(f) and is only exempt Puerto Rico source income to the extent specified in that regulation, but that gain allocated to the BFR from the S corporation's sales of securities is entirely U.S. source. The CCM goes on to apply