The Fundamental Principles of Income Attribution are Not Unmoored by Section 865(e)(2)
Douglas S. Stransky wrote an article entitled "The Fundamental Principles of Income Attribution are Not Unmoored by Section 865(e)(2)," published in Tax Notes International on June 11, 2012. The article also appeared in Worldwide Tax Daily.
In cases where a foreign corporation manufactures goods outside the United States and sells such goods through an office or other fixed place of business in the United States (an “OFPB”), Internal Revenue Code section 865(e)(2)(A) appears to preempt all other sourcing provisions in the Code so that the entire amount of income relating to the sale of inventory property (the manufacturing profit and the distribution profit) by such OFPB is treated as U.S.-source income and subject to U.S. federal income tax. In this article, Mr. Stransky argues that Code section 865(e)(2)(A) should not be read as preempting all of the other sourcing provisions of the Code and the fundamental principles of U.S. international taxation so as to force a result that exceeds the amount that would be treated as income from sources within the United States if the foreign corporation (itself) had sold the goods or merchandise in the United States. In short, Code section 865(e)(2) does not unmoor the fundamental principles of income attribution.