(3) Source (A) In general Except as otherwise provided in regulations, in the case of any amount treated as ordinary income or loss under paragraph (1) (without regard to paragraph (1)(B)), the source of such amount shall be determined by reference to the residence of the taxpayer or the qualified business unit of the taxpayer on whose books the asset, liability, or item of income or expense is properly reflected. (B) Residence For purposes of this subpart— (i) In general The residence of any person shall be— (I) in the case of an individual, the country in which such individual’s tax home (as defined in section 911(d)(3) ) is located, (II) in the case of any corporation, partnership, trust, or estate which is a United States person (as defined in section 7701(a)(30) ), the United States, and (III) in the case of any corporation, partnership, trust, or estate which is not a United States person, a country other than the United States. If an individual does not have a tax home (as so defined), the residence of such individual shall be the United States if such individual is a United States citizen or a resident alien and shall be a country other than the United States if such individual is not a United States citizen or a resident alien. (ii) Exception In the case of a qualified business unit of any taxpayer (including an individual), the residence of such unit shall be the country in which the principal place of business of such qualified business unit is located. (iii) Special rule for partnerships To the extent provided in regulations, in the case of a partnership, the determination of residence shall be made at the partner level. (C) Special rule for certain related party loans Except to the extent provided in regulations, in the case of a loan by a United States person or a related person to a 10-percent owned foreign corporation which is denominated in a currency other than the dollar and bears interest at a rate at least 10 percentage points higher than the Federal mid-term rate (determined under section 1274(d) ) at the time such loan is entered into, the following rules shall apply: (i) For purposes of section 904 only, such loan shall be marked to market on an annual basis. (ii) Any interest income earned with respect to such loan for the taxable year shall be treated as income from sources within the United States to the extent of any loss attributable to clause (i). For purposes of this subparagraph, the term “related person” has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting “United States person” for “controlled foreign corporation” each place such term appears. (D) 10-percent owned foreign corporation The term “10-percent owned foreign corporation” means any foreign corporation in which the United States person owns directly or indirectly at least 10 percent of the voting stock.
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Now, let's delve into the concepts discussed in the provided article:
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Source of Income Determination:
- The article emphasizes that the source of income or loss treated as ordinary is determined based on the residence of the taxpayer or the qualified business unit (QBU) of the taxpayer where the asset, liability, or income/expense item is properly reflected.
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Residence for Individuals, Corporations, and Entities:
- The residence of an individual is tied to the country where their tax home is located. If an individual lacks a tax home, their residence is the United States if they are a U.S. citizen or resident alien; otherwise, it's a country other than the U.S.
- For corporations, partnerships, trusts, or estates classified as U.S. persons, residence is the United States. If they are not U.S. persons, residence is in a country other than the United States.
- A special rule applies to qualified business units (QBUs) within a taxpayer, determining residence based on the location of the QBU's principal place of business.
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Partnerships and Residence Determination:
- For partnerships, residence determination is made at the partner level, subject to regulations.
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Special Rule for Related Party Loans:
- In the case of loans from a U.S. person or a related person to a 10-percent owned foreign corporation, denominated in a non-dollar currency and bearing interest at least 10 percentage points higher than the Federal mid-term rate, special rules apply.
- The loan must be marked to market annually for section 904 purposes.
- Any interest income from such a loan is treated as income from sources within the United States to the extent of any losses attributable to the marked-to-market valuation.
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Definition of "10-Percent Owned Foreign Corporation":
- The term "10-percent owned foreign corporation" refers to any foreign corporation where a U.S. person owns directly or indirectly at least 10 percent of the voting stock.
In summary, the article outlines intricate rules for determining the source of income for tax purposes, taking into account the residence of the taxpayer, special rules for related party loans, and specific criteria for identifying a 10-percent owned foreign corporation. These provisions highlight the complexity of international taxation and the need for a comprehensive understanding of the rules governing income sourcing.
