Q1: What are the special source rules according to IRM 21.8.1.5.2.3 (10-01-2022)?

A1: The Internal Revenue Manual (IRM) outlines special source rules for certain items of income. These include the treatment of income from the sale of goods manufactured or purchased in a territory, gain from the disposition of certain personal property by a U.S. citizen or resident, and special rules for determining the sources of dividends and interest from territory corporations.

Q2: How does the allocation of income from the sale of goods work between the U.S. and territory sources?

A2: The regulations maintain the existing treatment of income from the sale of goods, meaning the income is allocated between the U.S. and territory sources. For example, if a product is manufactured in Puerto Rico (a U.S. territory) and sold in the U.S., the income would be allocated between the two jurisdictions.

Q3: What does the special gain rule apply to?

A3: This rule applies to gains from the disposition of certain personal property like stocks, bonds, and other investment properties. If a U.S. citizen or resident owned the property when they became a bona fide resident of a territory, the gains may not be treated as from sources within a territory. However, an exception exists where taxpayers can elect to treat the portion of the gain accrued while being a territory resident as territory-source income.

Q4: Can you give an example of this special gain rule?

A4: Sure. Let’s say you’re a U.S. citizen who became a bona fide resident of Guam in 2022. You own stocks that you decide to sell in 2023. According to the special gain rule, the gain from this sale may not be considered as sourced within Guam. However, you can elect to treat the portion of the gain that accrued while you were a resident of Guam as sourced within the territory.

Example 2: John, a U.S. citizen, becomes a bona fide resident of a U.S. territory on January 1, 2023. He owns stocks that he purchased before moving to the territory. If John sells these stocks within 10 years of becoming a bona fide resident, the gains from the disposition may not be treated as from sources within the territory under the special gain rule. However, John can elect to treat as territory source the portion of the gain that accrued while he was a bona fide resident of the territory.

Example 3: Let’s say John, a U.S. citizen, becomes a bona fide resident of a U.S. territory and sells his shares in a U.S. company within 10 years of moving. Under the special gain rule, the gains from this sale may not be treated as sourced within the territory. However, John can elect to treat the portion of the gain that accrued while he was a resident of the territory as territory-sourced income.

Q5: What are the special rules for dividends and interest from territory corporations?

A5: The IRM provides special rules for determining the sources of dividends and interest paid by territory corporations. However, the specifics of these rules are not detailed in the section referenced. For more detailed information, please refer to CFR 1.937-2(f).

Q6: When did these special source rules come into effect?

A6: The special source rules for gains, dividends, and interest apply to dispositions and amounts paid or accrued after April 11, 2005.

This guide is based on IRM 21.8.1.5.2.3 (10-01-2022). For comprehensive advice on your specific situation, please consult a tax professional.