## Facts

- International Multifoods Corporation (IMC), a U.S. corporation filing with affiliates, indirectly owned stock in Paty S.A.–Produtos Alimenticios, Ltda., a Brazilian corporation.
- Paty was unprofitable and did not generate net income or pay dividends.
- On March 31, 1987, IMC and affiliates sold all Paty stock to unrelated purchasers at a significant loss.
- On the consolidated return, the group treated the stock-sale loss as U.S.-source in computing the foreign tax credit limitation under I.R.C. § 904(a).
- The IRS determined the loss was foreign-source, which changed the § 904(a) limitation and produced asserted deficiencies for the 1987 and 1988 tax years.
- After other issues were resolved in prior proceedings, the Tax Court decided the remaining severed issue: the proper source of the Paty stock-sale loss.

## Issues

1. Whether I.R.C. § 865’s residence-based sourcing rule for “income from the sale of personal property” also applies to losses from the sale of noninventory personal property (stock) by a U.S. resident.
2. If § 865 does not apply to losses, whether the loss must instead be sourced under §§ 861–862 regulatory allocation rules by reference to the class of income the stock would ordinarily produce.

## Decision

- The Tax Court held the taxpayer’s loss on the sale of Paty stock was U.S.-source.
- The court concluded § 865 generally governs the sourcing of losses as well as gains from sales of noninventory personal property by U.S. residents.
- The court rejected using Treas. Reg. § 1.861-8 to source the stock-sale loss as foreign-source based on expected dividend income.
- The loss was treated as U.S.-source for purposes of computing the foreign tax credit limitation under § 904(a).

## Legal Principles

- Section 865’s general residence-of-the-seller rule for sourcing income from sales of noninventory personal property is generally applicable to losses from such sales to prevent gain/loss asymmetry.
- After enactment of § 865, prior §§ 861–862 allocation regulations are not controlling to the extent they would source stock disposition losses inconsistently with § 865’s residence-based regime.
- Proposed Treasury regulations are not binding, but may provide confirmatory context where consistent with the court’s statutory analysis.
- For § 904(a) purposes, the source characterization of a stock-disposition loss can materially affect the foreign tax credit limitation and must follow the governing sourcing statute.

## Conclusion

The Tax Court held that a U.S. corporation’s loss on the sale of stock in a foreign corporation is generally sourced in the United States under I.R.C. § 865, and that this U.S.-source characterization applies in computing the § 904(a) foreign tax credit limitation.


International Multifoods Corp. & Affiliated Cos. v. Commissioner, 108 T.C. 579 (1997)