The Source of Income Analysis
Once it is determined that a computer program is a copyright article and thus “export property” for DISC purposes; then the issue is to determine whether the Software Program is being sold for use, consumption of disposition outside of the U.S. This analysis depends upon the “source of income” rules.
Generally under the current rules, the source of income from sales of property depends to varying extents upon both the type of property and whether the property sold or leased is “inventory property”.
Income from the lease of a copyright article must also fit this definition of non U.S. source of income.
The user of the computer program is particularly important in the international context. Income earned from commerce between countries must be assigned a source under rules. This requires a determination of whether the transaction is a sale of inventory, a rental of property, a license or sale of intellectual property or the provision of services.
The regulations provide that income from transactions that are classified as sales or exchanges of copyrighted articles will be sourced under the sections of Internal Revenue Code that determine if income is earned in the United States for tax purposes or earned outside of the United States. Income from the leasing of a computer program will be sourced under different Internal Revenue Code sections.
Next: Part 5 – Source of Income for Sales of Copyrighted Articles
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Richard S. Lehman is a graduate of Georgetown Law School and obtained his Master’s degree in taxation from New York University. He has served as a law clerk to the Honorable William M. Fay, U.S. Tax Court and as Senior Attorney of the Interpretative Division in the Chief Counsel’s Office of the Internal Revenue Service in Washington D.C., the IRS’s internal law firm.
Mr. Lehman has had extensive experience with all areas of the Internal Revenue code that apply to American taxpayers and nonresident aliens and foreign corporations investing or conducting business in the United States, as well as U.S. citizens and domestic corporations investing abroad.
Mr. Lehman regularly works with law firms, accountants, businesses and individuals struggling to find their way through the complexities of the tax law.
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