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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
• For any of the 10 years preceding that There are two methods for figuring the gain source income on your 2022 Puerto Rico tax re-
year, you were a citizen or resident alien of (or loss) for the territory holding period, one for turn (and the remainder as non-Puerto Rico
the United States (other than a bona fide marketable securities and another for other source income), you elect to treat $75,276 as
resident of the relevant territory). types of investment property. Puerto Rico source income.
Marketable securities. Marketable securi-
If you meet these conditions, gains from the ties are those actively traded on an established
disposition of this property will not be treated as financial market, such as stock in a publicly held
income from sources within the relevant terri- corporation. Under the special election, allocate Scholarships, Fellowships,
tory for purposes of the Internal Revenue Code. the gain (or loss) by figuring the appreciation Grants, Prizes, and Awards
Accordingly, bona fide residents of American separately for your territory and U.S. holding
Samoa and Puerto Rico, for example, may not periods.
exclude the gain on their U.S. tax return. (See Your territory holding period begins on the The source of these types of income is gener-
chapter 3 for additional filing information.) With first day you do not have a tax home outside the ally the residence of the payer, regardless of
respect to the CNMI, Guam, and the USVI, the relevant territory. The gain (or loss) attributable who actually disburses the funds. Therefore, in
gain from the disposition of this property will not to the territory holding period is the difference in order to be territory source income, the payer
meet the requirements for certain tax rules that fair market value of the security at the close of must be a resident of the relevant territory, such
may allow bona fide residents of those territo- the market on the first and last days of this hold- as an individual who is a bona fide resident or a
ries to reduce or obtain a rebate of taxes on in- ing period. This is your gain (or loss) that is trea- corporation created or organized in that terri-
come from sources within the relevant territo- ted as being from sources within the relevant tory.
ries. territory. If you were a bona fide resident of the These rules do not apply to amounts
relevant territory for more than one continuous paid as salary or other compensation
For details, see Regulations section period, combine the gains (or losses) from each CAUTION! for services. See Compensation for La-
1.937-2(f)(1) and Examples 1 and 2 of section territory holding period. bor or Personal Services, earlier in this chapter,
1.937-2(k). for the source rules that apply.
Example 2. Assume the same facts as in
Example 1. In 2016, you, a U.S. citizen, Example 1, except that you make the special
lived in the United States and paid $1,000 for election to allocate the gain between your U.S.
100 shares of stock in the Rose Corporation, a and territory holding periods. Your territory hold- Effectively Connected
U.S. corporation listed on the New York Stock ing period began March 1, 2019, the date your
Exchange. On March 1, 2019, you moved to tax home changed to Puerto Rico. Therefore, Income
Puerto Rico and changed your tax home to Pu- the portion of the gain attributable to your terri-
erto Rico on the same date. You satisfied the tory holding period is $5,000 ($7,000 sale price In limited circumstances, some kinds of income
presence test in 2019 and, under the – $2,000 closing value on the first day of the ter- from sources outside the relevant territory must
year-of-move exception, you were considered a ritory holding period). By reporting $5,000 of be treated as effectively connected with a trade
bona fide resident of Puerto Rico for the rest of your $6,000 gain as Puerto Rico source income or business in that territory. These circumstan-
2019. On March 1, 2019, the closing value of on your 2022 Puerto Rico tax return (and the re- ces are listed below.
your stock in the Rose Corporation was $2,000. mainder as non-Puerto Rico source income), • You have an office or other fixed place of
On January 5, 2022, while still a bona fide resi- you elect to treat that amount as Puerto Rico business in the relevant territory to which
dent of Puerto Rico, you sold all your Rose Cor- source income. the income can be attributed.
poration stock for $7,000. Under the special • That office or place of business is a mate-
rules discussed earlier, none of your $6,000 Other personal property. For personal rial factor in producing the income.
gain will be treated as income from sources property other than marketable securities, use a • The income is produced in the ordinary
within Puerto Rico. time-based allocation. Figure the gain (or loss) course of the trade or business carried on
attributable to the territory holding period by through that office or other fixed place of
The source rules discussed in the pre- multiplying your total gain (or loss) by the fol- business.
! ceding paragraphs supplement, and lowing fraction.
CAUTION may apply in conjunction with, an exist- An office or other fixed place of business is
ing special rule. This existing special rule ap- a material factor if it significantly contributes to,
plies if you are a U.S. citizen or resident alien Number of days in the and is an essential economic element in, the
who becomes a bona fide resident of American territory holding period earning of the income.
Samoa, the CNMI, or Guam, and who has gain Total number of days
from the disposition of certain U.S. assets dur- in your holding period The three kinds of income from sources out-
ing the 10-year period beginning when you be- side the relevant territory to which these rules
came a bona fide resident. The gain is U.S. apply are the following.
source income that is generally subject to U.S. The result is your gain (or loss) that is trea-
tax if the property is either (1) located in the Uni- ted as being from sources within the relevant 1. Rents and royalties for the use of, or for
ted States; (2) stock issued by a U.S. corpora- territory. the privilege of using, intangible personal
property located outside the relevant terri-
tion or a debt obligation of a U.S. person or of tory or from any interest in such property.
the United States, a state (or political subdivi- Example 3. In addition to the stock in Rose
sion), or the District of Columbia; or (3) property Corporation, you acquired a 5% interest in the Included are rents or royalties for the use
that has a basis in whole or in part by reference Alder Partnership on January 1, 2018. On of, or for the privilege of using, outside the
to property described in (1) or (2). See chap- March 1, 2019, when you established bona fide relevant territory, patents, copyrights, se-
ter 3 for filing information. residency in Puerto Rico, your partnership inter- cret processes and formulas, goodwill,
est was not considered a marketable security. trademarks, trade brands, franchises, and
On September 15, 2022, while still a bona fide similar properties if the rents or royalties
Special election. You can choose to treat the resident of Puerto Rico, you sold your interest in are from the active conduct of a trade or
part of gain (or loss) attributable to the time you Alder Partnership for a $100,000 gain. You had business in the relevant territory.
held the property while a bona fide resident of owned the interest for a total of 1,719 days. 2. Dividends or interest from the active con-
the relevant territory (the territory holding pe- Your territory holding period (from March 1, duct of a banking, financing, or similar
riod) as gain (or loss) from sources within that 2019, through September 15, 2022) is 1,294 business in the relevant territory.
territory. Make the election by reporting the gain days. The portion of your gain attributable to
attributable to the territory holding period on Puerto Rico is $75,276 ($100,000 x (1,294 Pu- 3. Income, gain, or loss from the sale or ex-
your income tax return for the year of disposi- erto Rico days ÷ 1,719 total days)). By reporting change outside the relevant territory,
tion. This election overrides both of the special $75,276 of your $100,000 gain as Puerto Rico through the office or other fixed place of
rules discussed earlier. business in the relevant territory, of:
Page 10 Chapter 2 Possession Source Income
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