Article 13 assigns either primary — U.S. Income Tax Treaty

alienation of property to the State of residence or the State of source and defines the terms necessary to apply the Article.

Paragraph 1

Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax gains attributable to the alienation of immovable (real) property situated in that State. The

paragraph therefore permits the United States to apply section 897 of the Code to tax gains derived by a resident of the other Contracting State that are attributable to the alienation of immovable property situated in the United States (as defined in paragraph 12 of Article 1 of the Protocol). Gains attributable to the alienation of immovable property include gain from any other property that is treated as immovable property within the meaning of paragraph 12 of Article 1 of the Protocol.

Paragraph 12 of Article 1 of the Protocol provides that, in the case of the United States, the term “immovable property” includes a United States real property interest and, in the case of Italy, it includes immovable property referred to in Article 6 (Income from Immovable Property), shares or comparable interests in a company or other body of persons, the assets of which consist wholly or principally of real property situated in Italy, and an interest in an estate the assets of which consist wholly or principally of real property situated in Italy.

Under section 897(c) of the Code the term "United States real property interest" includes real property described in Article 6 (Income from Immovable Property) as well as shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an asset-ratio test on certain testing dates. The term also includes certain foreign corporations that have elected to be treated as U.S. corporations for this purpose. Section 897(i). In applying paragraph 1 the United States will look through distributions made by a REIT. Accordingly, distributions made by a REIT are taxable under paragraph 1 of Article 13 (not under Article 10 (Dividends)) when they are attributable to gains derived from the alienation of real property.

Paragraph 2

Paragraph 2 of Article 13 deals with the taxation of certain gains from the alienation of movable property forming part of the business property of a permanent establishment that an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services. This also includes gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base. Such gains may be taxed in the State in which the permanent establishment or fixed base is located.

A resident of Italy that is a partner in a partnership doing business in the United States generally will have a permanent establishment in the United States as a result of the activities of the partnership, assuming that the activities of the partnership rise to the level of a permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 2, the United States generally may tax a partner's distributive share of income realized by a partnership on the disposition of movable property forming part of the business property of the partnership in the United States.

Paragraph 6 of Article 7 (Business Profits) refers to paragraph 2 of Article 13. That rule clarifies that income that is attributable to a permanent establishment or a fixed base, but that is deferred and received after the permanent establishment or fixed base no longer exists, may nevertheless be taxed by the State in which the permanent establishment or fixed base was

located. Thus, under Article 13, gains derived by a resident of a Contracting State from the sale of movable property forming part of the business property of a permanent establishment in the other Contracting State may be taxed by that other State even if the income is deferred and received after the permanent establishment no longer exists.

Paragraph 3

This paragraph limits the taxing jurisdiction of the state of source with respect to gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft. The term “international traffic” is defined in subparagraph 1(d) of Article 3. Under paragraph 3, when such gains are derived by an enterprise of a Contracting State they are taxable only in that Contracting State. Notwithstanding paragraph 2, the rules of this paragraph apply even if the income is attributable to a permanent establishment maintained by the enterprise in the other Contracting State. This result is consistent with the general rule under Article 8 (Shipping and Air Transport) that confers exclusive taxing rights over international shipping and air transport income on the state of residence of the enterprise deriving such income.

The gains from the alienation of ships or aircraft operated in international traffic that are exempt from source State tax under paragraph 3 are defined in paragraph 13 of Article 1 of the Protocol. This paragraph is identical to the corresponding paragraph of the prior Convention. Subparagraph 13(a), consistent with paragraph 4 of the U.S. Model, explains that the exemption applies to gains from the alienation of containers (including trailers, barges, and related equipment for the transport of containers) used for the transport in international traffic of goods or merchandise. For example, if a U.S. resident leases containers for use in the international traffic of goods or merchandise, gains from the alienation of those containers by the lessor are exempt from tax in Italy.

Subparagraph 13(b) of Article 1 of the Protocol provides that gains from the alienation of ships or aircraft rented on a full (time or voyage) basis are also exempt from source State tax under paragraph 3. As in the prior Convention and the OECD Model, but unlike the U.S. Model, paragraph 3 applies to gains from the alienation of ships or aircraft rented on a bareboat basis only if the rental profits were incidental to other profits from the operation of ships or aircraft in international traffic. For example, if a U.S. airline which operates internationally leases a plane on a bareboat basis to an Italian airline, gains derived by the U.S. company from the alienation of that plane are exempt from Italian tax under paragraph 3. However, if the U.S. airline otherwise operates only within the United States, or if a U.S. bank leases the plane to the Italian airline, gains derived from the alienation of the plane are not exempt under this Article.

Paragraph 4

Paragraph 4 grants to the State of residence of the alienator the exclusive right to tax gains from the alienation of property other than property referred to in paragraphs 1 through 3. For example, gain derived from shares, other than shares described in paragraphs 1 or 2, debt instruments and various financial instruments, may be taxed only in the State of residence, to the extent such income is not otherwise characterized as income taxable under another article (e.g.,