PART I—SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME
Editorial Notes
Amendments
1988—
1986—
§861. Income from sources within the United States
(a) Gross income from sources within United States
The following items of gross income shall be treated as income from sources within the United States:
(1) Interest
Interest from the United States or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of noncorporate residents or domestic corporations not including—
(A) interest—
(i) on deposits with a foreign branch of a domestic corporation or a domestic partnership if such branch is engaged in the commercial banking business, and
(ii) on amounts satisfying the requirements of subparagraph (B) of section 871(i)(3) which are paid by a foreign branch of a domestic corporation or a domestic partnership, and
(B) in the case of a foreign partnership, which is predominantly engaged in the active conduct of a trade or business outside the United States, any interest not paid by a trade or business engaged in by the partnership in the United States and not allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(2) Dividends
The amount received as dividends—
(A) from a domestic corporation, or
(B) from a foreign corporation unless less than 25 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period which was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States bears to its gross income from all sources; but dividends (other than dividends for which a deduction is allowable under section 245(b)) from a foreign corporation shall, for purposes of subpart A of part III (relating to foreign tax credit), be treated as income from sources without the United States to the extent (and only to the extent) exceeding the amount which is 100/50th of the amount of the deduction allowable under section 245 in respect of such dividends, or
(C) from a foreign corporation to the extent that such amount is required by section 243(e) (relating to certain dividends from foreign corporations) to be treated as dividends from a domestic corporation which is subject to taxation under this chapter, and to such extent subparagraph (B) shall not apply to such amount, or
(D) from a DISC or former DISC (as defined in section 992(a)) except to the extent attributable (as determined under regulations prescribed by the Secretary) to qualified export receipts described in section 993(a)(1) (other than interest and gains described in section 995(b)(1)).
In the case of any dividend from a 20-percent owned corporation (as defined in section 243(c)(2)), subparagraph (B) shall be applied by substituting "100/65th" for "100/50th".
(3) Personal services
Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if—
(A) the labor or services are performed by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year,
(B) such compensation does not exceed $3,000 in the aggregate, and
(C) the compensation is for labor or services performed as an employee of or under a contract with—
(i) a nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or
(ii) an individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation.
In addition, compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States.
(4) Rentals and royalties
Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property.
(5) Disposition of United States real property interest
Gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)).
(6) Sale or exchange of inventory property
Gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) without the United States (other than within a possession of the United States) and its sale or exchange within the United States.
(7) Amounts received as underwriting income (as defined in section 832(b)(3)) derived from the issuing (or reinsuring) of any insurance or annuity contract—
(A) in connection with property in, liability arising out of an activity in, or in connection with the lives or health of residents of, the United States, or
(B) in connection with risks not described in subparagraph (A) as a result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect to issuing (or reinsuring) any insurance or annuity contract in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, the United States.
(8) Social security benefits
Any social security benefit (as defined in section 86(d)).
(9) Guarantees
Amounts received, directly or indirectly, from—
(A) a noncorporate resident or domestic corporation for the provision of a guarantee of any indebtedness of such resident or corporation, or
(B) any foreign person for the provision of a guarantee of any indebtedness of such person, if such amount is connected with income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(b) Taxable income from sources within United States
From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.
(c) Special rule for application of subsection (a)(2)(B)
For purposes of subsection (a)(2)(B), if the foreign corporation has no gross income from any source for the 3-year period (or part thereof) specified, the requirements of such subsection shall be applied with respect to the taxable year of such corporation in which the payment of the dividend is made.
(d) Income from certain railroad rolling stock treated as income from sources within the United States
(1) General rule
For purposes of subsection (a) and section 862(a), if—
(A) a taxpayer leases railroad rolling stock which is section 1245 property (as defined in section 1245(a)(3)) to a domestic common carrier by railroad or a corporation which is controlled, directly or indirectly, by one or more such common carriers, and
(B) the use under such lease is expected to be use within the United States,
all amounts includible in gross income by the taxpayer with respect to such railroad rolling stock (including gain from sale or other disposition of such railroad rolling stock) shall be treated as income from sources within the United States. The requirements of subparagraph (B) of the preceding sentence shall be treated as satisfied if the only expected use outside the United States is use by a person (whether or not a United States person) in Canada or Mexico on a temporary basis which is not expected to exceed a total of 90 days in any taxable year.
(2) Paragraph (1) not to apply where lessor is a member of controlled group which includes a railroad
Paragraph (1) shall not apply to a lease between two members of the same controlled group of corporations (as defined in section 1563) if any member of such group is a domestic common carrier by railroad or a switching or terminal company all of whose stock is owned by one or more domestic common carriers by railroad.
(3) Denial of foreign tax credit
No credit shall be allowed under section 901 for any payments to foreign countries with respect to any amount received by the taxpayer with respect to railroad rolling stock which is subject to paragraph (1).
(e) Cross reference
For treatment of interest paid by the branch of a foreign corporation, see section 884(f).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2018—Subsec. (a)(2)(A).
2017—Subsec. (a)(2).
Subsec. (a)(2)(B).
2010—Subsec. (a)(1).
Subsec. (a)(9).
Subsecs. (c) to (f).
2004—Subsec. (a)(1)(C).
2001—Subsec. (a)(3).
1997—Subsec. (a)(3).
1996—Subsec. (e)(1)(A).
1990—Subsec. (a)(1)(A), (B).
"(C) interest on a debt obligation which was part of an issue with respect to which an election has been made under subsection (c) of section 4912 (as in effect before July 1, 1974) and which, when issued (or treated as issued under subsection (c)(2) of such section), had a maturity not exceeding 15 years and, when issued, was purchased by one or more underwriters with a view to distribution through resale, but only with respect to interest attributable to periods after the date of such election, and
"(D) interest on a debt obligation which was part of an issue which—
"(i) was part of an issue outstanding on April 1, 1971,
"(ii) was guaranteed by a United States person,
"(iii) was treated under
"(iv) as of June 30, 1974, had a maturity of not more than 15 years, and
"(v) when issued, was purchased by one or more underwriters for the purpose of distribution through resale."
Subsec. (e)(1)(A).
Subsec. (e)(2).
1989—Subsec. (a)(6).
Subsec. (e)(1).
1988—Subsec. (a)(2)(B).
Subsec. (a)(2)(C).
Subsec. (a)(6).
Subsec. (a)(7).
Subsec. (c)(1)(B).
Subsec. (c)(2)(B)(ii).
Subsec. (f).
1987—Subsec. (a)(2).
Subsec. (a)(2)(B).
1986—Subsec. (a)(1).
Subsec. (a)(1)(A).
Subsec. (a)(1)(B).
Subsec. (a)(1)(C).
Subsec. (a)(1)(D).
Subsec. (a)(1)(E).
Subsec. (a)(1)(F).
Subsec. (a)(1)(G).
Subsec. (a)(1)(H).
Subsec. (a)(2)(A).
Subsec. (a)(2)(B).
Subsec. (a)(6).
Subsec. (b).
Subsec. (c).
Subsec. (d).
Subsecs. (e), (f).
1983—Subsec. (a)(8).
1980—Subsec. (a)(5).
Subsec. (e).
1978—Subsec. (a)(1)(F).
Subsec. (f).
1977—Subsec. (b).
1976—Subsec. (a)(1).
Subsec. (a)(2)(A).
Subsec. (a)(2)(D).
Subsec. (a)(5), (6).
Subsec. (a)(7).
Subsec. (c)(3).
Subsec. (e)(1).
Subsecs. (e)(2), (3).
1975—Subsec. (a)(1)(H).
Subsec. (c)(3).
1971—Subsec. (a)(1)(G).
Subsec. (a)(2)(D).
Subsec. (e).
1969—Subsec. (a)(1)(C), (D).
Subsec. (c)(3).
1966—Subsec. (a)(1)(A).
Subsec. (a)(1)(B).
Subsec. (a)(1)(C) to (F).
Subsec. (a)(2)(B).
Subsec. (a)(3)(C)(ii).
Subsecs. (c), (d).
1962—Subsec. (a)(2)(B).
1960—Subsec. (a)(2)(C).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2010 Amendment
"(1)
"(2)
"(A)
"(B)
"(C)
Effective Date of 2004 Amendment
Effective Date of 2001 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by section 11813(b)(17) of
Effective Date of 1989 Amendment
Amendment by section 7811(i)(2) of
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 104(b)(11) of
Amendment by section 1211(b)(1)(B) of
Amendment by section 1212(d) of
"(1)
"(2)
"(A)
"(B)
"(3)
"(A)
"(B)
"(4)
"(A)
"(B)
"(i) was incorporated in Delaware in February, 1979,
"(ii) is headquartered in Garden City, New York, and
"(iii) the parent corporation of which is a resident of Sweden."
[
Amendment by section 1241(b) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
"(1)
"(2)
"(A)
"(B)
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
For effective date of amendment by section 1051(h)(3) of
Amendment by section 1901(b)(26)(A), (B), (c)(7) of
Amendment by section 1904(b)(10)(B) of
Effective Date of 1975 Amendment
Effective Date of 1971 Amendments
Amendment by section 503 of
Effective Date of 1969 Amendment
Effective Date of 1966 Amendment
"(1) The amendments made by subsections (a), (c), and (d) [amending this section and
"(2) The amendments made by subsection (b) [amending this section] shall apply with respect to amounts received after December 31, 1966."
Effective Date of 1962 Amendment
Amendment by
Effective Date of 1960 Amendment
Amendment by
Short Title of 1971 Amendment
Short Title of 1966 Amendment
Savings Provisions
For provisions that nothing in amendment by
For provisions that nothing in amendment by
Dividends Received or Accrued During 1987
Subsec. (a)(2)(B) of this section to be applied by substituting "100/80ths" for the fraction specified therein with regard to dividends received or accrued during 1987, see section 1006(b)(1)(B) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
"(2)
"(A) The amendments made by section 1201 of the Reform Act [amending
"(B) The amendments made by title VII of the Reform Act [enacting
"(3)
"(A) The amendments made by section 1211 of the Reform Act [enacting
"(i) such amendments apply in the case of an individual treated as a resident of a foreign country under a treaty obligation of the United States as so in effect, or
"(ii) such amendments relate to income of a nonresident from the sale or exchange of inventory property which would otherwise be sourced under section 865(e)(2) of the 1986 Code.
"(B) The amendments made by section 1212(a) of the Reform Act [amending
"(C) The amendments made by subsections (b) and (c) of section 1212 of the Reform Act [enacting
"(D) The amendments made by section 1214 of the Reform Act [amending this section and
"(E) The amendment made by section 1241(a) of the Reform Act [enacting
"(F) The amendment made by section 1241(b)(2)(A) of the Reform Act [amending this section].
"(G) The amendment made by section 1241(a) of the Reform Act [enacting
"(H) The amendments made by section 1242 of the Reform Act [amending
"(I) The amendment made by section 1247(a) of the Reform Act [amending
"(J) The amendments made by section 123 of the Reform Act [amending
"(4)
Qualified Research and Experimental Expenditures; Allocation and Apportionment; Definitions; Special Rules; Effective Dates
"(a)
"(1) Any qualified research and experimental expenditures expended solely to meet legal requirements imposed by a political entity with respect to the improvement or marketing of specific products or processes for purposes not reasonably expected to generate gross income (beyond de minimis amounts) outside the jurisdiction of the political entity shall be allocated only to gross income from sources within such jurisdiction.
"(2) In the case of any qualified research and experimental expenditures (not allocated under paragraph (1)) to the extent—
"(A) that such expenditures are attributable to activities conducted in the United States, 64 percent of such expenditures shall be allocated and apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and
"(B) that such expenditures are attributable to activities conducted outside the United States, 64 percent of such expenditures shall be allocated and apportioned to income from sources outside the United States and deducted from such income in determining the amount of taxable income from sources outside the United States.
"(3) The remaining portion of qualified research and experimental expenditures (not allocated under paragraphs (1) and (2)) shall be apportioned, at the annual election of the taxpayer, on the basis of gross sales or gross income, except that, if the taxpayer elects to apportion on the basis of gross income, the amount apportioned to income from sources outside the United States shall be at least 30 percent of the amount which would be so apportioned on the basis of gross sales.
"(b)
"(c)
"(1)
"(A) if incurred by a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted in the United States, and
"(B) if incurred by a person other than a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted outside the United States.
"(2)
"(A) in space,
"(B) on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States, or
"(C) in Antarctica.
"(d)
"(1) Except as provided in paragraph (2), the allocation and apportionment required by subsection (a) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5) of section 864 of the 1986 Code) were a single corporation.
"(2) For purposes of the allocation and apportionment required by subsection (a)—
"(A) sales and gross income from products produced in whole or in part in a possession by an electing corporation (within the meaning of [former] section 936(h)(5)(E) of the 1986 Code); and
"(B) dividends from an electing corporation,
shall not be taken into account, except that this paragraph shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under [former] section 936(h)(5)(F) of the 1986 Code is not in effect.
"(3) The qualified research and experimental expenditures taken into account for purposes of subsection (a) shall be adjusted to reflect the amount of such expenditures included in computing the cost-sharing amount (determined under [former] section 936(h)(5)(C)(i)(I) of the 1986 Code).
"(4) The Secretary of the Treasury or his delegate may prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by paragraph (3).
"(5) Paragraph (6) of section 864(e) of the 1986 Code shall not apply to qualified research and experimental expenditures.
"(e)
"(1)
"(2)
"(A) the lesser of 4 months or the number of months in the taxable year, bears to
"(B) the number of months in the taxable year."
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
"(a)
"(1) 50 percent of all amounts allowable as a deduction for qualified research and experimental expenditures shall be apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and
"(2) the remaining portion of such amounts shall be apportioned on the basis of gross sales or gross income.
The preceding sentence shall not apply to any expenditures described in section 1.861–8(e)(3)(i)(B) of the Income Tax Regulations.
"(b)
"(1)
"(A) which are research and experimental expenditures within the meaning of section 174 of such Code, and
"(B) which are attributable to activities conducted in the United States.
"(2)
"(c)
Allocation Under Section 861 of Research and Experimental Expenditures
"(a)
"(b)
"(1)
"(A) which are research and experimental expenditures within the meaning of section 174 of such Code, and
"(B) which are attributable to activities conducted in the United States.
"(2)
"(c)
"(1)
"(2)
Conformity of Amendments Made by Foreign Investors Tax Act of 1966 With Treaty Obligations of the United States
§862. Income from sources without the United States
(a) Gross income from sources without United States
The following items of gross income shall be treated as income from sources without the United States:
(1) interest other than that derived from sources within the United States as provided in section 861(a)(1);
(2) dividends other than those derived from sources within the United States as provided in section 861(a)(2);
(3) compensation for labor or personal services performed without the United States;
(4) rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like properties;
(5) gains, profits, and income from the sale or exchange of real property located without the United States;
(6) gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within the United States and its sale or exchange without the United States;
(7) underwriting income other than that derived from sources within the United States as provided in section 861(a)(7);
(8) gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)) when the real property is located in the Virgin Islands; and
(9) amounts received, directly or indirectly, from a foreign person for the provision of a guarantee of indebtedness of such person other than amounts which are derived from sources within the United States as provided in section 861(a)(9).
(b) Taxable income from sources without United States
From the items of gross income specified in subsection (a) there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2010—Subsec. (a)(9).
1989—Subsec. (a)(6).
1988—Subsec. (c).
"(c)
1986—Subsec. (a)(6).
Subsec. (b).
1981—Subsec. (a)(8).
1977—Subsec. (b).
1976—Subsec. (a)(5), (6).
Subsec. (a)(7).
1971—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 2010 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 104(b)(12) of
Amendment by section 1211(b)(1)(C) of
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1036(b) of
Amendment by section 1901(b)(26)(C) of
Effective Date of 1971 Amendment
Amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1211(b)(1)(C) of
Qualified Research and Experimental Expenditures; Allocation and Apportionment; Definitions; Special Rules; Effective Dates
For allocation and apportionment of qualified research and experimental expenditures for purposes of
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
For rule governing allocation under subsec. (b) of this section of amounts allowable as a deduction for qualified research and experimental expenditures during taxable years beginning after Aug. 1, 1986, and on or before Aug. 1, 1987, see section 1216 of
Allocation Under Section 861 of Research and Experimental Expenditures
For purposes of subsec. (b) of this section, all amounts allowable as a deduction for qualified research and experimental expenditures are to be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States for taxable years beginning after Aug. 13, 1983, and on or before Aug. 1, 1986, see section 126 of
§863. Special rules for determining source
(a) Allocation under regulations
Items of gross income, expenses, losses, and deductions, other than those specified in sections 861(a) and 862(a), shall be allocated or apportioned to sources within or without the United States, under regulations prescribed by the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States.
(b) Income partly from within and partly from without the United States
In the case of gross income derived from sources partly within and partly without the United States, the taxable income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income; and the portion of such taxable income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Secretary. Gains, profits, and income—
(1) from services rendered partly within and partly without the United States,
(2) from the sale or exchange of inventory property (within the meaning of section 865(i)(1)) produced (in whole or in part) by the taxpayer within and sold or exchanged without the United States, or produced (in whole or in part) by the taxpayer without and sold or exchanged within the United States, or
(3) derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within a possession of the United States and its sale or exchange within the United States,
shall be treated as derived partly from sources within and partly from sources without the United States. Gains, profits, and income from the sale or exchange of inventory property described in paragraph (2) shall be allocated and apportioned between sources within and without the United States solely on the basis of the production activities with respect to the property.
(c) Source rule for certain transportation income
(1) Transportation beginning and ending in the United States
All transportation income attributable to transportation which begins and ends in the United States shall be treated as derived from sources within the United States.
(2) Other transportation having United States connection
(A) In general
50 percent of all transportation income attributable to transportation which—
(i) is not described in paragraph (1), and
(ii) begins or ends in the United States,
shall be treated as from sources in the United States.
(B) Special rule for personal service income
Subparagraph (A) shall not apply to any transportation income which is income derived from personal services performed by the taxpayer, unless such income is attributable to transportation which—
(i) begins in the United States and ends in a possession of the United States, or
(ii) begins in a possession of the United States and ends in the United States.
In the case of transportation income derived from, or in connection with, a vessel, this subparagraph shall only apply if the taxpayer is a citizen or resident alien.
(3) Transportation income
For purposes of this subsection, the term "transportation income" means any income derived from, or in connection with—
(A) the use (or hiring or leasing for use) of a vessel or aircraft, or
(B) the performance of services directly related to the use of a vessel or aircraft.
For purposes of the preceding sentence, the term "vessel or aircraft" includes any container used in connection with a vessel or aircraft.
(d) Source rules for space and certain ocean activities
(1) In general
Except as provided in regulations, any income derived from a space or ocean activity—
(A) if derived by a United States person, shall be sourced in the United States, and
(B) if derived by a person other than a United States person, shall be sourced outside the United States.
(2) Space or ocean activity
For purposes of paragraph (1)—
(A) In general
The term "space or ocean activity" means—
(i) any activity conducted in space, and
(ii) any activity conducted on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States.
Such term includes any activity conducted in Antarctica.
(B) Exception for certain activities
The term "space or ocean activity" shall not include—
(i) any activity giving rise to transportation income (as defined in section 863(c)),
(ii) any activity giving rise to international communications income (as defined in subsection (e)(2)), and
(iii) any activity with respect to mines, oil and gas wells, or other natural deposits to the extent within the United States or any foreign country or possession of the United States (as defined in section 638).
For purposes of applying section 638, the jurisdiction of any foreign country shall not include any jurisdiction not recognized by the United States.
(e) International communications income
(1) Source rules
(A) United States persons
In the case of any United States person, 50 percent of any international communications income shall be sourced in the United States and 50 percent of such income shall be sourced outside the United States.
(B) Foreign persons
(i) In general
Except as provided in regulations or clause (ii), in the case of any person other than a United States person, any international communications income shall be sourced outside the United States.
(ii) Special rule for income attributable to office or fixed place of business in the United States
In the case of any person (other than a United States person) who maintains an office or other fixed place of business in the United States, any international communications income attributable to such office or other fixed place of business shall be sourced in the United States.
(2) Definition
For purposes of this section, the term "international communications income" includes all income derived from the transmission of communications or data from the United States to any foreign country (or possession of the United States) or from any foreign country (or possession of the United States) to the United States.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2017—Subsec. (b).
1997—Subsec. (c)(2)(B).
1989—Subsec. (b)(2), (3).
1988—
Subsec. (e)(2).
1986—Subsec. (b)(1).
Subsec. (b)(2), (3).
Subsec. (c)(2).
Subsecs. (d), (e).
1984—Subsec. (c).
1976—Subsec. (a).
Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1211(b)(1)(A) of
"(1)
"(2)
"(3)
"(A)
"(B)
| "March 5, 1986 | $176,844,000 |
| February 5, 1986 | 64,567,000 |
| April 22, 1986 | 64,598,000 |
| May 22, 1986 | 175,300,000." |
Effective Date of 1984 Amendment
Effective Date of 1976 Amendment
Amendment by section 1901(b)(26)(C), (D) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendments by sections 1211(b)(1)(A) and 1212(a) of
Qualified Research and Experimental Expenditures; Allocation and Appointment; Definitions; Special Rules; Effective Dates
For allocation and apportionment of qualified research and experimental expenditures for purposes of
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
For rule governing allocation under subsec. (b) of this section of amounts allowable as a deduction for qualified research and experimental expenditures during taxable years beginning after Aug. 1, 1986, and on or before Aug. 1, 1987, see section 1216 of
Allocation Under Section 861 of Research and Experimental Expenditures
For purposes of subsec. (b) of this section, all amounts allowable as a deduction for qualified research and experimental expenditures are to be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States for taxable years beginning after Aug. 13, 1983, and on or before Aug. 1, 1986, see section 126 of
§864. Definitions and special rules
(a) Produced
For purposes of this part, the term "produced" includes created, fabricated, manufactured, extracted, processed, cured, or aged.
(b) Trade or business within the United States
For purposes of this part, part II, and
(1) Performance of personal services for foreign employer
The performance of personal services—
(A) for a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or
(B) for an office or place of business maintained in a foreign country or in a possession of the United States by an individual who is a citizen or resident of the United States or by a domestic partnership or a domestic corporation,
by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensation for such services does not exceed in the aggregate $3,000.
(2) Trading in securities or commodities
(A) Stocks and securities
(i) In general
Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent.
(ii) Trading for taxpayer's own account
Trading in stocks or securities for the taxpayer's own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in stocks or securities.
(B) Commodities
(i) In general
Trading in commodities through a resident broker, commission agent, custodian, or other independent agent.
(ii) Trading for taxpayer's own account
Trading in commodities for the taxpayer's own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in commodities.
(iii) Limitation
Clauses (i) and (ii) shall apply only if the commodities are of a kind customarily dealt in on an organized commodity exchange and if the transaction is of a kind customarily consummated at such place.
(C) Limitation
Subparagraphs (A)(i) and (B)(i) shall apply only if, at no time during the taxable year, the taxpayer has an office or other fixed place of business in the United States through which or by the direction of which the transactions in stocks or securities, or in commodities, as the case may be, are effected.
(c) Effectively connected income, etc.
(1) General rule
For purposes of this title—
(A) In the case of a nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year, the rules set forth in paragraphs (2), (3), (4), (6), (7), and (8) shall apply in determining the income, gain, or loss which shall be treated as effectively connected with the conduct of a trade or business within the United States.
(B) Except as provided in paragraph (6) 1 (7), or (8) or in section 871(d) or sections 882(d) and (e), in the case of a nonresident alien individual or a foreign corporation not engaged in trade or business within the United States during the taxable year, no income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the United States.
(2) Periodical, etc., income from sources within United States—factors
In determining whether income from sources within the United States of the types described in section 871(a)(1), section 871(h), section 881(a), or section 881(c), or whether gain or loss from sources within the United States from the sale or exchange of capital assets, is effectively connected with the conduct of a trade or business within the United States, the factors taken into account shall include whether—
(A) the income, gain, or loss is derived from assets used in or held for use in the conduct of such trade or business, or
(B) the activities of such trade or business were a material factor in the realization of the income, gain, or loss.
In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business.
(3) Other income from sources within United States
All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States.
(4) Income from sources without United States
(A) Except as provided in subparagraphs (B) and (C), no income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States.
(B) Income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or a foreign corporation if such person has an office or other fixed place of business within the United States to which such income, gain, or loss is attributable and such income, gain, or loss—
(i) consists of rents or royalties for the use of or for the privilege of using intangible property described in section 862(a)(4) derived in the active conduct of such trade or business;
(ii) consists of dividends, interest, or amounts received for the provision of guarantees of indebtedness, and either is derived in the active conduct of a banking, financing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or
(iii) is derived from the sale or exchange (outside the United States) through such office or other fixed place of business of personal property described in section 1221(a)(1), except that this clause shall not apply if the property is sold or exchanged for use, consumption, or disposition outside the United States and an office or other fixed place of business of the taxpayer in a foreign country participated materially in such sale.
Any income or gain which is equivalent to any item of income or gain described in clause (i), (ii), or (iii) shall be treated in the same manner as such item for purposes of this subparagraph.
(C) In the case of a foreign corporation taxable under part I or part II of subchapter L, any income from sources without the United States which is attributable to its United States business shall be treated as effectively connected with the conduct of a trade or business within the United States.
(D) No income from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States if it either—
(i) consists of dividends, interest, or royalties paid by a foreign corporation in which the taxpayer owns (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or
(ii) is subpart F income within the meaning of section 952(a).
(5) Rules for application of paragraph (4)(B)
For purposes of subparagraph (B) of paragraph (4)—
(A) in determining whether a nonresident alien individual or a foreign corporation has an office or other fixed place of business, an office or other fixed place of business of an agent shall be disregarded unless such agent (i) has the authority to negotiate and conclude contracts in the name of the nonresident alien individual or foreign corporation and regularly exercises that authority or has a stock of merchandise from which he regularly fills orders on behalf of such individual or foreign corporation, and (ii) is not a general commission agent, broker, or other agent of independent status acting in the ordinary course of his business,
(B) income, gain, or loss shall not be considered as attributable to an office or other fixed place of business within the United States unless such office or fixed place of business is a material factor in the production of such income, gain, or loss and such office or fixed place of business regularly carries on activities of the type from which such income, gain, or loss is derived, and
(C) the income, gain, or loss which shall be attributable to an office or other fixed place of business within the United States shall be the income, gain, or loss property allocable thereto, but, in the case of a sale or exchange described in clause (iii) of such subparagraph, the income which shall be treated as attributable to an office or other fixed place of business within the United States shall not exceed the income which would be derived from sources within the United States if the sale or exchange were made in the United States.
(6) Treatment of certain deferred payments, etc.
For purposes of this title, in the case of any income or gain of a nonresident alien individual or a foreign corporation which—
(A) is taken into account for any taxable year, but
(B) is attributable to a sale or exchange of property or the performance of services (or any other transaction) in any other taxable year,
the determination of whether such income or gain is taxable under section 871(b) or 882 (as the case may be) shall be made as if such income or gain were taken into account in such other taxable year and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year referred to in subparagraph (A).
(7) Treatment of certain property transactions
For purposes of this title, if—
(A) any property ceases to be used or held for use in connection with the conduct of a trade or business within the United States, and
(B) such property is disposed of within 10 years after such cessation,
the determination of whether any income or gain attributable to such disposition is taxable under section 871(b) or 882 (as the case may be) shall be made as if such sale or exchange occurred immediately before such cessation and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year for which such income or gain is taken into account.
(8) Gain or loss of foreign persons from sale or exchange of certain partnership interests
(A) In general
Notwithstanding any other provision of this subtitle, if a nonresident alien individual or foreign corporation owns, directly or indirectly, an interest in a partnership which is engaged in any trade or business within the United States, gain or loss on the sale or exchange of all (or any portion of) such interest shall be treated as effectively connected with the conduct of such trade or business to the extent such gain or loss does not exceed the amount determined under subparagraph (B).
(B) Amount treated as effectively connected
The amount determined under this subparagraph with respect to any partnership interest sold or exchanged—
(i) in the case of any gain on the sale or exchange of the partnership interest, is—
(I) the portion of the partner's distributive share of the amount of gain which would have been effectively connected with the conduct of a trade or business within the United States if the partnership had sold all of its assets at their fair market value as of the date of the sale or exchange of such interest, or
(II) zero if no gain on such deemed sale would have been so effectively connected, and
(ii) in the case of any loss on the sale or exchange of the partnership interest, is—
(I) the portion of the partner's distributive share of the amount of loss on the deemed sale described in clause (i)(I) which would have been so effectively connected, or
(II) zero if no loss on such deemed sale would be have been so effectively connected.
For purposes of this subparagraph, a partner's distributive share of gain or loss on the deemed sale shall be determined in the same manner as such partner's distributive share of the non-separately stated taxable income or loss of such partnership.
(C) Coordination with United States real property interests
If a partnership described in subparagraph (A) holds any United States real property interest (as defined in section 897(c)) at the time of the sale or exchange of the partnership interest, then the gain or loss treated as effectively connected income under subparagraph (A) shall be reduced by the amount so treated with respect to such United States real property interest under section 897.
(D) Sale or exchange
For purposes of this paragraph, the term "sale or exchange" means any sale, exchange, or other disposition.
(E) Secretarial authority
The Secretary shall prescribe such regulations or other guidance as the Secretary determines appropriate for the application of this paragraph, including with respect to exchanges described in section 332, 351, 354, 355, 356, or 361.
(d) Treatment of related person factoring income
(1) In general
For purposes of the provisions set forth in paragraph (2), if any person acquires (directly or indirectly) a trade or service receivable from a related person, any income of such person from the trade or service receivable so acquired shall be treated as if it were interest on a loan to the obligor under the receivable.
(2) Provisions to which paragraph (1) applies
The provisions set forth in this paragraph are as follows:
(A) Section 904 (relating to limitation on foreign tax credit).
(B) Subpart F of part III of this subchapter (relating to controlled foreign corporations).
(3) Trade or service receivable
For purposes of this subsection, the term "trade or service receivable" means any account receivable or evidence of indebtedness arising out of—
(A) the disposition by a related person of property described in section 1221(a)(1), or
(B) the performance of services by a related person.
(4) Related person
For purposes of this subsection, the term "related person" means—
(A) any person who is a related person (within the meaning of section 267(b)), and
(B) any United States shareholder (as defined in section 951(b)) and any person who is a related person (within the meaning of section 267(b)) to such a shareholder.
(5) Certain provisions not to apply
The following provisions shall not apply to any amount treated as interest under paragraph (1) or (6):
(A) Section 904(d)(2)(B)(iii)(I) (relating to exceptions for export financing interest).
(B) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).
(C) Subparagraph (B) of section 954(c)(2) (relating to certain export financing).
(D) Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).
(6) Special rule for certain income from loans of a controlled foreign corporation
Any income of a controlled foreign corporation (within the meaning of section 957(a)) from a loan to a person for the purpose of financing—
(A) the purchase of property described in section 1221(a)(1) of a related person, or
(B) the payment for the performance of services by a related person,
shall be treated as interest described in paragraph (1).
(7) Exception for certain related persons doing business in same foreign country
Paragraph (1) shall not apply to any trade or service receivable acquired by any person from a related person if—
(A) the person acquiring such receivable and such related person are created or organized under the laws of the same foreign country and such related person has a substantial part of its assets used in its trade or business located in such same foreign country, and
(B) such related person would not have derived any foreign base company income (as defined in section 954(a), determined without regard to section 954(b)(3)(A)), or any income effectively connected with the conduct of a trade or business within the United States, from such receivable if it had been collected by such related person.
(8) Regulations
The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the provisions of this subsection or section 956(c)(3).
(e) Rules for allocating interest, etc.
For purposes of this subchapter—
(1) Treatment of affiliated groups
The taxable income of each member of an affiliated group shall be determined by allocating and apportioning interest expense of each member as if all members of such group were a single corporation.
(2) Gross income and fair market value methods may not be used for interest
All allocations and apportionments of interest expense shall be determined using the adjusted bases of assets rather than on the basis of the fair market value of the assets or gross income.
(3) Tax-exempt assets not taken into account
For purposes of allocating and apportioning any deductible expense, any tax-exempt asset (and any income from such an asset) shall not be taken into account. A similar rule shall apply in the case of the portion of any dividend (other than a qualifying dividend as defined in section 243(b)) equal to the deduction allowable under section 243 or 245(a) with respect to such dividend and in the case of a like portion of any stock the dividends on which would be so deductible and would not be qualifying dividends (as so defined).
(4) Basis of stock in nonaffiliated 10-percent owned corporations adjusted for earnings and profits changes
(A) In general
For purposes of allocating and apportioning expenses on the basis of assets, the adjusted basis of any stock in a nonaffiliated 10-percent owned corporation shall be—
(i) increased by the amount of the earnings and profits of such corporation attributable to such stock and accumulated during the period the taxpayer held such stock, or
(ii) reduced (but not below zero) by any deficit in earnings and profits of such corporation attributable to such stock for such period.
(B) Nonaffiliated 10-percent owned corporation
For purposes of this paragraph, the term "nonaffiliated 10-percent owned corporation" means any corporation if—
(i) such corporation is not included in the taxpayer's affiliated group, and
(ii) members of such affiliated group own 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote.
(C) Earnings and profits of lower tier corporations taken into account
(i) In general
If, by reason of holding stock in a nonaffiliated 10-percent owned corporation, the taxpayer is treated under clause (iii) as owning stock in another corporation with respect to which the stock ownership requirements of clause (ii) are met, the adjustment under subparagraph (A) shall include an adjustment for the amount of the earnings and profits (or deficit therein) of such other corporation which are attributable to the stock the taxpayer is so treated as owning and to the period during which the taxpayer is treated as owning such stock.
(ii) Stock ownership requirements
The stock ownership requirements of this clause are met with respect to any corporation if members of the taxpayer's affiliated group own (directly or through the application of clause (iii)) 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote.
(iii) Stock owned through entities
For purposes of this subparagraph, stock owned (directly or indirectly) by a corporation, partnership, or trust shall be treated as being owned proportionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence, shall, for purposes of applying such sentence, be treated as actually owned by such person.
(D) Coordination with subpart F, etc.
For purposes of this paragraph, proper adjustment shall be made to the earnings and profits of any corporation to take into account any earnings and profits included in gross income under section 951 or under any other provision of this title and reflected in the adjusted basis of the stock.
(5) Affiliated group
For purposes of this subsection—
(A) In general
Except as provided in subparagraph (B), the term "affiliated group" has the meaning given such term by section 1504. Notwithstanding the preceding sentence, a foreign corporation shall be treated as a member of the affiliated group if—
(i) more than 50 percent of the gross income of such foreign corporation for the taxable year is effectively connected with the conduct of a trade or business within the United States, and
(ii) at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group (determined with regard to this sentence).
(B) Treatment of certain financial institutions
For purposes of subparagraph (A), any corporation described in subparagraph (C) shall be treated as an includible corporation for purposes of section 1504 only for purposes of applying such section separately to corporations so described. This subparagraph shall not apply for purposes of paragraph (6).
(C) Description
A corporation is described in this subparagraph if—
(i) such corporation is a financial institution described in section 581 or 591,
(ii) the business of such financial institution is predominantly with persons other than related persons (within the meaning of subsection (d)(4)) or their customers, and
(iii) such financial institution is required by State or Federal law to be operated separately from any other entity which is not such an institution.
(D) Treatment of bank holding companies
To the extent provided in regulations—
(i) a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956), and
(ii) any subsidiary of a financial institution described in section 581 or 591 or of any bank holding company if such subsidiary is predominantly engaged (directly or indirectly) in the active conduct of a banking, financing, or similar business,
shall be treated as a corporation described in subparagraph (C).
(6) Allocation and apportionment of other expenses
Expenses other than interest which are not directly allocable or apportioned to any specific income producing activity shall be allocated and apportioned as if all members of the affiliated group were a single corporation.
(7) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing—
(A) for the resourcing of income of any member of an affiliated group or modifications to the consolidated return regulations to the extent such resourcing or modification is necessary to carry out the purposes of this section,
(B) for direct allocation of interest expense incurred to carry out an integrated financial transaction to any interest (or interest-type income) derived from such transaction and in other circumstances where such allocation would be appropriate to carry out the purposes of this subsection,
(C) for the apportionment of expenses allocated to foreign source income among the members of the affiliated group and various categories of income described in section 904(d)(1),
(D) for direct allocation of interest expense in the case of indebtedness resulting in a disallowance under section 246A,
(E) for appropriate adjustments in the application of paragraph (3) in the case of an insurance company,
(F) preventing assets or interest expense from being taken into account more than once, and
(G) that this subsection shall not apply for purposes of any provision of this subchapter to the extent the Secretary determines that the application of this subsection for such purposes would not be appropriate.
[(f) Repealed. Pub. L. 117–2, title IX, §9671(a), Mar. 11, 2021, 135 Stat. 184 ]
(g) Allocation of research and experimental expenditures
(1) In general
For purposes of sections 861(b), 862(b), and 863(b), qualified research and experimental expenditures shall be allocated and apportioned as follows:
(A) Any qualified research and experimental expenditures expended solely to meet legal requirements imposed by a political entity with respect to the improvement or marketing of specific products or processes for purposes not reasonably expected to generate gross income (beyond de minimis amounts) outside the jurisdiction of the political entity shall be allocated only to gross income from sources within such jurisdiction.
(B) In the case of any qualified research and experimental expenditures (not allocated under subparagraph (A)) to the extent—
(i) that such expenditures are attributable to activities conducted in the United States, 50 percent of such expenditures shall be allocated and apportioned to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States, and
(ii) that such expenditures are attributable to activities conducted outside the United States, 50 percent of such expenditures shall be allocated and apportioned to income from sources outside the United States and deducted from such income in determining the amount of taxable income from sources outside the United States.
(C) The remaining portion of qualified research and experimental expenditures (not allocated under subparagraphs (A) and (B)) shall be apportioned, at the annual election of the taxpayer, on the basis of gross sales or gross income, except that, if the taxpayer elects to apportion on the basis of gross income, the amount apportioned to income from sources outside the United States shall at least be 30 percent of the amount which would be so apportioned on the basis of gross sales.
(2) Qualified research and experimental expenditures
For purposes of this section, the term "qualified research and experimental expenditures" means amounts which are research and experimental expenditures within the meaning of section 174. For purposes of this paragraph, rules similar to the rules of subsection (c) 2 of section 174 shall apply. Any qualified research and experimental expenditures treated as deferred expenses under subsection (b) 2 of section 174 shall be taken into account under this subsection for the taxable year for which such expenditures are allowed as a deduction under such subsection.
(3) Special rules for expenditures attributable to activities conducted in space, etc.
(A) In general
Any qualified research and experimental expenditures described in subparagraph (B)—
(i) if incurred by a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted in the United States, and
(ii) if incurred by a person other than a United States person, shall be allocated and apportioned under this section in the same manner as if they were attributable to activities conducted outside the United States.
(B) Description of expenditures
For purposes of subparagraph (A), qualified research and experimental expenditures are described in this subparagraph if such expenditures are attributable to activities conducted—
(i) in space,
(ii) on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States, or
(iii) in Antarctica.
(4) Affiliated group
(A) Except as provided in subparagraph (B), the allocation and apportionment required by paragraph (1) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5)) were a single corporation.
(B) For purposes of the allocation and apportionment required by paragraph (1)—
(i) sales and gross income from products produced in whole or in part in a possession by an electing corporation (within the meaning of section 936(h)(5)(E)),2 and
(ii) dividends from an electing corporation,
shall not be taken into account, except that this subparagraph shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under section 936(h)(5)(F) 2 is not in effect.
(C) The qualified research and experimental expenditures taken into account for purposes of paragraph (1) shall be adjusted to reflect the amount of such expenditures included in computing the cost-sharing amount (determined under section 936(h)(5)(C)(i)(I)).2
(D) The Secretary may prescribe such regulations as may be necessary to carry out the purposes of this paragraph, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by subparagraph (B) or (C).
(E) Paragraph (6) of subsection (e) shall not apply to qualified research and experimental expenditures.
(5) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection, including regulations relating to the determination of whether any expenses are attributable to activities conducted in the United States or outside the United States and regulations providing such adjustments to the provisions of this subsection as may be appropriate in the case of cost-sharing arrangements and contract research.
(6) Applicability
This subsection shall apply to the taxpayer's first taxable year (beginning on or before August 1, 1994) following the taxpayer's last taxable year to which Revenue Procedure 92–56 applies or would apply if the taxpayer elected the benefits of such Revenue Procedure.
(Aug. 16, 1954, ch. 736,
Editorial Notes
References in Text
Section 2(a) of the Bank Holding Company Act of 1956, referred to in subsec. (e)(5)(D)(i), is classified to
Section 174, referred to in subsec. (g)(2), was amended generally by
Section 936, referred to in subsec. (g)(4)(B), (C), was repealed by
Amendments
2021—Subsec. (f).
2018—Subsec. (d)(5).
Subsec. (d)(8).
Subsec. (e)(5)(A).
Subsec. (f)(1)(C)(i).
Subsec. (f)(2).
2017—Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
Subsec. (c)(8).
Subsec. (e)(2).
2010—Subsec. (c)(4)(B)(ii).
Subsec. (e)(5)(A).
Subsec. (f)(5)(D), (6).
2009—Subsec. (f)(5)(D), (6).
Subsec. (f)(7).
2008—Subsec. (f)(5)(D), (6).
Subsec. (f)(7).
2004—Subsec. (c)(4)(B).
Subsec. (d)(2).
Subsec. (d)(5)(A)(i).
Subsec. (e)(3).
Subsec. (e)(7)(B).
Subsec. (e)(7)(F), (G).
Subsecs. (f), (g).
2000—Subsec. (e)(3).
1999—Subsecs. (c)(4)(B)(iii), (d)(3)(A), (6)(A).
1997—Subsec. (b)(2)(A)(ii).
1993—Subsec. (f)(1)(B).
Subsec. (f)(4)(D).
Subsec. (f)(5), (6).
"(A)
"(B)
1991—Subsec. (f)(5).
1990—Subsec. (f)(5).
"(A)
"(B)
"(i) the lesser of 9 months or the number of months in the taxable year, bears to
"(ii) the number of months in the taxable year."
1989—Subsec. (f).
1988—Subsec. (b)(2)(A)(ii).
Subsec. (c)(2).
Subsec. (c)(4)(B)(i), (ii).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(6).
Subsec. (c)(7).
Subsec. (d)(5)(A)(i).
Subsec. (e).
Subsec. (e)(1).
Subsec. (e)(3).
Subsec. (e)(4).
"(A) increased by the amount of the earnings and profits of such corporation attributable to such stock and accumulated during the period the taxpayer held such stock, or
"(B) reduced (but not below zero) by any deficit in earnings and profits of such corporation attributable to such stock for such period."
Subsec. (e)(5)(B).
Subsec. (e)(5)(D).
Subsec. (e)(6).
Subsec. (e)(7)(D) to (F).
1987—Subsec. (c)(4)(C).
1986—
Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
Subsec. (c)(2).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(6), (7).
Subsec. (d)(5)(A)(i).
Subsec. (d)(5)(A)(ii).
Subsec. (d)(5)(A)(iii).
Subsec. (d)(5)(A)(iv).
Subsec. (d)(5)(B).
Subsec. (d)(7), (8).
Subsec. (e).
1984—Subsec. (c)(2).
Subsec. (d).
1976—Subsec. (a).
Subsec. (c)(4)(B)(i).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(5)(C).
1966—
Statutory Notes and Related Subsidiaries
Effective Date of 2021 Amendment
Effective Date of 2017 Amendment
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2009 Amendment
Effective Date of 2008 Amendment
Effective Date of 2004 Amendment
Amendment by section 101(b)(6) of
"(1) the amendments made by this section [amending this section and
"(2) in the case of taxable years beginning after December 31, 2004, clause (iv) of section 904(d)(4)(C) of the Internal Revenue Code of 1986 (as amended by this section) shall be applied by substituting 'January 1, 2005' for 'January 1, 2003' both places it appears."
[Amendment by
Amendment by section 413(c)(12) of
Effective Date of 2000 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1991 Amendment
Effective Date of 1990 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1201(d)(4) of
Amendment by section 1211(b)(2) of
"(1)
"(2)
"(A)
"(i)
"(ii)
| The applicable | |
| "In the case of the: | percentage is: |
| 1st taxable year | 75 |
| 2nd taxable year | 50 |
| 3rd taxable year | 25. |
"(iii)
"(B)
"(i)
"(I) subparagraph (A) shall not apply for purposes of paragraph (1) of section 864(e) of the Internal Revenue Code of 1986 (as added by this section), but
"(II) such paragraph (1) shall not apply to interest expenses paid or accrued by the taxpayer during the taxable year with respect to an aggregate amount of indebtedness which does not exceed the special phase-in amount.
"(ii)
"(I) the general phase-in amount as determined for purposes of subparagraph (A),
"(II) the 5-year phase-in amount, and
"(III) the 4-year phase-in amount.
For purposes of applying this subparagraph to interest expense attributable to any month, the special phase-in amount shall in no event exceed the limitation determined under subparagraph (A)(iii).
"(iii) 5-
"(I) the applicable percentage (determined under the following table for purposes of this subclause) of the 5-year debt amount, or
"(II) the applicable percentage (determined under the following table for purposes of this subclause) of the 5-year debt amount reduced by paydowns:
| "In the case of the: | The applicable percentage for purposes of subclause (I) is: | The applicable percentage for purposes of subclause (II) is: |
|---|---|---|
| 1st taxable year | 81/3 | 10 |
| 2nd taxable year | 162/3 | 25 |
| 3rd taxable year | 25 | 50 |
| 4th taxable year | 331/3 | 100 |
| 5th taxable year | 162/3 | 100. |
"(iv) 4-
"(I) the applicable percentage (determined under the following table for purposes of this subclause) of the 4-year debt amount, or
"(II) the applicable percentage (determined under the following table for purposes of this subclause) of the 4-year debt amount reduced by paydowns to the extent such paydowns exceed the 5-year debt amount:
| "In the case of the: | The applicable percentage for purposes of subclause (I) is: | The applicable percentage for purposes of subclause (II) is: |
|---|---|---|
| 1st taxable year | 5 | 6¼ |
| 2nd taxable year | 10 | 162/3 |
| 3rd taxable year | 15 | 37½ |
| 4th taxable year | 20 | 100 |
| 5th taxable year | 0 | 0. |
"(v) 5-
"(I) the amount of the outstanding indebtedness of the taxpayer on May 29, 1985, over
"(II) the amount of the outstanding indebtedness of the taxpayer as of the close of December 31, 1983.
The 5-year debt amount shall not exceed the aggregate amount of indebtedness of the taxpayer outstanding on November 16, 1985.
"(vi) 4-
"(I) the amount referred to in clause (v)(II), over
"(II) the amount of the outstanding indebtedness of the taxpayer as of the close of December 31, 1982.
The 4-year debt amount shall not exceed the aggregate amount of indebtedness of the taxpayer outstanding on November 16, 1985, reduced by the 5-year debt amount.
"(vii)
"(I) the aggregate amount of indebtedness of the taxpayer outstanding on November 16, 1985, over
"(II) the lowest amount of indebtedness of the taxpayer outstanding as of the close of any preceding month beginning after November 16, 1985 (or, to the extent provided in regulations under subparagraph (A)(iii), the average amount of indebtedness outstanding during any such month).
"(C)
"(D)
"(i) In the case of the 1st 9 taxable years of the taxpayer beginning after December 31, 1986, the amendments made by this section shall not apply to interest expenses paid or accrued by the taxpayer during the taxable year with respect to an aggregate amount of indebtedness which does not exceed the applicable percentage (determined under the following table) of the indebtedness described in clause (iii) or (iv):
| "In the case of the: | The applicable percentage is: |
|---|---|
| 1st taxable year | 90 |
| 2nd taxable year | 80 |
| 3rd taxable year | 70 |
| 4th taxable year | 60 |
| 5th taxable year | 50 |
| 6th taxable year | 40 |
| 7th taxable year | 30 |
| 8th taxable year | 20 |
| 9th taxable year | 10. |
"(ii) The provisions of this subparagraph shall apply in lieu of the provisions of subparagraphs (A) and (B).
"(iii)
"(iv)
"(E)
"(F)
"(3)
"(A)
"(i) the indebtedness was incurred to develop or improve existing property that is owned by the taxpayer on November 16, 1985, and was acquired with the intent to develop or improve the property,
"(ii) the loan agreement with respect to the indebtedness provides that the funds are to be utilized for purposes of developing or improving the above property, and
"(iii) the debt to equity ratio of the companies that join in the filing of the consolidated return is less than 15 percent.
"(B)
"(i) which was incorporated in Delaware on June 29, 1964,
"(ii) the principal subsidiary of which is a resident of Arkansas, and
"(iii) which is a member of an affiliated group the average daily United States production of oil of which is less than 50,000 barrels and the average daily United States refining of which is less than 150,000 barrels.
"(4)
"(A) $100,000,000 face amount of 11¾ percent notes due in 1990,
"(B) $100,000,000 of 8¾ percent notes due in 1989,
"(C) 6¾ percent Japanese yen notes due in 1991, and
"(D) 53/8 percent Swiss franc bonds due in 1994.
For purposes of this paragraph, the term 'applicable dollar amount' means $600,000,000 in the case of taxable years beginning in 1987 through 1991, $500,000,000 in the case of the taxable year beginning in 1992, $400,000,000 in the case of the taxable year beginning in 1993, $300,000,000 in the case of the taxable year beginning in 1994, $200,000,000 in the case of the taxable year beginning in 1995, $100,000,000 in the case of the taxable year beginning in 1996, and zero in the case of taxable years beginning after 1996.
"[(5) Repealed.
"(6)
"(A)
"(B)
| "In the case of taxable | The phase-in |
| years beginning in: | percentage is: |
| 1987 | 75 |
| 1988 | 50 |
| 1989 | 25." |
[
["(1)
["(2)
Amendment by section 1221(a)(2) of
Amendment by section 1275(c)(7) of
Amendment by section 1810(c)(2), (3) of
Effective Date of 1984 Amendment
"(1)
"(2)
"(A) $15,000,000 or
"(B) the amount of the Belgian corporation's adjusted basis on March 1, 1984, in stock of a foreign corporation formed to issue bonds outside the United States to the public."
Amendment by section 127(c) of
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by section 401(d)(1)(D)(x), (xvii)(IV), (V) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For applicability of amendment by section 1201(d)(4) of
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
1 So in original. Probably should be followed by a comma.
2 See References in Text note below.
§865. Source rules for personal property sales
(a) General rule
Except as otherwise provided in this section, income from the sale of personal property—
(1) by a United States resident shall be sourced in the United States, or
(2) by a nonresident shall be sourced outside the United States.
(b) Exception for inventory property
In the case of income derived from the sale of inventory property—
(1) this section shall not apply, and
(2) such income shall be sourced under the rules of sections 861(a)(6), 862(a)(6), and 863.
Notwithstanding the preceding sentence, any income from the sale of any unprocessed timber which is a softwood and was cut from an area in the United States shall be sourced in the United States and the rules of sections 862(a)(6) and 863(b) shall not apply to any such income. For purposes of the preceding sentence, the term "unprocessed timber" means any log, cant, or similar form of timber.
(c) Exception for depreciable personal property
(1) In general
Gain (not in excess of the depreciation adjustments) from the sale of depreciable personal property shall be allocated between sources in the United States and sources outside the United States—
(A) by treating the same proportion of such gain as sourced in the United States as the United States depreciation adjustments with respect to such property bear to the total depreciation adjustments, and
(B) by treating the remaining portion of such gain as sourced outside the United States.
(2) Gain in excess of depreciation
Gain (in excess of the depreciation adjustments) from the sale of depreciable personal property shall be sourced as if such property were inventory property.
(3) United States depreciation adjustments
For purposes of this subsection—
(A) In general
The term "United States depreciation adjustments" means the portion of the depreciation adjustments to the adjusted basis of the property which are attributable to the depreciation deductions allowable in computing taxable income from sources in the United States.
(B) Special rule for certain property
Except in the case of property of a kind described in section 168(g)(4), if, for any taxable year—
(i) such property is used predominantly in the United States, or
(ii) such property is used predominantly outside the United States,
all of the depreciation deductions allowable for such year shall be treated as having been allocated to income from sources in the United States (or, where clause (ii) applies, from sources outside the United States).
(4) Other definitions
For purposes of this subsection—
(A) Depreciable personal property
The term "depreciable personal property" means any personal property if the adjusted basis of such property includes depreciation adjustments.
(B) Depreciation adjustments
The term "depreciation adjustments" means adjustments reflected in the adjusted basis of any property on account of depreciation deductions (whether allowed with respect to such property or other property and whether allowed to the taxpayer or to any other person).
(C) Depreciation deductions
The term "depreciation deductions" means any deductions for depreciation or amortization or any other deduction allowable under any provision of this chapter which treats an otherwise capital expenditure as a deductible expense.
(d) Exception for intangibles
(1) In general
In the case of any sale of an intangible—
(A) this section shall apply only to the extent the payments in consideration of such sale are not contingent on the productivity, use, or disposition of the intangible, and
(B) to the extent such payments are so contingent, the source of such payments shall be determined under this part in the same manner as if such payments were royalties.
(2) Intangible
For purposes of paragraph (1), the term "intangible" means any patent, copyright, secret process or formula, goodwill, trademark, trade brand, franchise, or other like property.
(3) Special rule in the case of goodwill
To the extent this section applies to the sale of goodwill, payments in consideration of such sale shall be treated as from sources in the country in which such goodwill was generated.
(4) Coordination with subsection (c)
(A) Gain not in excess of depreciation adjustments sourced under subsection (c)
Notwithstanding paragraph (1), any gain from the sale of an intangible shall be sourced under subsection (c) to the extent such gain does not exceed the depreciation adjustments with respect to such intangible.
(B) Subsection (c)(2) not to apply to intangibles
Paragraph (2) of subsection (c) shall not apply to any gain from the sale of an intangible.
(e) Special rules for sales through offices or fixed places of business
(1) Sales by residents
(A) In general
In the case of income not sourced under subsection (b), (c), (d)(1)(B) or (3), or (f), if a United States resident maintains an office or other fixed place of business in a foreign country, income from sales of personal property attributable to such office or other fixed place of business shall be sourced outside the United States.
(B) Tax must be imposed
Subparagraph (A) shall not apply unless an income tax equal to at least 10 percent of the income from the sale is actually paid to a foreign country with respect to such income.
(2) Sales by nonresidents
(A) In general
Notwithstanding any other provisions of this part, if a nonresident maintains an office or other fixed place of business in the United States, income from any sale of personal property (including inventory property) attributable to such office or other fixed place of business shall be sourced in the United States. The preceding sentence shall not apply for purposes of section 971 (defining export trade corporation).
(B) Exception
Subparagraph (A) shall not apply to any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer in a foreign country materially participated in the sale.
(3) Sales attributable to an office or other fixed place of business
The principles of section 864(c)(5) shall apply in determining whether a taxpayer has an office or other fixed place of business and whether a sale is attributable to such an office or other fixed place of business.
(f) Stock of affiliates
If—
(1) a United States resident sells stock in an affiliate which is a foreign corporation,
(2) such sale occurs in a foreign country in which such affiliate is engaged in the active conduct of a trade or business, and
(3) more than 50 percent of the gross income of such affiliate for the 3-year period ending with the close of such affiliate's taxable year immediately preceding the year in which the sale occurred was derived from the active conduct of a trade or business in such foreign country,
any gain from such sale shall be sourced outside the United States. For purposes of paragraphs (2) and (3), the United States resident may elect to treat an affiliate and all other corporations which are wholly owned (directly or indirectly) by the affiliate as one corporation.
(g) United States resident; nonresident
For purposes of this section—
(1) In general
Except as otherwise provided in this subsection—
(A) United States resident
The term "United States resident" means—
(i) any individual who—
(I) is a United States citizen or a resident alien and does not have a tax home (as defined in section 911(d)(3)) in a foreign country, or
(II) is a nonresident alien and has a tax home (as so defined) in the United States, and
(ii) any corporation, trust, or estate which is a United States person (as defined in section 7701(a)(30)).
(B) Nonresident
The term "nonresident" means any person other than a United States resident.
(2) Special rules for United States citizens and resident aliens
For purposes of this section, a United States citizen or resident alien shall not be treated as a nonresident with respect to any sale of personal property unless an income tax equal to at least 10 percent of the gain derived from such sale is actually paid to a foreign country with respect to that gain.
(3) Special rule for certain stock sales by residents of Puerto Rico
Paragraph (2) shall not apply to the sale by an individual who was a bona fide resident of Puerto Rico during the entire taxable year of stock in a corporation if—
(A) such corporation is engaged in the active conduct of a trade or business in Puerto Rico, and
(B) more than 50 percent of its gross income for the 3-year period ending with the close of such corporation's taxable year immediately preceding the year in which such sale occurred was derived from the active conduct of a trade or business in Puerto Rico.
For purposes of the preceding sentence, the taxpayer may elect to treat a corporation and all other corporations which are wholly owned (directly or indirectly) by such corporation as one corporation.
(h) Treatment of gains from sale of certain stock or intangibles and from certain liquidations
(1) In general
In the case of gain to which this subsection applies—
(A) such gain shall be sourced outside the United States, but
(B) subsections (a), (b), and (c) of section 904 and sections 907 and 960 shall be applied separately with respect to such gain.
(2) Gain to which subsection applies
This subsection shall apply to—
(A) Gain from sale of certain stock or intangibles
Any gain—
(i) which is from the sale of stock in a foreign corporation or an intangible (as defined in subsection (d)(2)) and which would otherwise be sourced in the United States under this section,
(ii) which, under a treaty obligation of the United States (applied without regard to this section), would be sourced outside the United States, and
(iii) with respect to which the taxpayer chooses the benefits of this subsection.
(B) Gain from liquidation in possession
Any gain which is derived from the receipt of any distribution in liquidation of a corporation—
(i) which is organized in a possession of the United States, and
(ii) more than 50 percent of the gross income of which during the 3-taxable year period ending with the close of the taxable year immediately preceding the taxable year in which the distribution is received is from the active conduct of a trade or business in such possession.
(i) Other definitions
For purposes of this section—
(1) Inventory property
The term "inventory property" means personal property described in paragraph (1) of section 1221(a).
(2) Sale includes exchange
The term "sale" includes an exchange or any other disposition.
(3) Treatment of possessions
Any possession of the United States shall be treated as a foreign country.
(4) Affiliate
The term "affiliate" means a member of the same affiliated group (within the meaning of section 1504(a) without regard to section 1504(b)).
(5) Treatment of partnerships
In the case of a partnership, except as provided in regulations, this section shall be applied at the partner level.
(j) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section, including regulations—
(1) relating to the treatment of losses from sales of personal property,
(2) applying the rules of this section to income derived from trading in futures contracts, forward contracts, options contracts, and other instruments, and
(3) providing that, subject to such conditions (which may include provisions comparable to section 877) as may be provided in such regulations, subsections (e)(1)(B) and (g)(2) shall not apply for purposes of sections 931 and 933.
(k) Cross references
(1) For provisions relating to the characterization as dividends for source purposes of gains from the sale of stock in certain foreign corporations, see section 1248.
(2) For sourcing of income from certain foreign currency transactions, see section 988.
(Added
Editorial Notes
Amendments
2018—Subsec. (j)(3).
2017—Subsec. (h)(1)(B).
1999—Subsec. (i)(1).
1996—Subsec. (b)(2).
1993—Subsec. (b).
1990—Subsec. (c)(3)(B).
1988—Subsec. (d)(2).
Subsec. (d)(4).
Subsec. (e)(1)(A).
Subsec. (e)(2)(B).
"(i) any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer outside the United States materially participated in the sale, or
"(ii) any amount included in gross income under section 951(a)(1)(A)."
Subsec. (f).
"(1) a United States resident sells stock in an affiliate which is a foreign corporation,
"(2) such affiliate is engaged in the active conduct of a trade or business, and
"(3) such sale occurs in the foreign country in which the affiliate derived more than 50 percent of its gross income for the 3-year period ending with the close of the affiliate's taxable year immediately preceding the year during which such sale occurred,
any gain from such sale shall be sourced outside the United States."
Subsec. (g)(1)(A)(i).
Subsec. (g)(1)(A)(ii).
Subsec. (g)(3).
Subsec. (h).
Subsec. (i).
Subsec. (i)(5).
Subsec. (j).
Subsec. (j)(3).
Subsec. (k).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Effective Date of 1993 Amendment
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1012(d)(1)–(4), (6), (8), (9), (11), (12) of
Effective Date
"(1)
"(2)
Savings Provision
For provisions that nothing in amendment by
For provisions that nothing in amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1211(a) of