
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC863]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
  Subchapter N--Tax Based on Income From Sources Within or Without the 
                              United States
 
 PART I--SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME
 
Sec. 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.

(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, 68A Stat. 277; Pub. L. 94-455, title XIX, 
Secs. 1901(b)(26)(C), (D), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1798, 
1799, 1834; Pub. L. 98-369, div. A, title I, Sec. 124(a), July 18, 1984, 
98 Stat. 646; Pub. L. 99-514, title XII, Secs. 1211(b)(1)(A), 1212(a), 
(e), 1213(a), Oct. 22, 1986, 100 Stat. 2536, 2539, 2540; Pub. L. 100-
647, title I, Sec. 1012(e)(3)(A), (f), Nov 10, 1988, 102 Stat. 3500; 
Pub. L. 101-239, title VII, Sec. 7811(i)(2), Dec. 19, 1989, 103 Stat. 
2409; Pub. L. 105-34, title XI, Sec. 1174(a)(2), Aug. 5, 1997, 111 Stat. 
989.)


                               Amendments

    1997--Subsec. (c)(2)(B). Pub. L. 105-34 inserted concluding 
provisions ``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.''
    1989--Subsec. (b)(2), (3). Pub. L. 101-239 substituted ``865(i)(1)'' 
for ``865(h)(1)''.
    1988--Pub. L. 100-647, Sec. 1012(e)(3)(A), substituted ``Special 
rules for determining source'' for ``Item not specified in section 861 
or 862'' in section catchline.
    Subsec. (e)(2). Pub. L. 100-647, Sec. 1012(f), substituted ``foreign 
country (or possession of the United States)'' for ``foreign country'' 
in two places.
    1986--Subsec. (b)(1). Pub. L. 99-514, Sec. 1212(e), substituted 
``services'' for ``transportation or other services''.
    Subsec. (b)(2), (3). Pub. L. 99-514, Sec. 1211(b)(1)(A), substituted 
``inventory property (within the meaning of section 865(h)(1))'' for 
``personal property''.
    Subsec. (c)(2). Pub. L. 99-514, Sec. 1212(a), amended par. (2) 
generally, in subpar. (A) substituting provisions relating to other 
transportation having United States connections for provisions relating 
to transportation between United States and any possession, and in 
subpar. (B) substituting provisions relating to special rule for 
personal service income for provisions relating to special rule for 
certain lessors of aircraft.
    Subsecs. (d), (e). Pub. L. 99-514, Sec. 1213(a), added subsecs. (d) 
and (e).
    1984--Subsec. (c). Pub. L. 98-369 added subsec. (c).
    1976--Subsec. (a). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out 
``or his delegate'' after ``Secretary''.
    Subsec. (b). Pub. L. 94-455, Secs. 1901(b)(26)(C), (D), 
1906(b)(13)(A), struck out ``or his delegate'' after ``Secretary'' in 
introductory provisions, and inserted ``or exchange'' after ``sale'' in 
pars. (2) and (3), and ``or exchanged'' after ``sold'' in par. (2) 
wherever appearing.


                    Effective Date of 1997 Amendment

    Amendment by Pub. L. 105-34 applicable to remuneration for services 
performed in taxable years beginning after Dec. 31, 1997, see section 
1174(c) of Pub. L. 105-34, set out as a note under section 7701 of this 
title.


                    Effective Date of 1989 Amendment

    Amendment by Pub. L. 101-239 effective, except as otherwise 
provided, as if included in the provision of the Technical and 
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such 
amendment relates, see section 7817 of Pub. L. 101-239, set out as a 
note under section 1 of this title.


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1986 Amendment

    Amendment by section 1211(b)(1)(A) of Pub. L. 99-514 applicable to 
taxable years beginning after Dec. 31, 1986, except as otherwise 
provided, see section 1211(c) of Pub. L. 99-514, set out as an Effective 
Date note under section 865 of this title.
    Section 1212(f) of Pub. L. 99-514 provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendments made by this section [enacting section 887 of this title and 
amending this section and sections 861, 872, and 883 of this title] 
shall apply to taxable years beginning after December 31, 1986.
    ``(2) Special rule for certain leased property.--The amendments made 
by subsections (a) and (d) [amending this section and section 861 of 
this title] shall not apply to any income attributable to property held 
by the taxpayer on January 1, 1986, if such property was first leased by 
the taxpayer before January 1, 1986, in a lease to which section 
863(c)(2)(B) or 861(e) of the Internal Revenue Code of 1954 [now 1986] 
(as in effect on the day before the date of the enactment of this Act 
[Oct. 22, 1986]) applied.
    ``(3) Special rule for certain ships leased by the united states 
navy.--
        ``(A) In general.--In the case of any property described in 
    subparagraph (B), paragraph (2) shall be applied by substituting 
    `1987' for `1986' each place it appears.
        ``(B) Property to which paragraph applies.--Property described 
    in this subparagraph consists of 4 ships which are to be leased by 
    the United States Navy and which are the subject of Internal Revenue 
    Service rulings bearing the following dates and which involved the 
    following amount of financing, respectively:

    ``March 5, 1986......................................  $176,844,000  

    February 5, 1986......................................    64,567,000 
                                                                        
    April 22, 1986........................................    64,598,000 
                                                                        
                 May 22, 1986........................................   
                                                          175,300,000.''

    Section 1213(b) of Pub. L. 99-514 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to taxable 
years beginning after December 31, 1986.''


                    Effective Date of 1984 Amendment

    Section 124(b) of Pub. L. 98-369 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply with respect to 
transportation beginning after the date of the enactment of this Act 
[July 18, 1984] in taxable years ending after such date.''


                    Effective Date of 1976 Amendment

    Amendment by section 1901(b)(26)(C), (D) of Pub. L. 94-455 effective 
for taxable years beginning after Dec. 31, 1976, see section 1901(d) of 
Pub. L. 94-455, set out as a note under section 2 of this title.


  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 Pub. L. 99-514 to the extent application of such amendments 
would be contrary to any treaty obligation of the United States in 
effect on Oct. 22, 1986, with provision that for such purposes any 
amendment by title I of Pub. L. 100-647 be treated as if it had been 
included in the provision of Pub. L. 99-514 to which such amendment 
relates, see section 1012(aa)(3), (4) of Pub. L. 100-647, set out as a 
note under section 861 of this title.


    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 sections 861 to 863 of this 
title, see section 4009 of Pub. L. 100-647, set out as a note under 
section 861 of this title.


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 Pub. L. 99-514, set out as a 
note under section 861 of this title.


 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 Pub. L. 
98-369, set out as a note under section 861 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 818, 864, 865, 887, 954 of 
this title.
