# 26 U.S.C. § 863: Special rules for determining source Source: OLRC release point 119-134 . Cite pinpoints as 26 U.S.C. § 863(a)(1). ## § 863(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. ## § 863(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— **§ 863(b)(1)** from services rendered partly within and partly without the United States, **§ 863(b)(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 **§ 863(b)(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. ## § 863(c) Source rule for certain transportation income **§ 863(c)(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. **§ 863(c)(2) Other transportation having United States connection.** **§ 863(c)(2)(A) In general.** 50 percent of all transportation income attributable to transportation which— **§ 863(c)(2)(A)(i)** is not described in paragraph (1), and **§ 863(c)(2)(A)(ii)** begins or ends in the United States, shall be treated as from sources in the United States. **§ 863(c)(2)(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— **§ 863(c)(2)(B)(i)** begins in the United States and ends in a possession of the United States, or **§ 863(c)(2)(B)(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. **§ 863(c)(3) Transportation income.** For purposes of this subsection, the term “transportation income” means any income derived from, or in connection with— **§ 863(c)(3)(A)** the use (or hiring or leasing for use) of a vessel or aircraft, or **§ 863(c)(3)(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. ## § 863(d) Source rules for space and certain ocean activities **§ 863(d)(1) In general.** Except as provided in regulations, any income derived from a space or ocean activity— **§ 863(d)(1)(A)** if derived by a United States person, shall be sourced in the United States, and **§ 863(d)(1)(B)** if derived by a person other than a United States person, shall be sourced outside the United States. **§ 863(d)(2) Space or ocean activity.** For purposes of paragraph (1)— **§ 863(d)(2)(A) In general.** The term “space or ocean activity” means— **§ 863(d)(2)(A)(i)** any activity conducted in space, and **§ 863(d)(2)(A)(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. **§ 863(d)(2)(B) Exception for certain activities.** The term “space or ocean activity” shall not include— **§ 863(d)(2)(B)(i)** any activity giving rise to transportation income (as defined in section 863(c)), **§ 863(d)(2)(B)(ii)** any activity giving rise to international communications income (as defined in subsection (e)(2)), and **§ 863(d)(2)(B)(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. ## § 863(e) International communications income **§ 863(e)(1) Source rules.** **§ 863(e)(1)(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. **§ 863(e)(1)(B) Foreign persons.** **§ 863(e)(1)(B)(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. **§ 863(e)(1)(B)(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. **§ 863(e)(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. ## Regulations - [Treas. Reg. § 1.863-0](/26/reg/1.863-0.md): Table of contents. (interprets § 863) - [Treas. Reg. § 1.863-0A](/26/reg/1.863-0A.md): Table of contents. (interprets § 863) - [Treas. Reg. § 1.863-1](/26/reg/1.863-1.md): Allocation of gross income under section 863(a). (interprets § 863) - [Treas. Reg. § 1.863-2](/26/reg/1.863-2.md): Allocation and apportionment of taxable income. (interprets § 863) - [Treas. Reg. § 1.863-3](/26/reg/1.863-3.md): Allocation and apportionment of income from certain sales of inventory. (interprets § 863) - [Treas. Reg. § 1.863-3A](/26/reg/1.863-3A.md): Income from the sale of personal property derived partly from within and partly from without the United States. (interprets § 863) - [Treas. Reg. § 1.863-3AT](/26/reg/1.863-3AT.md): Income from the sale of personal property derived partly from within and partly from without the United States (temporary regulations). (interprets § 863) - [Treas. Reg. § 1.863-4](/26/reg/1.863-4.md): Certain transportation services. (interprets § 863) - [Treas. Reg. § 1.863-6](/26/reg/1.863-6.md): Income from sources within a foreign country. (interprets § 863) - [Treas. Reg. § 1.863-7](/26/reg/1.863-7.md): Allocation of income attributable to certain notional principal contracts under section 863(a). (interprets § 863) - [Treas. Reg. § 1.863-8](/26/reg/1.863-8.md): Source of income derived from space and ocean activity under section 863(d). (interprets § 863) - [Treas. Reg. § 1.863-9](/26/reg/1.863-9.md): Source of income derived from communications activity under section 863(a), (d), and (e). (interprets § 863) - [Treas. Reg. § 1.863-10](/26/reg/1.863-10.md): Source of income from a qualified fails charge. (interprets § 863) ## Final rules - [85 FR 79837](https://www.federalregister.gov/documents/2020/12/11/2020-21817/source-of-income-from-certain-sales-of-personal-property) (2020): Source of Income From Certain Sales of Personal Property - [85 FR 59428](https://www.federalregister.gov/documents/2020/09/22/2020-17549/ownership-attribution-under-section-958-including-for-purposes-of-determining-status-as-controlled) (2020): Ownership Attribution Under Section 958 Including for Purposes of Determining Status as Controlled Foreign Corporation or United States Shareholder - [78 FR 73079](https://www.federalregister.gov/documents/2013/12/05/2013-28933/dividend-equivalents-from-sources-within-the-united-states) (2013): Dividend Equivalents From Sources Within the United States - [77 FR 9846](https://www.federalregister.gov/documents/2012/02/21/2012-3909/source-of-income-from-qualified-fails-charges) (2012): Source of Income From Qualified Fails Charges - [73 FR 40171](https://www.federalregister.gov/documents/2008/07/14/E8-15940/remic-residual-interests-accounting-for-remic-net-income-including-any-excess-inclusions-foreign) (2008): REMIC Residual Interests-Accounting for REMIC Net Income (Including Any Excess Inclusions) (Foreign Holders) - [71 FR 77594](https://www.federalregister.gov/documents/2006/12/27/E6-22174/source-of-income-from-certain-space-and-ocean-activities-source-of-communications-income) (2006): Source of Income From Certain Space and Ocean Activities; Source of Communications Income - [71 FR 43363](https://www.federalregister.gov/documents/2006/08/01/E6-12363/remic-residual-interests-accounting-for-remic-net-income-including-any-excess-inclusions-foreign) (2006): REMIC Residual Interests-Accounting for REMIC Net Income (Including Any Excess Inclusions) (Foreign Holders) - [70 FR 18920](https://www.federalregister.gov/documents/2005/04/11/05-7087/residence-and-source-rules-involving-us-possessions-and-other-conforming-changes) (2005): Residence and Source Rules Involving U.S. Possessions and Other Conforming Changes - [69 FR 26040](https://www.federalregister.gov/documents/2004/05/11/04-10684/real-estate-mortgage-investment-conduits-application-of-section-446-with-respect-to-inducement-fees) (2004): Real Estate Mortgage Investment Conduits; Application of Section 446 With Respect to Inducement Fees - [63 FR 55020](https://www.federalregister.gov/documents/1998/10/14/98-27395/source-of-income-from-sales-of-inventory-partly-from-sources-within-a-possession-of-the-united) (1998): Source of Income From Sales of Inventory Partly From Sources Within a Possession of the United States; Also, Source of Income Derived From Certain Purchases From a Corporation Electing Section 936 - [61 FR 60540](https://www.federalregister.gov/documents/1996/11/29/96-30617/source-of-income-from-sales-of-inventory-and-natural-resources-produced-in-one-jurisdiction-and-sold) (1996): Source of Income From Sales of Inventory and Natural Resources Produced in One Jurisdiction and Sold in Another Jurisdiction - [60 FR 44274](https://www.federalregister.gov/documents/1995/08/25/95-21089/special-rules-for-determining-sources-of-scholarships-and-fellowship-grants) (1995): Special Rules for Determining Sources of Scholarships and Fellowship Grants ## Leading cases - [Phillips Petroleum Co. v. Commissioner, 101 T.C. 78 (1993)](https://www.courtlistener.com/opinion/4694909/phillips-petroleum-co-v-commissioner/) - [Clark v. Commissioner, T.C. Memo. 2008-71](https://www.courtlistener.com/opinion/4559746/clark-v-commr/) ## Proposed regulations (not in force) - [Prop. Treas. Reg. § 1.863-3](/26/prop/1.863-3_98-5674.md): (REG-208299-90, proposed 1998-03-06) - [Prop. Treas. Reg. § 1.863-7](/26/prop/1.863-7_98-5674.md): Allocation of income attributable to certain notional principal contracts under section 863(a). (REG-208299-90, proposed 1998-03-06) - [Prop. Treas. Reg. § 1.863-0](/26/prop/1.863-0_03-18212.md): Table of contents. (REG-162625-02, proposed 2003-07-21) - [Prop. Treas. Reg. § 1.863-7](/26/prop/1.863-7_2011-23665.md): Allocation of income attributable to certain notional principal contracts under section 863(a). (REG-111283-11, proposed 2011-09-16) ## Connections Cites: § 638 Continental shelf areas; § 865 Source rules for personal property sales Cited by: § 887 Imposition of tax on gross transportation income of nonresident aliens and foreign corporations; § 904 Limitation on credit Derived from: 1939 § 22(g); 1939 § 119(e) ## Amendments - 1954-08-16: [Act Aug. 16, 1954, ch. 736](/26/act/1954-ch736.md), 68A Stat. 277 - 1976-10-04: [Pub. L. 94-455](/26/act/94-455.md), 90 Stat. 1798 - 1984-07-18: [Pub. L. 98-369](/26/act/98-369.md), 98 Stat. 646 - 1986-10-22: [Pub. L. 99-514](/26/act/99-514.md), 100 Stat. 2536 - 1988-11-10: [Pub. L. 100-647](/26/act/100-647.md), 102 Stat. 3500 - 1989-12-19: [Pub. L. 101-239](/26/act/101-239.md), 103 Stat. 2409 - 1997-08-05: [Pub. L. 105-34](/26/act/105-34.md), 111 Stat. 989 - 2017-12-22: [Pub. L. 115-97](/26/act/115-97.md), 131 Stat. 2225