Title 26 — Internal Revenue CodeRelease 119-73
§863 Special rules for determining source
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter N— - Tax Based on Income From Sources Within or Without the United States › Part PART I— - SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME › § 863
Summary
Decides where income and related costs count as coming from—inside or outside the United States—and tells the Treasury Department to make rules for that. If money items are tied to U.S. sources, you first subtract the costs and losses that belong to them and a fair share of costs that can’t be split exactly. Whatever is left is treated as U.S.-source income. If income comes partly from inside and partly from outside the U.S., you figure taxable income after subtracting the right costs, then use formulas the Treasury gives to decide the U.S. portion. This covers things like services done partly in and partly out of the U.S. and certain sales of inventory produced and sold in different places. For transportation, if a trip starts and ends in the U.S., all related income counts as U.S.-source. If a trip only starts or only ends in the U.S., half of that income counts as U.S.-source, but that 50% rule does not apply to personal service income unless the trip is between the U.S. and a U.S. possession. “Transportation income” means money from using or leasing a ship or plane or from services tied directly to them. Income from space or ocean activities is treated as U.S.-source if earned by a U.S. person and as foreign-source if earned by a non-U.S. person, unless Treasury rules say otherwise; this does not include transportation, international communications, or certain mining/oil activities. For international communications, a U.S. person’s income is split 50% U.S. and 50% foreign. A non-U.S. person’s communications income is generally foreign-source, except the part tied to a U.S. office is U.S.-source.
Full Legal Text
Title 26, §863
Internal Revenue Code — Source: USLM XML via OLRC
(a)Items of gross income, expenses, losses, and deductions, other than those specified in section 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)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,
(c)(1)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)(A)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,
(B)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.
(3)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.
(d)(1)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)For purposes of paragraph (1)—
(A)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.
(B)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).
(e)(1)(A)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)(i)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)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)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.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2017—Subsec. (b). Pub. L. 115–97 inserted at end of concluding provisions “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.” 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, § 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, § 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, § 1212(e), substituted “services” for “transportation or other services”. Subsec. (b)(2), (3). Pub. L. 99–514, § 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, § 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, § 1213(a), added subsecs. (d) and (e). 1984—Subsec. (c). Pub. L. 98–369 added subsec. (c). 1976—Subsec. (a). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”. Subsec. (b). Pub. L. 94–455, §§ 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.
Statutory Notes and Related Subsidiaries
Effective Date
of 2017 Amendment Pub. L. 115–97, title I, § 14303(b), Dec. 22, 2017, 131 Stat. 2225, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 2017.”
Effective Date
of 1997 AmendmentAmendment 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 AmendmentAmendment 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 AmendmentAmendment 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 AmendmentAmendment 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. Pub. L. 99–514, title XII, § 1212(f), Oct. 22, 1986, 100 Stat. 2539, 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 section 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, 198664,567,000
April 22, 198664,598,000
May 22, 1986175,300,000.” Pub. L. 99–514, title XII, § 1213(b), Oct. 22, 1986, 100 Stat. 2541, 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 Pub. L. 98–369, div. A, title I, § 124(b),
July 18, 1984, 98 Stat. 647, 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 AmendmentAmendment 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 StatesFor nonapplication of
Amendments
by section 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 Date
sFor 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 ExpendituresFor 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 ExpendituresFor 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.
Reference
Citations & Metadata
Citation
26 U.S.C. § 863
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73