Title 26 — Internal Revenue CodeRelease 119-73
§864 Definitions and special rules
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 › § 864
Summary
Sets plain rules for when money is treated as connected to doing business in the United States. U.S. source income is usually treated as connected if it comes from assets used in the U.S. business or if the business’s activities helped produce the income. Money from outside the U.S. is not treated as connected unless the taxpayer has a U.S. office that played a material role and the income is one of a few types (active rents or royalties on certain intangibles, dividends or interest from banking/financing or a securities trader, or sales of personal property made outside the U.S. through the U.S. office). Personal services performed in the U.S. generally count as U.S. business but there are specific exceptions for services for certain foreign principals and for trading in stocks, securities, or commodities under set conditions. If property stops being used in the U.S. business and is sold within 10 years, or if a partner sells a partnership interest, special rules limit how much gain or loss is treated as U.S.-connected. Also, if someone buys a receivable from a related person, the income can be treated as interest for rules like the foreign tax credit and Subpart F, with some exceptions when both parties are in the same foreign country. Companies in an affiliated group must split and apportion interest and other expenses as if they were one corporation, using adjusted asset bases and ignoring tax-free assets. Research costs are split 50/50 between U.S. and foreign activities, with the remainder apportioned by election but at least 30% if apportioned by gross income. Key defined words: produced = made or processed; trade or business within the United States = includes U.S. personal services with listed exceptions; trade or service receivable = an account from a related-party sale or service; related person = related as in tax rules; affiliated group = companies treated as one for these rules; qualified research and experimental expenditures = research costs under sections 174/174A. The IRS must issue rules to apply these provisions.
Full Legal Text
Title 26, §864
Internal Revenue Code — Source: USLM XML via OLRC
(a)For purposes of this part, the term “produced” includes created, fabricated, manufactured, extracted, processed, cured, or aged.
(b)For purposes of this part, part II, and chapter 3, the term “trade or business within the United States” includes the performance of personal services within the United States at any time within the taxable year, but does not include—
(1)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,
(2)(A)(i)Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent.
(ii)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)(i)Trading in commodities through a resident broker, commission agent, custodian, or other independent agent.
(ii)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)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)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)(1)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) 11 So in original. Probably should be followed by a comma. (7), or (8) or in section 871(d) or section 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)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.
(3)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)(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.
(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)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)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,
(7)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,
(8)(A)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)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.
(C)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)For purposes of this paragraph, the term “sale or exchange” means any sale, exchange, or other disposition.
(E)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)(1)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)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)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)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)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)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,
(7)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)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)For purposes of this subchapter—
(1)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)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)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)(A)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)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)(i)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)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)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)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)For purposes of this subsection—
(A)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)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)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)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,
(6)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)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)
(g)(1)For purposes of section 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)For purposes of this section, the term “qualified research and experimental expenditures” means amounts which are foreign research or experimental expenditures within the meaning of section 174 or domestic research or experimental expenditures within the meaning of section 174A. For purposes of this paragraph, rules similar to the rules of subsection (c) of section 174 shall apply. Any qualified research and experimental expenditures allowed as an amortization deduction under section 174(a) or section 174A(c), shall be taken into account under this subsection for the taxable year for which such expenditures are allowed as a deduction under such section (as the case may be).
(3)(A)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)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)(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)),22 See References in Text note below. and
(ii)dividends from an electing corporation,
(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)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)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.
Legislative History
Notes & Related Subsidiaries
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 1841(a) of Title 12, Banks and Banking. section 936, referred to in subsec. (g)(4)(B), (C), was repealed by Pub. L. 115–141, div. U, title IV, § 401(d)(1)(C), Mar. 23, 2018, 132 Stat. 1206.
Amendments
2025—Subsec. (g)(2). Pub. L. 119–21 substituted “foreign research or experimental expenditures within the meaning of section 174 or domestic research or experimental expenditures within the meaning of section 174A” for “research and experimental expenditures within the meaning of section 174”, “allowed as an amortization deduction under section 174(a) or section 174A(c),” for “treated as deferred expenses under subsection (b) of section 174”, and “such section (as the case may be)” for “such subsection”. 2021—Subsec. (f). Pub. L. 117–2 struck out subsec. (f) which related to election to allocate interest and other expenses on worldwide basis. 2018—Subsec. (d)(5). Pub. L. 115–141, § 401(d)(1)(D)(x), amended par. (5) generally. Prior to amendment, par. (5) related to certain provisions that did not apply to any amount treated as interest under par. (1) or (6). Subsec. (d)(8). Pub. L. 115–141, § 401(a)(152), substituted “section 956(c)(3)” for “section 956(b)(3)”. Subsec. (e)(5)(A). Pub. L. 115–141, § 401(d)(1)(D)(xvii)(IV), struck out “(determined without regard to paragraph (4) of section 1504(b))” after “section 1504” in introductory provisions. Subsec. (f)(1)(C)(i). Pub. L. 115–141, § 401(d)(1)(D)(xvii)(V), substituted “paragraph (2)” for “paragraphs (2) and (4)”. Subsec. (f)(2). Pub. L. 115–141, § 401(d)(1)(D)(xvii)(V), which directed amendment of par. (2) by substituting “paragraph (2)” for “paragraphs (2) and (4)”, was executed by making the substitution for “paragraph (4)”, to reflect the probable intent of Congress. 2017—Subsec. (c)(1)(A). Pub. L. 115–97, § 13501(a)(2)(A), substituted “(7), and (8)” for “and (7)”. Subsec. (c)(1)(B). Pub. L. 115–97, § 13501(a)(2)(B), substituted “(7), or (8)” for “or (7)”. Subsec. (c)(8). Pub. L. 115–97, § 13501(a)(1), added par. (8). Subsec. (e)(2). Pub. L. 115–97, § 14502(a), amended par. (2) generally. Prior to amendment, text read as follows: “All allocations and apportionments of interest expense shall be made on the basis of assets rather than gross income.” 2010—Subsec. (c)(4)(B)(ii). Pub. L. 111–240 substituted “dividends, interest, or amounts received for the provision of guarantees of indebtedness” for “dividends or interest”. Subsec. (e)(5)(A). Pub. L. 111–226 inserted at end “Notwithstanding the preceding sentence, a foreign corporation shall be treated as a member of the affiliated group if—” and added cls. (i) and (ii). Subsec. (f)(5)(D), (6). Pub. L. 111–147 substituted “
December 31, 2020” for “
December 31, 2017”. 2009—Subsec. (f)(5)(D), (6). Pub. L. 111–92, § 15(a), substituted “
December 31, 2017” for “
December 31, 2010”. Subsec. (f)(7). Pub. L. 111–92, § 15(b), struck out par. (7). Text read as follows: “In the case of the first taxable year to which this subsection applies, the increase (if any) in the amount of the interest expense allocable to sources within the United States by reason of the application of this subsection shall be 30 percent of the amount of such increase determined without regard to this paragraph.” 2008—Subsec. (f)(5)(D), (6). Pub. L. 110–289, § 3093(a), substituted “
December 31, 2010” for “
December 31, 2008”. Subsec. (f)(7). Pub. L. 110–289, § 3093(b), added par. (7). 2004—Subsec. (c)(4)(B). Pub. L. 108–357, § 894(a), added concluding provisions. Subsec. (d)(2). Pub. L. 108–357, § 413(c)(12), redesignated subpars. (B) and (C) as (A) and (B), respectively, and struck out former subpar. (A) which read as follows: “Part III of subchapter G of this chapter (relating to foreign personal holding companies).” Subsec. (d)(5)(A)(i). Pub. L. 108–357, § 403(b)(6), substituted “(C)(iii)(II)” for “(C)(iii)(III)”. Subsec. (e)(3). Pub. L. 108–357, § 101(b)(6), struck out “(A) In general” before “For purposes” and struck out heading and text of subpar. (B). Text read as follows: “For purposes of allocating and apportioning any interest expense, there shall not be taken into account any qualifying foreign trade property (as defined in section 943(a)) which is held by the taxpayer for lease or rental in the ordinary course of trade or business for use by the lessee outside the United States (as defined in section 943(b)(2)).” Subsec. (e)(7)(B). Pub. L. 108–357, § 401(b)(1), inserted “and in other circumstances where such allocation would be appropriate to carry out the purposes of this subsection” before comma at end. Subsec. (e)(7)(F), (G). Pub. L. 108–357, § 401(b)(2), added subpar. (F) and redesignated former subpar. (F) as (G). Subsecs. (f), (g). Pub. L. 108–357, § 401(a), added subsec. (f) and redesignated former subsec. (f) as (g). 2000—Subsec. (e)(3). Pub. L. 106–519 designated existing provisions as subpar. (A), inserted heading, and added subpar. (B). 1999—Subsecs. (c)(4)(B)(iii), (d)(3)(A), (6)(A). Pub. L. 106–170 substituted “section 1221(a)(1)” for “section 1221(1)”. 1997—Subsec. (b)(2)(A)(ii). Pub. L. 105–34 struck out “, or in the case of a corporation (other than a corporation which is, or but for section 542(c)(7), 542(c)(10), or 543(b)(1)(C) would be, a personal holding company) the principal business of which is trading in stocks or securities for its own account, if its principal office is in the United States” after “dealer in stocks or securities”. 1993—Subsec. (f)(1)(B). Pub. L. 103–66, § 13234(a), substituted “50 percent” for “64 percent” in cls. (i) and (ii). Subsec. (f)(4)(D). Pub. L. 103–66, § 13234(b)(2), substituted “subparagraph (B) or (C)” for “subparagraph (C)”. Subsec. (f)(5), (6). Pub. L. 103–66, § 13234(b)(1), added pars. (5) and (6) and struck out heading and text of former par. (5). Text read as follows: “(A) In general.—This subsection shall apply to the taxpayer’s first 3 taxable years beginning after
August 1, 1989, and on or before
August 1, 1992. “(B) Reduction.—Notwithstanding subparagraph (A), in the case of the taxpayer’s first taxable year beginning after
August 1, 1991, this subsection shall only apply to qualified research and experimental expenditures incurred during the first 6 months of such taxable year.” 1991—Subsec. (f)(5). Pub. L. 102–227 amended par. (5) generally. Prior to amendment, par. (5) read as follows: “This subsection shall apply to the taxpayer’s first 2 taxable years beginning after
August 1, 1989, and on or before
August 1, 1991.” 1990—Subsec. (f)(5). Pub. L. 101–508 substituted “Years” for “Year” in heading and amended text generally. Prior to amendment, text read as follows: “(A) In general.—Except as provided in this paragraph, this subsection shall apply to the taxpayer’s first taxable year beginning after
August 1, 1989, and before
August 2, 1990. “(B) Reduction.—Notwithstanding subparagraph (A), this subsection shall only apply to that portion of the qualified research and experimental expenditures for the taxable year referred to in subparagraph (A) which bears the same ratio to the total amount of such expenditures as— “(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). Pub. L. 101–239 added subsec. (f). 1988—Subsec. (b)(2)(A)(ii). Pub. L. 100–647, § 1012(p)(30), substituted “section 542(c)(7), 542(c)(10),” for “section 542(c)(7)”. Subsec. (c)(2). Pub. L. 100–647, § 1012(g)(5), struck out at end “In applying this paragraph and paragraph (4), interest referred to in section 861(a)(1)(A) shall be considered income from sources within the United States.” Subsec. (c)(4)(B)(i), (ii). Pub. L. 100–647, § 1012(d)(10), struck out “(including any gain or loss realized on the sale or exchange of such property)” after “section 862(a)(4)” in cl. (i) and “, or gain or loss from the sale or exchange of stock or notes, bonds, or other evidences of indebtedness” after “dividends or interest” in cl. (ii). Subsec. (c)(4)(B)(iii). Pub. L. 100–647, § 1012(d)(7), added cl. (iii). Subsec. (c)(6). Pub. L. 100–647, § 1012(r)(2), amended par. (6) generally. Prior to amendment, par. (6) read as follows: “For purposes of this title, any income or gain of a nonresident alien individual or a foreign corporation for any taxable year which is attributable to a sale or exchange of property or the performance of services (or any other transaction) in any other taxable year shall be treated as effectively connected with the conduct of a trade or business within the United States if it would have been so treated if such income or gain were taken into account in such other taxable year.” Subsec. (c)(7). Pub. L. 100–647, § 1012(r)(1), amended par. (7) generally. Prior to amendment, par. (7) read as follows: “For purposes of this title, if any property ceases to be used or held for use in connection with the conduct of a trade or business within the United States, the determination of whether any income or gain attributable to a sale or exchange of such property occurring within 10 years after such cessation is effectively connected with the conduct of a trade or business within the United States shall be made as if such sale or exchange occurred immediately before such cessation.” Subsec. (d)(5)(A)(i). Pub. L. 100–647, § 1012(a)(1)(B), substituted “(C)(iii)(III)” for “(C)(iii)”. Subsec. (e). Pub. L. 100–647, § 1012(h)(6)(B), struck out “(except as provided in
Regulations
)” after “subchapter”. Subsec. (e)(1). Pub. L. 100–647, § 1012(h)(2)(A), struck out “from sources outside the United States” after “affiliated group”. Subsec. (e)(3). Pub. L. 100–647, § 1012(h)(3), inserted sentence at end and struck out former last sentence which read as follows: “A similar rule shall apply in the case of any dividend (other than a qualifying dividend as defined in section 243(b)) for which a deduction is allowable under section 243 or 245(a) and any stock the dividends on which would be so deductible and would not be qualifying dividends (as so defined).” Subsec. (e)(4). Pub. L. 100–647, § 1012(h)(1), substituted “nonaffiliated 10-percent owned corporations” for “certain corporations” in heading and amended text generally. Prior to amendment, text read as follows: “For purposes of allocating and apportioning expenses on the basis of assets, the adjusted basis of any asset which is stock in a corporation which is not included in the affiliated group and in which members of the affiliated group own 10 percent or more of the total combined voting power of all classes of stock entitled to vote in such corporation shall be— “(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). Pub. L. 100–647, § 1012(h)(4)(B), inserted at end “This subparagraph shall not apply for purposes of paragraph (6).” Subsec. (e)(5)(D). Pub. L. 100–647, § 1012(h)(4)(A), added subpar. (D). Subsec. (e)(6). Pub. L. 100–647, § 1012(h)(5), substituted “directly allocable or apportioned” for “directly allocable and apportioned”. Subsec. (e)(7)(D) to (F). Pub. L. 100–647, § 1012(h)(6)(A), added subpars. (D) to (F). 1987—Subsec. (c)(4)(C). Pub. L. 100–203 inserted “or part II” after “part I”. 1986—Pub. L. 99–514, § 1215(b)(1), inserted “and special rules” in section catchline. Subsec. (c)(1)(A). Pub. L. 99–514, § 1242(b)(1), inserted reference to pars. (6) and (7). Subsec. (c)(1)(B). Pub. L. 99–514, § 1242(b)(2), inserted “paragraph (6) or (7) or in”. Subsec. (c)(2). Pub. L. 99–514, § 1899A(21), inserted a comma between “section 871(h)” and “section 881(a)”. Subsec. (c)(4)(B)(iii). Pub. L. 99–514, § 1211(b)(2), struck out cl. (iii), which read as follows: “is derived from the sale or exchange (without the United States) through such office or other fixed place of business of personal property described in section 1221(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 outside the United States participated materially in such sale or exchange.” Subsec. (c)(6), (7). Pub. L. 99–514, § 1242(a), added pars. (6) and (7). Subsec. (d)(5)(A)(i). Pub. L. 99–514, § 1201(d)(4), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: “Subparagraphs (A), (B), (C), and (D) of section 904(d)(2) (relating to interest income to which separate limitation applies) and subparagraph (J) of section 904(d)(3) (relating to interest from members of same affiliated group).” Pub. L. 99–514, § 1810(c)(3), inserted “and subparagraph (J) of section 904(d)(3) (relating to interest from members of same affiliated group)”. Subsec. (d)(5)(A)(ii). Pub. L. 99–514, § 1223(b)(1), substituted “less than 5 percent or $1,000,000” for “less than 10 percent”. Subsec. (d)(5)(A)(iii). Pub. L. 99–514, § 1221(a)(2), amended cl. (iii) generally, substituting “section 954(c)(2) (relating to certain export financing)” for “section 954(c)(3) (relating to certain income derived in active conduct of trade or business)”. Subsec. (d)(5)(A)(iv). Pub. L. 99–514, § 1221(a)(2), amended cl. (iv) generally, substituting “Clause (i) of section 954(c)(3)(A) (relating to” for “Subparagraphs (A) and (B) of section 954(c)(4) (relating to exception for”. Subsec. (d)(5)(B). Pub. L. 99–514, § 1275(c)(7), amended subpar. (B) generally, striking out cl. (i) heading, substituting “An amount” for “Any amount”, and striking out cl. (ii), Virgin Islands corporations, which read as follows: “Subsection (b) of section 934 shall not apply to any amount treated as interest under paragraph (1) unless such amount is from sources within the Virgin Islands (determined after the application of paragraph (1)).” Subsec. (d)(7), (8). Pub. L. 99–514, § 1810(c)(2), added par. (7) and redesignated former par. (7) as (8). Subsec. (e). Pub. L. 99–514, § 1215(a), added subsec. (e). 1984—Subsec. (c)(2). Pub. L. 98–369, § 127(c), substituted “section 871(a)(1), section 871(h) section 881(a), or section 881(c)” for “section 871(a)(1) or section 881(a)”. Subsec. (d). Pub. L. 98–369, § 123(a), added subsec. (d). 1976—Subsec. (a). Pub. L. 94–455, § 1901(a)(113)(A), substituted in heading “Produced” for “Sale, etc.” and struck out in text provisions relating to the definition of sale and sold. Subsec. (c)(4)(B)(i). Pub. L. 94–455, § 1901(a)(113)(B), substituted “sale or exchange” for “sale”. Subsec. (c)(4)(B)(iii). Pub. L. 94–455, § 1901(a)(113)(B), (C), substituted “sold or exchanged” for “sold” and “sale or exchange” for “sale” wherever appearing. Subsec. (c)(5)(C). Pub. L. 94–455, § 1901(a)(113)(B), substituted “sale or exchange” for “sale” wherever appearing. 1966—Pub. L. 89–809 designated existing provisions as subsec. (a) and added subsecs. (b) and (c).
Statutory Notes and Related Subsidiaries
Effective Date
of 2025 AmendmentAmendment by Pub. L. 119–21 applicable to amounts paid or incurred in taxable years beginning after Dec. 31, 2024, subject to election for retroactive application by certain small businesses and election to deduct certain unamortized amounts paid or incurred in taxable years beginning before Jan. 1, 2025, see section 70302(e), (f) of Pub. L. 119–21, set out as an
Effective Date
note under section 174A of this title.
Effective Date
of 2021 Amendment Pub. L. 117–2, title IX, § 9671(b), Mar. 11, 2021, 135 Stat. 184, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 2020.”
Effective Date
of 2017 Amendment Pub. L. 115–97, title I, § 13501(c)(1), Dec. 22, 2017, 131 Stat. 2141, provided that: “The
Amendments
made by subsection (a) [amending this section] shall apply to sales, exchanges, and dispositions on or after
November 27, 2017.” Pub. L. 115–97, title I, § 14502(b), Dec. 22, 2017, 131 Stat. 2235, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after
December 31, 2017.”
Effective Date
of 2010 AmendmentAmendment by Pub. L. 111–240 applicable to guarantees issued after Sept. 27, 2010, see section 2122(d) of Pub. L. 111–240, set out as a note under section 861 of this title. Pub. L. 111–226, title II, § 216(b), Aug. 10, 2010, 124 Stat. 2400, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Aug. 10, 2010].” Pub. L. 111–147, title V, § 551(b), Mar. 18, 2010, 124 Stat. 117, provided that: “The
Amendments
made by this section [amending this section] shall take effect on the date of the enactment of this Act [Mar. 18, 2010].”
Effective Date
of 2009 Amendment Pub. L. 111–92, § 15(c), Nov. 6, 2009, 123 Stat. 2996, provided that: “The
Amendments
made by this section [amending this section] shall apply to taxable years beginning after December 31, 2010.”
Effective Date
of 2008 Amendment Pub. L. 110–289, div. C, title III, § 3093(c), July 30, 2008, 122 Stat. 2912, provided that: “The
Amendments
made by this section [amending this section] shall apply to taxable years beginning after December 31, 2008.”
Effective Date
of 2004 AmendmentAmendment by section 101(b)(6) of Pub. L. 108–357 applicable to transactions after Dec. 31, 2004, see section 101(c) of Pub. L. 108–357, set out as a note under section 56 of this title. Pub. L. 108–357, title IV, § 401(c), Oct. 22, 2004, 118 Stat. 1491, provided that: “The
Amendments
made by this section [amending this section] shall apply to taxable years beginning after December 31, 2008.” Pub. L. 108–357, title IV, § 403(c), Oct. 22, 2004, 118 Stat. 1494, provided that: “The
Amendments
made by this section [amending this section and section 904 of this title] shall apply to taxable years beginning after December 31, 2002.” Pub. L. 108–357, title IV, § 403(d), as added by Pub. L. 109–135, title IV, § 403(l), Dec. 21, 2005, 119 Stat. 2625, provided that: “If the taxpayer elects (at such time and in such form and manner as the Secretary of the Treasury may prescribe) to have the rules of this subsection apply— “(1) the
Amendments
made by this section [amending this section and section 904 of this title] shall not apply to taxable years beginning after
December 31, 2002, and before
January 1, 2005, 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 Pub. L. 109–135 adding section 403(d) of Pub. L. 108–357, set out above, effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as an
Effective Date
of 2005 Amendment note under section 26 of this title.] Amendment by section 413(c)(12) of Pub. L. 108–357 applicable to taxable years of foreign corporations beginning after Dec. 31, 2004, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end, see section 413(d)(1) of Pub. L. 108–357, set out as an Effective and Termination Dates of 2004
Amendments
note under section 1 of this title. Pub. L. 108–357, title VIII, § 894(b), Oct. 22, 2004, 118 Stat. 1647, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004].”
Effective Date
of 2000 AmendmentAmendment by Pub. L. 106–519 applicable to transactions after Sept. 30, 2000, with special rules relating to existing foreign sales corporations, see section 5 of Pub. L. 106–519, set out as a note under section 56 of this title.
Effective Date
of 1999 AmendmentAmendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.
Effective Date
of 1997 Amendment Pub. L. 105–34, title XI, § 1162(b), Aug. 5, 1997, 111 Stat. 987, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1997.”
Effective Date
of 1991 Amendment Pub. L. 102–227, title I, § 101(b), Dec. 11, 1991, 105 Stat. 1686, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after August 1, 1989.”
Effective Date
of 1990 Amendment Pub. L. 101–508, title XI, § 11401(b), Nov. 5, 1990, 104 Stat. 1388–472, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after August 1, 1989.”
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 1987 AmendmentAmendment by Pub. L. 100–203 applicable to taxable years beginning after Dec. 31, 1987, see section 10242(d) of Pub. L. 100–203, set out as a note under section 816 of this title.
Effective Date
of 1986 AmendmentAmendment by section 1201(d)(4) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, except as otherwise provided, see section 1201(e) of Pub. L. 99–514, set out as a note under section 904 of this title. Amendment by section 1211(b)(2) 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, § 1215(c), Oct. 22, 1986, 100 Stat. 2545, as amended by Pub. L. 100–647, title I, § 1012(h)(7), Nov. 10, 1988, 102 Stat. 3504; Pub. L. 104–191, title V, § 521(a), Aug. 21, 1996, 110 Stat. 2103, provided that: “(1) In general.—Except as otherwise provided in this subsection, the
Amendments
made by this section [amending this section] shall apply to taxable years beginning after
December 31, 1986. “(2) Transitional rules.—“(A) General phase-in.—“(i) In general.—In the case of the 1st 3 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 general phase-in amount. “(ii) General phase-in amount.—Except as provided in clause (iii), the general phase-in amount for purposes of clause (i) is the applicable percentage (determined under the following table) of the aggregate amount of indebtedness of the taxpayer outstanding on
November 16, 1985: The applicable “In the case of the:percentage is: 1st taxable year75 2nd taxable year50 3rd taxable year25 “(iii) Lower limit where taxpayer reduces indebtedness.—For purposes of applying this subparagraph to interest expenses attributable to any month, the general phase-in amount shall in no event exceed the lowest amount of indebtedness of the taxpayer outstanding as of the close of any preceding month beginning after
November 16, 1985. To the extent provided in
Regulations
, the average amount of indebtedness outstanding during any month shall be used (in lieu of the amount outstanding as of the close of such month) for purposes of the preceding sentence. “(B) Consolidation rule not to apply to certain interest.—“(i) In general.—In the case of the 1st 5 taxable years of the taxpayer beginning after
December 31, 1986—“(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) Special phase-in amount.—The special phase-in amount for purposes of clause (i) is the sum of—“(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-year phase-in amount.—The 5-year phase-in amount is the lesser of—“(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 year8⅓ 10 2nd taxable year16⅔ 25 3rd taxable year25 50 4th taxable year33⅓100 5th taxable year16⅔100 “(iv) 4-year phase-in amount.—The 4-year phase-in amount is the lesser of—“(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 year56¼ 2nd taxable year1016⅔ 3rd taxable year1537½ 4th taxable year20100 5th taxable year 0. “(v) 5-year debt amount.—The term ‘5-year debt amount’ means the excess (if any) of—“(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-year debt amount.—The term ‘4-year debt amount’ means the excess (if any) of—“(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) Paydowns.—For purposes of applying this subparagraph to interest expenses attributable to any month, the term ‘paydowns’ means the excess (if any) of—“(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) Coordination of subparagraphs (a) and (b).—In applying subparagraph (B), there shall first be taken into account indebtedness to which subparagraph (A) applies. “(D) Special rules.—“(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 year90 2nd taxable year80 3rd taxable year70 4th taxable year60 5th taxable year50 6th taxable year40 7th taxable year30 8th taxable year20 9th taxable year10 “(ii) The provisions of this subparagraph shall apply in lieu of the provisions of subparagraphs (A) and (B). “(iii) Indebtedness outstanding on may 29, 1985.—Indebtedness is described in this clause if it is indebtedness (which was outstanding on
May 29, 1985) of a corporation incorporated on
June 13, 1917, which has its principal place of business in Bartlesville, Oklahoma. “(iv) Indebtedness outstanding on may 29, 1985.—Indebtedness is described in this clause if it is indebtedness (which was outstanding on
May 29, 1985) of a member of an affiliated group (as defined in section 1504(a) [of the Internal Revenue Code of 1986]), the common parent of which was incorporated on
August 26, 1926, and has its principal place of business in Harrison, New York. “(E) Treatment of affiliated group.—For purposes of this paragraph, all members of the same affiliated group of corporations (as defined in section 864(e)(5)(A) of the Internal Revenue Code of 1986, as added by this section) shall be treated as 1 taxpayer whether or not such members filed a consolidated return. “(F) Election to have paragraph not apply.—A taxpayer may elect (at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe) to have this paragraph not apply. In the case of members of the same affiliated group (as so defined), such an election may be made only if each member consents to such election. “(3) Special rule.—“(A) In general.—In the case of a qualified corporation, in lieu of applying paragraph (2), the
Amendments
made by this section shall not apply to interest expenses allocable to any indebtedness to the extent such indebtedness does not exceed $500,000,000 if—“(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) Qualified corporation.—For purposes of subparagraph (A), the term ‘qualified corporation’ means a corporation—“(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) Special rules for subsidiary.—The
Amendments
made by this section shall not apply to interest on up to the applicable dollar amount of indebtedness of a subsidiary incorporated on
February 11, 1975, the indebtedness of which on
May 6, 1986, included—“(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) 5⅜ 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. Pub. L. 104–191, title V, § 521(a), Aug. 21, 1996, 110 Stat. 2103.] “(6) Special rules for allocating general and administrative expenses.—“(A) In general.—In the case of an affiliated group of domestic corporations the common parent of which has its principal office in New Brunswick, New Jersey, and has a certificate of organization which was filed with the Secretary of the State of New Jersey on
November 10, 1887, the
Amendments
made by this section shall not apply to the phase-in percentage of general and administrative expenses paid or incurred in its 1st 3 taxable years beginning after
December 31, 1986. “(B) Phase-in percentage.—For purposes of subparagraph (A): “In the case of taxableThe phase-in years beginning in:percentage is: 198775 198850 198925.” [Pub. L. 104–191, title V, § 521(b), Aug. 21, 1996, 110 Stat. 2103, provided that: [“(1) In general.—The amendment made by this section [amending section 1215(c) of Pub. L. 99–514, set out above] shall apply to taxable years beginning after
December 31, 1995. [“(2) Special rule.—In the case of the first taxable year beginning after
December 31, 1995, the pre-
Effective Date
portion of the interest expense of the corporation referred to in such paragraph (5) of such section 1215(c) [of Pub. L. 99–514] for such taxable year shall be allocated and apportioned without regard to such amendment. For purposes of the preceding sentence, the pre-
Effective Date
portion is the amount which bears the same ratio to the interest expense for such taxable year as the number of days during such taxable year before the date of the enactment of this Act [Aug. 21, 1996] bears to 366.”] Amendment by section 1221(a)(2) of Pub. L. 99–514 applicable to taxable years of foreign corporations beginning after Dec. 31, 1986, except as otherwise provided, see section 1221(g) of Pub. L. 99–514, set out as a note under section 954 of this title. Pub. L. 99–514, title XII, § 1223(c), Oct. 22, 1986, 100 Stat. 2558, provided that: “The
Amendments
made by this section [amending this section and section 881 and 954 of this title] shall apply to taxable years beginning after December 31, 1986.” Pub. L. 99–514, title XII, § 1242(c), Oct. 22, 1986, 100 Stat. 2580, provided that: “The
Amendments
made by this section [amending this section] shall apply to taxable years beginning after December 31, 1986.” Amendment by section 1275(c)(7) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1277 of Pub. L. 99–514, set out as a note under section 931 of this title. Amendment by section 1810(c)(2), (3) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.
Effective Date
of 1984 Amendment Pub. L. 98–369, div. A, title I, § 123(c), July 18, 1984, 98 Stat. 646, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “(1) In general.—Except as provided in paragraph (2), the
Amendments
made by this section [amending this section and section 956 of this title] shall apply to accounts receivable and evidences of indebtedness transferred after March 1, 1984, in taxable years ending after such date. “(2) Transitional rule.—The
Amendments
made by this section shall not apply to accounts receivable and evidences of indebtedness acquired after
March 1, 1984, and before
March 1, 1994, by a Belgian corporation in existence on
March 1, 1984, in any taxable year ending after such date, but only to the extent that the amount includible in gross income by reason of section 956 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] with respect to such corporation for all such taxable years is not reduced by reason of this paragraph by more than the lesser of—“(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 Pub. L. 98–369 applicable to interest received after
July 18, 1984, with respect to obligations issued after such date, in taxable years ending after such date, see section 127(g)(1) of Pub. L. 98–369, set out as a note under section 871 of this title.
Effective Date
of 1976 AmendmentAmendment by 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.
Effective Date
of 1966 AmendmentAmendment by Pub. L. 89–809 applicable with respect to taxable years beginning after Dec. 31, 1966, except that in applying section 864(c)(4)(B)(iii) of this title with respect to a binding contract entered into on or before Feb. 24, 1966, activities in the United States on or before such date in negotiating or carrying out such contract shall not be taken into account, see section 102(e)(1) of Pub. L. 89–809, set out as a note under section 861 of this title.
Savings Provision
For provisions that nothing in amendment by section 401(d)(1)(D)(x), (xvii)(IV), (V) of Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining liability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. Applicability of Certain
Amendments
by Pub. L. 99–514 in Relation to Treaty Obligations of United StatesFor applicability of amendment by section 1201(d)(4) of Pub. L. 99–514 notwithstanding any treaty obligation of the United States in effect on Oct. 22, 1986, and for nonapplication of
Amendments
by section 1211(b)(2) and 1242(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)(2) to (4) of Pub. L. 100–647, set out as a note under section 861 of this title. Plan
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Not Required Until January 1, 1989For 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 Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 864
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73