§863 — Special rules for determining source
10 citing cases
Statute Text — 26 U.S.C. §863
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.
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—
from services rendered partly within and partly without the United States,
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
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.
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.
50 percent of all transportation income attributable to transportation which—
is not described in paragraph (1), and
begins or ends in the United States,
shall be treated as from sources in the United States.
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—
begins in the United States and ends in a possession of the United States, or
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.
For purposes of this subsection, the term “transportation income” means any income derived from, or in connection with—
the use (or hiring or leasing for use) of a vessel or aircraft, or
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.
Except as provided in regulations, any income derived from a space or ocean activity—
if derived by a United States person, shall be sourced in the United States, and
if derived by a person other than a United States person, shall be sourced outside the United States.
For purposes of paragraph (1)—
The term “space or ocean activity” means—
any activity conducted in space, and
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.
The term “space or ocean activity” shall not include—
any activity giving rise to transportation income (as defined in section 863(c)),
any activity giving rise to international communications income (as defined in subsection (e)(2)), and
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.
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.
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.
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.
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.
Treasury Regulations
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Treas. Reg. §1.863-0Table of contents
This section lists captions contained in §§ 1.863-1 through 1.863-10.
(a) In general.
(b) Natural resources.
(1) In general.
(2) Additional production activities.
(3) Definitions.
(i) Production activity.
(ii) Additional production activities.
(4) Determination of fair market value.
(5) Determination of gross income.
(6) Tax return disclosure.
(7) Examples.
(i) Example 1. No additional production, foreign source gross receipts.
(ii) Example 2. No additional production, U.S. source gross receipts.
(iii) Example 3. Production in United States, foreign sales.
(iv) Example 4. Production and sales in United States.
(v) Example 5. Additional production.
(c) Determination of taxable income.
(d) Scholarships, fellowship grants, grants, prizes, and awards.
(1) In general.
(2) Source of income.
(i) United States source income.
(ii) Foreign source income.
(iii) Certain activities conducted outside the United States.
(3) Definitions.
(4) Effective dates.
(i) Scholarships and fellowship grants.
(ii) Grants, prizes and awards.
(e) Residual interest in a REMIC.
(1) REMIC inducement fees.
(2) Excess inclusion income and net losses.
(f) Applicability date.
(a) Determination of taxable income.
(b) Determination of source of taxable income.
(c) Applicability date.
(a) In general.
(1) Scope.
(2) Cross references.
(b) Sourcing based solely on production activities.
(c) Determination of the source of gross income from production activity.
(1) Production only within the United States or only within foreign countries.
(i) Source of income.
(ii) Definition of production assets.
(iii) Location of production assets.
(2) Production both within and without the United States.
(i) Source of income.
(ii) Adjusted basis of production assets.
(A) In general.
(B) Production assets used to produce other property.
(3) Anti-abuse rule.
(4) Examples.
(i) Example1. Source of gross income.
(ii) Example 2. Location of intangible property.
(iii) Example 3. Anti-abuse rule.
(d) Determination of source of taxable income.
(e) Income partly from sources within a possession of the United States.
(1) In general.
(2) Allocation or apportionment for Possession Production Sales.
(3) Allocation or apportionment for Possession Purchase Sales.
(i) Determination of source of gross income from Possession Purchase Sales.
(ii) Determination of source of gross income from business activity.
(A) Source of gross income.
(B) Business activity.
(C) Location of business activity.
(1) Sales activity.
(2) Cost of goods sold.
(3) Expenses.
(4) Examples.
(i) Example 1: Purchase of goods manufactured in possession.
(ii) Example 2: Purchase of goods manufactured outside possession.
(5) Special rules for partnerships.
(f) Special rules for partnerships.
(1) General rule.
(2) Exceptions.
(i) In general.
(ii) Attribution of production assets to or from a partnership.
(iii) Basis.
(3) Examples.
(i) Example 1. Distributive share of partnership income.
(ii) Example 2. Distribution in kind.
(g) Applicability dates.
(a) General.
(b) Gross income.
(c) Allocation of costs or expenses.
(d) Items not included as costs or expenses.
(1) Taxes and interest.
(2) Other business activity and general expenses.
(3) Personal exemptions and special deductions.
(e) Property used while within the United States.
(1) General.
(2) Average property.
(3) Current assets.
(f) Taxable income.
(1) General.
(2) Interest and taxes.
(3) General expenses.
(4) Personal exemptions.
(5) Special deductions.
(g) Allocation based on books of account.
(a) Scope.
(1) Introduction.
(2) Effective/applicability date.
(b) Source of notional principal contract income.
(1) General rule.
(2) Qualified business unit exception.
(3) Effectively connected notional principal contract income.
(c) Election.
(1) Eligibility and effect.
(2) Time for making election.
(3) Manner of making election.
(d) Example.
(e) Cross references.
(a) In general.
(b) Source of gross income from space and ocean activity.
(1) Space and ocean income derived by a United States person.
(2) Space and ocean income derived by a foreign person.
(i) In general.
(ii) Space and ocean income derived by a controlled foreign corporation.
(iii) Space and ocean income derived by foreign persons engaged in a trade or business within the United States.
(3) Source rules for income from certain sales of property.
(i) Sales of purchased property.
(ii) Sales of property produced by the taxpayer.
(A) General.
(B) Production only in space or international water, or only outside space and international water.
(C) Production both in space or international water and outside space and international water.
(4) Special rule for determining the source of gross income from services.
(5) Special rule for determining source of income from communications activity (other than income from international communications activity).
(c) Taxable income.
(d) Space and ocean activity.
(1) Definition.
(i) Space activity.
(ii) Ocean activity.
(2) Determining a space or ocean activity.
(i) Production of property in space or international water.
(ii) Special rule for performance of services.
(A) General.
(B) Exception to the general rule.
(3) Exceptions to space or ocean activity.
(e) Treatment of partnerships.
(f) Examples.
(1) Example 1. Space activity—activity occurring on land and in space.
(2) Example 2. Space activity.
(3) Example 3. Services as space activity—de minimis value attributable to performance occurring in space.
(4) Example 4. Space activity.
(5) Example 5. Space activity.
(6) Example 6. Space activity—treatment of land activity.
(7) Example 7. Use of intangible property in space.
(8) Example 8. Performance of services.
(9) Example 9. Separate transactions.
(10) Example 10. Sale of property in international water.
(11) Example 11. Sale of property in space.
(12) Example 12. Sale of property in space.
(13) Example 13. Source of income of a foreign person.
(14) Example 14. Source of income of a foreign person.
(g) Reporting and documentation requirements.
(1) In general.
(2) Required documentation.
(3) Access to software.
(4) Use of allocation methodology.
(h) Applicability date.
(a) In general.
(b) Source of international communications income.
(1) International communications income derived by a United States person.
(2) International communications income derived by foreign persons.
(i) In general.
(ii) International communications income derived by a controlled foreign corporation.
(iii) International communications income derived by foreign persons with a fixed place of business in the United States.
(iv) International communications income derived by foreign persons engaged in a trade or business within the United States.
(c) Source of U.S. communications income.
(d) Source of foreign communications income.
(e) Source of space/ocean communications income.
(f) Source of communications income when taxpayer cannot establish the two points between which the taxpayer is paid to transmit the communication.
(g) Taxable income.
(h) Communications activity and income derived from communications activity.
(1) Communications activity.
(i) General rule.
(ii) Separate transaction.
(2) Income derived from communications activity.
(3) Determining the type of communications activity.
(i) In general.
(ii) Income derived from international communications activity.
(iii) Income derived from U.S. communications activity.
(iv) Income derived from foreign communications activity.
(v) Income derived from space/ocean communications activity.
(i) Treatment of partnerships.
(j) Examples.
(k) Reporting and documentation requirements.
(1) In general.
(2) Required documentation.
(3) Access to software.
(4) Use of allocation methodology.
(l) Effective date.
(a) In general.
(b) Qualified business unit exception.
(c) Effectively connected income exception.
(d) Qualified fails charge.
(e) Designated security.
(g) Effective/applicability date.
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Treas. Reg. §1.863-0(a)In general.
In general.
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Treas. Reg. §1.863-0(b)Qualified business unit exception.
Qualified business unit exception.
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Treas. Reg. §1.863-0(c)Effectively connected income exception.
Effectively connected income exception.
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Treas. Reg. §1.863-0(d)Qualified fails charge.
Qualified fails charge.
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Treas. Reg. §1.863-0(e)Designated security.
Designated security.
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Treas. Reg. §1.863-0(f)Source of communications income when taxpayer cannot establish the two points between which the taxpayer is paid to transmit the communication.
Source of communications income when taxpayer cannot establish the two points between which the taxpayer is paid to transmit the communication.
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Treas. Reg. §1.863-0(g)Effective/applicability date.
Effective/applicability date.
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Treas. Reg. §1.863-0(h)Communications activity and income derived from communications activity.
Communications activity and income derived from communications activity.
(1) Communications activity.
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Treas. Reg. §1.863-0(i)Treatment of partnerships.
Treatment of partnerships.
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Treas. Reg. §1.863-0(j)Examples.
Examples.
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Treas. Reg. §1.863-0(k)Reporting and documentation requirements.
Reporting and documentation requirements.
(1) In general.
(2) Required documentation.
(3) Access to software.
(4) Use of allocation methodology.
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Treas. Reg. §1.863-0(l)Effective date.
Effective date.
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Treas. Reg. §1.863-0(v)Income derived from space/ocean communications activity.
Income derived from space/ocean communications activity.
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Treas. Reg. §1.863-0ATable of contents
This section lists captions contained in §§ 1.863-3A and 1.863-3AT.
(a) General.
(1) Classes of income.
(2) Definition.
(b) Income partly from sources within a foreign country.
(1) General.
(2) Allocation or apportionment.
(c) Income partly from sources within a possession of the United States.
(1) General.
(2) Allocation or apportionment.
(3) Personal property produced and sold.
(4) Personal property purchased and sold.
(a) [Reserved].
(b) Income partly from sources within a foreign country.
(1) [Reserved].
(2) Allocation or apportionment.
(c)(1) through (4) [Reserved].
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Treas. Reg. §1.863-0A(a)§1.863-0A(a)
[Reserved].
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Treas. Reg. §1.863-0A(b)Income partly from sources within a foreign country.
Income partly from sources within a foreign country.
(1) [Reserved].
(2) Allocation or apportionment.
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Treas. Reg. §1.863-0A(c)§1.863-0A(c)
(1) through (4) [Reserved].
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Treas. Reg. §1.863-1Allocation of gross income under section 863(a)
(a) In general. Items of gross income other than those specified in section 861(a) and section 862(a) will generally be separately allocated to sources within or without the United States. See § 1.863-2 for alternate methods to determine the income from sources within or without the United States in the case of items specified in § 1.863-2(a). See also section 865(b) for rules for sourcing income from the sale of inventory property, within the meaning of section 865(i)(1) (inventory), generally, and section 865(e)(2) and § 1.865-3 for sourcing income from the sale of personal property (including inventory) by a nonresident that is attributable to the nonresident's office or other fixed place of business in the United States. In the case of sales of property involving partners and partnerships, the rules of § 1.863-3(f) apply.
(b) Natural resources—(1) In general. Notwithstanding any other provision of this part, except to the extent provided in paragraph (b)(2) of this section or § 1.865-3, gross receipts from the sale outside the United States of products derived from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or uncut timber within the United States shall be treated as from sources within the United States, and gross receipts from the sale within the United States of products derived from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or uncut timber outside the United States shall be treated as from sources without the United States.
(2) Additional production activities. Notwithstanding any other provision of this section, gross receipts from the sale of products derived by a taxpayer who performs additional production activities as defined in paragraph (b)(3)(ii) of this section are allocated between sources within and without the United States based on the fair market value of the product immediately prior to the additional production activities. The source of gross receipts equal to the fair market value of the product immediately prior to the additional production activities will be from sources where the farm, mine, oil or gas well, other natural deposit, or uncut timber is located. The source of gross receipts from the sale of the product in excess of the fair market value immediately prior to the additional production activities must be determined under § 1.863-3. For purposes of applying § 1.863-3, only production assets used in the additional production activities are taken into account.
(3) Definitions—(i) Production activity. For purposes of this section, production activity means an activity that creates, fabricates, manufactures, extracts, processes, cures, or ages inventory. See § 1.864-1. Except as otherwise provided in § 1.1502-13 or 1.863-3(f)(2), only production activities conducted directly by the taxpayer are taken into account.
(ii) Additional production activities. For purposes of this section, additional production activities are substantial production activities performed directly by the taxpayer in addition to activities from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or uncut timber. Whether a taxpayer's activities constitute additional production activities will be determined under the principles of § 1.954-3(a)(4) (except for § 1.954-3(a)(4)(iv)). However, in no case will activities that prepare the natural resource itself for export, including those that are designed to facilitate the transportation of the natural resource, be considered additional production activities for purposes of this section.
(4) Determination of fair market value. For purposes of this section, fair market value depends on all of the facts and circumstances as they exist relative to a party in any particular case. Where the products are sold to a related party in a transaction subject to section 482, the determination of fair market value under this section must be consistent with the arm's length price determined under section 482.
(5) Determination of gross income. To determine the amount of a taxpayer's gross income from sources within or without the United States, the taxpayer's gross receipts from sources within or without the United States determined under this paragraph (b) must be reduced by the cost of goods sold properly attributable to gross receipts from sources within or without the United States.
(6) Tax return disclosure. A taxpayer that determines the source of its income under paragraph (b)(2) of this section shall attach a statement to its return explaining the methodology used to determine fair market value under paragraph (b)(4) of this section, and explaining any additional production activities (as defined in paragraph (b)(3)(ii) of this section) performed by the taxpayer. In addition, the taxpayer must provide such other information as is required by § 1.863-3.
(7) Examples. The following examples illustrate the rules of this paragraph (b):
(i) Example 1. No additional production, foreign source gross receipts. U.S. Mines, a domestic corporation, operates a copper mine and mill in Country X. U.S. Mines extracts copper-bearing rocks from the ground and transports the rocks to the mill where the rocks are ground and processed to produce copper-bearing concentrate. The concentrate is transported to a port where it is dried in preparation for export, stored, and then shipped to purchasers in the United States. Because, under the facts and circumstances, none of U.S. Mines' activities constitute additional production activities, within the meaning of paragraph (b)(3)(ii) of this section, paragraph (b)(2) of this section does not apply, and under paragraph (b)(1) of this section, gross receipts from the sale of the concentrate will be treated as from sources without the United States.
(ii) Example 2. No additional production, U.S. source gross receipts. U.S. Gas, a domestic corporation, extracts natural gas within the United States, and transports the natural gas to a Country X port where it is liquefied in preparation for shipment. The liquefied natural gas is then transported via freighter and sold without additional production activities in a foreign country. Under paragraph (b)(3)(ii) of this section, liquefaction of natural gas is not an additional production activity because liquefaction prepares the natural gas for transportation. Therefore, under paragraph (b)(1) of this section, gross receipts from the sale of the liquefied natural gas will be treated as from sources within the United States.
(iii) Example 3. Production in United States, foreign sales. U.S. Gold, a domestic corporation, mines gold in Country X, produces gold jewelry using production assets located in the United States, and sells the jewelry in Country Y. Assume that the fair market value of the gold before the additional production activities in the United States is $40x and that U.S. Gold ultimately sells the gold jewelry in Country Y for $100x. Under paragraph (b)(2) of this section, $40x of U.S. Gold's gross receipts will be treated as from sources without the United States, and the remaining $60x of gross receipts will be treated as from sources within the United States under § 1.863-3.
(iv) Example 4. Production and sales in United States. U.S. Oil, a domestic corporation, extracts oil in Country X, transports the oil via a pipeline to the United States, refines the oil using production assets located in the United States, and sells the refined product in the United States to unrelated persons. Assume that the fair market value of the oil before refinement in the United States is $80x and U.S. Oil ultimately sells the refined product for $100x. Under paragraph (b)(2) of this section, $80x of gross receipts will be treated as from sources without the United States, and the remaining $20x of gross receipts will be treated as from sources within the United States under § 1.863-3.
(v) Example 5. Additional production. The facts are the same as in paragraph (b)(7)(i) of this section (the facts in Example 1), except that U.S. Mines also operates a smelter in Country X. The concentrate output from the mill is transported to the smelter where it is transformed into smelted copper. The smelted copper is exported to purchasers in the United States. Under the facts and circumstances, all the processes applied to make copper concentrate are considered mining. Therefore, under paragraph (b)(2) of this section, gross receipts equal to the fair market value of the concentrate at the smelter will be treated as from sources without the United States. Under the facts and circumstances, the conversion of the concentrate into smelted copper is an additional production activity in a foreign country within the meaning of paragraph (b)(3)(ii) of this section. Therefore, the source of U.S. Mines's excess gross receipts will be determined under § 1.863-3, pursuant to paragraph (b)(2) of this section.
(c) Determination of taxable income. The taxpayer's taxable income from sources within or without the United States will be determined under the rules of §§ 1.861-8 through 1.861-14T for determining taxable income from sources within the United States.
(d) Scholarships, fellowship grants, grants, prizes and awards—(1) In general. This paragraph (d) applies to scholarships, fellowship grants, grants, prizes and awards. The provisions of this paragraph (d) do not apply to amounts paid as salary or other compensation for services.
(2) Source of income. The source of income from scholarships, fellowship grants, grants, prizes and awards is determined as follows:
(i) United States source income. Except as provided in paragraph (d)(2)(iii) of this section, scholarships, fellowship grants, grants, prizes and awards made by a U.S. citizen or resident, a domestic partnership, a domestic corporation, an estate or trust (other than a foreign estate or trust within the meaning of section 7701(a)(31)), the United States (or an instrumentality or agency thereof), a State (or any political subdivision thereof), or the District of Columbia shall be treated as income from sources within the United States.
(ii) Foreign source income. Scholarships, fellowship grants, grants, prizes and awards made by a foreign government (or an instrumentality, agency, or any political subdivision thereof), an international organization (as defined in section 7701(a)(18)), or a person other than a U.S. person (as defined in section 7701(a)(30)) shall be treated as income from sources without the United States.
(iii) Certain activities conducted outside the United States. Scholarships, fellowship grants, targeted grants, and achievement awards received by a person other than a U.S. person (as defined in section 7701(a)(30)) with respect to activities previously conducted (in the case of achievement awards) or to be conducted (in the case of scholarships, fellowships grants, and targeted grants) outside the United States shall be treated as income from sources without the United States.
(3) Definitions. The following definitions apply for purposes of this paragraph (d):
(i) Scholarships are defined in section 117 and the regulations thereunder.
(ii) Fellowship grants are defined in section 117 and the regulations thereunder.
(iii) Prizes and awards are defined in section 74 and the regulations thereunder.
(iv) Grants are amounts described in subparagraph (3) of section 4945(g) and the regulations thereunder, and are not amounts otherwise described in paragraphs (d)(3) (i), (ii), or (iii) of this section. For purposes of this paragraph (d), the reference to section 4945(g)(3) is applied without regard to the identity of the payor or recipient and without the application of the objective and nondiscriminatory basis test and the requirement of a procedure approved in advance.
(v) Targeted grants are grants—
(A) Issued by an organization described in section 501(c)(3), the United States (or an instrumentality or agency thereof), a State (or any political subdivision thereof), or the District of Columbia; and
(B) For an activity undertaken in the public interest and not primarily for the private financial benefit of a specific person or persons or organization.
(vi) Achievement awards are awards—
(A) Issued by an organization described in section 501(c)(3), the United States (or an instrumentality or agency thereof), a State (or political subdivision thereof), or the District of Columbia; and
(B) For a past activity undertaken in the public interest and not primarily for the private financial benefit of a specific person or persons or organization.
(4) Effective dates. The following are the effective dates concerning this paragraph (d):
(i) Scholarships and fellowship grants. This paragraph (d) is effective for scholarship and fellowship grant payments made after December 31, 1986. However, for scholarship and fellowship grant payments made after May 14, 1989, and before June 16, 1993, the residence of the payor rule of paragraph (d)(2) (i) and (ii) of this section may be applied without applying paragraph (d)(2)(iii) of this section.
(ii) Grants, prizes and awards. This paragraph (d) is effective for payments made for grants, prizes and awards, targeted grants, and achievement awards after September 25, 1995. However, the taxpayer may elect to apply the provisions of this paragraph (d) to payments made for grants, prizes and awards, targeted grants, and achievement awards after December 31, 1986, and before September 26, 1995.
(e) Residual interest in a REMIC—(1) REMIC inducement fees. An inducement fee (as defined in § 1.446-6(b)(2)) shall be treated as income from sources within the United States.
(2) Excess inclusion income and net losses. An excess inclusion (as defined in section 860E(c)) shall be treated as income from sources within the United States. To the extent of excess inclusion income previously taken into account with respect to a residual interest (reduced by net losses previously taken into account under this paragraph), a net loss (described in section 860C(b)(2)) with respect to the residual interest shall be allocated to the class of gross income and apportioned to the statutory grouping(s) or residual grouping of gross income to which the excess inclusion income was assigned.
(f) Applicability date. Paragraph (b) of this section applies to taxable years ending on or after December 23, 2019. However, a taxpayer may apply paragraph (b) of this section in its entirety for taxable years beginning after December 31, 2017, and ending before December 23, 2019, provided that the taxpayer and all persons related to the taxpayer (within the meaning of section 267 or 707) apply paragraph (b) of this section and §§ 1.863-2(b), 1.863-3, 1.863-8(b)(3)(ii), 1.864-5(a) and (b), 1.864-6(c)(2), and 1.865-3 in their entirety for the taxable year, and once applied, the taxpayer and all persons related to the taxpayer (within the meaning of section 267 or 707) continue to apply these regulations in their entirety for all subsequent taxable years. For regulations generally applicable to taxable years ending before December 23, 2019, see § 1.863-1 as contained in 26 CFR part 1 revised as of April 1, 2020. Paragraph (e)(2) of this section applies for taxable years ending after August 1, 2006.
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Treas. Reg. §1.863-1(a)In general.
In general. Items of gross income other than those specified in section 861(a) and section 862(a) will generally be separately allocated to sources within or without the United States. See § 1.863-2 for alternate methods to determine the income from sources within or without the United States in the case of items specified in § 1.863-2(a). See also section 865(b) for rules for sourcing income from the sale of inventory property, within the meaning of section 865(i)(1) (inventory), generally, and section 865(e)(2) and § 1.865-3 for sourcing income from the sale of personal property (including inventory) by a nonresident that is attributable to the nonresident's office or other fixed place of business in the United States. In the case of sales of property involving partners and partnerships, the rules of § 1.863-3(f) apply.
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Treas. Reg. §1.863-1(b)Natural resources—(1) In general.
Natural resources—(1) In general. Notwithstanding any other provision of this part, except to the extent provided in paragraph (b)(2) of this section or § 1.865-3, gross receipts from the sale outside the United States of products derived from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or uncut timber within the United States shall be treated as from sources within the United States, and gross receipts from the sale within the United States of products derived from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or uncut timber outside the United States shall be treated as from sources without the United States.
(2) Additional production activities. Notwithstanding any other provision of this section, gross receipts from the sale of products derived by a taxpayer who performs additional production activities as defined in paragraph (b)(3)(ii) of this section are allocated between sources within and without the United States based on the fair market value of the product immediately prior to the additional production activities. The source of gross receipts equal to the fair market value of the product immediately prior to the additional production activities will be from sources where the farm, mine, oil or gas well, other natural deposit, or uncut timber is located. The source of gross receipts from the sale of the product in excess of the fair market value immediately prior to the additional production activities must be determined under § 1.863-3. For purposes of applying § 1.863-3, only production assets used in the additional production activities are taken into account.
(3) Definitions—(i) Production activity. For purposes of this section, production activity means an activity that creates, fabricates, manufactures, extracts, processes, cures, or ages inventory. See § 1.864-1. Except as otherwise provided in § 1.1502-13 or 1.863-3(f)(2), only production activities conducted directly by the taxpayer are taken into account.
(ii) Additional production activities. For purposes of this section, additional production activities are substantial production activities performed directly by the taxpayer in addition to activities from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or uncut timber. Whether a taxpayer's activities constitute additional production activities will be determined under the principles of § 1.954-3(a)(4) (except for § 1.954-3(a)(4)(iv)). However, in no case will activities that prepare the natural resource itself for export, including those that are designed to facilitate the transportation of the natural resource, be considered additional production activities for purposes of this section.
(4) Determination of fair market value. For purposes of this section, fair market value depends on all of the facts and circumstances as they exist relative to a party in any particular case. Where the products are sold to a related party in a transaction subject to section 482, the determination of fair market value under this section must be consistent with the arm's length price determined under section 482.
(5) Determination of gross income. To determine the amount of a taxpayer's gross income from sources within or without the United States, the taxpayer's gross receipts from sources within or without the United States determined under this paragraph (b) must be reduced by the cost of goods sold properly attributable to gross receipts from sources within or without the United States.
(6) Tax return disclosure. A taxpayer that determines the source of its income under paragraph (b)(2) of this section shall attach a statement to its return explaining the methodology used to determine fair market value under paragraph (b)(4) of this section, and explaining any additional production activities (as defined in paragraph (b)(3)(ii) of this section) performed by the taxpayer. In addition, the taxpayer must provide such other information as is required by § 1.863-3.
(7) Examples. The following examples illustrate the rules of this paragraph (b):
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Treas. Reg. §1.863-1(c)Determination of taxable income.
Determination of taxable income. The taxpayer's taxable income from sources within or without the United States will be determined under the rules of §§ 1.861-8 through 1.861-14T for determining taxable income from sources within the United States.
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Treas. Reg. §1.863-1(d)Scholarships, fellowship grants, grants, prizes and awards—(1) In general.
Scholarships, fellowship grants, grants, prizes and awards—(1) In general. This paragraph (d) applies to scholarships, fellowship grants, grants, prizes and awards. The provisions of this paragraph (d) do not apply to amounts paid as salary or other compensation for services.
(2) Source of income. The source of income from scholarships, fellowship grants, grants, prizes and awards is determined as follows:
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Treas. Reg. §1.863-1(e)Residual interest in a REMIC—(1) REMIC inducement fees.
Residual interest in a REMIC—(1) REMIC inducement fees. An inducement fee (as defined in § 1.446-6(b)(2)) shall be treated as income from sources within the United States.
(2) Excess inclusion income and net losses. An excess inclusion (as defined in section 860E(c)) shall be treated as income from sources within the United States. To the extent of excess inclusion income previously taken into account with respect to a residual interest (reduced by net losses previously taken into account under this paragraph), a net loss (described in section 860C(b)(2)) with respect to the residual interest shall be allocated to the class of gross income and apportioned to the statutory grouping(s) or residual grouping of gross income to which the excess inclusion income was assigned.
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Treas. Reg. §1.863-1(f)Applicability date.
Applicability date. Paragraph (b) of this section applies to taxable years ending on or after December 23, 2019. However, a taxpayer may apply paragraph (b) of this section in its entirety for taxable years beginning after December 31, 2017, and ending before December 23, 2019, provided that the taxpayer and all persons related to the taxpayer (within the meaning of section 267 or 707) apply paragraph (b) of this section and §§ 1.863-2(b), 1.863-3, 1.863-8(b)(3)(ii), 1.864-5(a) and (b), 1.864-6(c)(2), and 1.865-3 in their entirety for the taxable year, and once applied, the taxpayer and all persons related to the taxpayer (within the meaning of section 267 or 707) continue to apply these regulations in their entirety for all subsequent taxable years. For regulations generally applicable to taxable years ending before December 23, 2019, see § 1.863-1 as contained in 26 CFR part 1 revised as of April 1, 2020. Paragraph (e)(2) of this section applies for taxable years ending after August 1, 2006.
10 Citing Cases
863 (d) (1) (A) . While petitioner may, as the parties have stipulated, exclude income earned in foreign ports from gross income, his income earned while working in international waters does not constitute foreign earned income for purposes of the exclusion under section 911 and must be included in his gross income for the years in issue . Mea
Although this provision does not provide a definitive answer as to whether Antarctica is a "foreign country," it supports the conclusion that section 911 is not intended to apply to income earned for services provided in Antarctica . We take this opportunity to state our agreement with the Court of Appeals' conclusion set forth above .
Under section 863, items of gross income, expenses, losses and deductions other than those specified in sections 861 and 862 - 4 - “shall be allocated or apportioned to sources within or without the United States, under regulations prescribed by the Secretary.” Petitioner admits, and the facts show, that he had no items of gross income, expenses, losses
nge the price of the LNG, including the years at issue. Reforming is a process whereby the molecular structure of material is broken down into smaller molecules. Supplied from petitioner and Marathon. For a more complete discussion of the genesis of sec. 863 and the related regulations, see Intel Corp. & Consol. Subsidiaries v. Commissioner, 100 T.C. 616 (1993), and Phillips Petroleum Co. v. Commissioner, 97 T.C. 30 (1991). The examples in sec. 1.863-3(b)(2), Income Tax Regs., instead of being m
Section 863 sets forth source rules for those items of gross income, expenses, losses, and deductions not enumerated in sections 861(a) and 862(a). Section 863 provides in pertinent part: SEC. 863. ITEMS NOT SPECIFIED IN SECTION 861 OR 862. (a) Allocation Under. Regulations. — Items of gross income, expenses, losses, and deductions, other than thos