US Code

Public Law 119-73 (01/23/2026)

26 U.S.C. § 863

Special rules for determining source

(a)

Allocation under regulations

Items of gross income, expenses, losses, and deductions, other than those specified in sections 861(a) and 862(a), shall be allocated or apportioned to sources within or without the United States, under regulations prescribed by the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States.

(b)

Income partly from within and partly from without the United States

In the case of gross income derived from sources partly within and partly without the United States, the taxable income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income; and the portion of such taxable income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Secretary. Gains, profits, and income—
(1)
from services rendered partly within and partly without the United States,
(2)
from the sale or exchange of inventory property (within the meaning of section 865(i)(1)) produced (in whole or in part) by the taxpayer within and sold or exchanged without the United States, or produced (in whole or in part) by the taxpayer without and sold or exchanged within the United States, or
(3)
derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within a possession of the United States and its sale or exchange within the United States,
shall be treated as derived partly from sources within and partly from sources without the United States. 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.
(c)

Source rule for certain transportation income

(1)

Transportation beginning and ending in the United States

All transportation income attributable to transportation which begins and ends in the United States shall be treated as derived from sources within the United States.

(2)

Other transportation having United States connection

(A)

In general

50 percent of all transportation income attributable to transportation which—
(i)
is not described in paragraph (1), and
(ii)
begins or ends in the United States,
shall be treated as from sources in the United States.
(B)

Special rule for personal service income

Subparagraph (A) shall not apply to any transportation income which is income derived from personal services performed by the taxpayer, unless such income is attributable to transportation which—
(i)
begins in the United States and ends in a possession of the United States, or
(ii)
begins in a possession of the United States and ends in the United States.
In the case of transportation income derived from, or in connection with, a vessel, this subparagraph shall only apply if the taxpayer is a citizen or resident alien.
(3)

Transportation income

For purposes of this subsection, the term “transportation income” means any income derived from, or in connection with—
(A)
the use (or hiring or leasing for use) of a vessel or aircraft, or
(B)
the performance of services directly related to the use of a vessel or aircraft.
For purposes of the preceding sentence, the term “vessel or aircraft” includes any container used in connection with a vessel or aircraft.
(d)

Source rules for space and certain ocean activities

(1)

In general

Except as provided in regulations, any income derived from a space or ocean activity—
(A)
if derived by a United States person, shall be sourced in the United States, and
(B)
if derived by a person other than a United States person, shall be sourced outside the United States.
(2)

Space or ocean activity

For purposes of paragraph (1)—
(A)

In general

The term “space or ocean activity” means—
(i)
any activity conducted in space, and
(ii)
any activity conducted on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States.
Such term includes any activity conducted in Antarctica.
(B)

Exception for certain activities

The term “space or ocean activity” shall not include—
(i)
any activity giving rise to transportation income (as defined in section 863(c)),
(ii)
any activity giving rise to international communications income (as defined in subsection (e)(2)), and
(iii)
any activity with respect to mines, oil and gas wells, or other natural deposits to the extent within the United States or any foreign country or possession of the United States (as defined in section 638).
For purposes of applying section 638, the jurisdiction of any foreign country shall not include any jurisdiction not recognized by the United States.
(e)

International communications income

(1)

Source rules

(A)

United States persons

In the case of any United States person, 50 percent of any international communications income shall be sourced in the United States and 50 percent of such income shall be sourced outside the United States.

(B)

Foreign persons

(i)

In general

Except as provided in regulations or clause (ii), in the case of any person other than a United States person, any international communications income shall be sourced outside the United States.

(ii)

Special rule for income attributable to office or fixed place of business in the United States

In the case of any person (other than a United States person) who maintains an office or other fixed place of business in the United States, any international communications income attributable to such office or other fixed place of business shall be sourced in the United States.

(2)

Definition

For purposes of this section, the term “international communications income” includes all income derived from the transmission of communications or data from the United States to any foreign country (or possession of the United States) or from any foreign country (or possession of the United States) to the United States.

Aug. 16, 1954, ch. 73668A Stat. 277Pub. L. 94–455, title XIX90 Stat. 1798Pub. L. 98–369, div. A, title I, § 124(a)98 Stat. 646Pub. L. 99–514, title XII100 Stat. 2536Pub. L. 100–647, title I, § 1012(e)(3)(A)102 Stat. 3500Pub. L. 101–239, title VII, § 7811(i)(2)103 Stat. 2409Pub. L. 105–34, title XI, § 1174(a)(2)111 Stat. 989Pub. L. 115–97, title I, § 14303(a)131 Stat. 2225(, ; , §§ 1901(b)(26)(C), (D), 1906(b)(13)(A), , , 1799, 1834; , , ; , §§ 1211(b)(1)(A), 1212(a), (e), 1213(a), , , 2539, 2540; , (f), , ; , , ; , , ; , , .)

Editorial Notes

Amendments

Pub. L. 115–972017—Subsec. (b). inserted at end of concluding provisions “Gains, profits, and income from the sale or exchange of inventory property described in paragraph (2) shall be allocated and apportioned between sources within and without the United States solely on the basis of the production activities with respect to the property.”

Pub. L. 105–341997—Subsec. (c)(2)(B). inserted concluding provisions “In the case of transportation income derived from, or in connection with, a vessel, this subparagraph shall only apply if the taxpayer is a citizen or resident alien.”

Pub. L. 101–2391989—Subsec. (b)(2), (3). substituted “865(i)(1)” for “865(h)(1)”.

Pub. L. 100–647, § 1012(e)(3)(A)1988—, substituted “Special rules for determining source” for “Item not specified in section 861 or 862” in section catchline.

Pub. L. 100–647, § 1012(f)Subsec. (e)(2). , substituted “foreign country (or possession of the United States)” for “foreign country” in two places.

Pub. L. 99–514, § 1212(e)1986—Subsec. (b)(1). , substituted “services” for “transportation or other services”.

Pub. L. 99–514, § 1211(b)(1)(A)Subsec. (b)(2), (3). , substituted “inventory property (within the meaning of section 865(h)(1))” for “personal property”.

Pub. L. 99–514, § 1212(a)Subsec. (c)(2). , amended par. (2) generally, in subpar. (A) substituting provisions relating to other transportation having United States connections for provisions relating to transportation between United States and any possession, and in subpar. (B) substituting provisions relating to special rule for personal service income for provisions relating to special rule for certain lessors of aircraft.

Pub. L. 99–514, § 1213(a)Subsecs. (d), (e). , added subsecs. (d) and (e).

Pub. L. 98–3691984—Subsec. (c). added subsec. (c).

Pub. L. 94–455, § 1906(b)(13)(A)1976—Subsec. (a). , struck out “or his delegate” after “Secretary”.

Pub. L. 94–455Subsec. (b). , §§ 1901(b)(26)(C), (D), 1906(b)(13)(A), struck out “or his delegate” after “Secretary” in introductory provisions, and inserted “or exchange” after “sale” in pars. (2) and (3), and “or exchanged” after “sold” in par. (2) wherever appearing.

Statutory Notes and Related Subsidiaries

Effective Date of 2017 Amendment

Pub. L. 115–97, title I, § 14303(b)131 Stat. 2225

“The amendment made by this section [amending this section] shall apply to taxable years beginning after .”
, , , provided that:

Effective Date of 1997 Amendment

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

Effective Date of 1989 Amendment

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

Effective Date of 1988 Amendment

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

Effective Date of 1986 Amendment

section 1211(b)(1)(A) of Pub. L. 99–514section 1211(c) of Pub. L. 99–514section 865 of this titleAmendment by applicable to taxable years beginning after , except as otherwise provided, see , set out as an Effective Date note under .

Pub. L. 99–514, title XII, § 1212(f)100 Stat. 2539

“(1)

In general .—

section 887 of this titleExcept as provided in paragraph (2), the amendments made by this section [enacting and amending this section and sections 861, 872, and 883 of this title] shall apply to taxable years beginning after .
“(2)

Special rule for certain leased property .—

section 861 of this titleThe amendments made by subsections (a) and (d) [amending this section and ] shall not apply to any income attributable to property held by the taxpayer on , if such property was first leased by the taxpayer before , in a lease to which section 863(c)(2)(B) or 861(e) of the Internal Revenue Code of 1954 [now 1986] (as in effect on the day before the date of the enactment of this Act []) applied.
“(3)

Special rule for certain ships leased by the united states navy.—

“(A)

In general .—

In the case of any property described in subparagraph (B), paragraph (2) shall be applied by substituting ‘1987’ for ‘1986’ each place it appears.
“(B)

Property to which paragraph applies .—

“March 5, 1986

$176,844,000  

  February 5, 1986

64,567,000  

  April 22, 1986

64,598,000  

  May 22, 1986

175,300,000.”
Property described in this subparagraph consists of 4 ships which are to be leased by the United States Navy and which are the subject of Internal Revenue Service rulings bearing the following dates and which involved the following amount of financing, respectively:
, , , provided that:

Pub. L. 99–514, title XII, § 1213(b)100 Stat. 2541

“The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after .”
, , , provided that:

Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title I, § 124(b)98 Stat. 647

“The amendment made by subsection (a) [amending this section] shall apply with respect to transportation beginning after the date of the enactment of this Act [] in taxable years ending after such date.”
, , , provided that:

Effective Date of 1976 Amendment

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

Pub. L. 99–514Applicability of Certain Amendments by in Relation to Treaty Obligations of United States

Pub. L. 99–514Pub. L. 100–647Pub. L. 99–514Pub. L. 100–647section 861 of this titleFor nonapplication of amendments by sections 1211(b)(1)(A) and 1212(a) of to the extent application of such amendments would be contrary to any treaty obligation of the United States in effect on , with provision that for such purposes any amendment by title I of be treated as if it had been included in the provision of to which such amendment relates, see section 1012(aa)(3), (4) of , set out as a note under .

Qualified Research and Experimental Expenditures; Allocation and Appointment; Definitions; Special Rules; Effective Dates

section 4009 of Pub. L. 100–647section 861 of this titleFor allocation and apportionment of qualified research and experimental expenditures for purposes of sections 861 to 863 of this title, see , set out as a note under .

1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures

section 1216 of Pub. L. 99–514section 861 of this titleFor rule governing allocation under subsec. (b) of this section of amounts allowable as a deduction for qualified research and experimental expenditures during taxable years beginning after , and on or before , see , set out as a note under .

Allocation Under Section 861 of Research and Experimental Expenditures

section 126 of Pub. L. 98–369section 861 of this titleFor purposes of subsec. (b) of this section, all amounts allowable as a deduction for qualified research and experimental expenditures are to be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States for taxable years beginning after , and on or before , see , set out as a note under .