Subchapter N—Tax Based on Income From Sources Within or Without the United States
Amendments
1988—
1976—
PART I—SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME
Amendments
1988—
1986—
§861. Income from sources within the United States
(a) Gross income from sources within United States
The following items of gross income shall be treated as income from sources within the United States:
(1) Interest
Interest from the United States or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of noncorporate residents or domestic corporations not including—
(A) interest—
(i) on deposits with a foreign branch of a domestic corporation or a domestic partnership if such branch is engaged in the commercial banking business, and
(ii) on amounts satisfying the requirements of subparagraph (B) of section 871(i)(3) which are paid by a foreign branch of a domestic corporation or a domestic partnership, and
(B) in the case of a foreign partnership, which is predominantly engaged in the active conduct of a trade or business outside the United States, any interest not paid by a trade or business engaged in by the partnership in the United States and not allocable to income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(2) Dividends
The amount received as dividends—
(A) from a domestic corporation, or
(B) from a foreign corporation unless less than 25 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period which was effectively connected (or treated as effectively connected other than income described in section 884(d)(2)) with the conduct of a trade or business within the United States bears to its gross income from all sources; but dividends (other than dividends for which a deduction is allowable under section 245(b)) from a foreign corporation shall, for purposes of subpart A of part III (relating to foreign tax credit), be treated as income from sources without the United States to the extent (and only to the extent) exceeding the amount which is 100/50th of the amount of the deduction allowable under section 245 in respect of such dividends, or
(C) from a foreign corporation to the extent that such amount is required by section 243(e) (relating to certain dividends from foreign corporations) to be treated as dividends from a domestic corporation which is subject to taxation under this chapter, and to such extent subparagraph (B) shall not apply to such amount, or
(D) from a DISC or former DISC (as defined in section 992(a)) except to the extent attributable (as determined under regulations prescribed by the Secretary) to qualified export receipts described in section 993(a)(1) (other than interest and gains described in section 995(b)(1)).
In the case of any dividend from a 20-percent owned corporation (as defined in section 243(c)(2)), subparagraph (B) shall be applied by substituting "100/65th" for "100/50th".
(3) Personal services
Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if—
(A) the labor or services are performed by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year,
(B) such compensation does not exceed $3,000 in the aggregate, and
(C) the compensation is for labor or services performed as an employee of or under a contract with—
(i) a nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or
(ii) an individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation.
In addition, compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States.
(4) Rentals and royalties
Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property.
(5) Disposition of United States real property interest
Gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)).
(6) Sale or exchange of inventory property
Gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) without the United States (other than within a possession of the United States) and its sale or exchange within the United States.
(7) Amounts received as underwriting income (as defined in section 832(b)(3)) derived from the issuing (or reinsuring) of any insurance or annuity contract—
(A) in connection with property in, liability arising out of an activity in, or in connection with the lives or health of residents of, the United States, or
(B) in connection with risks not described in subparagraph (A) as a result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect to issuing (or reinsuring) any insurance or annuity contract in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, the United States.
(8) Social security benefits
Any social security benefit (as defined in section 86(d)).
(9) Guarantees
Amounts received, directly or indirectly, from—
(A) a noncorporate resident or domestic corporation for the provision of a guarantee of any indebtedness of such resident or corporation, or
(B) any foreign person for the provision of a guarantee of any indebtedness of such person, if such amount is connected with income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States.
(b) Taxable income from sources within United States
From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly 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. The remainder, if any, shall be included in full as taxable income from sources within the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.
(c) Special rule for application of subsection (a)(2)(B)
For purposes of subsection (a)(2)(B), if the foreign corporation has no gross income from any source for the 3-year period (or part thereof) specified, the requirements of such subsection shall be applied with respect to the taxable year of such corporation in which the payment of the dividend is made.
(d) Income from certain railroad rolling stock treated as income from sources within the United States
(1) General rule
For purposes of subsection (a) and section 862(a), if—
(A) a taxpayer leases railroad rolling stock which is section 1245 property (as defined in section 1245(a)(3)) to a domestic common carrier by railroad or a corporation which is controlled, directly or indirectly, by one or more such common carriers, and
(B) the use under such lease is expected to be use within the United States,
all amounts includible in gross income by the taxpayer with respect to such railroad rolling stock (including gain from sale or other disposition of such railroad rolling stock) shall be treated as income from sources within the United States. The requirements of subparagraph (B) of the preceding sentence shall be treated as satisfied if the only expected use outside the United States is use by a person (whether or not a United States person) in Canada or Mexico on a temporary basis which is not expected to exceed a total of 90 days in any taxable year.
(2) Paragraph (1) not to apply where lessor is a member of controlled group which includes a railroad
Paragraph (1) shall not apply to a lease between two members of the same controlled group of corporations (as defined in section 1563) if any member of such group is a domestic common carrier by railroad or a switching or terminal company all of whose stock is owned by one or more domestic common carriers by railroad.
(3) Denial of foreign tax credit
No credit shall be allowed under section 901 for any payments to foreign countries with respect to any amount received by the taxpayer with respect to railroad rolling stock which is subject to paragraph (1).
(e) Cross reference
For treatment of interest paid by the branch of a foreign corporation, see section 884(f).
(Aug. 16, 1954, ch. 736,
Amendments
2018—Subsec. (a)(2)(A).
2017—Subsec. (a)(2).
Subsec. (a)(2)(B).
2010—Subsec. (a)(1).
Subsec. (a)(9).
Subsecs. (c) to (f).
2004—Subsec. (a)(1)(C).
2001—Subsec. (a)(3).
1997—Subsec. (a)(3).
1996—Subsec. (e)(1)(A).
1990—Subsec. (a)(1)(A), (B).
"(C) interest on a debt obligation which was part of an issue with respect to which an election has been made under subsection (c) of section 4912 (as in effect before July 1, 1974) and which, when issued (or treated as issued under subsection (c)(2) of such section), had a maturity not exceeding 15 years and, when issued, was purchased by one or more underwriters with a view to distribution through resale, but only with respect to interest attributable to periods after the date of such election, and
"(D) interest on a debt obligation which was part of an issue which—
"(i) was part of an issue outstanding on April 1, 1971,
"(ii) was guaranteed by a United States person,
"(iii) was treated under
"(iv) as of June 30, 1974, had a maturity of not more than 15 years, and
"(v) when issued, was purchased by one or more underwriters for the purpose of distribution through resale."
Subsec. (e)(1)(A).
Subsec. (e)(2).
1989—Subsec. (a)(6).
Subsec. (e)(1).
1988—Subsec. (a)(2)(B).
Subsec. (a)(2)(C).
Subsec. (a)(6).
Subsec. (a)(7).
Subsec. (c)(1)(B).
Subsec. (c)(2)(B)(ii).
Subsec. (f).
1987—Subsec. (a)(2).
Subsec. (a)(2)(B).
1986—Subsec. (a)(1).
Subsec. (a)(1)(A).
Subsec. (a)(1)(B).
Subsec. (a)(1)(C).
Subsec. (a)(1)(D).
Subsec. (a)(1)(E).
Subsec. (a)(1)(F).
Subsec. (a)(1)(G).
Subsec. (a)(1)(H).
Subsec. (a)(2)(A).
Subsec. (a)(2)(B).
Subsec. (a)(6).
Subsec. (b).
Subsec. (c).
Subsec. (d).
Subsecs. (e), (f).
1983—Subsec. (a)(8).
1980—Subsec. (a)(5).
Subsec. (e).
1978—Subsec. (a)(1)(F).
Subsec. (f).
1977—Subsec. (b).
1976—Subsec. (a)(1).
Subsec. (a)(2)(A).
Subsec. (a)(2)(D).
Subsec. (a)(5), (6).
Subsec. (a)(7).
Subsec. (c)(3).
Subsec. (e)(1).
Subsecs. (e)(2), (3).
1975—Subsec. (a)(1)(H).
Subsec. (c)(3).
1971—Subsec. (a)(1)(G).
Subsec. (a)(2)(D).
Subsec. (e).
1969—Subsec. (a)(1)(C), (D).
Subsec. (c)(3).
1966—Subsec. (a)(1)(A).
Subsec. (a)(1)(B).
Subsec. (a)(1)(C) to (F).
Subsec. (a)(2)(B).
Subsec. (a)(3)(C)(ii).
Subsecs. (c), (d).
1962—Subsec. (a)(2)(B).
1960—Subsec. (a)(2)(C).
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2010 Amendment
"(1)
"(2)
"(A)
"(B)
"(C)
Effective Date of 2004 Amendment
Effective Date of 2001 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by section 11813(b)(17) of
Effective Date of 1989 Amendment
Amendment by section 7811(i)(2) of
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 104(b)(11) of
Amendment by section 1211(b)(1)(B) of
Amendment by section 1212(d) of
"(1)
"(2)
"(A)
"(B)
"(3)
"(A)
"(B)
"(4)
"(A)
"(B)
"(i) was incorporated in Delaware in February, 1979,
"(ii) is headquartered in Garden City, New York, and
"(iii) the parent corporation of which is a resident of Sweden."
[
Amendment by section 1241(b) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
"(1)
"(2)
"(A)
"(B)
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
For effective date of amendment by section 1051(h)(3) of
Amendment by section 1901(b)(26)(A), (B), (c)(7) of
Amendment by section 1904(b)(10)(B) of
Effective Date of 1975 Amendment
Effective Date of 1971 Amendments
Amendment by section 503 of
Effective Date of 1969 Amendment
Effective Date of 1966 Amendment
"(1) The amendments made by subsections (a), (c), and (d) [amending this section and
"(2) The amendments made by subsection (b) [amending this section] shall apply with respect to amounts received after December 31, 1966."
Effective Date of 1962 Amendment
Amendment by
Effective Date of 1960 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by
Short Title of 1971 Amendment
Short Title of 1966 Amendment
Savings Provision
For provisions that nothing in amendment by
Dividends Received or Accrued During 1987
Subsec. (a)(2)(B) of this section to be applied by substituting "100/80ths" for the fraction specified therein with regard to dividends received or accrued during 1987, see section 1006(b)(1)(B) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
"(2)
"(A) The amendments made by section 1201 of the Reform Act [amending
"(B) The amendments made by title VII of the Reform Act [enacting
"(3)
"(A) The amendments made by section 1211 of the Reform Act [enacting
"(i) such amendments apply in the case of an individual treated as a resident of a foreign country under a treaty obligation of the United States as so in effect, or
"(ii) such amendments relate to income of a nonresident from the sale or exchange of inventory property which would otherwise be sourced under section 865(e)(2) of the 1986 Code.
"(B) The amendments made by section 1212(a) of the Reform Act [amending
"(C) The amendments made by subsections (b) and (c) of section 1212 of the Reform Act [enacting
"(D) The amendments made by section 1214 of the Reform Act [amending this section and
"(E) The amendment made by section 1241(a) of the Reform Act [enacting
"(F) The amendment made by section 1241(b)(2)(A) of the Reform Act [amending this section].
"(G) The amendment made by section 1241(a) of the Reform Act [enacting
"(H) The amendments made by section 1242 of the Reform Act [amending
"(I) The amendment made by section 1247(a) of the Reform Act [amending
"(J) The amendments made by section 123 of the Reform Act [amending
"(4)
Qualified Research and Experimental Expenditures; Allocation and Apportionment; Definitions; Special Rules; Effective Dates
"(a)
"(1) 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.
"(2) In the case of any qualified research and experimental expenditures (not allocated under paragraph (1)) to the extent—
"(A) that such expenditures are attributable to activities conducted in the United States, 64 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
"(B) that such expenditures are attributable to activities conducted outside the United States, 64 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.
"(3) The remaining portion of qualified research and experimental expenditures (not allocated under paragraphs (1) and (2)) 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 be at least 30 percent of the amount which would be so apportioned on the basis of gross sales.
"(b)
"(c)
"(1)
"(A) 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
"(B) 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.
"(2)
"(A) in space,
"(B) 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
"(C) in Antarctica.
"(d)
"(1) Except as provided in paragraph (2), the allocation and apportionment required by subsection (a) shall be determined as if all members of the affiliated group (as defined in subsection (e)(5) of section 864 of the 1986 Code) were a single corporation.
"(2) For purposes of the allocation and apportionment required by subsection (a)—
"(A) sales and gross income from products produced in whole or in part in a possession by an electing corporation (within the meaning of [former] section 936(h)(5)(E) of the 1986 Code); and
"(B) dividends from an electing corporation,
shall not be taken into account, except that this paragraph shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under [former] section 936(h)(5)(F) of the 1986 Code is not in effect.
"(3) The qualified research and experimental expenditures taken into account for purposes of subsection (a) shall be adjusted to reflect the amount of such expenditures included in computing the cost-sharing amount (determined under [former] section 936(h)(5)(C)(i)(I) of the 1986 Code).
"(4) The Secretary of the Treasury or his delegate may prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations providing for the source of gross income and the allocation and apportionment of deductions to take into account the adjustments required by paragraph (3).
"(5) Paragraph (6) of section 864(e) of the 1986 Code shall not apply to qualified research and experimental expenditures.
"(e)
"(1)
"(2)
"(A) the lesser of 4 months or the number of months in the taxable year, bears to
"(B) the number of months in the taxable year."
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
"(a)
"(1) 50 percent of all amounts allowable as a deduction for qualified research and experimental expenditures shall be 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
"(2) the remaining portion of such amounts shall be apportioned on the basis of gross sales or gross income.
The preceding sentence shall not apply to any expenditures described in section 1.861–8(e)(3)(i)(B) of the Income Tax Regulations.
"(b)
"(1)
"(A) which are research and experimental expenditures within the meaning of section 174 of such Code, and
"(B) which are attributable to activities conducted in the United States.
"(2)
"(c)
Allocation Under Section 861 of Research and Experimental Expenditures
"(a)
"(b)
"(1)
"(A) which are research and experimental expenditures within the meaning of section 174 of such Code, and
"(B) which are attributable to activities conducted in the United States.
"(2)
"(c)
"(1)
"(2)
Conformity of Amendments Made by Foreign Investors Tax Act of 1966 With Treaty Obligations of the United States
§862. Income from sources without the United States
(a) Gross income from sources without United States
The following items of gross income shall be treated as income from sources without the United States:
(1) interest other than that derived from sources within the United States as provided in section 861(a)(1);
(2) dividends other than those derived from sources within the United States as provided in section 861(a)(2);
(3) compensation for labor or personal services performed without the United States;
(4) rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like properties;
(5) gains, profits, and income from the sale or exchange of real property located without the United States;
(6) gains, profits, and income derived from the purchase of inventory property (within the meaning of section 865(i)(1)) within the United States and its sale or exchange without the United States;
(7) underwriting income other than that derived from sources within the United States as provided in section 861(a)(7);
(8) gains, profits, and income from the disposition of a United States real property interest (as defined in section 897(c)) when the real property is located in the Virgin Islands; and
(9) amounts received, directly or indirectly, from a foreign person for the provision of a guarantee of indebtedness of such person other than amounts which are derived from sources within the United States as provided in section 861(a)(9).
(b) Taxable income from sources without United States
From the items of gross income specified in subsection (a) there shall be deducted the expenses, losses, and other deductions properly 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. The remainder, if any, shall be treated in full as taxable income from sources without the United States. In the case of an individual who does not itemize deductions, an amount equal to the standard deduction shall be considered a deduction which cannot definitely be allocated to some item or class of gross income.
(Aug. 16, 1954, ch. 736,
Amendments
2010—Subsec. (a)(9).
1989—Subsec. (a)(6).
1988—Subsec. (c).
"(c)
1986—Subsec. (a)(6).
Subsec. (b).
1981—Subsec. (a)(8).
1977—Subsec. (b).
1976—Subsec. (a)(5), (6).
Subsec. (a)(7).
1971—Subsec. (c).
Effective Date of 2010 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 104(b)(12) of
Amendment by section 1211(b)(1)(C) of
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1036(b) of
Amendment by section 1901(b)(26)(C) of
Effective Date of 1971 Amendment
Amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1211(b)(1)(C) of
Qualified Research and Experimental Expenditures; Allocation and Apportionment; Definitions; Special Rules; Effective Dates
For allocation and apportionment of qualified research and experimental expenditures for purposes of
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
For rule governing allocation under subsec. (b) of this section of amounts allowable as a deduction for qualified research and experimental expenditures during taxable years beginning after Aug. 1, 1986, and on or before Aug. 1, 1987, see section 1216 of
Allocation Under Section 861 of Research and Experimental Expenditures
For purposes of subsec. (b) of this section, all amounts allowable as a deduction for qualified research and experimental expenditures are to be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States for taxable years beginning after Aug. 13, 1983, and on or before Aug. 1, 1986, see section 126 of
§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. 736,
Amendments
2017—Subsec. (b).
1997—Subsec. (c)(2)(B).
1989—Subsec. (b)(2), (3).
1988—
Subsec. (e)(2).
1986—Subsec. (b)(1).
Subsec. (b)(2), (3).
Subsec. (c)(2).
Subsecs. (d), (e).
1984—Subsec. (c).
1976—Subsec. (a).
Subsec. (b).
Effective Date of 2017 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1211(b)(1)(A) of
"(1)
"(2)
"(3)
"(A)
"(B)
| "March 5, 1986 | $176,844,000 |
| February 5, 1986 | 64,567,000 |
| April 22, 1986 | 64,598,000 |
| May 22, 1986 | 175,300,000." |
Effective Date of 1984 Amendment
Effective Date of 1976 Amendment
Amendment by section 1901(b)(26)(C), (D) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendments by sections 1211(b)(1)(A) and 1212(a) of
Qualified Research and Experimental Expenditures; Allocation and Appointment; Definitions; Special Rules; Effective Dates
For allocation and apportionment of qualified research and experimental expenditures for purposes of
1-Year Modification in Regulations Providing for Allocation of Research and Experimental Expenditures
For rule governing allocation under subsec. (b) of this section of amounts allowable as a deduction for qualified research and experimental expenditures during taxable years beginning after Aug. 1, 1986, and on or before Aug. 1, 1987, see section 1216 of
Allocation Under Section 861 of Research and Experimental Expenditures
For purposes of subsec. (b) of this section, all amounts allowable as a deduction for qualified research and experimental expenditures are to be allocated to income from sources within the United States and deducted from such income in determining the amount of taxable income from sources within the United States for taxable years beginning after Aug. 13, 1983, and on or before Aug. 1, 1986, see section 126 of
§864. Definitions and special rules
(a) Produced
For purposes of this part, the term "produced" includes created, fabricated, manufactured, extracted, processed, cured, or aged.
(b) Trade or business within the United States
For purposes of this part, part II, and
(1) Performance of personal services for foreign employer
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,
by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensation for such services does not exceed in the aggregate $3,000.
(2) Trading in securities or commodities
(A) Stocks and securities
(i) In general
Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent.
(ii) Trading for taxpayer's own account
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) Commodities
(i) In general
Trading in commodities through a resident broker, commission agent, custodian, or other independent agent.
(ii) Trading for taxpayer's own account
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) Limitation
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) Limitation
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) Effectively connected income, etc.
(1) General rule
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) 1 (7), or (8) or in section 871(d) or sections 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) Periodical, etc., income from sources within United States—factors
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.
In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business.
(3) Other income from sources within United States
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) Income from sources without United States
(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.
Any income or gain which is equivalent to any item of income or gain described in clause (i), (ii), or (iii) shall be treated in the same manner as such item for purposes of this subparagraph.
(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) Rules for application of paragraph (4)(B)
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) Treatment of certain deferred payments, etc.
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,
the determination of whether such income or gain is taxable under section 871(b) or 882 (as the case may be) shall be made as if such income or gain were taken into account in such other taxable year and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year referred to in subparagraph (A).
(7) Treatment of certain property transactions
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,
the determination of whether any income or gain attributable to such disposition is taxable under section 871(b) or 882 (as the case may be) shall be made as if such sale or exchange occurred immediately before such cessation and without regard to the requirement that the taxpayer be engaged in a trade or business within the United States during the taxable year for which such income or gain is taken into account.
(8) Gain or loss of foreign persons from sale or exchange of certain partnership interests
(A) In general
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) Amount treated as effectively connected
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.
For purposes of this subparagraph, a partner's distributive share of gain or loss on the deemed sale shall be determined in the same manner as such partner's distributive share of the non-separately stated taxable income or loss of such partnership.
(C) Coordination with United States real property interests
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) Sale or exchange
For purposes of this paragraph, the term "sale or exchange" means any sale, exchange, or other disposition.
(E) Secretarial authority
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) Treatment of related person factoring income
(1) In general
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) Provisions to which paragraph (1) applies
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) Trade or service receivable
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) Related person
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) Certain provisions not to apply
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) Special rule for certain income from loans of a controlled foreign corporation
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,
shall be treated as interest described in paragraph (1).
(7) Exception for certain related persons doing business in same foreign country
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) Regulations
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) Rules for allocating interest, etc.
For purposes of this subchapter—
(1) Treatment of affiliated groups
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) Gross income and fair market value methods may not be used for interest
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) Tax-exempt assets not taken into account
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) Basis of stock in nonaffiliated 10-percent owned corporations adjusted for earnings and profits changes
(A) In general
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) Nonaffiliated 10-percent owned corporation
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) Earnings and profits of lower tier corporations taken into account
(i) In general
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) Stock ownership requirements
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) Stock owned through entities
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) Coordination with subpart F, etc.
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) Affiliated group
For purposes of this subsection—
(A) In general
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) Treatment of certain financial institutions
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) Description
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) Treatment of bank holding companies
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,
shall be treated as a corporation described in subparagraph (C).
(6) Allocation and apportionment of other expenses
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) Regulations
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) Election to allocate interest, etc. on worldwide basis
For purposes of this subchapter, at the election of the worldwide affiliated group—
(1) Allocation and apportionment of interest expense
(A) In general
The taxable income of each domestic corporation which is a member of a worldwide 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.
(B) Treatment of worldwide affiliated group
The taxable income of the domestic members of a worldwide affiliated group from sources outside the United States shall be determined by allocating and apportioning the interest expense of such domestic members to such income in an amount equal to the excess (if any) of—
(i) the total interest expense of the worldwide affiliated group multiplied by the ratio which the foreign assets of the worldwide affiliated group bears to all the assets of the worldwide affiliated group, over
(ii) the interest expense of all foreign corporations which are members of the worldwide affiliated group to the extent such interest expense of such foreign corporations would have been allocated and apportioned to foreign source income if this subsection were applied to a group consisting of all the foreign corporations in such worldwide affiliated group.
(C) Worldwide affiliated group
For purposes of this paragraph, the term "worldwide affiliated group" means a group consisting of—
(i) the includible members of an affiliated group (as defined in section 1504(a), determined without regard to paragraph (2) of section 1504(b)), and
(ii) all controlled foreign corporations in which such members in the aggregate meet the ownership requirements of section 1504(a)(2) either directly or indirectly through applying paragraph (2) of section 958(a) or through applying rules similar to the rules of such paragraph to stock owned directly or indirectly by domestic partnerships, trusts, or estates.
(2) Allocation and apportionment of other expenses
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. For purposes of the preceding sentence, the term "affiliated group" has the meaning given such term by section 1504 (determined without regard to paragraph (2) of section 1504(b)).
(3) Treatment of tax-exempt assets; basis of stock in nonaffiliated 10-percent owned corporations
The rules of paragraphs (3) and (4) of subsection (e) shall apply for purposes of this subsection, except that paragraph (4) shall be applied on a worldwide affiliated group basis.
(4) Treatment of certain financial institutions
(A) In general
For purposes of paragraph (1), any corporation described in subparagraph (B) shall be treated as an includible corporation for purposes of section 1504 only for purposes of applying this subsection separately to corporations so described.
(B) Description
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.
(C) Treatment of bank and financial holding companies
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 (
(ii) a financial holding company (within the meaning of section 2(p) of the Bank Holding Company Act of 1956 (
(iii) any subsidiary of a financial institution described in section 581 or 591, or of any such bank or financial holding company, if such subsidiary is predominantly engaged (directly or indirectly) in the active conduct of a banking, financing, or similar business,
shall be treated as a corporation described in subparagraph (B).
(5) Election to expand financial institution group of worldwide group
(A) In general
If a worldwide affiliated group elects the application of this subsection, all financial corporations which—
(i) are members of such worldwide affiliated group, but
(ii) are not corporations described in paragraph (4)(B),
shall be treated as described in paragraph (4)(B) for purposes of applying paragraph (4)(A). This subsection (other than this paragraph) shall apply to any such group in the same manner as this subsection (other than this paragraph) applies to the pre-election worldwide affiliated group of which such group is a part.
(B) Financial corporation
For purposes of this paragraph, the term "financial corporation" means any corporation if at least 80 percent of its gross income is income described in section 904(d)(2)(D)(ii) and the regulations thereunder which is derived from transactions with persons who are not related (within the meaning of section 267(b) or 707(b)(1)) to the corporation. For purposes of the preceding sentence, there shall be disregarded any item of income or gain from a transaction or series of transactions a principal purpose of which is the qualification of any corporation as a financial corporation.
(C) Anti-abuse rules
In the case of a corporation which is a member of an electing financial institution group, to the extent that such corporation—
(i) distributes dividends or makes other distributions with respect to its stock after the date of the enactment of this paragraph to any member of the pre-election worldwide affiliated group (other than to a member of the electing financial institution group) in excess of the greater of—
(I) its average annual dividend (expressed as a percentage of current earnings and profits) during the 5-taxable-year period ending with the taxable year preceding the taxable year, or
(II) 25 percent of its average annual earnings and profits for such 5-taxable-year period, or
(ii) deals with any person in any manner not clearly reflecting the income of the corporation (as determined under principles similar to the principles of section 482),
an amount of indebtedness of the electing financial institution group equal to the excess distribution or the understatement or overstatement of income, as the case may be, shall be recharacterized (for the taxable year and subsequent taxable years) for purposes of this paragraph as indebtedness of the worldwide affiliated group (excluding the electing financial institution group). If a corporation has not been in existence for 5 taxable years, this subparagraph shall be applied with respect to the period it was in existence.
(D) Election
An election under this paragraph with respect to any financial institution group may be made only by the common parent of the pre-election worldwide affiliated group and may be made only for the first taxable year beginning after December 31, 2020, in which such affiliated group includes 1 or more financial corporations. Such an election, once made, shall apply to all financial corporations which are members of the electing financial institution group for such taxable year and all subsequent years unless revoked with the consent of the Secretary.
(E) Definitions relating to groups
For purposes of this paragraph—
(i) Pre-election worldwide affiliated group
The term "pre-election worldwide affiliated group" means, with respect to a corporation, the worldwide affiliated group of which such corporation would (but for an election under this paragraph) be a member for purposes of applying paragraph (1).
(ii) Electing financial institution group
The term "electing financial institution group" means the group of corporations to which this subsection applies separately by reason of the application of paragraph (4)(A) and which includes financial corporations by reason of an election under subparagraph (A).
(F) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out this subsection, including regulations—
(i) providing for the direct allocation of interest expense in other circumstances where such allocation would be appropriate to carry out the purposes of this subsection,
(ii) preventing assets or interest expense from being taken into account more than once, and
(iii) dealing with changes in members of any group (through acquisitions or otherwise) treated under this paragraph as an affiliated group for purposes of this subsection.
(6) Election
An election to have this subsection apply with respect to any worldwide affiliated group may be made only by the common parent of the domestic affiliated group referred to in paragraph (1)(C) and may be made only for the first taxable year beginning after December 31, 2020, in which a worldwide affiliated group exists which includes such affiliated group and at least 1 foreign corporation. Such an election, once made, shall apply to such common parent and all other corporations which are members of such worldwide affiliated group for such taxable year and all subsequent years unless revoked with the consent of the Secretary.
(g) Allocation of research and experimental expenditures
(1) In general
For purposes of sections 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) Qualified research and experimental expenditures
For purposes of this section, the term "qualified research and experimental expenditures" means amounts which are research and experimental expenditures within the meaning of section 174. For purposes of this paragraph, rules similar to the rules of subsection (c) 2 of section 174 shall apply. Any qualified research and experimental expenditures treated as deferred expenses under subsection (b) 2 of section 174 shall be taken into account under this subsection for the taxable year for which such expenditures are allowed as a deduction under such subsection.
(3) Special rules for expenditures attributable to activities conducted in space, etc.
(A) In general
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) Description of expenditures
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) Affiliated group
(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)),2 and
(ii) dividends from an electing corporation,
shall not be taken into account, except that this subparagraph shall not apply to sales of (and gross income and dividends attributable to sales of) products with respect to which an election under section 936(h)(5)(F) 2 is not in effect.
(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) Regulations
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) Applicability
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.
(Aug. 16, 1954, ch. 736,
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
The date of the enactment of this paragraph, referred to in subsec. (f)(5)(C)(i), is the date of enactment of
Section 174, referred to in subsec. (g)(2), was amended generally by
Section 936, referred to in subsec. (g)(4)(B), (C), was repealed by
Amendments
2018—Subsec. (d)(5).
Subsec. (d)(8).
Subsec. (e)(5)(A).
Subsec. (f)(1)(C)(i).
Subsec. (f)(2).
2017—Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
Subsec. (c)(8).
Subsec. (e)(2).
2010—Subsec. (c)(4)(B)(ii).
Subsec. (e)(5)(A).
Subsec. (f)(5)(D), (6).
2009—Subsec. (f)(5)(D), (6).
Subsec. (f)(7).
2008—Subsec. (f)(5)(D), (6).
Subsec. (f)(7).
2004—Subsec. (c)(4)(B).
Subsec. (d)(2).
Subsec. (d)(5)(A)(i).
Subsec. (e)(3).
Subsec. (e)(7)(B).
Subsec. (e)(7)(F), (G).
Subsecs. (f), (g).
2000—Subsec. (e)(3).
1999—Subsecs. (c)(4)(B)(iii), (d)(3)(A), (6)(A).
1997—Subsec. (b)(2)(A)(ii).
1993—Subsec. (f)(1)(B).
Subsec. (f)(4)(D).
Subsec. (f)(5), (6).
"(A)
"(B)
1991—Subsec. (f)(5).
1990—Subsec. (f)(5).
"(A)
"(B)
"(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).
1988—Subsec. (b)(2)(A)(ii).
Subsec. (c)(2).
Subsec. (c)(4)(B)(i), (ii).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(6).
Subsec. (c)(7).
Subsec. (d)(5)(A)(i).
Subsec. (e).
Subsec. (e)(1).
Subsec. (e)(3).
Subsec. (e)(4).
"(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).
Subsec. (e)(5)(D).
Subsec. (e)(6).
Subsec. (e)(7)(D) to (F).
1987—Subsec. (c)(4)(C).
1986—
Subsec. (c)(1)(A).
Subsec. (c)(1)(B).
Subsec. (c)(2).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(6), (7).
Subsec. (d)(5)(A)(i).
Subsec. (d)(5)(A)(ii).
Subsec. (d)(5)(A)(iii).
Subsec. (d)(5)(A)(iv).
Subsec. (d)(5)(B).
Subsec. (d)(7), (8).
Subsec. (e).
1984—Subsec. (c)(2).
Subsec. (d).
1976—Subsec. (a).
Subsec. (c)(4)(B)(i).
Subsec. (c)(4)(B)(iii).
Subsec. (c)(5)(C).
1966—
Effective Date of 2017 Amendment
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2009 Amendment
Effective Date of 2008 Amendment
Effective Date of 2004 Amendment
Amendment by section 101(b)(6) of
"(1) the amendments made by this section [amending this section 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
Amendment by section 413(c)(12) of
Effective Date of 2000 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1991 Amendment
Effective Date of 1990 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1987 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1201(d)(4) of
Amendment by section 1211(b)(2) of
"(1)
"(2)
"(A)
"(i)
"(ii)
| The applicable | |
| "In the case of the: | percentage is: |
| 1st taxable year | 75 |
| 2nd taxable year | 50 |
| 3rd taxable year | 25. |
"(iii)
"(B)
"(i)
"(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)
"(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-
"(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 year | 81/3 | 10 |
| 2nd taxable year | 162/3 | 25 |
| 3rd taxable year | 25 | 50 |
| 4th taxable year | 331/3 | 100 |
| 5th taxable year | 162/3 | 100. |
"(iv) 4-
"(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 year | 5 | 6¼ |
| 2nd taxable year | 10 | 162/3 |
| 3rd taxable year | 15 | 37½ |
| 4th taxable year | 20 | 100 |
| 5th taxable year | 0 | 0. |
"(v) 5-
"(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-
"(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)
"(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)
"(D)
"(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 year | 90 |
| 2nd taxable year | 80 |
| 3rd taxable year | 70 |
| 4th taxable year | 60 |
| 5th taxable year | 50 |
| 6th taxable year | 40 |
| 7th taxable year | 30 |
| 8th taxable year | 20 |
| 9th taxable year | 10. |
"(ii) The provisions of this subparagraph shall apply in lieu of the provisions of subparagraphs (A) and (B).
"(iii)
"(iv)
"(E)
"(F)
"(3)
"(A)
"(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)
"(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)
"(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) 53/8 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.
"(6)
"(A)
"(B)
| "In the case of taxable | The phase-in |
| years beginning in: | percentage is: |
| 1987 | 75 |
| 1988 | 50 |
| 1989 | 25." |
[
["(1)
["(2)
Amendment by section 1221(a)(2) of
Amendment by section 1275(c)(7) of
Amendment by section 1810(c)(2), (3) of
Effective Date of 1984 Amendment
"(1)
"(2)
"(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
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by section 401(d)(1)(D)(x), (xvii)(IV), (V) of
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For applicability of amendment by section 1201(d)(4) of
Plan Amendments Not Required Until January 1, 1989
For 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
1 So in original. Probably should be followed by a comma.
2 See References in Text note below.
§865. Source rules for personal property sales
(a) General rule
Except as otherwise provided in this section, income from the sale of personal property—
(1) by a United States resident shall be sourced in the United States, or
(2) by a nonresident shall be sourced outside the United States.
(b) Exception for inventory property
In the case of income derived from the sale of inventory property—
(1) this section shall not apply, and
(2) such income shall be sourced under the rules of sections 861(a)(6), 862(a)(6), and 863.
Notwithstanding the preceding sentence, any income from the sale of any unprocessed timber which is a softwood and was cut from an area in the United States shall be sourced in the United States and the rules of sections 862(a)(6) and 863(b) shall not apply to any such income. For purposes of the preceding sentence, the term "unprocessed timber" means any log, cant, or similar form of timber.
(c) Exception for depreciable personal property
(1) In general
Gain (not in excess of the depreciation adjustments) from the sale of depreciable personal property shall be allocated between sources in the United States and sources outside the United States—
(A) by treating the same proportion of such gain as sourced in the United States as the United States depreciation adjustments with respect to such property bear to the total depreciation adjustments, and
(B) by treating the remaining portion of such gain as sourced outside the United States.
(2) Gain in excess of depreciation
Gain (in excess of the depreciation adjustments) from the sale of depreciable personal property shall be sourced as if such property were inventory property.
(3) United States depreciation adjustments
For purposes of this subsection—
(A) In general
The term "United States depreciation adjustments" means the portion of the depreciation adjustments to the adjusted basis of the property which are attributable to the depreciation deductions allowable in computing taxable income from sources in the United States.
(B) Special rule for certain property
Except in the case of property of a kind described in section 168(g)(4), if, for any taxable year—
(i) such property is used predominantly in the United States, or
(ii) such property is used predominantly outside the United States,
all of the depreciation deductions allowable for such year shall be treated as having been allocated to income from sources in the United States (or, where clause (ii) applies, from sources outside the United States).
(4) Other definitions
For purposes of this subsection—
(A) Depreciable personal property
The term "depreciable personal property" means any personal property if the adjusted basis of such property includes depreciation adjustments.
(B) Depreciation adjustments
The term "depreciation adjustments" means adjustments reflected in the adjusted basis of any property on account of depreciation deductions (whether allowed with respect to such property or other property and whether allowed to the taxpayer or to any other person).
(C) Depreciation deductions
The term "depreciation deductions" means any deductions for depreciation or amortization or any other deduction allowable under any provision of this chapter which treats an otherwise capital expenditure as a deductible expense.
(d) Exception for intangibles
(1) In general
In the case of any sale of an intangible—
(A) this section shall apply only to the extent the payments in consideration of such sale are not contingent on the productivity, use, or disposition of the intangible, and
(B) to the extent such payments are so contingent, the source of such payments shall be determined under this part in the same manner as if such payments were royalties.
(2) Intangible
For purposes of paragraph (1), the term "intangible" means any patent, copyright, secret process or formula, goodwill, trademark, trade brand, franchise, or other like property.
(3) Special rule in the case of goodwill
To the extent this section applies to the sale of goodwill, payments in consideration of such sale shall be treated as from sources in the country in which such goodwill was generated.
(4) Coordination with subsection (c)
(A) Gain not in excess of depreciation adjustments sourced under subsection (c)
Notwithstanding paragraph (1), any gain from the sale of an intangible shall be sourced under subsection (c) to the extent such gain does not exceed the depreciation adjustments with respect to such intangible.
(B) Subsection (c)(2) not to apply to intangibles
Paragraph (2) of subsection (c) shall not apply to any gain from the sale of an intangible.
(e) Special rules for sales through offices or fixed places of business
(1) Sales by residents
(A) In general
In the case of income not sourced under subsection (b), (c), (d)(1)(B) or (3), or (f), if a United States resident maintains an office or other fixed place of business in a foreign country, income from sales of personal property attributable to such office or other fixed place of business shall be sourced outside the United States.
(B) Tax must be imposed
Subparagraph (A) shall not apply unless an income tax equal to at least 10 percent of the income from the sale is actually paid to a foreign country with respect to such income.
(2) Sales by nonresidents
(A) In general
Notwithstanding any other provisions of this part, if a nonresident maintains an office or other fixed place of business in the United States, income from any sale of personal property (including inventory property) attributable to such office or other fixed place of business shall be sourced in the United States. The preceding sentence shall not apply for purposes of section 971 (defining export trade corporation).
(B) Exception
Subparagraph (A) shall not apply to any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer in a foreign country materially participated in the sale.
(3) Sales attributable to an office or other fixed place of business
The principles of section 864(c)(5) shall apply in determining whether a taxpayer has an office or other fixed place of business and whether a sale is attributable to such an office or other fixed place of business.
(f) Stock of affiliates
If—
(1) a United States resident sells stock in an affiliate which is a foreign corporation,
(2) such sale occurs in a foreign country in which such affiliate is engaged in the active conduct of a trade or business, and
(3) more than 50 percent of the gross income of such affiliate for the 3-year period ending with the close of such affiliate's taxable year immediately preceding the year in which the sale occurred was derived from the active conduct of a trade or business in such foreign country,
any gain from such sale shall be sourced outside the United States. For purposes of paragraphs (2) and (3), the United States resident may elect to treat an affiliate and all other corporations which are wholly owned (directly or indirectly) by the affiliate as one corporation.
(g) United States resident; nonresident
For purposes of this section—
(1) In general
Except as otherwise provided in this subsection—
(A) United States resident
The term "United States resident" means—
(i) any individual who—
(I) is a United States citizen or a resident alien and does not have a tax home (as defined in section 911(d)(3)) in a foreign country, or
(II) is a nonresident alien and has a tax home (as so defined) in the United States, and
(ii) any corporation, trust, or estate which is a United States person (as defined in section 7701(a)(30)).
(B) Nonresident
The term "nonresident" means any person other than a United States resident.
(2) Special rules for United States citizens and resident aliens
For purposes of this section, a United States citizen or resident alien shall not be treated as a nonresident with respect to any sale of personal property unless an income tax equal to at least 10 percent of the gain derived from such sale is actually paid to a foreign country with respect to that gain.
(3) Special rule for certain stock sales by residents of Puerto Rico
Paragraph (2) shall not apply to the sale by an individual who was a bona fide resident of Puerto Rico during the entire taxable year of stock in a corporation if—
(A) such corporation is engaged in the active conduct of a trade or business in Puerto Rico, and
(B) more than 50 percent of its gross income for the 3-year period ending with the close of such corporation's taxable year immediately preceding the year in which such sale occurred was derived from the active conduct of a trade or business in Puerto Rico.
For purposes of the preceding sentence, the taxpayer may elect to treat a corporation and all other corporations which are wholly owned (directly or indirectly) by such corporation as one corporation.
(h) Treatment of gains from sale of certain stock or intangibles and from certain liquidations
(1) In general
In the case of gain to which this subsection applies—
(A) such gain shall be sourced outside the United States, but
(B) subsections (a), (b), and (c) of section 904 and sections 907 and 960 shall be applied separately with respect to such gain.
(2) Gain to which subsection applies
This subsection shall apply to—
(A) Gain from sale of certain stock or intangibles
Any gain—
(i) which is from the sale of stock in a foreign corporation or an intangible (as defined in subsection (d)(2)) and which would otherwise be sourced in the United States under this section,
(ii) which, under a treaty obligation of the United States (applied without regard to this section), would be sourced outside the United States, and
(iii) with respect to which the taxpayer chooses the benefits of this subsection.
(B) Gain from liquidation in possession
Any gain which is derived from the receipt of any distribution in liquidation of a corporation—
(i) which is organized in a possession of the United States, and
(ii) more than 50 percent of the gross income of which during the 3-taxable year period ending with the close of the taxable year immediately preceding the taxable year in which the distribution is received is from the active conduct of a trade or business in such possession.
(i) Other definitions
For purposes of this section—
(1) Inventory property
The term "inventory property" means personal property described in paragraph (1) of section 1221(a).
(2) Sale includes exchange
The term "sale" includes an exchange or any other disposition.
(3) Treatment of possessions
Any possession of the United States shall be treated as a foreign country.
(4) Affiliate
The term "affiliate" means a member of the same affiliated group (within the meaning of section 1504(a) without regard to section 1504(b)).
(5) Treatment of partnerships
In the case of a partnership, except as provided in regulations, this section shall be applied at the partner level.
(j) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section, including regulations—
(1) relating to the treatment of losses from sales of personal property,
(2) applying the rules of this section to income derived from trading in futures contracts, forward contracts, options contracts, and other instruments, and
(3) providing that, subject to such conditions (which may include provisions comparable to section 877) as may be provided in such regulations, subsections (e)(1)(B) and (g)(2) shall not apply for purposes of sections 931 and 933.
(k) Cross references
(1) For provisions relating to the characterization as dividends for source purposes of gains from the sale of stock in certain foreign corporations, see section 1248.
(2) For sourcing of income from certain foreign currency transactions, see section 988.
(Added
Amendments
2018—Subsec. (j)(3).
2017—Subsec. (h)(1)(B).
1999—Subsec. (i)(1).
1996—Subsec. (b)(2).
1993—Subsec. (b).
1990—Subsec. (c)(3)(B).
1988—Subsec. (d)(2).
Subsec. (d)(4).
Subsec. (e)(1)(A).
Subsec. (e)(2)(B).
"(i) any sale of inventory property which is sold for use, disposition, or consumption outside the United States if an office or other fixed place of business of the taxpayer outside the United States materially participated in the sale, or
"(ii) any amount included in gross income under section 951(a)(1)(A)."
Subsec. (f).
"(1) a United States resident sells stock in an affiliate which is a foreign corporation,
"(2) such affiliate is engaged in the active conduct of a trade or business, and
"(3) such sale occurs in the foreign country in which the affiliate derived more than 50 percent of its gross income for the 3-year period ending with the close of the affiliate's taxable year immediately preceding the year during which such sale occurred,
any gain from such sale shall be sourced outside the United States."
Subsec. (g)(1)(A)(i).
Subsec. (g)(1)(A)(ii).
Subsec. (g)(3).
Subsec. (h).
Subsec. (i).
Subsec. (i)(5).
Subsec. (j).
Subsec. (j)(3).
Subsec. (k).
Effective Date of 2017 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Effective Date of 1993 Amendment
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1012(d)(1)–(4), (6), (8), (9), (11), (12) of
Effective Date
"(1)
"(2)
Savings Provision
For provisions that nothing in amendment by
For provisions that nothing in amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1211(a) of
Study of Source Rules for Sales of Inventory Property
PART II—NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
Amendments
1986—
Subpart A—Nonresident Alien Individuals
Amendments
2008—
1986—
1984—
1976—
1966—
§871. Tax on nonresident alien individuals
(a) Income not connected with United States business—30 percent tax
(1) Income other than capital gains
Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as—
(A) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
(B) gains described in subsection (b) or (c) of section 631,
(C) in the case of—
(i) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the nonresident alien individual (to the extent such discount was not theretofore taken into account under clause (ii)), and
(ii) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the nonresident alien individual (except that such original issue discount shall be taken into account under this clause only to the extent such discount was not theretofore taken into account under this clause and only to the extent that the tax thereon does not exceed the payment less the tax imposed by subparagraph (A) thereon), and
(D) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
(2) Capital gains of aliens present in the United States 183 days or more
In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from the sale or exchange at any time during such year of capital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this paragraph, gains and losses shall be taken into account only if, and to the extent that, they would be recognized and taken into account if such gains and losses were effectively connected with the conduct of a trade or business within the United States, except that such gains and losses shall be determined without regard to section 1202 and such losses shall be determined without the benefits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account in determining the tax under paragraph (1) or subsection (b) shall not be taken into account in determining the tax under this paragraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year.
(3) Taxation of social security benefits
For purposes of this section and section 1441—
(A) 85 percent of any social security benefit (as defined in section 86(d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and
(B) section 86 shall not apply.
(b) Income connected with United States business—graduated rate of tax
(1) Imposition of tax
A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
(c) Participants in certain exchange or training programs
For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended (
(d) Election to treat real property income as income connected with United States business
(1) In general
A nonresident alien individual who during the taxable year derives any income—
(A) from real property held for the production of income and located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of such real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and
(B) which, but for this subsection, would not be treated as income which is effectively connected with the conduct of a trade or business within the United States,
may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (b)(1) whether or not such individual is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with respect to any taxable year.
(2) Election after revocation
If an election has been made under paragraph (1) and such election has been revoked, a new election may not be made under such paragraph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is effective, unless the Secretary consents to such new election.
(3) Form and time of election and revocation
An election under paragraph (1), and any revocation of such an election, may be made only in such manner and at such time as the Secretary may by regulations prescribe.
[(e) Repealed. Pub. L. 99–514, title XII, §1211(b)(5), Oct. 22, 1986, 100 Stat. 2536 ]
(f) Certain annuities received under qualified plans
(1) In general
For purposes of this section, gross income does not include any amount received as an annuity under a qualified annuity plan described in section 403(a)(1), or from a qualified trust described in section 401(a) which is exempt from tax under section 501(a), if—
(A) all of the personal services by reason of which the annuity is payable were either—
(i) personal services performed outside the United States by an individual who, at the time of performance of such personal services, was a nonresident alien, or
(ii) personal services described in section 864(b)(1) performed within the United States by such individual, and
(B) at the time the first amount is paid as an annuity under the annuity plan or by the trust, 90 percent or more of the employees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which the trust is a part, are citizens or residents of the United States.
(2) Exclusion
Income received during the taxable year which would be excluded from gross income under this subsection but for the requirement of paragraph (1)(B) shall not be included in gross income if—
(A) the recipient's country of residence grants a substantially equivalent exclusion to residents and citizens of the United States; or
(B) the recipient's country of residence is a beneficiary developing country under title V of the Trade Act of 1974 (
(g) Special rules for original issue discount
For purposes of this section and section 881—
(1) Original issue discount obligation
(A) In general
Except as provided in subparagraph (B), the term "original issue discount obligation" means any bond or other evidence of indebtedness having original issue discount (within the meaning of section 1273).
(B) Exceptions
The term "original issue discount obligation" shall not include—
(i) Certain short-term obligations
Any obligation payable 183 days or less from the date of original issue (without regard to the period held by the taxpayer).
(ii) Tax-exempt obligations
Any obligation the interest on which is exempt from tax under section 103 or under any other provision of law without regard to the identity of the holder.
(2) Determination of portion of original issue discount accruing during any period
The determination of the amount of the original issue discount which accrues during any period shall be made under the rules of section 1272 (or the corresponding provisions of prior law) without regard to any exception for short-term obligations.
(3) Source of original issue discount
Except to the extent provided in regulations prescribed by the Secretary, the determination of whether any amount described in subsection (a)(1)(C) is from sources within the United States shall be made at the time of the payment (or sale or exchange) as if such payment (or sale or exchange) involved the payment of interest.
(4) Stripped bonds
The provisions of section 1286 (relating to the treatment of stripped bonds and stripped coupons as obligations with original issue discount) shall apply for purposes of this section.
(h) Repeal of tax on interest of nonresident alien individuals received from certain portfolio debt investments
(1) In general
In the case of any portfolio interest received by a nonresident individual from sources within the United States, no tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a).
(2) Portfolio interest
For purposes of this subsection, the term "portfolio interest" means any interest (including original issue discount) which—
(A) would be subject to tax under subsection (a) but for this subsection, and
(B) is paid on an obligation—
(i) which is in registered form, and
(ii) with respect to which—
(I) the United States person who would otherwise be required to deduct and withhold tax from such interest under section 1441(a) receives a statement (which meets the requirements of paragraph (5)) that the beneficial owner of the obligation is not a United States person, or
(II) the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection.
(3) Portfolio interest not to include interest received by 10-percent shareholders
For purposes of this subsection—
(A) In general
The term "portfolio interest" shall not include any interest described in paragraph (2) which is received by a 10-percent shareholder.
(B) 10-Percent shareholder
The term "10-percent shareholder" means—
(i) in the case of an obligation issued by a corporation, any person who owns 10 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote, or
(ii) in the case of an obligation issued by a partnership, any person who owns 10 percent or more of the capital or profits interest in such partnership.
(C) Attribution rules
For purposes of determining ownership of stock under subparagraph (B)(i) the rules of section 318(a) shall apply, except that—
(i) section 318(a)(2)(C) shall be applied without regard to the 50-percent limitation therein,
(ii) section 318(a)(3)(C) shall be applied—
(I) without regard to the 50-percent limitation therein; and
(II) in any case where such section would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) which is owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owns in such corporation bears to the value of all stock in such corporation, and
(iii) any stock which a person is treated as owning after application of section 318(a)(4) shall not, for purposes of applying paragraphs (2) and (3) of section 318(a), be treated as actually owned by such person.
Under regulations prescribed by the Secretary, rules similar to the rules of the preceding sentence shall be applied in determining the ownership of the capital or profits interest in a partnership for purposes of subparagraph (B)(ii).
(4) Portfolio interest not to include certain contingent interest
For purposes of this subsection—
(A) In general
Except as otherwise provided in this paragraph, the term "portfolio interest" shall not include—
(i) any interest if the amount of such interest is determined by reference to—
(I) any receipts, sales or other cash flow of the debtor or a related person,
(II) any income or profits of the debtor or a related person,
(III) any change in value of any property of the debtor or a related person, or
(IV) any dividend, partnership distributions, or similar payments made by the debtor or a related person, or
(ii) any other type of contingent interest that is identified by the Secretary by regulation, where a denial of the portfolio interest exemption is necessary or appropriate to prevent avoidance of Federal income tax.
(B) Related person
The term "related person" means any person who is related to the debtor within the meaning of section 267(b) or 707(b)(1), or who is a party to any arrangement undertaken for a purpose of avoiding the application of this paragraph.
(C) Exceptions
Subparagraph (A)(i) shall not apply to—
(i) any amount of interest solely by reason of the fact that the timing of any interest or principal payment is subject to a contingency,
(ii) any amount of interest solely by reason of the fact that the interest is paid with respect to nonrecourse or limited recourse indebtedness,
(iii) any amount of interest all or substantially all of which is determined by reference to any other amount of interest not described in subparagraph (A) (or by reference to the principal amount of indebtedness on which such other interest is paid),
(iv) any amount of interest solely by reason of the fact that the debtor or a related person enters into a hedging transaction to manage the risk of interest rate or currency fluctuations with respect to such interest,
(v) any amount of interest determined by reference to—
(I) changes in the value of property (including stock) that is actively traded (within the meaning of section 1092(d)) other than property described in section 897(c)(1) or (g),
(II) the yield on property described in subclause (I), other than a debt instrument that pays interest described in subparagraph (A), or stock or other property that represents a beneficial interest in the debtor or a related person, or
(III) changes in any index of the value of property described in subclause (I) or of the yield on property described in subclause (II), and
(vi) any other type of interest identified by the Secretary by regulation.
(D) Exception for certain existing indebtedness
Subparagraph (A) shall not apply to any interest paid or accrued with respect to any indebtedness with a fixed term—
(i) which was issued on or before April 7, 1993, or
(ii) which was issued after such date pursuant to a written binding contract in effect on such date and at all times thereafter before such indebtedness was issued.
(5) Certain statements
A statement with respect to any obligation meets the requirements of this paragraph if such statement is made by—
(A) the beneficial owner of such obligation, or
(B) a securities clearing organization, a bank, or other financial institution that holds customers' securities in the ordinary course of its trade or business.
The preceding sentence shall not apply to any statement with respect to payment of interest on any obligation by any person if, at least one month before such payment, the Secretary has published a determination that any statement from such person (or any class including such person) does not meet the requirements of this paragraph.
(6) Secretary may provide subsection not to apply in cases of inadequate information exchange
(A) In general
If the Secretary determines that the exchange of information between the United States and a foreign country is inadequate to prevent evasion of the United States income tax by United States persons, the Secretary may provide in writing (and publish a statement) that the provisions of this subsection shall not apply to payments of interest to any person within such foreign country (or payments addressed to, or for the account of, persons within such foreign country) during the period—
(i) beginning on the date specified by the Secretary, and
(ii) ending on the date that the Secretary determines that the exchange of information between the United States and the foreign country is adequate to prevent the evasion of United States income tax by United States persons.
(B) Exception for certain obligations
Subparagraph (A) shall not apply to the payment of interest on any obligation which is issued on or before the date of the publication of the Secretary's determination under such subparagraph.
(7) Registered form
For purposes of this subsection, the term "registered form" has the same meaning given such term by section 163(f).
(i) Tax not to apply to certain interest and dividends
(1) In general
No tax shall be imposed under paragraph (1)(A) or (1)(C) of subsection (a) on any amount described in paragraph (2).
(2) Amounts to which paragraph (1) applies
The amounts described in this paragraph are as follows:
(A) Interest on deposits, if such interest is not effectively connected with the conduct of a trade or business within the United States.
(B) The active foreign business percentage of—
(i) any dividend paid by an existing 80/20 company, and
(ii) any interest paid by an existing 80/20 company.
(C) Income derived by a foreign central bank of issue from bankers' acceptances.
(D) Dividends paid by a foreign corporation which are treated under section 861(a)(2)(B) as income from sources within the United States.
(3) Deposits
For purposes of paragraph (2), the term "deposits" means amounts which are—
(A) deposits with persons carrying on the banking business,
(B) deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, but only to the extent that amounts paid or credited on such deposits or accounts are deductible under section 591 (determined without regard to sections 265 and 291) in computing the taxable income of such institutions, and
(C) amounts held by an insurance company under an agreement to pay interest thereon.
(j) Exemption for certain gambling winnings
No tax shall be imposed under paragraph (1)(A) of subsection (a) on the proceeds from a wager placed in any of the following games: blackjack, baccarat, craps, roulette, or big-6 wheel. The preceding sentence shall not apply in any case where the Secretary determines by regulation that the collection of the tax is administratively feasible.
(k) Exemption for certain dividends of regulated investment companies
(1) Interest-related dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any interest-related dividend received from a regulated investment company which meets the requirements of section 852(a) for the taxable year with respect to which the dividend is paid.
(B) Exceptions
Subparagraph (A) shall not apply—
(i) to any interest-related dividend received from a regulated investment company by a person to the extent such dividend is attributable to interest (other than interest described in subparagraph (E)(i) or (iii)) received by such company on indebtedness issued by such person or by any corporation or partnership with respect to which such person is a 10-percent shareholder,
(ii) to any interest-related dividend with respect to stock of a regulated investment company unless the person who would otherwise be required to deduct and withhold tax from such dividend under
(iii) to any interest-related dividend paid to any person within a foreign country (or any interest-related dividend payment addressed to, or for the account of, persons within such foreign country) during any period described in subsection (h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with respect to any stock which was acquired on or before the date of the publication of the Secretary's determination under subsection (h)(6).
(C) Interest-related dividend
For purposes of this paragraph—
(i) In general
Except as provided in clause (ii), an interest related dividend is any dividend, or part thereof, which is reported by the company as an interest related dividend in written statements furnished to its shareholders.
(ii) Excess reported amounts
If the aggregate reported amount with respect to the company for any taxable year exceeds the qualified net interest income of the company for such taxable year, an interest related dividend is the excess of—
(I) the reported interest related dividend amount, over
(II) the excess reported amount which is allocable to such reported interest related dividend amount.
(iii) Allocation of excess reported amount
(I) In general
Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported interest related dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported interest related dividend amount bears to the aggregate reported amount.
(II) Special rule for noncalendar year taxpayers
In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting "post-December reported amount" for "aggregate reported amount" and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year.
(iv) Definitions
For purposes of this subparagraph—
(I) Reported interest related dividend amount
The term "reported interest related dividend amount" means the amount reported to its shareholders under clause (i) as an interest related dividend.
(II) Excess reported amount
The term "excess reported amount" means the excess of the aggregate reported amount over the qualified net interest income of the company for the taxable year.
(III) Aggregate reported amount
The term "aggregate reported amount" means the aggregate amount of dividends reported by the company under clause (i) as interest related dividends for the taxable year (including interest related dividends paid after the close of the taxable year described in section 855).
(IV) Post-December reported amount
The term "post-December reported amount" means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year.
(D) Qualified net interest income
For purposes of subparagraph (C), the term "qualified net interest income" means the qualified interest income of the regulated investment company reduced by the deductions properly allocable to such income.
(E) Qualified interest income
For purposes of subparagraph (D), the term "qualified interest income" means the sum of the following amounts derived by the regulated investment company from sources within the United States:
(i) Any amount includible in gross income as original issue discount (within the meaning of section 1273) on an obligation payable 183 days or less from the date of original issue (without regard to the period held by the company).
(ii) Any interest includible in gross income (including amounts recognized as ordinary income in respect of original issue discount or market discount or acquisition discount under part V of subchapter P and such other amounts as regulations may provide) on an obligation which is in registered form; except that this clause shall not apply to—
(I) any interest on an obligation issued by a corporation or partnership if the regulated investment company is a 10-percent shareholder in such corporation or partnership, and
(II) any interest which is treated as not being portfolio interest under the rules of subsection (h)(4).
(iii) Any interest referred to in subsection (i)(2)(A) (without regard to the trade or business of the regulated investment company).
(iv) Any interest-related dividend includable in gross income with respect to stock of another regulated investment company.
(F) 10-percent shareholder
For purposes of this paragraph, the term "10-percent shareholder" has the meaning given such term by subsection (h)(3)(B).
(2) Short-term capital gain dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any short-term capital gain dividend received from a regulated investment company which meets the requirements of section 852(a) for the taxable year with respect to which the dividend is paid.
(B) Exception for aliens taxable under subsection (a)(2)
Subparagraph (A) shall not apply in the case of any nonresident alien individual subject to tax under subsection (a)(2).
(C) Short-term capital gain dividend
For purposes of this paragraph—
(i) In general
Except as provided in clause (ii), the term "short-term capital gain dividend" means any dividend, or part thereof, which is reported by the company as a short-term capital gain dividend in written statements furnished to its shareholders.
(ii) Excess reported amounts
If the aggregate reported amount with respect to the company for any taxable year exceeds the qualified short-term gain of the company for such taxable year, the term "short-term capital gain dividend" means the excess of—
(I) the reported short-term capital gain dividend amount, over
(II) the excess reported amount which is allocable to such reported short-term capital gain dividend amount.
(iii) Allocation of excess reported amount
(I) In general
Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported short-term capital gain dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported short-term capital gain dividend amount bears to the aggregate reported amount.
(II) Special rule for noncalendar year taxpayers
In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting "post-December reported amount" for "aggregate reported amount" and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year.
(iv) Definitions
For purposes of this subparagraph—
(I) Reported short-term capital gain dividend amount
The term "reported short-term capital gain dividend amount" means the amount reported to its shareholders under clause (i) as a short-term capital gain dividend.
(II) Excess reported amount
The term "excess reported amount" means the excess of the aggregate reported amount over the qualified short-term gain of the company for the taxable year.
(III) Aggregate reported amount
The term "aggregate reported amount" means the aggregate amount of dividends reported by the company under clause (i) as short-term capital gain dividends for the taxable year (including short-term capital gain dividends paid after the close of the taxable year described in section 855).
(IV) Post-December reported amount
The term "post-December reported amount" means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year.
(D) Qualified short-term gain
For purposes of subparagraph (C), the term "qualified short-term gain" means the excess of the net short-term capital gain of the regulated investment company for the taxable year over the net long-term capital loss (if any) of such company for such taxable year. For purposes of this subparagraph, the net short-term capital gain of the regulated investment company shall be computed by treating any short-term capital gain dividend includible in gross income with respect to stock of another regulated investment company as a short-term capital gain.
(E) Certain distributions
In the case of a distribution to which section 897 does not apply by reason of the second sentence of section 897(h)(1), the amount which would be treated as a short-term capital gain dividend to the shareholder (without regard to this subparagraph)—
(i) shall not be treated as a short-term capital gain dividend, and
(ii) shall be included in such shareholder's gross income as a dividend from the regulated investment company.
(l) Rules relating to existing 80/20 companies
For purposes of this subsection and subsection (i)(2)(B)—
(1) Existing 80/20 company
(A) In general
The term "existing 80/20 company" means any corporation if—
(i) such corporation met the 80-percent foreign business requirements of section 861(c)(1) (as in effect before the date of the enactment of this subsection) for such corporation's last taxable year beginning before January 1, 2011,
(ii) such corporation meets the 80-percent foreign business requirements of subparagraph (B) with respect to each taxable year after the taxable year referred to in clause (i), and
(iii) there has not been an addition of a substantial line of business with respect to such corporation after the date of the enactment of this subsection.
(B) Foreign business requirements
(i) In general
Except as provided in clause (iv), a corporation meets the 80-percent foreign business requirements of this subparagraph if it is shown to the satisfaction of the Secretary that at least 80 percent of the gross income from all sources of such corporation for the testing period is active foreign business income.
(ii) Active foreign business income
For purposes of clause (i), the term "active foreign business income" means gross income which—
(I) is derived from sources outside the United States (as determined under this subchapter), and
(II) is attributable to the active conduct of a trade or business in a foreign country or possession of the United States.
(iii) Testing period
For purposes of this subsection, the term "testing period" means the 3-year period ending with the close of the taxable year of the corporation preceding the payment (or such part of such period as may be applicable). If the corporation has no gross income for such 3-year period (or part thereof), the testing period shall be the taxable year in which the payment is made.
(iv) Transition rule
In the case of a taxable year for which the testing period includes 1 or more taxable years beginning before January 1, 2011—
(I) a corporation meets the 80-percent foreign business requirements of this subparagraph if and only if the weighted average of—
(aa) the percentage of the corporation's gross income from all sources that is active foreign business income (as defined in subparagraph (B) of section 861(c)(1) (as in effect before the date of the enactment of this subsection)) for the portion of the testing period that includes taxable years beginning before January 1, 2011, and
(bb) the percentage of the corporation's gross income from all sources that is active foreign business income (as defined in clause (ii) of this subparagraph) for the portion of the testing period, if any, that includes taxable years beginning on or after January 1, 2011,
is at least 80 percent, and
(II) the active foreign business percentage for such taxable year shall equal the weighted average percentage determined under subclause (I).
(2) Active foreign business percentage
Except as provided in paragraph (1)(B)(iv), the term "active foreign business percentage" means, with respect to any existing 80/20 company, the percentage which—
(A) the active foreign business income of such company for the testing period, is of
(B) the gross income of such company for the testing period from all sources.
(3) Aggregation rules
For purposes of applying paragraph (1) (other than subparagraphs (A)(i) and (B)(iv) thereof) and paragraph (2)—
(A) In general
The corporation referred to in paragraph (1)(A) and all of such corporation's subsidiaries shall be treated as one corporation.
(B) Subsidiaries
For purposes of subparagraph (A), the term "subsidiary" means any corporation in which the corporation referred to in subparagraph (A) owns (directly or indirectly) stock meeting the requirements of section 1504(a)(2) (determined by substituting "50 percent" for "80 percent" each place it appears and without regard to section 1504(b)(3)).
(4) Regulations
The Secretary may issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide for the proper application of the aggregation rules described in paragraph (3).
(m) Treatment of dividend equivalent payments
(1) In general
For purposes of subsection (a), sections 881 and 4948(a), and chapters 3 and 4, a dividend equivalent shall be treated as a dividend from sources within the United States.
(2) Dividend equivalent
For purposes of this subsection, the term "dividend equivalent" means—
(A) any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States,
(B) any payment made pursuant to a specified notional principal contract that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States, and
(C) any other payment determined by the Secretary to be substantially similar to a payment described in subparagraph (A) or (B).
(3) Specified notional principal contract
For purposes of this subsection, the term "specified notional principal contract" means—
(A) any notional principal contract if—
(i) in connection with entering into such contract, any long party to the contract transfers the underlying security to any short party to the contract,
(ii) in connection with the termination of such contract, any short party to the contract transfers the underlying security to any long party to the contract,
(iii) the underlying security is not readily tradable on an established securities market,
(iv) in connection with entering into such contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract, or
(v) such contract is identified by the Secretary as a specified notional principal contract,
(B) in the case of payments made after the date which is 2 years after the date of the enactment of this subsection, any notional principal contract unless the Secretary determines that such contract is of a type which does not have the potential for tax avoidance.
(4) Definitions
For purposes of paragraph (3)(A)—
(A) Long party
The term "long party" means, with respect to any underlying security of any notional principal contract, any party to the contract which is entitled to receive any payment pursuant to such contract which is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States with respect to such underlying security.
(B) Short party
The term "short party" means, with respect to any underlying security of any notional principal contract, any party to the contract which is not a long party with respect to such underlying security.
(C) Underlying security
The term "underlying security" means, with respect to any notional principal contract, the security with respect to which the dividend referred to in paragraph (2)(B) is paid. For purposes of this paragraph, any index or fixed basket of securities shall be treated as a single security.
(5) Payments determined on gross basis
For purposes of this subsection, the term "payment" includes any gross amount which is used in computing any net amount which is transferred to or from the taxpayer.
(6) Prevention of over-withholding
In the case of any chain of dividend equivalents one or more of which is subject to tax under subsection (a) or section 881, the Secretary may reduce such tax, but only to the extent that the taxpayer can establish that such tax has been paid with respect to another dividend equivalent in such chain, or is not otherwise due, or as the Secretary determines is appropriate to address the role of financial intermediaries in such chain. For purposes of this paragraph, a dividend shall be treated as a dividend equivalent.
(7) Coordination with chapters 3 and 4
For purposes of chapters 3 and 4, each person that is a party to any contract or other arrangement that provides for the payment of a dividend equivalent shall be treated as having control of such payment.
(n) Cross references
(1) For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(e)(2).
(2) For taxation of nonresident alien individuals who are expatriate United States citizens, see section 877.
(3) For doubling of tax on citizens of certain foreign countries, see section 891.
(4) For adjustment of tax in case of nationals or residents of certain foreign countries, see section 896.
(5) For withholding of tax at source on nonresident alien individuals, see section 1441.
(6) For election to treat married nonresident alien individual as resident of United States in certain cases, see subsections (g) and (h) of section 6013.
(7) For special tax treatment of gain or loss from the disposition by a nonresident alien individual of a United States real property interest, see section 897.
(Aug. 16, 1954, ch. 736,
References in Text
Section 207 of the Social Security Act, referred to in subsec. (a)(3)(A), is classified to
The Trade Act of 1974, referred to in subsec. (f)(2)(B), is
The date of the enactment of this subsection, referred to in subsec. (l)(1)(A)(i), (iii), (B)(iv)(I)(aa), is the date of enactment of
The date of the enactment of this subsection, referred to in subsec. (m)(3)(B), is the date of enactment of
Amendments
2018—Subsec. (a)(3).
2015—Subsec. (k)(1)(C)(v).
Subsec. (k)(2)(C)(v).
2014—Subsec. (a)(1)(B).
Subsec. (k)(1)(C)(v), (2)(C)(v).
2013—Subsec. (k)(1)(C)(v), (2)(C)(v).
2010—Subsec. (h)(2).
Subsec. (h)(3)(A).
Subsec. (i)(2)(B).
Subsec. (k)(1)(A).
Subsec. (k)(1)(C).
Subsec. (k)(2)(A).
Subsec. (k)(2)(C).
Subsec. (k)(2)(D).
"(i) the net short-term capital gain of the regulated investment company shall be computed by treating any short-term capital gain dividend includible in gross income with respect to stock of another regulated investment company as a short-term capital gain, and
"(ii) the excess of the net short-term capital gain for a taxable year over the net long-term capital loss for a taxable year (to which an election under section 4982(e)(4) does not apply) shall be determined without regard to any net capital loss or net short-term capital loss attributable to transactions after October 31 of such year, and any such net capital loss or net short-term capital loss shall be treated as arising on the 1st day of the next taxable year.
To the extent provided in regulations, clause (ii) shall apply also for purposes of computing the taxable income of the regulated investment company."
Subsec. (l).
Subsec. (m).
Subsec. (n).
2008—Subsec. (k)(1)(C), (2)(C).
2006—Subsec. (k)(2)(E).
2004—Subsec. (i)(2)(D).
Subsecs. (k), (l).
2000—Subsec. (f)(2)(B).
1999—Subsec. (h)(4)(C)(iv).
1998—Subsec. (f)(2)(B).
1996—Subsec. (b)(1).
Subsec. (f)(2)(B).
1994—Subsec. (a)(3)(A).
Subsec. (c).
1993—Subsec. (a)(2).
Subsec. (h)(2)(B)(ii).
Subsec. (h)(4) to (7).
1992—Subsec. (a)(1)(B).
Subsec. (b)(1).
Subsec. (k)(1).
1988—Subsec. (c).
Subsecs. (j), (k).
1986—Subsec. (a)(1).
Subsec. (a)(1)(C).
"(i) a sale or exchange of an original issue discount obligation, the amount of any gain not in excess of the original issue discount accruing while such obligation was held by the nonresident alien individual (to the extent such discount was not theretofore taken into account under clause (ii)), and
"(ii) the payment of interest on an original issue discount obligation, an amount equal to the original issue discount accrued on such obligation since the last payment of interest thereon (except that such original issue discount shall be taken into account under this clause only to the extent that the tax thereon does not exceed the interest payment less the tax imposed by subparagraph (A) thereon), and".
Subsec. (a)(1)(D).
Subsec. (a)(2).
Subsec. (a)(3).
Subsec. (e).
Subsec. (h)(2).
Subsec. (h)(3)(C)(ii), (iii).
Subsecs. (i), (j).
1984—Subsec. (a)(1).
Subsec. (a)(1)(A).
Subsec. (a)(1)(C).
Subsec. (g).
Subsec. (g)(6) to (8).
Subsec. (h).
Subsec. (i).
1983—Subsec. (a)(3).
Subsec. (a)(3)(A).
1981—Subsec. (g)(6).
1980—Subsec. (b)(1).
Subsec. (f).
Subsec. (g)(8).
1978—Subsec. (b)(1).
1976—Subsec. (a)(1)(C)(i), (ii).
Subsec. (d).
Subsec. (g)(7).
1974—Subsec. (b)(1).
1971—Subsec. (a)(1)(A).
Subsec. (a)(1)(C).
1966—Subsecs. (a), (b).
Subsec. (c).
Subsecs. (d) to (f).
Subsec. (g).
1964—Subsec. (a).
Subsec. (b).
1961—Subsecs. (d), (e).
1960—Subsec. (d).
1958—Subsec. (a)(1).
Subsec. (b).
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Amendment by section 221(a)(71) of
Effective Date of 2013 Amendment
Effective Date of 2010 Amendment
Amendment by section 301(f) of
Amendment by section 302(b)(2) of
Amendment by section 308(b)(3) of
Amendment by
Amendment by section 502(b)(1), (2)(A) of
Effective Date of 2008 Amendment
Effective Date of 2006 Amendment
Amendment by
Effective Date of 2004 Amendment
"(1)
"(2)
"(3)
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by section 1401(b)(10) of
Amendment by section 1954(b)(1) of
Effective Date of 1994 Amendment
Effective Date of 1993 Amendment
Amendment by section 13113(d)(5) of
Effective Date of 1992 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 1001(d)(2)(B) of
Effective Date of 1986 Amendment
Amendment by section 301(b)(9) of
Amendment by section 1211(b)(4), (5) of
Amendment by section 1214(c)(1) of
Amendment by section 1810(d)(1)(A), (2), (3)(A), (B), (e)(2)(A) of
Effective Date of 1984 Amendment
Amendment by section 42(a)(9) of
"(1)
"(2)
"(3)
"(A)
"(B)
"(C)
"(i) The term 'applicable CFC' has the meaning given such term by section 121(b)(2)(D) of this Act [set out as a note under
"(ii) The term 'United States affiliate obligation' means an obligation described in section 121(b)(2)(F) of this Act [set out as a note under
[
"(1)
"(2)
Amendment by section 412(b)(1) of
Effective Date of 1983 Amendment
Amendment by section 121(c)(1) of
Effective Date of 1981 Amendment
Effective Date of 1980 Amendment
Amendment by
Amendment by
Effective Date of 1978 Amendment
Amendment by section 401(b)(3) of
Amendment by section 421(e)(4) of
Effective Date of 1976 Amendment
Amendment by section 1012(a)(2) of
Amendment by section 1901(b)(3)(I) of
Effective Date of 1974 Amendment
Amendment by
Effective Date of 1971 Amendment
Effective Date of 1966 Amendment
"(1) The amendments made by this section (other than the amendments made by subsections (h), (i), and (k)) [amending this section and
"(2) The amendments made by subsection (h) [amending
"(3) The amendments made by subsection (i) [amending
"(4) The amendments made by subsection (k) [amending
Effective Date of 1964 Amendment
Amendment by section 113(b)(1) of
Amendment by section 201(d)(12) of
Effective Date of 1961 Amendment
Amendment by
Effective Date of 1960 Amendment
Amendment by
Effective Date of 1958 Amendment
Savings Provision
For provisions that nothing in amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendments by sections 1211(b)(4), (5) and 1214(c)(1) of
Plan Amendments Not Required Until January 1, 1998
For provisions directing that if any amendments made by subtitle D [§§1401–1465] of title I of
Plan Amendments Not Required Until January 1, 1994
For provisions directing that if any amendments made by subtitle B [§§521–523] of title V of
Plan Amendments Not Required Until January 1, 1989
For 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
§872. Gross income
(a) General rule
In the case of a nonresident alien individual, except where the context clearly indicates otherwise, gross income includes only—
(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2) gross income which is effectively connected with the conduct of a trade or business within the United States.
(b) Exclusions
The following items shall not be included in gross income of a nonresident alien individual, and shall be exempt from taxation under this subtitle:
(1) Ships operated by certain nonresidents
Gross income derived by an individual resident of a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to individual residents of the United States.
(2) Aircraft operated by certain nonresidents
Gross income derived by an individual resident of a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to individual residents of the United States.
(3) Compensation of participants in certain exchange or training programs
Compensation paid by a foreign employer to a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended. For purposes of this paragraph, the term "foreign employer" means—
(A) a nonresident alien individual, foreign partnership, or foreign corporation, or
(B) an office or place of business maintained in a foreign country or in a possession of the United States by a domestic corporation, a domestic partnership, or an individual who is a citizen or resident of the United States.
(4) Certain bond income of residents of the Ryukyu Islands or the Trust Territory of the Pacific Islands
Income derived by a nonresident alien individual from a series E or series H United States savings bond, if such individual acquired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands.
(5) Income derived from wagering transactions in certain parimutuel pools
Gross income derived by a nonresident alien individual from a legal wagering transaction initiated outside the United States in a parimutuel pool with respect to a live horse race or dog race in the United States.
(6) Certain rental income
Income to which paragraphs (1) and (2) apply shall include income which is derived from the rental on a full or bareboat basis of a ship or ships or aircraft, as the case may be.
(7) Application to different types of transportation
The Secretary may provide that this subsection be applied separately with respect to income from different types of transportation.
(8) Treatment of possessions
To the extent provided in regulations, a possession of the United States shall be treated as a foreign country for purposes of this subsection.
(Aug. 16, 1954, ch. 736,
References in Text
Section 101 of the Immigration and Nationality Act, referred to in subsec. (b)(3), is classified to
Amendments
2004—Subsec. (b)(5) to (8).
1994—Subsec. (b)(3).
1989—Subsec. (b)(7).
1988—Subsec. (a).
Subsec. (b)(1), (2).
1986—Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (b)(5), (6).
1966—Subsec. (a).
Subsec. (b)(3)(B).
Subsec. (b)(4).
1961—Subsec. (b)(3).
Effective Date of 2004 Amendment
Effective Date of 1994 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Effective Date of 1961 Amendment
Amendment by
Termination of Trust Territory of the Pacific Islands
For termination of Trust Territory of the Pacific Islands, see note set out preceding
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1212(c)(1), (2) of
§873. Deductions
(a) General rule
In the case of a nonresident alien individual, the deductions shall be allowed only for purposes of section 871(b) and (except as provided by subsection (b)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary.
(b) Exceptions
The following deductions shall be allowed whether or not they are connected with income which is effectively connected with the conduct of a trade or business within the United States:
(1) Losses
The deduction allowed by section 165 for casualty or theft losses described in paragraph (2) or (3) of section 165(c), but only if the loss is of property located within the United States.
(2) Charitable contributions
The deduction for charitable contributions and gifts allowed by section 170.
(3) Personal exemption
The deduction for personal exemptions allowed by section 151, except that only one exemption shall be allowed under section 151 unless the taxpayer is a resident of a contiguous country or is a national of the United States.
(c) Cross reference
For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).
(Aug. 16, 1954, ch. 736,
Amendments
1998—Subsec. (b)(1).
1984—Subsec. (b)(1).
1977—Subsec. (c).
1976—Subsec. (a).
1972—Subsec. (b)(3).
1966—
Effective Date of 1998 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1977 Amendment
Amendment by
Effective Date of 1972 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
§874. Allowance of deductions and credits
(a) Return prerequisite to allowance
A nonresident alien individual shall receive the benefit of the deductions and credits allowed to him in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F (sec. 6001 and following, relating to procedure and administration), including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. This subsection shall not be construed to deny the credits provided by sections 31 and 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline and special fuels.
(b) Tax withheld at source
The benefit of the deduction for exemptions under section 151 may, in the discretion of the Secretary, and under regulations prescribed by the Secretary, be received by a non-resident alien individual entitled thereto, by filing a claim therefor with the withholding agent.
(c) Foreign tax credit
Except as provided in section 906, a nonresident alien individual shall not be allowed the credits against the tax for taxes of foreign countries and possessions of the United States allowed by section 901.
(Aug. 16, 1954, ch. 736,
Amendments
1984—Subsec. (a).
1983—Subsec. (a).
1976—Subsecs. (a), (b).
1970—Subsec. (a).
1966—Subsec. (a).
Subsec. (c).
1965—Subsec. (a).
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1970 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by section 103(d) of
Effective Date of 1965 Amendment
Amendment by
§875. Partnerships; beneficiaries of estates and trusts
For purposes of this subtitle—
(1) a nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged, and
(2) a nonresident alien individual or foreign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States.
(Aug. 16, 1954, ch. 736,
Amendments
1966—
Effective Date of 1966 Amendment
Amendment by
§876. Alien residents of Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands
(a) General rule
This subpart shall not apply to any alien individual who is a bona fide resident of Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands during the entire taxable year and such alien shall be subject to the tax imposed by section 1.
(b) Cross references
For exclusion from gross income of income derived from sources within—
(1) Guam, American Samoa, and the Northern Mariana Islands, see section 931, and
(2) Puerto Rico, see section 933.
(Aug. 16, 1954, ch. 736,
Amendments
1986—
Subsec. (a).
Subsec. (b).
Effective Date of 1986 Amendment
Amendment by
§877. Expatriation to avoid tax
(a) Treatment of expatriates
(1) In general
Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871.
(2) Individuals subject to this section
This section shall apply to any individual if—
(A) the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000,
(B) the net worth of the individual as of such date is $2,000,000 or more, or
(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
In the case of the loss of United States citizenship in any calendar year after 2004, such $124,000 amount shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting "2003" for "1992" in subparagraph (B) thereof. Any increase under the preceding sentence shall be rounded to the nearest multiple of $1,000.
(b) Alternative tax
A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1 or 55, except that—
(1) the gross income shall include only the gross income described in section 872(a) (as modified by subsection (d) of this section), and
(2) the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover provided by section 1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be determined as provided under regulations prescribed by the Secretary.
For purposes of paragraph (2), the deductions allowed by section 873(b) shall be allowed; and the deduction (for losses not connected with the trade or business if incurred in transactions entered into for profit) allowed by section 165(c)(2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be included in gross income under this section. The tax imposed solely by reason of this section shall be reduced (but not below zero) by the amount of any income, war profits, and excess profits taxes (within the meaning of section 903) paid to any foreign country or possession of the United States on any income of the taxpayer on which tax is imposed solely by reason of this section.
(c) Exceptions
(1) In general
Subparagraphs (A) and (B) of subsection (a)(2) shall not apply to an individual described in paragraph (2) or (3).
(2) Dual citizens
(A) In general
An individual is described in this paragraph if—
(i) the individual became at birth a citizen of the United States and a citizen of another country and continues to be a citizen of such other country, and
(ii) the individual has had no substantial contacts with the United States.
(B) Substantial contacts
An individual shall be treated as having no substantial contacts with the United States only if the individual—
(i) was never a resident of the United States (as defined in section 7701(b)),
(ii) has never held a United States passport, and
(iii) was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual's loss of United States citizenship.
(3) Certain minors
An individual is described in this paragraph if—
(A) the individual became at birth a citizen of the United States,
(B) neither parent of such individual was a citizen of the United States at the time of such birth,
(C) the individual's loss of United States citizenship occurs before such individual attains age 18½, and
(D) the individual was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual's loss of United States citizenship.
(d) Special rules for source, etc.
For purposes of subsection (b)—
(1) Source rules
The following items of gross income shall be treated as income from sources within the United States:
(A) Sale of property
Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States.
(B) Stock or debt obligations
Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia.
(C) Income or gain derived from controlled foreign corporation
Any income or gain derived from stock in a foreign corporation but only—
(i) if the individual losing United States citizenship owned (within the meaning of section 958(a)), or is considered as owning (by applying the ownership rules of section 958(b)), at any time during the 2-year period ending on the date of the loss of United States citizenship, more than 50 percent of—
(I) the total combined voting power of all classes of stock entitled to vote of such corporation, or
(II) the total value of the stock of such corporation, and
(ii) to the extent such income or gain does not exceed the earnings and profits attributable to such stock which were earned or accumulated before the loss of citizenship and during periods that the ownership requirements of clause (i) are met.
(2) Gain recognition on certain exchanges
(A) In general
In the case of any exchange of property to which this paragraph applies, notwithstanding any other provision of this title, such property shall be treated as sold for its fair market value on the date of such exchange, and any gain shall be recognized for the taxable year which includes such date.
(B) Exchanges to which paragraph applies
This paragraph shall apply to any exchange during the 10-year period beginning on the date the individual loses United States citizenship if—
(i) gain would not (but for this paragraph) be recognized on such exchange in whole or in part for purposes of this subtitle,
(ii) income derived from such property was from sources within the United States (or, if no income was so derived, would have been from such sources), and
(iii) income derived from the property acquired in the exchange would be from sources outside the United States.
(C) Exception
Subparagraph (A) shall not apply if the individual enters into an agreement with the Secretary which specifies that any income or gain derived from the property acquired in the exchange (or any other property which has a basis determined in whole or part by reference to such property) during such 10-year period shall be treated as from sources within the United States. If the property transferred in the exchange is disposed of by the person acquiring such property, such agreement shall terminate and any gain which was not recognized by reason of such agreement shall be recognized as of the date of such disposition.
(D) Secretary may extend period
To the extent provided in regulations prescribed by the Secretary, subparagraph (B) shall be applied by substituting the 15-year period beginning 5 years before the loss of United States citizenship for the 10-year period referred to therein. In the case of any exchange occurring during such 5 years, any gain recognized under this subparagraph shall be recognized immediately after such loss of citizenship.
(E) Secretary may require recognition of gain in certain cases
To the extent provided in regulations prescribed by the Secretary—
(i) the removal of appreciated tangible personal property from the United States, and
(ii) any other occurrence which (without recognition of gain) results in a change in the source of the income or gain from property from sources within the United States to sources outside the United States,
shall be treated as an exchange to which this paragraph applies.
(3) Substantial diminishing of risks of ownership
For purposes of determining whether this section applies to any gain on the sale or exchange of any property, the running of the 10-year period described in subsection (a) and the period applicable under paragraph (2) shall be suspended for any period during which the individual's risk of loss with respect to the property is substantially diminished by—
(A) the holding of a put with respect to such property (or similar property),
(B) the holding by another person of a right to acquire the property, or
(C) a short sale or any other transaction.
(4) Treatment of property contributed to controlled foreign corporations
(A) In general
If—
(i) an individual losing United States citizenship contributes property during the 10-year period beginning on the date the individual loses United States citizenship to any corporation which, at the time of the contribution, is described in subparagraph (B), and
(ii) income derived from such property immediately before such contribution was from sources within the United States (or, if no income was so derived, would have been from such sources),
any income or gain on such property (or any other property which has a basis determined in whole or part by reference to such property) received or accrued by the corporation shall be treated as received or accrued directly by such individual and not by such corporation. The preceding sentence shall not apply to the extent the property has been treated under subparagraph (C) as having been sold by such corporation.
(B) Corporation described
A corporation is described in this subparagraph with respect to an individual if, were such individual a United States citizen—
(i) such corporation would be a controlled foreign corporation (as defined in section 957), and
(ii) such individual would be a United States shareholder (as defined in section 951(b)) with respect to such corporation.
(C) Disposition of stock in corporation
If stock in the corporation referred to in subparagraph (A) (or any other stock which has a basis determined in whole or part by reference to such stock) is disposed of during the 10-year period referred to in subsection (a) and while the property referred to in subparagraph (A) is held by such corporation, a pro rata share of such property (determined on the basis of the value of such stock) shall be treated as sold by the corporation immediately before such disposition.
(D) Anti-abuse rules
The Secretary shall prescribe such regulations as may be necessary to prevent the avoidance of the purposes of this paragraph, including where—
(i) the property is sold to the corporation, and
(ii) the property taken into account under subparagraph (A) is sold by the corporation.
(E) Information reporting
The Secretary shall require such information reporting as is necessary to carry out the purposes of this paragraph.
(e) Comparable treatment of lawful permanent residents who cease to be taxed as residents
(1) In general
Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.
(2) Long-term resident
For purposes of this subsection, the term "long-term resident" means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.
(3) Special rules
(A) Exceptions not to apply
Subsection (c) shall not apply to an individual who is treated as provided in paragraph (1).
(B) Step-up in basis
Solely for purposes of determining any tax imposed by reason of this subsection, property which was held by the long-term resident on the date the individual first became a resident of the United States shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable.
(4) Authority to exempt individuals
This subsection shall not apply to an individual who is described in a category of individuals prescribed by regulation by the Secretary.
(5) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out this subsection, including regulations providing for the application of this subsection in cases where an alien individual becomes a resident of the United States during the 10-year period after being treated as provided in paragraph (1).
(f) Burden of proof
If the Secretary establishes that it is reasonable to believe that an individual's loss of United States citizenship would, but for this section, result in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual.
(g) Physical presence
(1) In general
This section shall not apply to any individual to whom this section would otherwise apply for any taxable year during the 10-year period referred to in subsection (a) in which such individual is physically present in the United States at any time on more than 30 days in the calendar year ending in such taxable year, and such individual shall be treated for purposes of this title as a citizen or resident of the United States, as the case may be, for such taxable year.
(2) Exception
(A) In general
In the case of an individual described in any of the following subparagraphs of this paragraph, a day of physical presence in the United States shall be disregarded if the individual is performing services in the United States on such day for an employer. The preceding sentence shall not apply if—
(i) such employer is related (within the meaning of section 267 and 707) to such individual, or
(ii) such employer fails to meet such requirements as the Secretary may prescribe by regulations to prevent the avoidance of the purposes of this paragraph.
Not more than 30 days during any calendar year may be disregarded under this subparagraph.
(B) Individuals with ties to other countries
An individual is described in this subparagraph if—
(i) the individual becomes (not later than the close of a reasonable period after loss of United States citizenship or termination of residency) a citizen or resident of the country in which—
(I) such individual was born,
(II) if such individual is married, such individual's spouse was born, or
(III) either of such individual's parents were born, and
(ii) the individual becomes fully liable for income tax in such country.
(C) Minimal prior physical presence in the United States
An individual is described in this subparagraph if, for each year in the 10-year period ending on the date of loss of United States citizenship or termination of residency, the individual was physically present in the United States for 30 days or less. The rule of section 7701(b)(3)(D) shall apply for purposes of this subparagraph.
(h) Termination
This section shall not apply to any individual whose expatriation date (as defined in section 877A(g)(3)) is on or after the date of the enactment of this subsection.
(Added
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
References in Text
The date of the enactment of this subsection, referred to in subsec. (h), is the date of enactment of
Prior Provisions
A prior section 877 was renumbered
Amendments
2018—Subsec. (d)(4)(B)(i).
2014—Subsec. (e)(2).
2008—Subsec. (e)(1).
"(A) ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)), or
"(B) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and who does not waive the benefits of such treaty applicable to residents of the foreign country,
shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement."
Subsec. (h).
2005—Subsec. (g)(2)(C).
2004—Subsec. (a).
Subsec. (c).
Subsec. (g).
1997—Subsec. (d)(2)(B).
Subsec. (d)(2)(D).
Subsec. (d)(3).
Subsec. (d)(4)(A).
Subsec. (d)(4)(A)(i).
Subsec. (d)(4)(A)(ii).
Subsec. (e)(1).
1996—Subsec. (a).
"(a)
Subsec. (a)(1).
Subsec. (b).
Subsec. (b)(1).
Subsec. (c).
Subsec. (d).
"(d)
"(1)
"(2)
For purposes of this section, gain on the sale or exchange of property which has a basis determined in whole or in part by reference to property described in paragraph (1) or (2) shall be treated as gain described in paragraph (1) or (2)."
"(d)
Subsecs. (e), (f).
1992—Subsec. (b).
1986—Subsec. (c).
1980—Subsec. (b).
1978—Subsec. (b).
1976—Subsecs. (b)(2), (e).
1974—Subsec. (b).
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2008 Amendment
Amendment by
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendment
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
"(1)
"(A) individuals losing United States citizenship (within the meaning of section 877 of the Internal Revenue Code of 1986) on or after February 6, 1995, and
"(B) long-term residents of the United States with respect to whom an event described in [former] subparagraph (A) or (B) of section 877(e)(1) of such Code occurs on or after February 6, 1995.
"(2)
"(3)
"(A)
"(B)
Amendment by
Effective Date of 1992 Amendment
Amendment by
Effective Date of 1986 Amendment
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1974 Amendment
Amendment by
Effective Date
Section applicable with respect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of
Plan Amendments Not Required Until January 1, 1998
For provisions directing that if any amendments made by subtitle D [§§1401–1465] of title I of
Plan Amendments Not Required Until January 1, 1994
For provisions directing that if any amendments made by subtitle B [§§521–523] of title V of
§877A. Tax responsibilities of expatriation
(a) General rules
For purposes of this subtitle—
(1) Mark to market
All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.
(2) Recognition of gain or loss
In the case of any sale under paragraph (1)—
(A) notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and
(B) any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss.
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence, determined without regard to paragraph (3).
(3) Exclusion for certain gain
(A) In general
The amount which would (but for this paragraph) be includible in the gross income of any individual by reason of paragraph (1) shall be reduced (but not below zero) by $600,000.
(B) Adjustment for inflation
(i) In general
In the case of any taxable year beginning in a calendar year after 2008, the dollar amount in subparagraph (A) shall be increased by an amount equal to—
(I) such dollar amount, multiplied by
(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting "calendar year 2007" for "calendar year 2016" in subparagraph (A)(ii) thereof.
(ii) Rounding
If any amount as adjusted under clause (i) is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
(b) Election to defer tax
(1) In general
If the taxpayer elects the application of this subsection with respect to any property treated as sold by reason of subsection (a), the time for payment of the additional tax attributable to such property shall be extended until the due date of the return for the taxable year in which such property is disposed of (or, in the case of property disposed of in a transaction in which gain is not recognized in whole or in part, until such other date as the Secretary may prescribe).
(2) Determination of tax with respect to property
For purposes of paragraph (1), the additional tax attributable to any property is an amount which bears the same ratio to the additional tax imposed by this chapter for the taxable year solely by reason of subsection (a) as the gain taken into account under subsection (a) with respect to such property bears to the total gain taken into account under subsection (a) with respect to all property to which subsection (a) applies.
(3) Termination of extension
The due date for payment of tax may not be extended under this subsection later than the due date for the return of tax imposed by this chapter for the taxable year which includes the date of death of the expatriate (or, if earlier, the time that the security provided with respect to the property fails to meet the requirements of paragraph (4), unless the taxpayer corrects such failure within the time specified by the Secretary).
(4) Security
(A) In general
No election may be made under paragraph (1) with respect to any property unless adequate security is provided with respect to such property.
(B) Adequate security
For purposes of subparagraph (A), security with respect to any property shall be treated as adequate security if—
(i) it is a bond which is furnished to, and accepted by, the Secretary, which is conditioned on the payment of tax (and interest thereon), and which meets the requirements of section 6325, or
(ii) it is another form of security for such payment (including letters of credit) that meets such requirements as the Secretary may prescribe.
(5) Waiver of certain rights
No election may be made under paragraph (1) unless the taxpayer makes an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of any tax imposed by reason of this section.
(6) Elections
An election under paragraph (1) shall only apply to property described in the election and, once made, is irrevocable.
(7) Interest
For purposes of section 6601, the last date for the payment of tax shall be determined without regard to the election under this subsection.
(c) Exception for certain property
Subsection (a) shall not apply to—
(1) any deferred compensation item (as defined in subsection (d)(4)),
(2) any specified tax deferred account (as defined in subsection (e)(2)), and
(3) any interest in a nongrantor trust (as defined in subsection (f)(3)).
(d) Treatment of deferred compensation items
(1) Withholding on eligible deferred compensation items
(A) In general
In the case of any eligible deferred compensation item, the payor shall deduct and withhold from any taxable payment to a covered expatriate with respect to such item a tax equal to 30 percent thereof.
(B) Taxable payment
For purposes of subparagraph (A), the term "taxable payment" means with respect to a covered expatriate any payment to the extent it would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States. A deferred compensation item shall be taken into account as a payment under the preceding sentence when such item would be so includible.
(2) Other deferred compensation items
In the case of any deferred compensation item which is not an eligible deferred compensation item—
(A)(i) with respect to any deferred compensation item to which clause (ii) does not apply, an amount equal to the present value of the covered expatriate's accrued benefit shall be treated as having been received by such individual on the day before the expatriation date as a distribution under the plan, and
(ii) with respect to any deferred compensation item referred to in paragraph (4)(D), the rights of the covered expatriate to such item shall be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date,
(B) no early distribution tax shall apply by reason of such treatment, and
(C) appropriate adjustments shall be made to subsequent distributions from the plan to reflect such treatment.
(3) Eligible deferred compensation items
For purposes of this subsection, the term "eligible deferred compensation item" means any deferred compensation item with respect to which—
(A) the payor of such item is—
(i) a United States person, or
(ii) a person who is not a United States person but who elects to be treated as a United States person for purposes of paragraph (1) and meets such requirements as the Secretary may provide to ensure that the payor will meet the requirements of paragraph (1), and
(B) the covered expatriate—
(i) notifies the payor of his status as a covered expatriate, and
(ii) makes an irrevocable waiver of any right to claim any reduction under any treaty with the United States in withholding on such item.
(4) Deferred compensation item
For purposes of this subsection, the term "deferred compensation item" means—
(A) any interest in a plan or arrangement described in section 219(g)(5),
(B) any interest in a foreign pension plan or similar retirement arrangement or program,
(C) any item of deferred compensation, and
(D) any property, or right to property, which the individual is entitled to receive in connection with the performance of services to the extent not previously taken into account under section 83 or in accordance with section 83.
(5) Exception
Paragraphs (1) and (2) shall not apply to any deferred compensation item to the extent attributable to services performed outside the United States while the covered expatriate was not a citizen or resident of the United States.
(6) Special rules
(A) Application of withholding rules
Rules similar to the rules of subchapter B of
(B) Application of tax
Any item subject to the withholding tax imposed under paragraph (1) shall be subject to tax under section 871.
(C) Coordination with other withholding requirements
Any item subject to withholding under paragraph (1) shall not be subject to withholding under section 1441 or
(e) Treatment of specified tax deferred accounts
(1) Account treated as distributed
In the case of any interest in a specified tax deferred account held by a covered expatriate on the day before the expatriation date—
(A) the covered expatriate shall be treated as receiving a distribution of his entire interest in such account on the day before the expatriation date,
(B) no early distribution tax shall apply by reason of such treatment, and
(C) appropriate adjustments shall be made to subsequent distributions from the account to reflect such treatment.
(2) Specified tax deferred account
For purposes of paragraph (1), the term "specified tax deferred account" means an individual retirement plan (as defined in section 7701(a)(37)) other than any arrangement described in subsection (k) or (p) of section 408, a qualified tuition program (as defined in section 529), a qualified ABLE program (as defined in section 529A), a Coverdell education savings account (as defined in section 530), a health savings account (as defined in section 223), and an Archer MSA (as defined in section 220).
(f) Special rules for nongrantor trusts
(1) In general
In the case of a distribution (directly or indirectly) of any property from a nongrantor trust to a covered expatriate—
(A) the trustee shall deduct and withhold from such distribution an amount equal to 30 percent of the taxable portion of the distribution, and
(B) if the fair market value of such property exceeds its adjusted basis in the hands of the trust, gain shall be recognized to the trust as if such property were sold to the expatriate at its fair market value.
(2) Taxable portion
For purposes of this subsection, the term "taxable portion" means, with respect to any distribution, that portion of the distribution which would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States.
(3) Nongrantor trust
For purposes of this subsection, the term "nongrantor trust" means the portion of any trust that the individual is not considered the owner of under subpart E of part I of subchapter J. The determination under the preceding sentence shall be made immediately before the expatriation date.
(4) Special rules relating to withholding
For purposes of this subsection—
(A) rules similar to the rules of subsection (d)(6) shall apply, and
(B) the covered expatriate shall be treated as having waived any right to claim any reduction under any treaty with the United States in withholding on any distribution to which paragraph (1)(A) applies unless the covered expatriate agrees to such other treatment as the Secretary determines appropriate.
(5) Application
This subsection shall apply to a nongrantor trust only if the covered expatriate was a beneficiary of the trust on the day before the expatriation date.
(g) Definitions and special rules relating to expatriation
For purposes of this section—
(1) Covered expatriate
(A) In general
The term "covered expatriate" means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).
(B) Exceptions
An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or
(ii)(I) the individual's relinquishment of United States citizenship occurs before such individual attains age 18½, and
(II) the individual has been a resident of the United States (as so defined) for not more than 10 taxable years before the date of relinquishment.
(C) Covered expatriates also subject to tax as citizens or residents
In the case of any covered expatriate who is subject to tax as a citizen or resident of the United States for any period beginning after the expatriation date, such individual shall not be treated as a covered expatriate during such period for purposes of subsections (d)(1) and (f) and section 2801.
(2) Expatriate
The term "expatriate" means—
(A) any United States citizen who relinquishes his citizenship, and
(B) any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
(3) Expatriation date
The term "expatriation date" means—
(A) the date an individual relinquishes United States citizenship, or
(B) in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
(4) Relinquishment of citizenship
A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
(A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (
(B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (
(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(D) the date a court of the United States cancels a naturalized citizen's certificate of naturalization.
Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.
(5) Long-term resident
The term "long-term resident" has the meaning given to such term by section 877(e)(2).
(6) Early distribution tax
The term "early distribution tax" means any increase in tax imposed under section 72(t), 220(f)(4), 223(f)(4), 409A(a)(1)(B), 529(c)(6), 529A(c)(3), or 530(d)(4).
(h) Other rules
(1) Termination of deferrals, etc.
In the case of any covered expatriate, notwithstanding any other provision of this title—
(A) any time period for acquiring property which would result in the reduction in the amount of gain recognized with respect to property disposed of by the taxpayer shall terminate on the day before the expatriation date, and
(B) any extension of time for payment of tax shall cease to apply on the day before the expatriation date and the unpaid portion of such tax shall be due and payable at the time and in the manner prescribed by the Secretary.
(2) Step-up in basis
Solely for purposes of determining any tax imposed by reason of subsection (a), property which was held by an individual on the date the individual first became a resident of the United States (within the meaning of section 7701(b)) shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable.
(3) Coordination with section 684
If the expatriation of any individual would result in the recognition of gain under section 684, this section shall be applied after the application of section 684.
(i) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
(Added
Inflation Adjusted Items for Certain Years
For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under
Amendments
2018—Subsec. (g)(6).
2017—Subsec. (a)(3)(B)(i)(II).
2014—Subsec. (e)(2).
Subsec. (g)(6).
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2014 Amendment
Amendment by
Effective Date
Section applicable to any individual whose expatriation date is on or after June 17, 2008, see section 301(g)(1) of
§878. Foreign educational, charitable, and certain other exempt organizations
For special provisions relating to foreign educational, charitable, and other exempt organizations, see sections 512(a) and 4948.
(Aug. 16, 1954, ch. 736,
Amendments
1969—
Effective Date of 1969 Amendment
Amendment by
§879. Tax treatment of certain community income in the case of nonresident alien individuals
(a) General rule
In the case of a married couple 1 or both of whom are nonresident alien individuals and who have community income for the taxable year, such community income shall be treated as follows:
(1) Earned income (within the meaning of section 911(d)(2)), other than trade or business income and a partner's distributive share of partnership income, shall be treated as the income of the spouse who rendered the personal services,
(2) Trade or business income, and a partner's distributive share of partnership income, shall be treated as provided in section 1402(a)(5),
(3) Community income not described in paragraph (1) or (2) which is derived from the separate property (as determined under the applicable community property law) of one spouse shall be treated as the income of such spouse, and
(4) All other such community income shall be treated as provided in the applicable community property law.
(b) Exception where election under section 6013(g) is in effect
Subsection (a) shall not apply for any taxable year for which an election under subsection (g) or (h) of section 6013 (relating to election to treat nonresident alien individual as resident of the United States) is in effect.
(c) Definitions and special rules
For purposes of this section—
(1) Community income
The term "community income" means income which, under applicable community property laws, is treated as community income.
(2) Community property laws
The term "community property laws" means the community property laws of a State, a foreign country, or a possession of the United States.
(3) Determination of marital status
The determination of marital status shall be made under section 7703(a).
(Added
Amendments
1986—Subsec. (c)(3).
1984—
Subsec. (a).
1981—Subsec. (a)(1).
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Effective Date of 1981 Amendment
Amendment by
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1976, see section 1012(d) of
Subpart B—Foreign Corporations
Amendments
1986—
1966—
§881. Tax on income of foreign corporations not connected with United States business
(a) Imposition of tax
Except as provided in subsection (c), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a foreign corporation as—
(1) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
(2) gains described in section 631(b) or (c),
(3) in the case of—
(A) a sale or exchange of an original issue discount obligation, the amount of the original issue discount accruing while such obligation was held by the foreign corporation (to the extent such discount was not theretofore taken into account under subparagraph (B)), and
(B) a payment on an original issue discount obligation, an amount equal to the original issue discount accruing while such obligation was held by the foreign corporation (except that such original issue discount shall be taken into account under this subparagraph only to the extent such discount was not theretofore taken into account under this subparagraph and only to the extent that the tax thereon does not exceed the payment less the tax imposed by paragraph (1) thereon), and
(4) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged,
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
(b) Exception for certain possessions
(1) Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands
For purposes of this section and section 884, a corporation created or organized in Guam, American Samoa, the Northern Mariana Islands, or the Virgin Islands or under the law of any such possession shall not be treated as a foreign corporation for any taxable year if—
(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is beneficially owned (directly or indirectly) by foreign persons,
(B) at least 65 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to be effectively connected with the conduct of a trade or business in such a possession or the United States for the 3-year period ending with the close of the taxable year of such corporation (or for such part of such period as the corporation or any predecessor has been in existence), and
(C) no substantial part of the income of such corporation is used (directly or indirectly) to satisfy obligations to persons who are not bona fide residents of such a possession or the United States.
(2) Commonwealth of Puerto Rico
(A) In general
If dividends are received during a taxable year by a corporation—
(i) created or organized in, or under the law of, the Commonwealth of Puerto Rico, and
(ii) with respect to which the requirements of subparagraphs (A), (B), and (C) of paragraph (1) are met for the taxable year,
subsection (a) shall be applied for such taxable year by substituting "10 percent" for "30 percent".
(B) Applicability
If, on or after the date of the enactment of this paragraph, an increase in the rate of the Commonwealth of Puerto Rico's withholding tax which is generally applicable to dividends paid to United States corporations not engaged in a trade or business in the Commonwealth to a rate greater than 10 percent takes effect, this paragraph shall not apply to dividends received on or after the effective date of the increase.
(3) Definitions
(A) Foreign person
For purposes of paragraph (1), the term "foreign person" means any person other than—
(i) a United States person, or
(ii) a person who would be a United States person if references to the United States in section 7701 included references to a possession of the United States.
(B) Indirect ownership rules
For purposes of paragraph (1), the rules of section 318(a)(2) shall apply except that "5 percent" shall be substituted for "50 percent" in subparagraph (C) thereof.
(c) Repeal of tax on interest of foreign corporations received from certain portfolio debt investments
(1) In general
In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed under paragraph (1) or (3) of subsection (a).
(2) Portfolio interest
For purposes of this subsection, the term "portfolio interest" means any interest (including original issue discount) which—
(A) would be subject to tax under subsection (a) but for this subsection, and
(B) is paid on an obligation—
(i) which is in registered form, and
(ii) with respect to which—
(I) the person who would otherwise be required to deduct and withhold tax from such interest under section 1442(a) receives a statement which meets the requirements of section 871(h)(5) that the beneficial owner of the obligation is not a United States person, or
(II) the Secretary has determined that such a statement is not required in order to carry out the purposes of this subsection.
(3) Portfolio interest shall not include interest received by certain persons
For purposes of this subsection, the term "portfolio interest" shall not include any portfolio interest which—
(A) except in the case of interest paid on an obligation of the United States, is received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business,
(B) is received by a 10-percent shareholder (within the meaning of section 871(h)(3)(B)), or
(C) is received by a controlled foreign corporation from a related person (within the meaning of section 864(d)(4)).
(4) Portfolio interest not to include certain contingent interest
For purposes of this subsection, the term "portfolio interest" shall not include any interest which is treated as not being portfolio interest under the rules of section 871(h)(4).
(5) Special rules for controlled foreign corporations
(A) In general
In the case of any portfolio interest received by a controlled foreign corporation, the following provisions shall not apply:
(i) Subparagraph (A) of section 954(b)(3) (relating to exception where foreign base company income is less than 5 percent or $1,000,000).
(ii) Paragraph (4) of section 954(b) (relating to exception for certain income subject to high foreign taxes).
(iii) Clause (i) of section 954(c)(3)(A) (relating to certain income received from related persons).
(B) Controlled foreign corporation
For purposes of this subsection, the term "controlled foreign corporation" has the meaning given to such term by section 957(a).
(6) Secretary may cease application of this subsection
Under rules similar to the rules of section 871(h)(6), the Secretary may provide that this subsection shall not apply to payments of interest described in section 871(h)(6).
(7) Registered form
For purposes of this subsection, the term "registered form" has the meaning given such term by section 163(f).
(d) Tax not to apply to certain interest and dividends
No tax shall be imposed under paragraph (1) or (3) of subsection (a) on any amount described in section 871(i)(2).
(e) Tax not to apply to certain dividends of regulated investment companies
(1) Interest-related dividends
(A) In general
Except as provided in subparagraph (B), no tax shall be imposed under paragraph (1) of subsection (a) on any interest-related dividend (as defined in section 871(k)(1)) received from a regulated investment company.
(B) Exception
Subparagraph (A) shall not apply—
(i) to any dividend referred to in section 871(k)(1)(B), and
(ii) to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation.
(C) Treatment of dividends received by controlled foreign corporations
The rules of subsection (c)(5)(A) shall apply to any interest-related dividend received by a controlled foreign corporation (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section).
(2) Short-term capital gain dividends
No tax shall be imposed under paragraph (1) of subsection (a) on any short-term capital gain dividend (as defined in section 871(k)(2)) received from a regulated investment company.
(f) Cross reference
For doubling of tax on corporations of certain foreign countries, see section 891.
For special rules for original issue discount, see section 871(g).
(Aug. 16, 1954, ch. 736,
References in Text
The date of the enactment of this paragraph, referred to in subsec. (b)(2)(B), is the date of enactment of
Amendments
2010—Subsec. (c)(2).
2005—Subsec. (e)(1)(C).
2004—Subsec. (b).
Subsec. (b)(1).
Subsec. (b)(2), (3).
Subsec. (e), (f).
1993—Subsec. (c)(2)(B)(ii).
Subsec. (c)(4), (5).
Subsec. (c)(6).
Subsec. (c)(7).
1988—Subsec. (c)(4)(A)(ii) to (v).
"(ii) Paragraph (4) of section 954(b) (relating to corporations not formed or availed of to avoid tax).
"(iii) Subparagraph (B) of section 954(c)(3) (relating to certain income derived in active conduct of trade or business).
"(iv) Subparagraph (C) of section 954(c)(3) (relating to certain income derived by an insurance company).
"(v) Subparagraphs (A) and (B) of section 954(c)(4) (relating to exception for certain income received from related persons)."
1986—Subsec. (a)(3)(A).
Subsec. (a)(3)(B).
Subsec. (a)(4).
Subsec. (b)(1).
"(A) at all times during such taxable year less than 25 percent in value of the stock of such corporation is owned (directly or indirectly) by foreign persons, and
"(B) at least 20 percent of the gross income of such corporation is shown to the satisfaction of the Secretary to have been derived from sources within Guam or the Virgin Islands (as the case may be) for the 3-year period ending with the close of the preceding taxable year of such corporation (or for such part of such period as the corporation has been in existence)."
Subsec. (b)(2).
Subsec. (b)(2)(A).
Subsec. (b)(3), (4).
Subsec. (c).
Subsec. (c)(2).
Subsec. (c)(3)(C).
Subsec. (c)(4)(A)(i).
Subsecs. (d), (e).
1984—Subsec. (a).
Subsec. (a)(1).
Subsec. (a)(3).
Subsec. (b).
Subsec. (c).
Subsec. (d).
1976—Subsec. (a)(3)(A), (B).
1972—Subsecs. (b), (c).
1971—Subsec. (a)(1).
Subsec. (a)(3).
1966—Subsec. (a).
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by section 411(a)(2) of
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 1211(b)(6) of
Amendment by section 1214(c)(2) of
Amendment by section 1223(b)(2) of
Amendment by section 1273(b)(1), (2)(A) of
Amendment by section 1810(d)(1)(B), (3)(C), (e)(2)(B) of
Effective Date of 1984 Amendment
Amendment by section 42(a)(10) of
Amendment by section 127(b) of
Amendment by section 128(b) of
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1972 Amendment
Effective Date of 1971 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendments by sections 1211(b)(6) and 1214(c)(2) of
Plan Amendments Not Required Until January 1, 1989
For 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
§882. Tax on income of foreign corporations connected with United States business
(a) Imposition of tax
(1) In general
A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11 or 59A,1 on its taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
(3) [Cross reference 2]
For special tax treatment of gain or loss from the disposition by a foreign corporation of a United States real property interest, see section 897.
(b) Gross income
In the case of a foreign corporation, except where the context clearly indicates otherwise, gross income includes only—
(1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and
(2) gross income which is effectively connected with the conduct of a trade or business within the United States.
(c) Allowance of deductions and credits
(1) Allocation of deductions
(A) General rule
In the case of a foreign corporation, the deductions shall be allowed only for purposes of subsection (a) and (except as provided by subparagraph (B)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the deductions for this purpose shall be determined as provided in regulations prescribed by the Secretary.
(B) Charitable contributions
The deduction for charitable contributions and gifts provided by section 170 shall be allowed whether or not connected with income which is effectively connected with the conduct of a trade or business within the United States.
(2) Deductions and credits allowed only if return filed
A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F, including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. The preceding sentence shall not apply for purposes of the tax imposed by section 541 (relating to personal holding company tax), and shall not be construed to deny the credit provided by section 33 for tax withheld at source or the credit provided by section 34 for certain uses of gasoline.
(3) Foreign tax credit
Except as provided by section 906, foreign corporations shall not be allowed the credit against the tax for taxes of foreign countries and possessions of the United States allowed by section 901.
(4) Cross reference
For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 906(b)(1).
(d) Election to treat real property income as income connected with United States business
(1) In general
A foreign corporation which during the taxable year derives any income—
(A) from real property located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of real property or an interest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and
(B) which, but for this subsection, would not be treated as income effectively connected with the conduct of a trade or business within the United States,
may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or business within the United States. In such case, such income shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with respect to any taxable year.
(2) Election after revocation, etc.
Paragraphs (2) and (3) of section 871(d) shall apply in respect of elections under this subsection in the same manner and to the same extent as they apply in respect of elections under section 871(d).
(e) Interest on United States obligations received by banks organized in possessions
In the case of a corporation created or organized in, or under the law of, a possession of the United States which is carrying on the banking business in a possession of the United States, interest on obligations of the United States which is not portfolio interest (as defined in section 881(c)(2)) shall—
(1) for purposes of this subpart, be treated as income which is effectively connected with the conduct of a trade or business within the United States, and
(2) shall be taxable as provided in subsection (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year.
(f) Returns of tax by agent
If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return required under section 6012 shall be made by the agent.
(Aug. 16, 1954, ch. 736,
Amendments
2017—Subsec. (a)(1).
2014—Subsec. (a)(1).
1988—Subsec. (a)(1).
Subsec. (b).
Subsec. (e).
1986—Subsec. (a)(1).
Subsec. (e).
1984—Subsec. (c)(2).
1983—Subsec. (c)(2).
1980—Subsec. (a)(3).
1978—Subsec. (a).
1976—Subsecs. (c)(1)(A), (2), (d).
1966—
Effective Date of 2017 Amendment
Amendment by section 12001(b)(14) of
Amendment by section 13001(b)(2)(L) of
Amendment by section 14401(d)(2) of
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by section 701(e)(4)(F) of
Amendment by
Effective Date of 1986 Amendment
Amendment by section 701(e)(4)(F) of
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For applicability of amendment by section 701(e)(4)(F) of
1 So in original. The comma probably should not appear.
2 Par. (3) heading editorially supplied.
§883. Exclusions from gross income
(a) Income of foreign corporations from ships and aircraft
The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle:
(1) Ships operated by certain foreign corporations
Gross income derived by a corporation organized in a foreign country from the international operation of a ship or ships if such foreign country grants an equivalent exemption to corporations organized in the United States.
(2) Aircraft operated by certain foreign corporations
Gross income derived by a corporation organized in a foreign country from the international operation of aircraft if such foreign country grants an equivalent exemption to corporations organized in the United States.
(3) Railroad rolling stock of foreign corporations
Earnings derived from payments by a common carrier for the use on a temporary basis (not expected to exceed a total of 90 days in any taxable year) of railroad rolling stock owned by a corporation of a foreign country which grants an equivalent exemption to corporations organized in the United States.
(4) Special rules
The rules of paragraphs (6), (7), and (8) of section 872(b) shall apply for purposes of this subsection.
(5) Special rule for countries which tax on residence basis
For purposes of this subsection, there shall not be taken into account any failure of a foreign country to grant an exemption to a corporation organized in the United States if such corporation is subject to tax by such foreign country on a residence basis pursuant to provisions of foreign law which meets such standards (if any) as the Secretary may prescribe.
(b) Earnings derived from communications satellite system
The earnings derived from the ownership or operation of a communications satellite system by a foreign entity designated by a foreign government to participate in such ownership or operation shall be exempt from taxation under this subtitle, if the United States, through its designated entity, participates in such system pursuant to the Communications Satellite Act of 1962 (
(c) Treatment of certain foreign corporations
(1) In general
Paragraph (1) or (2) of subsection (a) (as the case may be) shall not apply to any foreign corporation if 50 percent or more of the value of the stock of such corporation is owned by individuals who are not residents of such foreign country or another foreign country meeting the requirements of such paragraph.
(2) Treatment of controlled foreign corporations
Paragraph (1) shall not apply to any foreign corporation which is a controlled foreign corporation (as defined in section 957(a)).
(3) Special rules for publicly traded corporations
(A) Exception
Paragraph (1) shall not apply to any corporation which is organized in a foreign country meeting the requirements of paragraph (1) or (2) of subsection (a) (as the case may be) and the stock of which is primarily and regularly traded on an established securities market in such foreign country, another foreign country meeting the requirements of such paragraph, or the United States.
(B) Treatment of stock owned by publicly traded corporation
Any stock in another corporation which is owned (directly or indirectly) by a corporation meeting the requirements of subparagraph (A) shall be treated as owned by individuals who are residents of the foreign country in which the corporation meeting the requirements of subparagraph (A) is organized.
(4) Stock ownership through entities
For purposes of paragraph (1), stock owned (directly or indirectly) by or for a corporation, partnership, trust, or estate 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.
(Aug. 16, 1954, ch. 736,
References in Text
The Communications Satellite Act of 1962, referred to in subsec. (b), is
Amendments
2004—Subsec. (a)(4).
1989—Subsec. (a)(4).
Subsec. (a)(5).
1988—Subsec. (a)(1), (2).
Subsec. (c)(1).
Subsec. (c)(3).
"(A) the stock of which is primarily and regularly traded on an established securities market in the foreign country in which such corporation is organized, or
"(B) which is wholly owned (either directly or indirectly) by another corporation meeting the requirements of subparagraph (A) and is organized in the same foreign country as such other corporation."
1986—Subsec. (a)(1).
Subsec. (a)(2).
Subsec. (a)(4).
Subsec. (c).
1975—Subsec. (a)(3).
1968—
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1975 Amendment
Effective Date of 1968 Amendment
Applicability of Certain Amendments by Pub. L. 99–514 in Relation to Treaty Obligations of United States
For nonapplication of amendment by section 1212(c)(3)–(5) of
§884. Branch profits tax
(a) Imposition of tax
In addition to the tax imposed by section 882 for any taxable year, there is hereby imposed on any foreign corporation a tax equal to 30 percent of the dividend equivalent amount for the taxable year.