26 USC 864 - Definitions and special rules

U.S Code last checked for updates: May 19, 2024

§ 864.

Definitions and special rules

(a)

Produced

(b)

Trade or business within the United States

For purposes of this part, part II, and chapter 3, the term “trade or business within the United States” includes the performance of personal services within the United States at any time within the taxable year, but does not include—

(1)

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

(ii)

Trading for taxpayer’s own account

(B)

Commodities

(i)

In general

(ii)

Trading for taxpayer’s own account

(iii)

Limitation

(C)

Limitation

(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

 So in original. Probably should be followed by a comma.

(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

(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

(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

(D)

Sale or exchange

(E)

Secretarial authority

(d)

Treatment of related person factoring income

(1)

In general

(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

(e)

Rules for allocating interest, etc.

For purposes of this subchapter—

(1)

Treatment of affiliated groups

(2)

Gross income and fair market value methods may not be used for interest

(3)

Tax-exempt assets not taken into account

(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

(ii)

Stock ownership requirements

(iii)

Stock owned through entities

(D)

Coordination with subpart F, etc.

(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

(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

(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)

Repealed. Pub. L. 117–2, title IX, § 9671(a), Mar. 11, 2021, 135 Stat. 184]

(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

(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

(6)

Applicability

(Aug. 16, 1954, ch. 736, 68A Stat. 278; Pub. L. 89–809, title I, § 102(d), Nov. 13, 1966, 80 Stat. 1544; Pub. L. 94–455, title XIX, § 1901(a)(113), Oct. 4, 1976, 90 Stat. 1783; Pub. L. 98–369, div. A, title I, §§ 123(a), 127(c), July 18, 1984, 98 Stat. 644, 651; Pub. L. 99–514, title XII, §§ 1201(d)(4), 1211(b)(2), 1215(a), (b)(1), 1221(a)(2), 1223(b)(1), 1242(a), (b), 1275(c)(7), title XVIII, §§ 1810(c)(2), (3), 1899A(21), Oct. 22, 1986, 100 Stat. 2525, 2536, 2544, 2545, 2550, 2558, 2580, 2599, 2824, 2959; Pub. L. 100–203, title X, § 10242(b), Dec. 22, 1987, 101 Stat. 1330–423; Pub. L. 100–647, title I, § 1012(a)(1)(B), (d)(7), (10), (g)(5), (h)(1), (2)(A), (3)–(6), (p)(30), (r), Nov. 10, 1988, 102 Stat. 3494, 3498, 3499, 3501–3503, 3521, 3525; Pub. L. 101–239, title VII, § 7111, Dec. 19, 1989, 103 Stat. 2326; Pub. L. 101–508, title XI, § 11401(a), Nov. 5, 1990, 104 Stat. 1388–472; Pub. L. 102–227, title I, § 101(a), Dec. 11, 1991, 105 Stat. 1686; Pub. L. 103–66, title XIII, § 13234, Aug. 10, 1993, 107 Stat. 504; Pub. L. 105–34, title XI, § 1162(a), Aug. 5, 1997, 111 Stat. 987; Pub. L. 106–170, title V, § 532(c)(2)(N)–(P), Dec. 17, 1999, 113 Stat. 1931; Pub. L. 106–519, § 4(3), Nov. 15, 2000, 114 Stat. 2432; Pub. L. 108–357, title I, § 101(b)(6), title IV, §§ 401(a), (b), 403(b)(6), 413(c)(12), title VIII, § 894(a), Oct. 22, 2004, 118 Stat. 1423, 1488, 1491, 1494, 1507, 1647; Pub. L. 110–289, div. C, title III, § 3093(a), (b), July 30, 2008, 122 Stat. 2912; Pub. L. 111–92, § 15(a), (b), Nov. 6, 2009, 123 Stat. 2996; Pub. L. 111–147, title V, § 551(a), Mar. 18, 2010, 124 Stat. 117; Pub. L. 111–226, title II, § 216(a), Aug. 10, 2010, 124 Stat. 2400; Pub. L. 111–240, title II, § 2122(c), Sept. 27, 2010, 124 Stat. 2568; Pub. L. 115–97, title I, §§ 13501(a), 14502(a), Dec. 22, 2017, 131 Stat. 2138, 2235; Pub. L. 115–141, div. U, title IV, § 401(a)(152), (d)(1)(D)(x), (xvii)(IV), (V), Mar. 23, 2018, 132 Stat. 1191, 1207, 1208; Pub. L. 117–2, title IX, § 9671(a), Mar. 11, 2021, 135 Stat. 184.)

cite as: 26 USC 864

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