by rules of separate allocation or by processes or formulas of general apportionment. The statute provides for the following three categories of income:

(1) Within the United States. The gross income from sources within the United States, consisting of the items of gross income specified in section 861 (a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863 (a). See §§ 1.861-2 to 1.861-7, inclusive, and § 1.863-1. The taxable income from sources within the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 861 (b) and 863 (a), the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. See §§ 1.861-8 and 1.863-1.

(2) Without the United States. The gross income from sources without the United States, consisting of the items of gross income specified in section 862 (a) plus the items of gross income allocated or apportioned to such sources in accordance with section 863 (a). See §§ 1.862-1 and 1.863-1. The taxable income from sources without the United States, in the case of such income, shall be determined by deducting therefrom, in accordance with sections 862 (b) and 863 (a), the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be allocated to some item or class of gross income. See §§ 1.862-1 and 1.863-1.

(3) Partly within and partly without the United States. The gross income derived from sources partly within and partly without the United States, consisting of the items specified in section 863 (b) (1), (2), and (3). The taxable income allocated or apportioned to sources within the United States, in the case of such income, shall be determined in accordance with section 863 (a) or (b). See §§ 1.863-2 to 1.863-5, inclusive. (b) Taxable income from sources within the United States. The taxable income from sources within the United States shall consist of the taxable income described in paragraph (a) (1) of this section plus the taxable income allocated or apportioned to such sources, as indicated in paragraph (a) (3) of this section.

(a) General. There shall be included in gross income from sources within the United States all interest (including interest on certain deferred payments, as provided in section 483 and the regulations thereunder) received or accrued, as the case may be, from the United States, any Territory, any political subdivision of a Territory, or the District of Columbia, and interest on bonds, notes, or other interest-bearing obligations of residents of the United States, whether corporate or otherwise, except

(1) Deposits. Interest paid on deposits with persons, including individuals, partnerships, or corporations, carrying on the banking business, to persons not engaged in business within the United States;

(2) Payer deriving income abroad. Interest received from a resident alien individual, a resident foreign corporation, or a domestic corporation, when it is shown to the satisfaction of the district director (or, if applicable, the Director of International Operations) that less than 20 percent of the gross income of such resident payer or domestic corporation has been derived from sources within the United States, as determined under the provisions of sections 861 to 864, inclusive, and the regulations thereunder, for the 3-year period ending with the close of the taxable year of the payer which precedes the payment of such interest, or for such part of that period as may be applicable; and

(3) Bankers' acceptances. Income derived by a foreign central bank of issue from bankers' acceptances. A foreign central bank of issue means a bank which is by law or government sanction the principal authority, other than the government itself, issuing instruments intended to circulate as currency. Such banks are generally the custodians of the banking reserves of their countries.

(b) Interest on refunds. Interest received from the United States on a refund of Federal income taxes constitutes income from sources within the United States.

Any tax

(c) Statement with return. payer who excludes from gross income items of the type specified in paragraph (a) (1), (2), or (3) of this section shall file with his return a statement setting forth the amount of such income and such information as may be necessary to show that the income is of the type specified therein.

[T.D. 6500, 25 F.R. 11910, Nov. 26, 1960, as amended by T.D. 6873, 31 F.R. 953, Jan. 25, 1966]

§ 1.861-3 Dividends.

(a) General-(1) Dividends included in gross income. Gross income from sources within the United States includes a dividend (as defined by section 316 and the regulations thereunder) described in subparagraph (2), (3), or (4) of this paragraph.

(2) Dividend from a domestic corporation. A dividend described in this subparagraph is a dividend from a domestic corporation other than a domestic corporation entitled to the benefits of section 931, and other than a domestic corporation less than 20 percent of the gross income of which is shown to the satisfaction of the district director (or, if applicable, the Director of International Operations) to have been derived from sources within the United States, as determined under the provisions of sections 861 to 864, inclusive, and the regulations thereunder, for the 3-year period ending with the close of the taxable year of such corporation preceding the declaration of such dividend, or for such part of such period as the corporation has been in existence.

(3) Dividend from a foreign corporation. A dividend described in this subparagraph is a dividend from a foreign corporation (other than a dividend to which subparagraph (4) of this paragraph applies) unless less than 50 percent of such foreign corporation's gross income for the 3-year period ending with the close of its taxable year preceding the declaration of such dividend, or for such part of such period as it has been in existence, was derived from sources within the United States, as determined under the provisions of part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder;

but only in an amount which bears the same ratio to such dividend as the gross income of the corporation for such period derived from sources within the United States bears to its gross income from all sources. However, for purposes of sections 901 to 905, inclusive, and the regulations thereunder, relating to the foreign tax credit, a dividend from a foreign corporation shall be treated as income from sources without the United States to the extent exceeding the amount of the deduction allowable under section 245 in respect of such dividend.

(4) Dividend from a foreign corporation succeeding to earnings of a domestic corporation. A dividend described in this subparagraph is a dividend from a foreign corporation, if such dividend is received by a corporation after December 31, 1959, but only to the extent that such dividend is treated by such recipient corporation under the provisions of § 1.2433 as a dividend from a domestic corporation subject to taxation under chapter 1 of the Code. To the extent that this subparagraph applies to a dividend received from a foreign corporation, subparagraph (3) of this paragraph shall not apply to such dividend.

Divi

(b) Presumption as to source. dends will be treated as income from sources within the United States (except for purposes of sections 901 to 905, inclusive, and the regulations thereunder) unless the taxpayer submits with his return sufficient data to establish to the satisfaction of the district director (or, if applicable, the Director of International Operations) that, in accordance with paragraph (a) (1) or (2) of this section, they are not income from sources within the United States.

[T.D. 6500, 25 F.R. 11910, Nov. 26, 1960, as amended by T.D. 6830, 30 F.R. 8046, June 23, 1965]

§ 1.861-4

Compensation for labor or personal services.

(a) General. Gross income from sources within the United States includes compensation for labor or personal services performed in the United States regardless of the residence of the payer, of the place in which the contract for service was made, or of the place of payment; except that such compensation shall be deemed not to be income from sources within the United States, if—

(1) 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;

(2) The compensation does not exceed $3,000 in the aggregate; and

(3) 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) A domestic corporation, if the 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 that corporation.

(b) Amount includible in gross income. If a specific amount is paid for labor or personal services performed in the United States, that amount (if income from sources within the United States) shall be included in the gross income. If no accurate allocation or segregation of compensation for labor or personal services performed in the United States can be made, or when such labor or service is performed partly within and partly without the United States, the amount to be included in the gross income shall be determined by an apportionment on the time basis; that is, there shall be included in the gross income an amount which bears the same relation to the total compensation as the number of days of performance of the labor or services within the United States bears to the total number of days of performance of labor or services for which the payment is made.

(c) Coastwise travel. Except as to income excluded by paragraph (a) of this section, wages received for services rendered inside the territorial limits of the United States and wages of an alien seaman earned on a coastwise vessel are to be regarded as from sources within the United States.

§ 1.861-5 Rentals and royalties.

Gross income from sources within the United States includes rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the United States, patents, copyrights, the use of, or for the privilege of using, in secret processes and formulas, goodwill, trade-marks, trade brands, franchises, and other like property. The income arising from the rental of property, whether tangible or intangible, located within the United States, or from the use

of property, whether tangible or intangible, within the United States, is from sources within the United States. § 1.861-6 Sale of real property.

Gross income from sources within the United States includes gain, computed under the provisions of section 1001 and the regulations thereunder, derived from the sale or other disposition of real property located in the United States. For the treatment of capital gains and losses, see subchapter P (section 1201 and following), chapter 1 of the Code, and the regulations thereunder.

§ 1.861-7 Sale of personal property.

(a) General. Gains, profits, and income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which the property is sold. Thus, gross income from sources within the United States includes gains, profits, and income derived from the purchase of personal property without the United States and its sale within the United States.

(b) Purchase within a possession. Notwithstanding paragraph (a) of this section, income derived from the purchase of personal property within a possession of the United States and its sale within the United States shall be treated as derived partly from sources within and partly from sources without the United States. See section 863 (b) (3) and § 1.863-2.

(c) Country in which sold. For the purposes of part I (section 861 and following), subchapter N, chapter 1 of the Code, and the regulations thereunder, a sale of personal property is consummated at the time when, and the place where, the rights, title, and interest of the seller in the property are transferred to the buyer. Where bare legal title is retained by the seller, the sale shall be deemed to have occurred at the time and place of passage to the buyer of beneficial ownership and the risk of loss. However, in any case in which the sales transaction is arranged in a particular manner for the primary purpose of tax avoidance, the foregoing rules will not be applied. In such cases, all factors of the transaction, such as negotiations, the execution of the agreement, the location of the property, and the place of payment, will be considered, and the sale will be treated as having been consummated at the place where the substance of the sale occurred.

§ 1.861-8

Computation of taxable income from sources within the United States.

(a) General. From the items of gross income specified in §§ 1.861-2 to 1.861-7, inclusive, 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 other expenses, losses, or 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. The ratable part is based upon the ratio of gross income from sources within the United States to the total gross income.

Example. A taxpayer engaged in trade or business receives for the taxable year gross income from all sources in the amount of $180,000, one-fifth of which ($36,000) is from sources within the United States, computed as follows:

Interest on bonds of a domestic cor

The remainder of the gross income is from sources without the United States, as determined under § 1.862-1. The expenses of the taxpayer for the year amount to $78,000. Of these expenses the amount of $8,000 is properly allocated to income from sources within the United States, and the amount of $40,000 is properly allocated to income from sources without the United States. The remainder of the expenses ($30,000) cannot be definitely allocated to any item or class of gross income. A ratable part thereof, based upon the relation of gross income from sources within the United States to the total gross income, shall be deducted in computing taxable income from sources within the United States. Thus, there are deducted from the $36,000 of gross income from sources within the United States expenses amounting to

$14,000, representing $8,000 properly apportioned to the income from sources within the United States and $6,000 of the expenses (one-fifth thereof) which cannot definitely be allocated to any item or class of gross income. The remainder ($22,000) is the taxable income from sources within the United States.

(b) Personal exemptions. The deductions for the personal exemptions allowed by section 151 or 642(b) shall not be taken into account for purposes of paragraph (a) of this section but shall be allowed as deductions from the taxable income computed thereunder, if and to the extent that such deductions are allowable for purposes of computing the taxable income of the taxpayer. See sections 642(b), 873 (d), 904 (c), and 931(e), and the regulations thereunder.

(c) Special deductions. The special deductions allowed in the case of a corporation by section 241 (relating to the deductions for partially tax-exempt interest, dividends received, etc.), section 922 (relating to Western Hemisphere trade corporations), and section 941 (relating to China Trade Act corporations) shall be taken into account for purposes of paragraph (a) of this section.

(d) Exempt income. No deduction shall be allowed under this section for the amount of any item or part thereof allocable to a class or classes of exempt income. See section 265 and the regulations thereunder.

[T.D. 6500, 25 F.R. 11910, Nov. 26, 1960, as amended by T.D. 6892, 31 F.R. 11144, Aug. 23, 1966]

§ 1.862 Statutory provisions; income

from sources without the United States.

SEC. 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 of real property located without the United States; and

(6) Gains, profits, and income derived from the purchase of personal property within the United States and its sale without the United States.

(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.

§ 1.862-1 Income specifically from sources without the United States.

(a) Gross income. The following items of gross income shall be treated as income from sources without the United States:

(1) Interest other than that specified in section 861 (a) (1) as being derived from sources within the United States;

(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 (for the treatment of compensation for labor or personal services performed partly within the United States and partly without the United States, see paragraph (b) of § 1.861-4):

(4) Rentals or royalties from property located without the United Sates 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, trademarks, trade brands, franchises, and other like property;

(5) Gains, profits, and income from the sale of real property located without the United States; and

(6) Gains, profits, and income derived from the purchase of personal property within the United States and its sale without the United States. Income derived from the purchase of personal property within the United States and its sale within a possession of the United States shall be treated as derived entirely from within that possession of the United States. For determining the time and place of sale of personal property for purposes of this subparagraph, see paragraph (c) of § 1.861-7.

(b) Taxable income. The taxable income from sources without the United States, in the case of the items of gross income specified in paragraph (a) of this section, shall be determined on the same basis as that used in § 1.861-8 for determining the taxable income from sources within the United States.

§ 1.863 Statutory provisions; items not specified in section 861 or 862.

SEC. 863. Items not specified in section 861 or 862-(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 or his delegate. 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 or his delegate. Gains, profits, and income

(1) From transportation or other services rendered partly within and partly without the United States,

(2) From the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole or in part) by the taxpayer without and sold within the United States, or

(3) Derived from the purchase of personal property within a possession of the United States and its sale within the United States, shall be treated as derived partly from sources within and partly from sources without the United States.

§ 1.863-1 Allocation of gross income under section 863 (a).

(a) General. Items of gross income other than those specified in section 861