26 U.S.C. § 864 : US Code - Section 864: Definitions and special rules

Search 26 U.S.C. § 864 : US Code - Section 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 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
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), and (7) 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) or (7) 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 or interest, 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.
(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
(A) Certain exceptions
The following provisions shall not apply to any amount
treated as interest under paragraph (1) or (6):
(i) Subparagraphs (A)(iii)(II), (B)(ii), and (C)(iii)(II)
of section 904(d)(2) (relating to exceptions for export
financing interest).
(ii) Subparagraph (A) of section 954(b)(3) (relating to
exception where foreign base company income is less than 5
percent or $1,000,000).
(iii) Subparagraph (B) of section 954(c)(2) (relating to
certain export financing).
(iv) Clause (i) of section 954(c)(3)(A) (relating to
certain income received from related persons).
(B) Special rules for possessions
An amount treated as interest under paragraph (1) shall not
be treated as income described in subparagraph (A) or (B) of
section 936(a)(1) unless such amount is from sources within a
possession of the United States (determined after the
application of paragraph (1)).
(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(b)(3).(!1)
(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 method may not be used for interest
All allocations and apportionments of interest expense shall be
made on the basis of assets rather than 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
(determined without regard to paragraph (4) of section
1504(b)).
(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,
(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, and
(F) 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) 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) of section 174 shall apply. Any qualified research
and experimental expenditures treated as deferred expenses under
subsection (b) 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)), 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) 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)).
(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.