Sec. 1.863-0 Table of contents.
Sec. 1.863-1 Allocation of gross income under section 863(a).
(a) In general.
(b) Natural resources.
(1) In general.
(2) Additional production activities.
(3) Definitions.
(i) Production activity.
(ii) Additional production activities.
(4) Determination of fair market value.
(5) Determination of gross income.
(6) Tax return disclosure.
(7) Examples.
(i) Example 1. No additional production, foreign source gross receipts.
(ii) Example 2. No additional production, U.S. source gross receipts.
(iii) Example 3. Production in United States, foreign sales.
(iv) Example 4. Production and sales in United States.
(v) Example 5. Additional production.
(c) Determination of taxable income.
(d) Scholarships, fellowship grants, grants, prizes, and awards.
(1) In general.
(2) Source of income.
(i) United States source income.
(ii) Foreign source income.
(iii) Certain activities conducted outside the United States.
(3) Definitions.
(4) Effective dates.
(i) Scholarships and fellowship grants.
(ii) Grants, prizes and awards.
(e) Residual interest in a REMIC.
(1) REMIC inducement fees.
(2) Excess inclusion income and net losses.
(f) Applicability date.
Sec. 1.863-2 Allocation and apportionment of taxable income.
(a) Determination of taxable income.
(b) Determination of source of taxable income.
(c) Applicability date.
Sec. 1.863-3 Allocation and apportionment of income from certain sales of inventory.
(a) In general.
(1) Scope.
(2) Cross references.
(b) Sourcing based solely on production activities.
(c) Determination of the source of gross income from production activity.
(1) Production only within the United States or only within foreign countries.
(i) Source of income.
(ii) Definition of production assets.
(iii) Location of production assets.
(2) Production both within and without the United States.
(i) Source of income.
(ii) Adjusted basis of production assets.
(A) In general.
(B) Production assets used to produce other property.
(3) Anti-abuse rule.
(4) Examples.
(i) Example1. Source of gross income.
(ii) Example 2. Location of intangible property.
(iii) Example 3. Anti-abuse rule.
(d) Determination of source of taxable income.
(e) Income partly from sources within a possession of the United States.
(1) In general.
(2) Allocation or apportionment for Possession Production Sales.
(3) Allocation or apportionment for Possession Purchase Sales.
(i) Determination of source of gross income from Possession Purchase Sales.
(ii) Determination of source of gross income from business activity.
(A) Source of gross income.
(B) Business activity.
(C) Location of business activity.
(1) Sales activity.
(2) Cost of goods sold.
(3) Expenses.
(4) Examples.
(i) Example 1: Purchase of goods manufactured in possession.
(ii) Example 2: Purchase of goods manufactured outside possession.
(5) Special rules for partnerships.
(f) Special rules for partnerships.
(1) General rule.
(2) Exceptions.
(i) In general.
(ii) Attribution of production assets to or from a partnership.
(iii) Basis.
(3) Examples.
(i) Example 1. Distributive share of partnership income.
(ii) Example 2. Distribution in kind.
(g) Applicability dates.
Sec. 1.863-4 Certain transportation services.
(a) General.
(b) Gross income.
(c) Allocation of costs or expenses.
(d) Items not included as costs or expenses.
(1) Taxes and interest.
(2) Other business activity and general expenses.
(3) Personal exemptions and special deductions.
(e) Property used while within the United States.
(1) General.
(2) Average property.
(3) Current assets.
(f) Taxable income.
(1) General.
(2) Interest and taxes.
(3) General expenses.
(4) Personal exemptions.
(5) Special deductions.
(g) Allocation based on books of account.
Sec. 1.863-6 Income from sources within a foreign country.
Sec. 1.863-7 Allocation of income attributable to certain notional principal contracts under section 863(a).
(a) Scope.
(1) Introduction.
(2) Effective/applicability date.
(b) Source of notional principal contract income.
(1) General rule.
(2) Qualified business unit exception.
(3) Effectively connected notional principal contract income.
(c) Election.
(1) Eligibility and effect.
(2) Time for making election.
(3) Manner of making election.
(d) Example.
(e) Cross references.
Sec. 1.863-8 Source of income derived from space and ocean activity under section 863(d).
(a) In general.
(b) Source of gross income from space and ocean activity.
(1) Space and ocean income derived by a United States person.
(2) Space and ocean income derived by a foreign person.
(i) In general.
(ii) Space and ocean income derived by a controlled foreign corporation.
(iii) Space and ocean income derived by foreign persons engaged in a trade or business within the United States.
(3) Source rules for income from certain sales of property.
(i) Sales of purchased property.
(ii) Sales of property produced by the taxpayer.
(A) General.
(B) Production only in space or international water, or only outside space and international water.
(C) Production both in space or international water and outside space and international water.
(4) Special rule for determining the source of gross income from services.
(5) Special rule for determining source of income from communications activity (other than income from international communications activity).
(c) Taxable income.
(d) Space and ocean activity.
(1) Definition.
(i) Space activity.
(ii) Ocean activity.
(2) Determining a space or ocean activity.
(i) Production of property in space or international water.
(ii) Special rule for performance of services.
(A) General.
(B) Exception to the general rule.
(3) Exceptions to space or ocean activity.
(e) Treatment of partnerships.
(f) Examples.
(1) Example 1. Space activity—activity occurring on land and in space.
(2) Example 2. Space activity.
(3) Example 3. Services as space activity—de minimis value attributable to performance occurring in space.
(4) Example 4. Space activity.
(5) Example 5. Space activity.
(6) Example 6. Space activity—treatment of land activity.
(7) Example 7. Use of intangible property in space.
(8) Example 8. Performance of services.
(9) Example 9. Separate transactions.
(10) Example 10. Sale of property in international water.
(11) Example 11. Sale of property in space.
(12) Example 12. Sale of property in space.
(13) Example 13. Source of income of a foreign person.
(14) Example 14. Source of income of a foreign person.
(g) Reporting and documentation requirements.
(1) In general.
(2) Required documentation.
(3) Access to software.
(4) Use of allocation methodology.
(h) Applicability date.
Sec. 1.863-9 Source of income derived from communications activity under section 863(a), (d), and (e).
(a) In general.
(b) Source of international communications income.
(1) International communications income derived by a United States person.
(2) International communications income derived by foreign persons.
(i) In general.
(ii) International communications income derived by a controlled foreign corporation.
(iii) International communications income derived by foreign persons with a fixed place of business in the United States.
(iv) International communications income derived by foreign persons engaged in a trade or business within the United States.
(c) Source of U.S. communications income.
(d) Source of foreign communications income.
(e) Source of space/ocean communications income.
(f) Source of communications income when taxpayer cannot establish the two points between which the taxpayer is paid to transmit the communication.
(g) Taxable income.
(h) Communications activity and income derived from communications activity.
(1) Communications activity.
(i) General rule.
(ii) Separate transaction.
(2) Income derived from communications activity.
(3) Determining the type of communications activity.
(i) In general.
(ii) Income derived from international communications activity.
(iii) Income derived from U.S. communications activity.
(iv) Income derived from foreign communications activity.
(v) Income derived from space/ocean communications activity.
(i) Treatment of partnerships.
(j) Examples.
(k) Reporting and documentation requirements.
(1) In general.
(2) Required documentation.
(3) Access to software.
(4) Use of allocation methodology.
(l) Effective date.
Sec. 1.863-10 Source of income from a qualified fails charge.
(a) In general.
(b) Qualified business unit exception.
(c) Effectively connected income exception.
(d) Qualified fails charge.
(e) Designated security.
(g) Effective/applicability date.
[T.D. 8687, 61 FR 60540-60551, Nov. 29, 1996, as amended by T.D. 9128, 69 FR 26040-26042, May 11, 2004; T.D. 9272, 71 FR 43363-43366, Aug. 1, 2006; T.D. 9415, 73 FR 40171-40173, July 14, 2008; T.D. 9921, 85 FR 79837-79853, Dec. 11, 2020.]
