Section 861. Income From Sources Within the United States.

Section 861 specifies items of gross income that are treated as income from U.S. sources.

Interest. U.S. source income includes interest from the United States or the District of Columbia, and interest
from a U.S. resident on a bond, note, or other interest-bearing obligation issued, assumed, or incurred by that
person. U.S.-source income doesn’t include interest from a resident alien or a U.S. corporation if the individual
or corporation meets the 80 percent foreign business requirements of section 861(c)(1). It also doesn’t include
interest on deposits with a foreign branch of a U.S. bank or, in the case of a foreign partnership predominantly
engaged in a trade or business outside the United States, any interest not paid by a business of the
partnership in the United States and not allocable to income effectively connected with the conduct of business
in the United States.

Dividends. Gross income from U.S. sources includes dividends from a U.S. corporation (other than one that
has a section 936 election in effect). It also includes a portion of the dividends from a foreign corporation,
unless less than 25 percent of the corporation’s income for the immediately preceding three-year period was
effectively connected with the conduct of a U.S. trade or business. The amount that’s treated as U.S.-source
income is the amount that bears the same ratio to the dividends that the corporation’s effectively connected
income bears to its gross income from all sources.

Under section 245, U.S. corporations that receive dividends from 10-percent-owned foreign corporations can
take a dividends received deduction for 70 percent of the U.S.-source portion of the dividends (80 percent for
20-percent-owned corporations). The U.S.-source portion is determined under the rules of section 245. For
foreign tax credit limitation purposes, foreign-source income is limited to the amount that the dividend exceeds
the dividends received deduction under section 245 multiplied by 100/70 (or 100/80). Dividends from a wholly
owned foreign subsidiary that are eligible for the 100 percent dividends received deduction are all U.S.-source.

Dividends from a foreign corporation that succeeded to a U.S. corporation’s accumulated earnings and profits
are U.S.-source income to the extent the dividend is paid from the U.S. corporation’s E&P.

Dividends from a DISC are U.S.-source income except to the extent they’re qualified export receipts.

Personal Services. Gross income from U.S. sources includes compensation for labor or personal services
performed in the United States, irrespective of the residence of the payer, the place in which the contract for
service was made, or the place or time of payment.

Exception. The compensation will be deemed not to be income from U.S. sources if:

· 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 tax year;

· The compensation for the labor or services doesn’t exceed in the aggregate a gross amount of $3,000;
and

· The compensation is for labor or services performed as an employee of, or under any form of contract
with (1) a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or
business in the United States, or (2) an individual who is a U.S. citizen or resident, a domestic partnership, or 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 U.S. possession by the individual, partnership, or corporation.

In general, U.S.-source income doesn’t include the compensation of a nonresident alien, who is present in the
United States as a crew member of a foreign ship, for the performance of personal services in connection with
the international operation of the ship.

Rents and Royalties. Gross income from U.S. sources includes rentals or royalties from property located in
the United States or from any interest in that 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,
trademarks, trade brands, franchises, and other like property. The income from the rental of property, whether
tangible or intangible, located in the United States, or from the use of property, whether tangible or intangible,
in the United States, is from U.S. sources.

Sale of Real Property. Gross income from U.S. sources includes gain derived from the sale or other
disposition of real property located in the United States.

Sale or Exchange of Inventory Property. Gains, profits, and income derived from the purchase of inventory
property outside the United States (other than in a U.S. possession) or in the United States generally will be
treated as U.S.-source income.

Undewriting Income. U.S-source income includes underwriting income from insuring U.S. risks.

Social Security Benefits. U.S.-source income includes any social security benefit (as defined in section 86
(d)).

U.S.-Source Taxable Income. From the items of U.S.-source gross income there must be deducted the
expenses, losses, and other deductions apportioned or allocated to them and a ratable part of any deductions
that can’t be definitely be allocated to some item or class of gross income. Any remainder is included as
taxable income from U.S. sources. For an individual who doesn’t itemize deductions, an amount equal to the
standard deduction is considered a deduction that can’t be definitely allocated.