Federal Tax

Source of Income Rules (Portfolio 6620)

  • This Bloomberg Tax Portfolio analyzes the rules applicable in determining whether income is treated as from sources within the United States or from foreign sources.


In the case of persons who are not citizens or residents of the United States or domestic corporations, and thus are not subject to U.S. taxation on their worldwide income, the source of income rules generally are pivotal in determining whether the tax jurisdiction of the United States extends to the income. In addition, in the case of all persons who are subject to U.S. tax, the source of income rules are critical to determining to what extent a credit is available for income taxes or taxes in lieu of income taxes paid to a foreign government. The source of income rules are applied in conjunction with the rules governing the allocation and apportionment of expenses between domestic and foreign sources in order to determine foreign-source taxable income for purposes of the foreign tax credit limitation prescribed for each separate limitation category under §904. The source of income rules are contained largely in §§861–863 and 865.

In addition, certain other rules are contained under other provisions of the Code or regulations under such provisions or have been prescribed by the IRS or courts by analogy to statutory rules. Since different rules apply for different types of income, the proper classification of income is a prerequisite to determining the source of income.

Table of Contents

I. Introduction
II. Interest Income
III. Dividend Income
IV. Service Income
V. Income from Use of Property – Rents and Royalties
VI. Income from the Sale of Real Property
VII. Income from the Sale of Personal Property
VIII. Insurance Underwriting Income
IX. Income from Transportation
X. Income from Space and Ocean Activity
XI. Income from Communications Activities
XII. Income from Certain Financial Transactions
XIII. Distributive Share of Income from Certain Pass-Through Entities and S Corporations
XIV. Transactions Involving Computer Programs
XV. Other Income and Special Rules

Peter Blessing
Head Of Cross-Border Corporate Transactions
Gregory Lubkin
PricewaterhouseCoopers LLP