TITLE 26--INTERNAL REVENUE
 
                               (CONTINUED)
 
Normal Taxes and Surtaxes (Continued)--Table of Contents
 
Sec. 1.861-1  Income from sources within the United States.

    (a) Categories of income. Part I (section 861 and following), 
subchapter N, chapter 1 of the Code, and the regulations thereunder 
determine the sources of income for purposes of the income tax. These 
sections explicitly allocate certain important sources of income to the 
United States or to areas outside the United States, as the case may be; 
and, with respect to the remaining income (particularly that derived 
partly from sources within and partly from sources without the United 
States), authorize the Secretary or his delegate to determine the income 
derived from sources within the United States, either 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 Secs. 1.861-2 to 
1.861-7, inclusive, and Sec. 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

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be allocated to some item or class of gross income. See Secs. 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 Secs. 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 
Secs. 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 Secs. 1.863-2 to 1.863-5, 
inclusive.
    (4) Exceptions. An owner of certain aircraft or vessels first leased 
on or before December 28, 1980, may elect to treat income in respect of 
these aircraft or vessels as income from sources within the United 
States for purposes of sections 861(a) and 862(a). See Sec. 1.861-9. An 
owner of certain aircraft, vessels, or spacecraft first leased after 
December 28, 1980, must treat income in respect of these craft as income 
from sources within the United States for purposes of sections 861(a) 
and 862(a). See Sec. 1.861-9A.
    (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.
    (c) Computation of income. If a taxpayer has gross income from 
sources within or without the United States, together with gross income 
derived partly from sources within and partly from sources without the 
United States, the amounts thereof, together with the expenses and 
investment applicable thereto, shall be segregated; and the taxable 
income from sources within the United States shall be separately 
computed therefrom.

[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 7928, 48 FR 
55845, Dec. 16, 1983]