aircraft. This is true whether the vessel or aircraft is owned, hired, or leased. The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft.
All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States.
For transportation income from personal services, 50% of the income is U.S. source income if the transportation is between the United States and a U.S. possession. For nonresident aliens, this applies only to income derived from, or in connection with, an aircraft.
Scholarships, grants, prizes, and awards
Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds.
For example, payments for research or study in the United States made by the United States, a noncorporate U.S. resident, or a domestic corporation, are from U.S. sources. Similar payments from a foreign government or foreign corporation are foreign-source payments even though the funds may be disbursed through a U.S. agent.
Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources.
Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U.S. source income.
These rules do not apply to amounts paid as salary or other compensation for services.
Pensions and annuities
If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U.S. sources. That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded).
If you performed services as an employee of the United States, you may receive a distribution from the U.S. government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Your U.S. source income is the otherwise taxable amount of the distribution that is attributable to one’s total U.S. government basic pay other than tax exempt pay for services performed outside the United States.
Rents or royalties
Your U.S. source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property.
U.S. source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property.
Real property
Real property is land and buildings and generally anything built on, growing on, or attached to land. Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States.
The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country or located in a foreign country and sold in the United States, is partly from sources in the United States. For information on determining that part, see Treasury Regulation 1.863-1(b).
Summary of source rules for income
| Item of income | Factor determining source |
| Salaries, wages, other compensation | Where services are physically performed |
| Business income | |
| Personal services | Where services performed |
| Sale of inventory—purchased | Where sold (title, risk of loss) |
| Sale of inventory—produced | Allocation |
| Interest | Residence of payer |
| Dividends | Whether a U.S. or foreign corporation* |
| Rents | Location of property |
| Royalties | |
| Natural resources | Location of property |
| Patents, copyrights, and so on | Where property is used |
| Sale of real property | Location of property |
| Sale of personal property | Seller’s tax home with exceptions |
| Pension distributions attributable to contributions | Where services were performed that earned the pension |
| Investment earnings on pension contributions | Location of pension trust |
| Sale of natural resources | Allocation based on fair market value of product at export terminal (For more information, see Treasury Regulation 1.863-1(b).) |
*Exceptions include
a. Dividends paid by a U.S. corporation are foreign-source if the corporation elects the American Samoa economic development credit.
b. Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the three tax years before the year in which the dividends are declared.
Knowledge check
1 An employee receives a lump sum as compensation for services rendered both within and outside the United States. The income should generally be apportioned on what basis?Facts and circumstances of the particular case.Residency of the individual receiving the compensation.Geographic basis.Time basis.
Personal property
Personal property is property, such as machinery, equipment, or furniture that is not real property. Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States.
A tax home is the general area of one’s main place of business, employment, or post of duty, regardless of where