[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.863-4]

[Page 283-286]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.863-4  Certain transportation services.

    (a) General. A taxpayer carrying on the business of transportation 
service (other than an activity giving rise to transportation income 
described in section 863(c) or to income subject to other specific 
provisions of this title) between points in the United States and points 
outside the United States derives income partly from sources within and 
partly from sources without the United States.
    (b) Gross income. The gross income from sources within the United 
States

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derived from such services shall be determined by taking such a portion 
of the total gross revenues therefrom as (1) the sum of the costs or 
expenses of such transportation business carried on by the taxpayer 
within the United States and a reasonable return upon the property used 
in its transportation business while within the United States bears to 
(2) the sum of the total costs or expenses of such transportation 
business carried on by the taxpayer and a reasonable return upon the 
total property used in such transportation business. Revenues from 
operations incidental to transportation services, such as the sale of 
money orders, shall be apportioned on the same basis as direct revenues 
from transportation services.
    (c) Allocation of costs or expenses. In allocating the total costs 
or expenses incurred in such transportation business, costs or expenses 
incurred in connection with that part of the services which was wholly 
rendered in the United States shall be assigned to the cost of 
transportation business within the United States. For example, expenses 
of loading and unloading in the United States, rentals, office expenses, 
salaries, and wages wholly incurred for services rendered to the 
taxpayer in the United States belong to this class. Costs and expenses 
incurred in connection with services rendered partly within and partly 
without the United States may be prorated on a reasonable basis between 
such services. For example, ship wages, charter money, insurance, and 
supplies chargeable to voyage expenses shall ordinarily be prorated for 
each voyage on the basis of the proportion which the number of days the 
ship was within the territorial limits of the United States bears to the 
total number of days on the voyage; and fuel consumed on each voyage may 
be prorated on the basis of the proportion which the number of miles 
sailed within the territorial limits of the United States bears to the 
total number of miles sailed on the voyage. For other expenses entering 
into the cost of services, only such expenses as are allowable 
deductions under the internal revenue laws shall be taken into account.
    (d) Items not included as costs or expenses--(1) Taxes and interest. 
Income, war profits, and excess profits taxes shall not be regarded as 
costs or expenses for the purpose of determining the proportion of gross 
income from sources within the United States; and, for such purpose, 
interest and other expenses for the use of borrowed capital shall not be 
taken into the cost of services rendered, for the reason that the return 
upon the property used measures the extent to which such borrowed 
capital is the source of the income. See paragraph (f)(2) of this 
section.
    (2) Other business activity and general expenses. If a taxpayer 
subject to this section is also engaged in a business other than that of 
providing transportation service between points in the United States and 
points outside the United States, the costs and expenses, including 
taxes, properly apportioned or allocated to such other business shall be 
excluded both from the deductions and from the apportionment process 
prescribed in paragraph (c) of this section; but, for the purpose of 
determining taxable income, a ratable part of any general expenses, 
losses, or deductions, which cannot definitely be allocated to some item 
or class of gross income, may be deducted from the gross income from 
sources within the United States after the amount of such gross income 
has been determined. Such ratable part shall ordinarily be based upon 
the ratio of gross income from sources within the United States to the 
total gross income. See paragraph (f)(3) of this section.
    (3) Personal exemptions and special deductions. The deductions for 
the personal exemptions, and the special deductions described in 
paragraph (c) of Sec. 1.861-8, shall not be taken into account for 
purposes of paragraph (c) of this section.
    (e) Property used while within the United States--(1) General. The 
value of the property used shall be determined upon the basis of cost 
less depreciation. Eight percent may ordinarily be taken as a reasonable 
rate of return to apply to such property. The property taken shall be 
the average property employed in the transportation service between 
points in the United States and points

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outside the United States during the taxable year.
    (2) Average property. For ships, the average shall be determined 
upon a daily basis for each ship, and the amount to be apportioned for 
each ship as assets employed within the United States shall be computed 
upon the proportion which the number of days the ship was within the 
territorial limits of the United States bears to the total number of 
days the ship was in service during the taxable period. For other assets 
employed in the transportation business, the average of the assets at 
the beginning and end of the taxable period ordinarily may be taken, but 
if the average so obtained does not, by reason of material changes 
during the taxable year, fairly represent the average for such year 
either for the assets employed in the transportation business in the 
United States or in total, the average must be determined upon a monthly 
or daily basis.
    (3) Current assets. Current assets shall be decreased by current 
liabilities and allocated to services between the United States and 
foreign countries and to other services. The part allocated to services 
between the United States and foreign countries shall be based on the 
proportion which the gross receipts from such services bear to the gross 
receipts from all services. The amount so allocated to services between 
the United States and foreign countries shall be further allocated to 
services rendered within the United States and to services rendered 
without the United States. The portion allocable to services rendered 
within the United States shall be based on the proportion which the 
expenses incurred within the territorial limits of the United States 
bear to the total expenses incurred in services between the United 
States and foreign countries.
    (f) Taxable income--(1) General. In computing taxable income from 
sources within the United States there shall be allowed as deductions 
from the gross income from such sources, determined in accordance with 
paragraph (b) of this section, (i) the expenses of the transportation 
business carried on within the United States (as determined under 
paragraphs (c) and (d) of this section) and (ii) the expenses and 
deductions determined in accordance with this paragraph.
    (2) Interest and taxes. Interest and income, war-profits, and excess 
profits taxes shall be excluded from the apportionment process, as 
indicated in paragraph (d) of this section; but, for the purpose of 
computing taxable income there may be deducted from the gross income 
from sources within the United States, after the amount of such gross 
income has been determined, a ratable part of all interest deductible 
under section 163 and of all income, war-profits, and excess profits 
taxes deductible under section 164, paid or accrued in respect of the 
business of transportation service between points in the United States 
and points outside the United States. The ratable part shall ordinarily 
be based upon the ratio of gross income from sources within the United 
States to the total gross income, from such transportation service.
    (3) General expenses. General expenses, losses, or deductions shall 
be deducted under this paragraph to the extent indicated in paragraph 
(d)(2) of this section.
    (4) Personal exemptions. The deductions for the personal exemptions 
shall be allowed under this paragraph to the same extent as provided by 
paragraph (b) of Sec. 1.861-8.
    (5) Special deductions. The special deductions allowed in the case 
of a corporation by sections 241, 922, and 941 shall be allowed under 
this paragraph to the same extent as provided by paragraph (c) of Sec. 
1.861-8.
    (g) Allocation based on books of account. Application for permission 
to base the return upon the taxpayer's books of account will be 
considered by the district director (or, if applicable, the Director of 
International Operations) in the case of any taxpayer subject to this 
section, who, in good faith and unaffected by considerations of tax 
liability, regularly employs in his books of account a detailed 
allocation of receipts and expenditures which more clearly reflects the 
income derived from sources within the United States than does the 
process prescribed

[[Page 286]]

by paragraphs (b) to (f), inclusive, of this section.

[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 8687, 61 FR 
60550, Nov. 29, 1996]