LIMITATION ON FOREIGN INCOME EXCLUSION APPLIES ONLY TO CUBA, LIBYA, AND IRAQ.

Rev. Rul. 92-63

Section 911(a) of the Internal Revenue Code excludes certain amounts from the gross income of individuals. Rev. Rul. 87-35, 1987-1 C.B. 182, lists countries with respect to which this income exclusion is limited under section 911(d)(8). This revenue ruling revokes a portion of Rev. Rul. 87-35.

Rev. Rul. 90-53, 1990-2 C.B. 178, lists countries the income from which is subject to certain special tax rules under sections 901(j) and 952(a)(5) of the Code. This revenue ruling supersedes that ruling.

ISSUE

Tax benefits generally available to United States taxpayers living or doing business in a foreign country are limited for some countries. This revenue ruling lists the countries for which section 911(d)(8) of the Code limits the income exclusions otherwise available under section 911 to individuals living abroad. It also lists the countries for which sections 901(j) and 952(a) change the foreign tax credit rules and the definition of subpart F income otherwise applicable to taxpayers doing business abroad.

Section 911

LAW AND ANALYSIS

Section 911(a) of the Code allows a "qualified individual" to exclude from gross income "foreign earned income" and "housing cost amounts" as defined in section 911(b) and (c). Section 911(d)(1) defines a "qualified individual" as a citizen (or, in some cases, a resident) of the United States whose tax home is in a foreign country and who meets the section's requirement of residence or presence in the foreign country for a specified time.

Section 911(d)(8) of the Code provides that if travel with respect to any foreign country (or any transaction in connection with such travel) is proscribed by certain regulations during any period, then: (1) foreign earned income does not include income from sources within that country attributable to services performed during that period; (2) housing expenses do not include any expenses allocable to such period for housing in that country, or for housing of the taxpayer's spouse or dependents in another country while the taxpayer is present in that country; and (3) an individual is not treated as a bona fide resident of, or as present in, a foreign country for any day during which the individual was present in that country. The regulations referred to above are those promulgated pursuant to the Trading With the Enemy Act, 50 U.S.C. App. sections 1-44 (1989), or the International Emergency Economic Powers Act, 50 U.S.C. 1701 et. seq. (1989), that must include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country.

Section 911(d)(8) of the Code was promulgated in 1986 as part of the Tax Reform Act of 1986 (Pub. L. No. 99-514, 1986-3 C.B. 1, 481). The Report of the Senate Committee on Finance (S. Rep. No. 99-313, 99th Cong., 2d Sess. 389 (1986)) listed North Korea, Cuba, Vietnam, Kampuchea (Cambodia), and Libya as the countries for which Treasury regulations proscribed transactions related to travel of U.S. citizens and residents. Rev. Rul. 87-35 listed those five countries as countries for which section 911(d)(8) limits the income exclusions otherwise available under section 911 to individuals living abroad.

The Internal Revenue Service has now determined that the original listings were incorrect. The following regulations meet the description in section 911(d)(8) for the countries and periods indicated in the holding below: 31 C.F.R. section 515.560 (1989) (Cuba), 31 C.F.R. section 550.207 (1989) (Libya), and 31 C.F.R. section 575.207 (1991) (Iraq).

HOLDING AND EFFECTIVE DATES

The following foreign countries, and no others, are subject to the limitations of section 911(d)(8) of the Code:

      Country             starting date            ending date

LAW AND ANALYSIS

Section 901 of the Code allows U.S. taxpayers to claim a foreign tax credit for income, war profits, and excess profits taxes paid or accrued (or deemed paid or accrued under sections 902 and 960) to any foreign country or to any possession of the United States. Section 901(j) denies the credit for taxes paid on income derived in certain countries for certain periods, which are listed in Rev. Rul. 90-53. Based on information supplied by the Department of State, this revenue ruling (1) adds Iraq to the list; (2) states the date on which South Africa end Albania ceased to be described in section 901(j); and (3) states the date on which the People's Democratic Republic of Yemen, a listed country, ceased to exist. For any country that is first described in section 901(j)(2)(A) of the Code on a date after January 1, 1987, section 901(j) applies to taxes paid or accrued (or deemed paid or accrued under sections 902 and 960) to that country with respect to income attributable to any period beginning six months after that date. Iraq was first described in section 901(j)(2)(A) on August 1, 1990. Accordingly, section 901(j) applies to Iraq for the period beginning on February 1, 1991.

HOLDING AND EFFECTIVE DATES

Section 901(j) of the Code describes these countries for the following periods:

      Country             starting date            ending date

For a discussion of issues arising when a country stops being described in section 901(j)(2)(A) or (C) of the Code, see Rev. Rul. 92-62, page , this Bulletin.

Section 952

LAW AND ANALYSIS

The income of a foreign corporation with United States shareholders is generally not taxed to the shareholders until the income is repatriated. Section 951 of the Code, however, provides that this deferral of United States tax is not available to shareholders of controlled foreign corporations with certain types of income ("subpart F income"). Section 952(a)(5) provides that subpart F income includes income derived by a controlled foreign corporation from sources inside a foreign country while section 901(j) applies to that country. The countries to which section 901(j) applies are listed above.

HOLDING AND EFFECTIVE DATES

Section 952(a)(5) of the Code applies to income derived from sources inside the countries listed immediately above during the periods specified in the discussion of section 901(j) above. Therefore, that income is subpart F income. Income derived from the Republic of Yemen after such date is not subpart F income under section 952(a)(5).

EFFECT ON OTHER REVENUE RULINGS

A portion of Rev. Rul. 87-35 is revoked and Rev. Rul. 90-53 is superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is Thomas L. Ralph of the Office of Associate Chief Counsel (International). For further information regarding this revenue ruling contact Mr. Ralph at (202) 622-3880 (not a toll-free call).