Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 62-67

1962-1 C.B. 128

Sec. 861

Sec. 901

Sec. 904

IRS Headnote

The amount of compensation received from a foreign corporation for services performed by a taxpayer within the United States may not be included in the numerator of the fraction provided in section 904 of the Internal Revenue Code of 1954 as a limitation on the allowance of a foreign tax credit. Further, no foreign tax credit is allowable in respect of taxes paid to a foreign country where the numerator of the limiting fraction is zero because the taxpayer had no income from sources without the United States subject to United States income tax for the same taxable year.

Full Text

Rev. Rul. 62-67

In view of the decision of the Tax Court of the United States in the case of Gordon Duke et ux. v. Commissioner , 34 T.C. 772 (1960), advice has been requsted whether the amount of compensation received from a foreign corporation for services performed by a taxpayer within the United States may be included in the numerator of the fraction provided in section 904 of the Internal Revenue Code of 1954 as a limitation on the allowance of a foreign tax credit.

Section 904 of the Code provides, in part, that, in the case of a taxpayer who does not elect the overall limitation, the total amount of credit for taxes paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year. However, in the case of a taxpayer who elects the overall limitation allowed by that section, the total amount of the credit for taxes paid or accrued to all foreign countries and possessions of the United States shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States bears to his entire taxable income for the same taxable year.

Section 861(a) of the Code provides, insofar as here pertinent, that compensation for personal services performed in the United States shall be treated as income from sources within the United States. The source rules of section 861 are made applicable to the determination of the source of income for foreign tax credit purposes by section 1.901-2(d) of the Income Tax Regulations.

For the purpose of determining the limitation on the credit allowable on account of income taxes paid to all foreign countries and possessions of the United States, where a taxpayer elects the overall limitations provided in section 904 of the Code, the taxpayer's taxable income from sources outside the United States becomes the numerator and his entire taxable income becomes the denominator of the fraction used in determining the proportion set forth in section 904 of the Code.

Where a taxpayer does not elect the overall limitation, the taxpayer's taxable income from sources within a foreign country or possession of the United States becomes the numerator and his entire taxable income becomes the denominator of the fraction used in determining the limitation on the credit allowable for income taxes paid to such foreign country or possession of the United States. See I. B. Dexter et ux. v. Commissioner , 47 B.T.A. 285, at 290 (1942), acquiescence, C.B. 1948-2, 1, interpreting the credit limitation provided in section 131(b) of the Revenue Act of 1936.

In the Duke case the taxpayer, a citizen of the United States and a bona fide resident of Mexico, claimed a foreign tax credit for taxes paid to Mexico on salaries received from two Mexican corporations as compensation for personal services performed partly without and partly within the United States. He also received a salary from a United States corporation. He excluded from his gross income, under section 116(a) of the Internal Revenue Code of 1939 (section 911 of the 1954 Code), the portion of salary income attributable to services performed without the United States. However, in computing the limitation on the allowable foreign tax credit, he included the entire amount of salary income in the denominator of the limiting fraction and used the salaries paid by the Mexican corporations as the numerator.

The Commissioner of Internal Revenue, in the Duke case, took the position that income which is excluded from taxation by the United States should not be included in either the numerator or the denominator of the limiting fraction and computed the foreign tax credit limitation under section 131(b) of the 1939 Code (section 904 of the 1954 Code) by using the portion of the salary paid by the Mexican corporations for services performed in the United States as the numerator of the fraction and the total amount of taxable income reported in the return as the denominator. The court agreed with the Commissioner and held that the taxpayer's credit for income taxes paid to a foreign country was limited to the amount determined by the Commissioner.

Since the court had before it two computations, it did not analyze the source of the income which both the taxpayer and the Commissioner included in the numerator of the limiting fraction but considered only the issue before it, that is, whether income which is not subject to United States tax is includible in either the numerator or the denominator of the limiting fraction. Thus, the decision of the court is not deemed to be a precedent for resolving the question whether a taxpayer, who is entitled to exclude from his gross income for Federal income tax purposes all of his income from sources without the United States, is entitled to a credit for taxes paid to a foreign country where he also receives income from a foreign corporation for services performed within the United States.

As the source rules of section 861 of the 1954 Code apply to the determination of the source of income for foreign tax credit purposes, it is held that salaries paid by a foreign corporation to a citizen of the United States for services performed within the United States may not be treated as income from sources within a foreign country in computing the foreign tax credit limitation and, therefore, may not be included in the numerator of the fraction limiting the foreign tax credit. Further, where none of the taxpayer's income from sources without the United States is subject to United States tax for the taxable year, the numerator of the limiting fraction is zero and no credit against Federal income tax is allowable on account of taxes paid to a foreign country.