Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 65-48

1965-1 C.B. 613

Sec. 162
Sec. 274
Sec. 861
Sec. 871

IRS Headnote

For purposes of determining whether compensation received by a nonresident alien individual for labor or personal services performed within the United States during a taxable year exceeds the $3,000 limitation provided by Article IX of the income tax convention between the United States and Japan (or the dollar limitation specified in substantially identical treaty provisions relating to other countries which do not define the term `compensation for labor or personal services' for treaty purposes), any amounts received by the individual from his employer as advances or reimbursements for travel expenses incurred on behalf of the employer should be omitted. to the extent of expenses incurred, from the compensation received by the individual where he was required to account and did account to his employer for such expenses and has met the tests for such accounting provided in sections 1.162-17 and 1.274-5(e)(4) of the Income Tax Regulations. If advances or reimbursements exceed such expenses, the amount of such excess must be included in `compensation for labor or personal services' for purposes of the income tax conventions.

Full Text

Rev. Rul. 65-48

Advice has been requested whether amounts received as advances or reimbursements for travel expenses by a resident of Japan (a nonresident alien individual with respect to the United States) from his employer, under circumstances where the individual is required to account and does account to his employer for such expenses as provided in section 1.162-17(b) of the Income Tax Regulations, constitute `compensation for labor or personal services' under Article IX of the Income Tax Convention between the United States and Japan, C.B. 1955-1, 658.

Article IX of the convention provides:

An individual resident of one of the contracting States shall be exempt from the tax of the other contracting State upon compensation for labor or personal services (including the practice of liberal professions) performed in such other State in any taxable year if such resident is temporarily present in such other State:

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(b) for a period or periods not exceeding a total of 90 days during such taxable year and his compensation received for such labor or personal services does not exceed 3,000 United States dollars, or the equivalent sum in yen as computed at the official basic rate of exchange in effect at the time such compensation is paid.

The convention does not define the term `compensation for labor or personal services' and provides in article II(2) that any term not otherwise defined in the convention shall, unless the context otherwise requires, have the meaning which such term has under the laws of the State applying the convention.

An employee is not required to report on his tax return amounts received as advances or reimbursements of expenses for travel paid or incurred by him solely for the benefit of his employer for which he is required to account and does account to the employer under the tests for such accounting provided in sections 1.162-17 and 1.274-5(e)(4) of the regulations, provided the total amount of such advances or reimbursements is equal to such expenses. (Section 1.162-17(b)(1) of the regulations.) Accordingly, an employee should omit the amount of such advances or reimbursements, to the extent of expenses incurred, from his compensation for personal services for purposes of sections 861(a)(3) and 871(c) of the Internal Revenue Code of 1954. Compensation for personal services as used in article IX of the income tax convention with Japan has the same meaning as compensation for personal services as used in sections 861(a)(3) and 871(c) of the Code, and the amount of such advances or reimbursements should also be omitted from compensation to the extent of expenses incurred for purposes of article IX(b) of the convention.

Where amounts paid by an employer to an employee as advances or reimbursements for traveling expenses incurred by the employee in connection with the performance of services for his employer exceed the amount of such expenses for which the employee is required to and does account, the employee is required to report such excess in gross income (section 1.162-17(b)(2) of the regulations). Such excess amounts have their source in the performance of personal services and are, therefore, in the nature of compensation for personal services within the meaning of sections 861(a)(3) and 871(c) of the Code, and are also `compensation for labor or personal services' within the meaning of article IX of the income tax convention with Japan.

Accordingly, it is held that for purposes of determining whether compensation received by a nonresident alien individual for labor or personal services performed within the United States during a taxable year exceeds the $3,000 limitation provided by article IX of the income tax convention with Japan (or the dollar limitation specified in substantially identical treaty provisions relating to other countries which do not define the term `compensation for labor or personal services' for treaty purposes), any amounts received by the individual from his employer as advances or reimbursements for travel expenses incurred on behalf of the employer should be omitted from the compensation received by the individual, to the extent of expenses incurred, where he was required to account and did account to his employer for such expenses and has met the tests for such accounting provided in sections 1.162-17 and 1.274-5(e)(4) of the regulations. If advances or reimbursements exceed such expenses, the amount of such excess must be included in `compensation for labor or personal services' for purposes of the income tax conventions.