Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 67-87

1967-1 C.B. 186

Sec. 911

IRS Headnote

Compensation received by a United States citizen for services performed in a foreign country, under a contract with the foreign government which required him to render advisory services for a period of two years, is not an amount paid by the United States or any agency thereof within the meaning of section 911(a)(2) of the Internal Revenue Code of 1954, even though the project on which he worked was financed in part by an agency of the United States. Therefore, such compensation is excludable from the gross income of the taxpayer, to the extent provided by section 911(c)(1) of the Code, if he otherwise meets the requirements for exemption under section 911(a)(2) of the Code.

Full Text

Rev. Rul. 67-87

Advice has been requested whether compensation received by a United States citizen for services performed after 1962 in a foreign country under a contract with the government of that country, which required him to render advisory services for a period of two years, is excludable from gross income under section 911(a)(2) of the Internal Revenue Code of 1954.

The contract in this case was executed pursuant to a project agreement between an agency of the United States and the foreign government which provided that a civil service expert would be recruited and employed under an individual contract with the foreign government to serve as a staff adviser to an official of the foreign government. The project was financed through a contribution of 40 x dollars from the U.S. agency and a contribution of 16 x dollars from the foreign government.

Under the terms of the employment contract between the United States citizen and the foreign government, the United States citizen was paid a salary of 14 x dollars a year and related emoluments, including transportation expenses for himself and his dependents, leave benefits, housing accommodations, medical and dental care, and a bonus on termination of his services. The foreign government paid him from its own funds a salary of 4 x dollars a year, the basic rate for a special official of the foreign government. The difference between that paid for a special official and the salary stipulated in the contract was paid by the foreign government out of the funds contributed by the U.S. agency under the project agreement. However, the U.S. agency incurred no obligation to pay any part of the salary stipulated in the contract and would not have paid any part of it if the foreign government had failed to live up to its agreement. The taxpayer was required to pay all taxes and fees imposed by the laws of the foreign country.

The contract provided that the first six months should be a probationary period. Either party could terminate the contract by giving one month's notice. The foreign government could, for cause, terminate the contract with or without 30 days' notice, in which event the employee could be subject to loss of entitlement to transportation expenses back to the United States and loss of the right to all or part of the bonus payable on termination of his services. The interpretation of the provisions of the contract was to be based on the laws of the foreign country.

Section 911 of the Code provides, in part, as follows:

(a) GENERAL RULE.-The following items shall not be included in gross income and shall be exempt from taxation under this subtitle:

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(2) PRESENCE IN FOREIGN COUNTRY FOR 17 MONTHS.-In the case of an individual citizen of the United States who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) which constitute earned income attributable to services performed during such 18-month period. The amount excluded under this paragraph for any taxable year shall be computed by applying the special rules contained in subsection (c). * * *.

The facts in this case are distinguishable from those in Commissioner v. Eldon E. Wolfe,  et ux. , U.S. Court of Appeals, District of Columbia Circuit, 361 F.2d 62 (1966), reversing 43 T.C. 572 (1965), certiorari denied, 385 U.S. 838 (1966). The Wolfe case involved an employee of the U.S. Bureau of Public Roads who was assigned to work on a highway project of the Government of Iran, which had entered into a credit agreement with the Export-Import Bank in Washington under which the proceeds of a loan to Iran were to be used exclusively to finance the road project. The court of appeals held that the amounts he received as salary were `amounts paid by the United States or an agency thereof.' This decision was based on the following salient features: The taxpayer was an employee of the United States, maintaining unique status as such and receiving unique benefits as such; the United States had the primary and sole obligation to pay his salary, and his rights were only against the United States; and a U.S. agency actually executed and delivered the salary checks to him. The court further noted that the taxpayer was exempt from all income taxes, duties, fees and customs charges of Iran; that he received a 10-percent increment over his base salary as a foreign post differential; and that there were financial burdens on the U.S. Government which were not compensable by Iran.

The facts in this case show that the taxpayer was an employee of the foreign government with respect to services performed under the contract. That government exercised complete control over him in the performance of such services, and the U.S. agency exercised no control over the employee. The foreign government had the primary and sole obligation to pay his salary. The project agreement is merely a grant on the part of the U.S. agency to enable the foreign government to hire experts at the rate of compensation which they would receive for similar services performed in this country. The taxpayer was subject to all taxes and fees imposed by the laws of the foreign country.

Under these circumstances, the compensation received by the United States citizen for advisory services performed in the foreign country is not an amount paid by the United States or any agency thereof within the meaning of section 911(a)(2) of the Code. Therefore, such compensation is excludable from the gross income of the taxpayer, to the extent provided by section 911(c)(1) of the Code, if he otherwise meets the requirements for exemption under section 911(a)(2) of the Code.