Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-84

1975-1 C.B. 236

Sec. 82
Sec. 217
Sec. 911

IRS Headnote

U.S. citizen employed abroad; moving expenses reimbursed. Examples discuss the treatment of reimbursed moving expenses of a U.S. citizen who performs services abroad for his domestic employer, and whose foreign earnings qualify for exclusion from gross income under section 911(a) of the Code, and explain the extent to which his moving expenses are deductible and the extent to which the reimbursement is includible in his gross income and subject to income tax withholding. The examples cover moving to the foreign country and moving back to the U.S. (1) to work for the same employer, (2) to work for a different employer, and (3) to retire.

Full Text

Rev. Rul. 75-84

Advice has been requested whether, in the situations described below, (1) moving expenses of employees, United States citizens, incurred in transferring to or returning from foreign countries are deductible by such employees; (2) reimbursements for such moving expenses made by a United States employer to or on behalf of such employees are includible in their gross income; and (3) such reimbursements, if so includible, are subject to withholding of Federal income tax. In each of the factual situations described below, the employee's taxable year is the calendar year and he uses the cash receipts and disbursements method of accounting.

Situation (1). A, a citizen of the United States, was employed in the United States by X, a domestic employer. A was notified by X in December 1971 of his transfer to work in a foreign country for X. A arrived in the foreign country on December 31, 1971, and for the entire taxable year 1972 qualified as a bona fide resident of the foreign country. In 1972, A paid $6,000 for allowable moving expenses from the United States to the foreign country and was fully reimbursed for such expenses by X in that year. For 1972, A's only income was the $19,000 he earned as compensation for services rendered to X.

Situation (2). B, a United States citizen, was employed by X, a domestic employer, in a foreign country and qualified as a bona fide resident of such foreign country for his entire taxable year. In the following year B was transferred to the United States to work for X. X reimbursed B for his moving expenses to the United States in that year.

Situation (3). C, a United States citizen, was employed by X, a domestic employer, in a foreign country and qualified as a bona fide resident of such country for his entire taxable year. In the following year, after completing his work in the foreign country, C returned to the United States to work for a company other than X. C was reimbursed for his moving expenses to the United States by X in that year.

Situation (4). D, a United States citizen, was employed by X, a domestic employer, in a foreign country and qualified as a bona fide resident of such foreign country for his entire taxable year. In the following year, after completing his work in the foreign country, D retired and returned to the United States. X reimbursed D for his moving expenses to the United States in that year.

Section 82 of the Internal Revenue Code of 1954 provides that there shall be included in gross income (as compensation for services) any amount received or accrued, directly or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence which is attributable to employment or self-employment.

Section 217 of the Code allows as a deduction moving expenses (as defined therein) paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work.

Section 861(a)(3) of the Code provides that income from sources within the United States includes compensation for labor or personal services performed in the United States. Section 862(a)(3) provides that income from sources without the United States includes compensation for labor or personal services performed without the United States.

Section 911(a) of the Code allows an individual United States citizen employed abroad, who is either a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or present in a foreign country or countries for 510 days during a period of 18 consecutive months, to exclude from gross income amounts received from sources without the United States which constitute earned income attributable to services performed during such period. The amounts excluded are computed by applying the special rules contained in section 911(c). Section 911(a) also provides that an individual citizen of the United States shall not be allowed, as a deduction from his gross income, any deductions (other than those allowed by section 151, relating to personal exemptions) properly allocable to or chargeable against amounts excluded from gross income thereunder.

Section 911(b) of the Code provides, in general, that earned income means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered.

Section 911(c)(1) of the Code provides as follows:

(c) Special rules. For purposes of computing the amount excludable under subsection (a), the following rules shall apply:

(1) Limitations on amount of exclusion. The amount excluded from gross income of an individual under subsection (a) for any taxable year shall not exceed an amount which shall be computed on a daily basis at an annual rate of--

(A) except as provided in subparagraph (B), $20,000 in the case of an individual who qualifies under subsection (a) or

(B) $25,000 in the case of an individual who qualifies under subsection (a)(1), but only with respect to that portion of such taxable year occurring after such individual has been a bona fide resident of a foreign country or countries for an uninterrupted period of 3 consecutive years.

Section 1.911-2(d)(1)(i) of the Income Tax Regulations provides that for purposes of applying the $20,000 and $25,000 limitations, amounts received (whether received before, during, or after the taxable year in which the services to which the amounts are attributable are performed) by an individual shall be considered received in his taxable year in which the services to which the amounts are attributable are performed by such individual. However, section 1.911-2(d)(1)(ii) provides that the rule in the preceding sentence does not affect the time of reporting of any amounts which are includible in the individual's gross income.

Section 1.911-2(d)(6) of the regulations provides, in part, that in any case in which any amount is excluded from the gross income of an individual on account of residence or presence in a foreign country, there shall be disallowed as a deduction any expenses, losses, or other items otherwise deductible (other than those allowed by section 151 of the Code, relating to personal exemptions) properly allocable to or chargeable against the amount so excluded from gross income. If the earned income excludable under section 911(a)(1) or (2) (determined without regard to the applicable dollar limitation) exceeds the earned income excludable under section 911(a)(1) or (2), the amount disallowed as a deduction shall be limited to an amount which bears the same ratio to the total of such items properly allocable to or chargeable against such earned income so excludable (determined without regard to the applicable dollar limitation) as the amount excluded from gross income under section 911(a)(1) or (2) bears to such earned income (determined without regard to the applicable dollar limitation).

Section 3401(a)(8)(A)(i) of the Code provides that the term "wages" shall not include remuneration paid for services for an employer (other than the United States or any agency thereof) performed by a citizen of the United States, if at the time of the payment of such remuneration, it is reasonable to believe that such remuneration will be excluded from gross income under section 911.

Section 3401(a)(15) of the Code provides that the term "wages" shall not include remuneration paid to or on behalf of an employee if (and to the extent that) at the time of the payment of such remuneration it is reasonable to believe that a corresponding deduction is allowable under section 217 (relating to moving expenses).

Section 3402 of the Code provides, in part, that every employer making payment of "wages" shall deduct and withhold tax upon such wages as provided therein.

For moving expenses to be deductible under section 217 of the Code, they must be incurred by a taxpayer in connection with the commencement of work by him at a new principal place of work. When such new principal place of work is in a foreign country, deductible expenses incurred in moving there are properly allocable to or chargeable against earned income under section 911. Hartung v. Commissioner, 484 F. 2d 953 (9th Cir. 1973), rev'g 55 T.C. 1 (1970), nonacquiescence page 3, this Bulletin; and Markus v. Commissioner, 486 F. 2d 1314 (D.C. Cir. 1973), rev'g 30 CCH Tax Ct. Mem. 1346 (1971). In such cases, those expenses will be viewed as allocable to or chargeable against earned income in the taxable year of the move and if the taxpayer's period of qualification under section 911 does not include the entire taxable year in which the move took place, then the moving expenses will also be considered allocable to the following taxable year or portion thereof during which the taxpayer qualifies under section 911.

When a taxpayer incurs moving expenses in connection with the commencement of work by him at a new principal place of work in the United States, such expenses are allocable to United States source income and not allocable to or chargeable against earned income under section 911 of the Code.

Since moving expenses are allocable to or chargeable against income to be derived from an employee's performance of services at a new principal place of work, a reimbursement received by an employee from his employer for such expenses will generally, in the absence of evidence to the contrary, also be attributable to such services. In such cases where the move is to a foreign country, the moving expense reimbursement will be viewed as attributable to and compensation for future services to be performed by the employee for the employer in the foreign country in the year of the move and, if such employee does not qualify under section 911 of the Code for the entire taxable year of the move, the entire taxable year (or portion thereof eligible for section 911 treatment if less than an entire taxable year) immediately succeeding the year of the move.

At times, however, an employee will be reimbursed for moving expenses by an employer for whom the employee will no longer be working after the move. In such cases where the move is from a foreign country, the moving expense reimbursement will be viewed as attributable to and compensation for past services performed by the employee for the employer in the foreign country in the year of the move and, if such employee does not qualify under section 911 of the Code for the entire taxable year in which the move took place, then the reimbursement will be considered partly attributable to services performed in the preceding year or portion thereof during which the employee qualified under section 911.

The conclusions set forth below apply the foregoing to the factual situations presented.

Situation (1). A's moving expenses are allocable to or chargeable against income from sources outside the United States. Thus, A's allowable moving expenses are deductible under section 217 of the Code, as limited by section 217(b)(3), except to the extent such expenses are allocable to or chargeable against earned income excluded from gross income for the taxable year 1972 under section 911. The moving expense reimbursement received by A in 1972 is gross income under section 82 and is attributable to services performed in a foreign country in 1972. Thus, such amount constitutes income from sources without the United States and is eligible for the earned income exclusion under section 911. To the extent not excludable, such amount is includible in A's gross income in the year received (1972). As provided in sections 3401(a)(8)(A)(i) and 3401(a)(15), that portion of such reimbursement in excess of an amount excludable from A's gross income under section 911 will not be subject to withholding under section 3401 to the extent that, at the time of payment, it is reasonable to believe that a corresponding deduction is allowable under section 217. A's moving expense deduction, the reimbursement he received for moving expenses, and the withholding with respect to such reimbursement, are computed for his 1972 taxable year as follows:

Compensation for services                            $19,000
Add reimbursed  moving expenses                        6,000
                                                     -------
Total earned income                                  $25,000
Earned income excludable under section 911(c)(1)(A)  $20,000
                                                     -------
Total gross income                                            $5,000
Unallowable moving expense deduction:
                        $20,000 / $25,000 X $6,000 = $ 4,800
                                                     =======
Total earned income                                  $25,000
Less: Allowable moving expense deduction
  ($6,000 - $4,800)
    = $1,200                                           1,200
  Earned income exclusion allowed under section
  911(c)(1)(A)
                       20,000                         21,200
                       ------                        -------
Amount subject to withholding                        $ 3,800
                                                     =======
Adjusted gross income                                         ------
                                                              $3,800
                                                              ======

If A had arrived in the foreign country on December 15, 1971, and had thereafter derived earned income in 1971 and 1972 from X in the foreign country, the portion of A's moving expenses allocable to or chargeable against earned income excluded under section 911 of the Code, and thus nondeductible, would be determined by multiplying the total moving expenses incurred by a fraction the numerator of which is the total amount of excluded income earned from the time the bona fide residence was first established (in 1971) in the foreign country to the end of the entire immediately succeeding taxable year (1972), and the denominator of which is the total amount of earned income during the same period. Also, in determining the excludability of A's moving expense reimbursement under section 911 and the total amount of excluded earned income for purposes of the numerator of the above fraction: (1) the portion of the moving expense reimbursement attributable to services performed in the foreign country in 1971 would be determined by multiplying the total moving expense reimbursement by a fraction the numerator of which is the number of A's bona fide residence days in the foreign country in 1971, and the denominator of which is the total number of A's bona fide residence days in that country in 1971 and 1972; and (2) the remaining portion of the moving expense reimbursement would be attributable to services performed in the foreign country in 1972. Under such circumstances, A's moving expense reimbursement is includible in his gross income in the taxable year received (1972) to the extent it is not excludable under section 911.

Situation (2). B's moving expenses are allocable to or chargeable against income from sources within the United States. Thus, B's allowable moving expenses are deductible under section 217 of the Code, as limited by section 217(b)(3). The moving expense reimbursement received by B is gross income under section 82 and is attributable to future services to be performed in the United States. Thus, such amount constitutes income from sources within the United States and is not eligible for the exclusion provided by section 911. As provided in section 3401(a)(15), B's moving expense reimbursement will not be subject to withholding under section 3402 to the extent that, at the time of payment, it is reasonable to believe that a corresponding deduction is allowable under section 217.

Situation (3). C's moving expenses are allocable to or chargeable against income from sources within the United States. Thus, C's allowable moving expenses are deductible under section 217 of the Code, as limited by section 217(b)(3). The moving expense reimbursement received by C is gross income under section 82 and is attributable to past services performed in a foreign country. Thus, such amount constitutes income from sources without the United States and is eligible for the earned income exclusion under section 911. To the extent not excludable, such amount is includible in C's gross income in the taxable year received.

In determining the excludability of the moving expense reimbursement under section 911 of the Code: (1) the portion of the moving expense reimbursement attributable to services performed in the foreign country in the taxable year of the move for purpose of the limitation on the amount excludable under section 911(c)(1) would be determined by multiplying the total moving expense reimbursement by a fraction the numerator of which is the number of C's bona fide residence days in the foreign country in that taxable year and the denominator of which is the total number of C's bona fide residence days in that country in the year of the move and the entire taxable year immediately preceding the year of the move; and (2) the remaining portion of the moving expense reimbursement would be attributable to services performed in the foreign country in the entire taxable year immediately preceding the year of the move.

As provided in sections 3401(a)(8)(A)(i) and 3401(a)(15) of the Code, that portion of C's moving expense reimbursement in excess of an amount excludable from his gross income under section 911 will not be subject to withholding under section 3402 to the extent that, at the time of payment, it is reasonable to believe that a corresponding deduction is allowable under section 217.

Situation (4). D would not be entitled to a deduction for his moving expenses under section 217 of the Code since he is not moving to a new principal place of work. The moving expense reimbursement received by D is gross income under section 82 and is attributable to past services performed in a foreign country. Thus, such amount constitutes income from sources without the United States and is eligible for the earned income exclusion under section 911. The excludability of D's moving expense reimbursement is determined in the same manner as provided in Situation (3) above. To the extent not excludable, such amount is includible in D's gross income in the taxable year received. That portion of D's moving expense reimbursement in excess of an amount excludable from his gross income under section 911 is subject to withholding under section 3402.

The principles set forth herein with respect to an individual citizen of the United States who satisfies the "bona fide resident" test under section 911(a)(1) of the Code are equally applicable to an individual citizen of the United States who satisfies the "presence" test under section 911(a)(2).