Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 79-28

1979-1 C.B. 457

Section 861
Section 901

IRS Headnote

Japan; income source; foreign tax credit. Compensation received by a U.S. citizen residing in Japan for services performed as a flight crew member on international flights for a Japanese airline, including the portion attributable to services performed within the U.S., is treated as income from sources within Japan for purposes of computing the foreign tax credit provided in Article 5(1)(a) of the United States-Japan Income Tax Convention.

Full Text

Rev. Rul. 79-28

ISSUE

Where is the compensation for personal services received by a United States citizen residing in Japan sourced for purposes of computing the foreign tax credit provided in Article 5(1)(a) of the United States-Japan Income Tax Convention ("Treaty"), 1973-1 C.B. 630?

FACTS

The taxpayer, a United States citizen residing in Japan, is a member of an international flight crew of a Japanese airline operating aircraft to and from Alaska from points around the world. The taxpayer performed personal services that consisted of actual flight time services and preflight services. The taxpayer performed some of these services within the United States. The compensation paid to the taxpayer for these services was subject to Japanese income taxes under Article 18(1) of the Treaty. Pursuant to Article 5(1)(a), the taxpayer claimed a foreign tax credit on the federal income tax return for 1977 for the amount of Japanese income taxes the taxpayer paid on the compensation received in that year.

LAW AND ANALYSIS

Article 5(1)(a) of the Treaty provides for a credit against United States taxes for the appropriate amount of Japanese tax paid by a citizen or resident of the United States in accordance with the provisions of the law of the United States. Article 5(1)(a) provides further that when applying the United States tax credit in relation to taxes paid to Japan, the rules set forth in Article 6 shall be applied to determine the source of income.

Article 6(6) of the Treaty provides that income from labor or personal services performed aboard aircraft operated by a resident of Japan in international traffic shall be treated as income from sources within Japan, if rendered by a member of the regular complement of the aircraft.

Article 4(3) of the Treaty contains a "savings clause," which provides that the Treaty shall not affect the taxation by the United States of its citizens and residents. This clause is qualified by Article 4(4)(a) which states that the benefits provided under Articles 5, 7, 21, and 25 shall not be affected by the savings clause.

Article 5(1)(a) of the Treaty is specifically exempted from the effect of the savings clause. It provides that the income source rules of Article 6 are to be used in computing the United States foreign tax credit. Therefore, these special source rules are available to a United States citizen in computing the allowable credit under section 901 of the Internal Revenue Code of 1954. Because the taxpayer is a resident of Japan, the compensation received as a flight crew member for services performed aboard the aircraft of the Japanese airline on international flights shall be treated as income from sources within Japan, including the portion of the compensation attributable to services rendered within the United States.

Article 6 of the Treaty is not specifically exempted by Article 4(4) from the effect of the savings clause because Article 6 is specifically incorporated by reference in Article 5 that is itself specifically exempted from the savings clause. The purpose of Article 6 is not to bestow benefits under the Treaty, but rather to provide rules to be used by both countries in determining the source of specific types of income in situations when the Treaty applies. Therefore, Article 6 itself is not specifically listed as exempt from the effect of the savings clause.

In the present situation, an airline crew member taxed by Japan on income that would be sourced in the United States under section 861(a)(3) of the Code but is sourced in Japan under Article 6(6) of the Treaty may claim a credit for the Japanese tax against his United States taxes. See Rev. Rul. 77-167, 1977-1 C.B. 239. This potential conflict between the source rules of the Code and the Treaty was anticipated.

S. Exec. Rep. No. 92-12, in discussing the then proposed Treaty, states that the Treaty follows in substance several other recent treaties by providing that income that is taxed by Japan pursuant to the Treaty will be treated for purposes of the foreign tax credit as income from sources within Japan. It further states that thus, a foreign tax credit will be available with respect to this income even though under the Code the income might have its source elsewhere, in which case a foreign tax credit would not be available if the source of the income was the United States. S. Exec. Rep. No. 92-12, 92d Cong., 1st Sess. 13-14 (1971). The special source rules of the Treaty thus take precedence over the source rules of the Code, even in the case of United States taxation of a United States citizen.

HOLDING

The compensation received by a United States citizen residing in Japan for services performed as a flight crew member aboard the aircraft of a Japanese airline on international flights including the portion of the compensation attributable to services rendered within the United States shall be treated as income from sources within Japan under Article 6(6) of the Treaty for purposes of computing the foreign tax credit provided in Article 5(1)(a). However, the normal source of income rules provided in section 861(a)(3) of the Code with respect to compensation for personal services are applicable for all other purposes such as section 911.