Rev. Rul. 85-29

1985-1 C.B. 223, 1985-11 I.R.B. 17.

INCOME SOURCE; AMOUNTS RECEIVED BY EMPLOYEE OF U.S. AGENCY PERFORMING

SERVICES IN A FOREIGN COUNTRY; U.S. AGENCY REIMBURSED BY THE FOREIGN COUNTRY

Published: March 18, 1985

Section 911.-Citizens or Residents of the United States Living Abroad, 26 CFR 1.911-1: Individuals qualifying for the exclusion

  Income source; amounts received by employee of U.S. agency performing services in a foreign country; U.S. agency reimbursed by the foreign country. Amounts received by a U.S. citizen and and an employee of the U.S. Corps of Engineers for services performed in a foreign country are not foreign earned income within the meaning of section 911 of the Code since the individual is an employee of, and paid by, the Corps even though the ultimate 'source' of such amounts is foreign. Rev. Rul. 80-78 clarified.

ISSUE

  Whether amounts paid by the United States government to one of its employees for services performed in a foreign country (FC), which are reimbursed to the United States government by the government of FC pursuant to an agreement

between the two governments, qualify as foreign earned income under section 911 of the Internal Revenue Code?

FACTS

  B is a United States citizen and an employee of the United States Corps of Engineers (the 'Corps'). During 1983, B was stationed in FC to perform construction management services under an agreement between the Corps and the government of FC. The agreement provides that the Corps will assume responsibility for the design and construction of numerous projects in FC. FC funded the projects in advance of their construction by depositing funds in a New York City bank. The funds are used by the Corps for expenses of the projects including the payroll expenses of project personnel such as B. No United States appropriated funds have been made available through the United States Congress to finance any part of the projects in FC.

  As an employee of the Corps B's salary is determined under the United States Civil Service regulations. While stationed in FC, B was paid by United States Treasury check which B arranged to have deposited directly to his account in a United States bank. B was subject to hiring, firing, and supervision by the Corps. B had no separate contract with the government of FC.

LAW AND ANALYSIS

  Section 911(a)(1) of the Code provides an elective exclusion from gross income of foreign earned income for qualified individuals. Section 911(b)(1)(B)(ii) provides that the foreign earned income for an individual shall not include amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof.

  Rev. Rul. 70-504, 1970-2 C.B. 204, describes a situation in which city police officers are assigned by the city to perform services for a theater owner. The officers remain under the direction and control of the city but they are paid directly by the theater owner. The ruling concludes that the fact the officers are paid by the theater owner does not in itself make them employees of the theater owner.

  Similarly, Rev. Rul. 68-494, 1968-2 C.B. 432, concludes that an individual who is placed in training with a company, which is reimbursed by a state for part of the individual's wages, is an employee of the company for federal employment tax purposes without regard to the fact that the company is partially reimbursed by the state. The ruling points out that the contract for services is between the company and the individual and the individual performs personal services for the company rather than the state.

  In Smith v. Commissioner, 701 F.2d 807 (9th Cir. 1983), aff'g, 77 T.C. 1181  (1981), the taxpayer, a United States Customs Service inspector, performed inspections on overtime for private airlines in the Bahamas. Customs inspectors on overtime were subject to hiring, firing, and supervision by the Customs Service and not by the airlines that requested their services. The court, therefore, concluded that the customs inspectors on overtime were considered employees of the United States and not of the airlines for purposes of section 911(a) of the Code.

  In the present case, B was subject to hiring, firing, and supervision by the Corps, and had no separate contract with the government of FC. Therefore, B is an employee of the Corps, and not of the government of FC.

  Further, although the government of FC reimburses the Corps for B's salary, B is paid by the Corps, and not by the government of FC. In Smith, the private airline companies in the Bahamas requesting the overtime services of U.S. Customs inspectors were required to pay a reasonable rate of compensation for such services, and to post a bond or deposit sufficient funds with the Customs Service for this purpose. The Ninth Circuit in Smith observed that 'the airlines' payment obligation is to the United States government, not to the individual customs inspector who performs the overtime services.' 701 F.2d at 808. Thus, the court held that the overtime pay received by the customs inspector was paid by the Customs Service, and was not excludable from his taxable income under section 911(a)(1) as compensation paid by the private airlines even though the private airlines were the ultimate sources of such compensation.

  Several other courts have also held that amounts received by a United States employee for performing services as a U.S. employee for a foreign government are not excludable from such employee's gross income under section 911(a) even though the ultimate 'source' of such amounts is foreign. Commissioner v. Mooneyhan, 404 F.2d 522, 527 (6th Circ. 1968), cert. denied, 394 U.S. 1001 (1969); Johnson v. United States, 390 F.2d 715, 717 (Ct. Cl. 1968); United States v. Johnson, 386 F.2d 824, 825 (5th Cir. 1967); Commissioner v. Wolfe, 361 F.2d 62, 67 (D.C. Cir.), cert. denied, 385 U.S. 838, (1966). Similarly, the amounts that B receives in the subject case from the Corps as compensation for services performed as an employee of the Corps in FC are considered paid by the Corps even though the ultimate source of such amounts is FC.

HOLDING

  Amounts received by B from the Corps for services performed in FC are not foreign earned income within the meaning of section 911 of the Code since B is an employee of, and paid by, the Corps.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 80-78, 1980-1 C.B. 171, as modified by Rev. Rul. 80-167, 1980-1 C.B. 176, holds that '(i)t remains the position of the Service that the exception in section 911(a) applies to ANY U.S. citizen, regardless of whether such citizen is a Civil Service or contract employee, who is paid by the United States or any agency thereof.' (Emphasis added). The taxable year at issue in Rev. Rul. 80-78 was prior to December 31, 1981.

  The Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, 1981-2 C.B. 256, amended section 911 to provide, in part, that for taxable years beginning after December 31, 1981, the exception to the foreign earned income exclusion under section 911(a) (for amount paid by the United States or an agency thereof) applies only to amounts paid to an EMPLOYEE of the United States or an agency thereof. Accordingly, Rev. Rul. 80-78, as modified is hereby clarified to indicate that, for taxable years beginning after December 31, 1981, the position of the Service is that the exception to the section 911(a) exclusion in section 911(b)(1)(B)(ii) applies only to amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof.

Rev. Rul. 85-29, 1985-1 C.B. 223, 1985-11 I.R.B. 17.