REVENUE RULE 91-58

1991-2 C.B. 340, 1991-44 I.R.B. 4.

Internal Revenue Service
Revenue Ruling

FOREIGN SOURCE EARNED INCOME; TREATIES; NONDISCRIMINATION CLAUSE; RESIDENT ALIENS

Published: November 4, 1991

Section 911 Citizens or Residents of the United States Living Abroad., 26 CFR 1.911-2: Qualified Individuals.

(See Also Sections 871, 7701; 1.871-2.)

Foreign source earned income; treaties; nondiscrimination clause; resident aliens. Nationals of the United Kingdom who are residents in the U.S. within the meaning of section 7701(b) of the Code many qualify for the benefits provided by section 911 by satisfying the bona fide residence test of section 911(d)(1)(A). Rev. Ruls. 72-330 and 72-598 obsoleted. [Full text in this issue.]

ISSUE

May nationals of the United Kingdom who are residents of the United States within the meaning of section 7701(b) of the Code qualify for the exclusions and deduction provided by section 911 by establishing that they have been bona fide residents of a foreign country or countries for an uninterrupted period that includes an entire taxable year.

FACTS

X is a domestic corporation that provides specialized services in the United States and foreign countries. X employees nationals (citizens) of the United Kingdom whose tax homes are in the United Kingdom whose tax homes are in the United Kingdom or other foreign countries. Although these nationals are employed by X in the United Kingdom and other foreign countries, they are residents of the United States, within the meaning of section 7701(b) of the Internal Revenue Code of 1986.

LAW AND ANALYSIS

Section 911 of the Code provides that a "qualified individual" may elect to exclude or deduct certain amounts from gross income. A citizen of the United States is a qualified individual if either of the following tests is met: (1) the individual's tax home is in a foreign country and the individual establishes to the satisfaction of the Secretary that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year (the "bona fide residence test"); or (2) the individual's tax home is in a foreign country and, during any period of 12 consecutive months, he or she is present in a foreign country or countries during at least 330 full days in such period (the "physical presence test"). Section 911(d)(1). The determination of whether a United States citizen is a bona fide resident of a foreign country is made by applying the principles of section 871 and the regulations thereunder. Section 1.911-2(c) of the Income Tax Regulations. By its terms, section 911(d)(1)(B) provides that an alien resident of the United States is a qualified individual only if he or she satisfies the requirements of the physical presence test.

Prior to the Foreign Earned Income Act of 1978 (the 1978 Act), section 911 of the Code by its terms applied only to citizens of the United States. An alien individual resident in the United States could be a qualified individual under the physical presence test, as then in effect, only under the non- discrimination article in certain income tax treaties between the United States and foreign countries. Rev. Rul. 72-330, 1972-2 C.B. 444, as amplified by Rev. Rul. 72-598, 1972-2 C.B. 451. Rev. Rul. 72-330 provides that the non- discrimination article in a particular treaty will be applied without regard to the saving clause in such treaty absent a specific treaty provision or a provision of the regulations under the treaty to the contrary. Accordingly, Rev. Rul. 72-330 holds that under the non-discrimination articles of United States income tax treaties with foreign countries set forth therein, citizens of those countries who are resident aliens of the United States may qualify for the section 911 exclusion under the physical presence test.

The 1978 Act changed the eligibility requirements of section 911 of the Code by providing that an alien individual resident in the United States may qualify for the benefits provided for by section 911 (and section 913 before its repeal in 1981) by satisfying the physical presence test set forth in section 913(a)(2). As a practical matter, prior to the Deficit Reduction Act of 1984 (the 1984 Act), the bona fide residence test could not apply to United States resident aliens because, under the residency rules of section 1.871-2(b) of the regulations, an individual could not be both a bona fide resident of a foreign country for purposes of section 911 and a resident of the United States.

The 1984 Act added new section 7701(b) of the Code to provide a statutory definition of a resident alien. Pursuant to section 7701(b), an alien individual shall be treated as a resident of the United States if the individual is a lawful permanent resident of the United States at any time during the calendar year, the individual meets the substantial presence test set forth in section 7701(b)(3), or the individual makes the election provided in section 7701(b)(4). The new rules do not apply for purposes of determining whether a person is a bona fide resident of a foreign country for purposes of section 911. As a result, it now is possible to be both a resident of the United States pursuant to section 7701(b) and a bona fide resident of a foreign country under section 1.871-2(b) of the regulations for purposes of section 911.

The principles set forth in Rev. Rul. 72-330 are applicable to the instant situation. Therefore, absent a specific treaty provision or a provision of the regulations under the treaty to the contrary, the non-discrimination article in a United States income tax treaty will be applied without regard to the saving clause in the treaty.

Paragraph (1) of Article 24 (Non-discrimination) of the United States-United Kingdom Income Tax Convention (the Treaty), 1980-1 C.B. 394, 31 UST 2355, TIAS 5726, provides that individuals who are nationals of a Contracting State and who are residents of the other Contracting State shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. Paragraph (3) (Personal Scope) of the Treaty contains the saving clause and provides that a Contracting State may tax its residents and its nationals as if the Treaty had not come into effect. However, paragraph (4) of Article I of the Treaty provides, in part, that the savings clause shall not affect the application of Article 24 (Non-discrimination).

Because citizens of the United States may be treated as qualified individuals for purposes of section 911(d) of the Code under either the bona fide residence test or the physical presence test, requiring nationals of the United Kingdom to satisfy the physical presence test subjects them to a requirement connected with section 911 which is more burdensome than the taxation and connected requirements to which citizens of the United States in the same circumstances are subjected. Accordingly, nationals of the United Kingdom must be treated as qualified individuals for purposes of section 911 if they satisfy the requirements of the bona fide residence test.

HOLDING

Nationals of the United Kingdom who are residents of the United States within the meaning of section 7701(b) of the Code may qualify for the exclusions and deduction provided by section 911 by establishing to the satisfaction of the Secretary that they have been bona fide residents of a foreign country or countries under the residency rules of section 1.871-2(b) of the regulations for a period that includes an entire taxable year. The conclusions reached in this revenue ruling are also applicable to all United States income tax treaties now in effect.

1. Australia, 1986-2 C.B. 220, TIAS 10773

2. Austria, 1957-2 C.B. 985, 8 UST 1699, TIAS 3923

3. Barbados, (signed December 31, 1984; entered into force February 28, 1986)

4. Belgium, 1973-1 C.B. 619, 23 UST 2687, TIAS 7463

5. Canada, 1986-2 C.B. 258 (signed September 26, 1980; entered into force August 16, 1984)

6. Cyprus, 1989-2 C.B. 280 (signed March 19, 1984; entered into force December 31, 1985)

7. Denmark, T.D. 5777, 1950-1 C.B. 76, 62 Stat. 1730, TIAS 1854

8. Egypt, 1982-1 C.B. 219, 33 UST 1809, TIAS 10149

9. Finland, S. Treaty Doc. No. 101-11, 101st Cong., 1st Sess. (1989) (signed September 21, 1989; entered into force December 30, 1990)

10. France, 1968-2 C.B. 691, 19 UST 5280, TIAS 6518

11. The Federal Republic of Germany, S. Treaty Doc. No. 101-10, 101st Cong., 2d Sess. (1991) (signed August 29, 1989; entered into force August 21, 1991)

12. Greece, 1958-2 C.B. 1054, 5 UST 47, TIAS 2902

13. Hungary, 1980-1 C.B. 333, 30 UST 6357, TIAS 9560

14. Iceland, 1976-1 C.B. 442, 26 UST 2004, TIAS 8151

15. India, S. Treaty Doc. No. 101-5. 101st Cong., 1st Sess. (1989) (signed September 12, 1989; entered into force December 18, 1990)

16. Indonesia, S. Treaty Doc. No. 100-22, 100th Cong., 2d Sess. (1988) (signed July 11, 1988; entered into force December 30, 1990)

17. Ireland, 1958-2 C.B. 1060, 2 UST 2303, TIAS 2356

18. Italy, (signed April 17, 1984; entered into force December 30, 1985)

19. Jamaica, 1982-1 C.B. 257, 33 UST 2865, TIAS 10206

20. Japan, 1973-1 C.B. 630, 23 UST 967, TIAS 7365

21. Korea, 1979-2 C.B. 435, 30 UST 5253, TIAS 9506

22. Luxembourg, 1965-1 C.B. 615, 15 UST 2355, TIAS 5726

23. Malta, 1984-2 C.B. 339, TIAS 10567

24. Morocco, 1982-2 C.B. 405, 33 UST 2545, TIAS 10194

25. The Netherlands, T.D. 5778, 1950-1 C.B. 92, 62 Stat. 1757, TIAS 1855, (as amended by supplementary treaty, 1967-2 C.B. 472, 17 UST 896, TIAS 6051)

26. New Zealand, 1990-2 C.B. 274, TIAS 10772

27. Norway, 1973-1 C.B. 669, 23 UST 2832, TIAS 7474

28. Pakistan, 1960-2 C.B. 646, 10 UST 984, TIAS 4232

29. People's Republic of China, 1988-1 C.B. 414 (signed April 30, 1984; entered into force November 21, 1986)

30. The Philippines, 1984-2 C.B. 384, TIAS 10417

31. Poland, 1977-1 C.B. 416, 28 UST 891, TIAS 8486

32. Romania, 1976-2 C.B. 492, 27 UST 165, TIAS 8228

33. Spain, S. Treaty Doc. No. 101-16, 101st Cong., 2d Sess. (1990) (signed February 22, 1990; entered into force November 21, 1990)

34. Sweden, 1940-2 C.B. 43, 54 Stat. 1759, TS-958 (as amended by supplementary treaty, 1965-1 C.B. 626, 15 UST 1824, TIAS 5656)

35. Switzerland, T.D. 6149, 1955-2 C.B. 814, 2 UST 1751, TIAS 2316

36. Trinidad and Tobago, 1971-2 C.B. 479, 22 UST 164, TIAS 7047

37. Tunisia, S. Treaty Doc. No. 99-13, 99th Cong., 2d Sess. (1986) (signed June 17, 1985; entered into force December 31, 1990)

38. Union of Soviet Socialist Republics, 1976-2 C.B. 463, 27 UST 1, TIAS 8225

DRAFTING INFORMATION

The principal author of this revenue ruling is Willard W. Yates of the Office of the Associate Chief Counsel (International), Internal Revenue Service. For further information regarding this revenue ruling contact Mr. Yates on (202) 566-3452 (not a toll-free call)

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 72-330 and Rev. Rul. 72-598 are obsolete.

Rev. Rul. 91-58, 1991-2 C.B. 340, 1991-44 I.R.B. 4.