Rev. Rul. 57-379

Advice has been requested as to the method of computation of gross income in a case in which the taxpayer has received in the current year certain payments attributable to blocked foreign income of prior years.

In the instant case, the taxpayer had received blocked foreign income for the years 1952, 1953, and 1954. Under the provisions of Mimeograph 6475, C.B. 1950-1, 50, he elected to defer the payment of tax on such income until the year and to the extent that it no longer qualified as deferable income. In 1955, the taxpayer received certain payments attributable to the blocked foreign income. The Internal Revenue Service has been asked to determine the manner in which such payments should be included in gross income.

Mimeograph 6475, supra , as amended by Mimeograph 6494, C.B. 1950-1, 54, and Mimeograph 6584, C.B. 1951-1, 19, which sets forth the treatment of blocked foreign income for Federal income tax purposes, provides under its terms and conditions for the deferment of Federal taxation where the taxpayer has made an election to use a method of accounting in which the reporting of `deferable income' as taxable income is deferred until the income ceases to be `deferable income.'

An underlying principle of the Mimeograph is that deferred income which ceases to be deferable, reduced by the dollar costs attributable thereto, is income subject to Federal taxation. Under the provisions of the Mimeograph, the taxpayer's gross receipts of blocked foreign currency is reported and its costs in terms of such currency are subtracted. From the foreign currency gross income so computed the expenses incurred in terms of the foreign currency are deducted, the results being foreign currency net income. When any part of such net income ceases to be deferable, it is reduced by the dollar costs attributable thereto, the remainder being included in the taxpayer's gross income from which the dollar direct expenses, to the extent authorized by the Mimeograph, are, in turn, deducted. The income thus reported, together with such deductions, will be verified against the taxpayer's returns of `deferable income' which were previously filed. Such expenses will be deductible in any subsequent taxable year in the same proportion as the `deferable income' is includible in taxable income.

It is the position of the Internal Revenue Service that where a taxpayer has elected to defer the reporting of deferable income as taxable income in accordance with the provisions of Mimeograph 6475, a partial remittance of unblocked foreign income from prior years shall be included in taxable income, with proper deductions allocated thereto, in the year it is unblocked on the basis of first-in first-out, so that such remittance shall be regarded as part of the earliest blocked income.