Rev. Rul. 69-238

Advice has been requested whether a United States citizen, who is employed abroad and eligible for the benefits of section 911(a)(1) of the Internal Revenue Code of 1954, must allocate the allowance described below between income attributable to sources within and without the United States.

The taxpayer, employed by a domestic corporation, has established a bona fide residence in a foreign country. In addition to his annual salary, the taxpayer received an annual allowance that was intended to compensate him for the additional cost of living abroad. During 1968 he was compensated for 240 work days. He spent 180 work days abroad and 60 work days in the United States.

The taxpayer's contract of employment did not provide for an accurate allocation or segregation of compensation for services performed within and without the United States, nor did it indicate that he was not entitled to the cost of living allowance while in the United States.

Section 911(a)(1) of the Code provides, in pertinent part, that a citizen of the United States who establishes that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, may exclude from his gross income amounts received from sources without the United States which constitute earned income attributable to services performed during such uninterrupted period. The amount excluded is limited under section 911(c) of the Code.

Section 911(b) of the Code, provides that the term "earned income" includes wages, salaries, and other amounts received as compensation for personal services actually rendered.

Section 1.911-2(c)(4) of the Income Tax Regulations provides, in part, that no amount received for services performed within the United States shall be excluded from gross income under section 911(a) or (b) of the Code. Further, for the purpose of allocating income from sources within and without the United States the rules provided by sections 861, 862, 863, and 864 of the Code and applicable regulations thereunder are to be followed.

Section 1.861-4(b) of the regulations provides, in part, that if no accurate allocation or segregation of compensation for personal services within the United States can be made or when such service is performed partly within and partly without the United States, the amount to be included in gross income shall be determined by an apportionment on the time basis.

In the instant case, 180 days or 75 percent (180/240) of the taxpayer's work days were spent abroad and 60 days or 25 percent (60/240) of his work days were spent in the United States. Since the taxpayer was not paid a specific amount for his services in the United States it is necessary to make an allocation of his compensation in order to determine the amount of his income from United States sources. The amount paid as a cost of living allowance will be included as part of his compensation for this purpose since his employment contract did not indicate that he was not entitled to this allowance while he was in the United States.

Accordingly, in the instant case the cost of living allowance as well as the regular salary received by the taxpayer must be allocated between the time he spent working in the United States and the time he spent working abroad when determining the source of income for the purpose of section 911(a) of the Code.