Rev. Rul. 59-278

Advice has been requested concerning the excludability from gross income of pension payments received, by a resident citizen beneficiary under an employees' funded pension plan, in taxable years beginning after December 31, 1950, where such pension payments are wholly or partly for services rendered outside the United States by the employee during a period of bona fide residence in a foreign country or countries, in view of the words "attributable to such period" first added to section 116(a)(1) of the Internal Revenue Code of 1939 (section 911(a)(1) of the 1954 Code), effective for taxable years beginning after December 31, 1950, by section 321 (a) and (c) of the Revenue Act of 1951, 65 Stat. 452, 26 USC 12.

Revenue Ruling 56-125, C.B. 1956-1, 627, holds that, for taxable years beginning after December 31, 1950, and subject to the Internal Revenue Code of 1939, annuity payments made to a resident citizen beneficiary, under and pursuant to an employees' funded pension or annuity plan which meets the requirements of section 165(a) of the 1939 Code, to the extent they represent the employer's contributions made under the plan on account of the employee's services during an uninterrupted period (which includes an entire taxable year) of bona fide residence in a foreign country or countries, may be considered as earned income attributable to such period within the meaning of section 116(a)(1) of the 1939 Code (section 911(a)(1) of the 1954 Code) and, as such, may be excluded from gross income as "consideration paid" for the annuity under section 22(b)(2)(B) of the 1939 Code.

However, the exclusion from gross income provided by section 911(a)(1) of the 1954 Code, and the corresponding provision of prior revenue laws, of certain amounts constituting earned income received from sources without the United States, was first added to the internal revenue laws, effective January 1, 1925, by section 213(b)(14) of the Revenue Act of 1926, 44 Stat. 9, 26 USC 3200.

In Revenue Ruling 56-571, C.B. 1956-2, 982, 17, it was held, in substance, that, for taxable years beginning after December 31, 1950, the amounts of annuity payments received by a resident citizen beneficiary under an employees' funded pension or annuity plan which may be considered as earned income attributable to the employee's services rendered outside the United States and, as such, excluded from gross income by the distributee as "consideration paid" for the annuity would be limited to employer contributions made on or after January 1, 1925 with respect to services rendered by the employee outside the United States during a period beginning on or after that date when the employee was entitled to the earned income exclusion provided by either section 213(b)(14) of the Revenue Act of 1926, or a corresponding provision of subsequent law.

The italicized portion of the preceding paragraph, which is a direct quotation from Revenue Ruling 56-571, supra, has now been found to be more restrictive than is warranted by the applicable provisions of internal revenue law in that it limits the scope or application of section 213(b)(14) of the Revenue Act of 1926, supra, and the corresponding subsequent provisions of internal revenue law, to services rendered outside the United States after the effective date of such act. See I.T. 2274 and I.T. 2285, C.B. V-1, 50 and 51, respectively, (1926); I.T. 2293, C.B. V-2, 33 (1926); and G.C.M. 9848, C.B. X-2, 178 (1931).

Accordingly, it is held that, for taxable years beginning after December 31, 1950, the amounts of annuity payments received by or made available to a resident citizen beneficiary, under an employees' funded pension or annuity plan, which may be excluded from gross income by the distributee as "consideration paid" for the annuity includes that portion of each such annuity payment which represents "earned income" within the meaning of section 911(b) of the 1951 Code and the corresponding provision of prior internal revenue laws, attributable to services rendered outside the United States by the employee during a period of bona fide residence in a foreign country or countries within the meaning of section 911(a)(1) of the 1954 Code, or the corresponding provision of prior internal revenue laws. The portion of each such annuity payment which represents such earned income is the portion attributable to such contributions, not in excess of reasonable compensation with respect to services rendered outside the United States by the employee, as were made by the employer to a trust or insurer under and pursuant to the pension or annuity plan (1) after December 31, 1924, and prior to January 1, 1943, during a year when the employee was a bona fide nonresident of the United States for more than six months and (2) after December 31, 1942, and prior to a taxable year of the employee beginning on or after January 1, 1951, during a year when the employee was a bona fide resident of a foreign country or countries during the entire taxable year, and (3) during a taxable year of the employee beginning after December 31, 1950, which were attributable to services rendered outside the United States by the employee during an uninterrupted period (inclusive of an entire taxable year) when the employee was a bona fide resident of a foreign country or countries.

Revenue Ruling 56-125, supra, is hereby amplified.

Revenue Ruling 56-571, supra, is hereby superseded.

Amended regulations under the Internal Revenue Code of 1954 relating to the returns to be filed by individuals claiming an exclusion of certain income earned abroad. See T.D. 6426, page 90.