rr-05-03.pdf

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Part 1

Section 901.—Taxes of Foreign Countries and of Possessions of United States.

Rev. Rul. 2005-3

This ruling sets forth guidance regarding the application of section 901(j) of the
Internal Revenue Code (Code) with respect to Libya and the application of
section 911(d)(8) of the Code with respect to Iraq and Libya. This ruling modifies
and supersedes Rev. Rul. 95-63, 1995-2 C.B. 85, which lists countries subject to
special tax rules under sections 901(j) and 952(a)(5) of the Code, and also
supersedes Rev. Rul. 2004-103, 2004-45 I.R.B. 783, which modified Rev. Rul.
95-63. This ruling also modifies and supersedes Rev. Rul. 92-63, 1992-2 C.B.
195, which lists countries subject to section 911(d)(8) of the Code.

SECTION 901(j)

LAW AND ANALYSIS

Sections 901, 902, and 960 of the Code generally allow U.S. taxpayers to claim a
foreign tax credit for income, war profits, and excess profits taxes paid or accrued
(or deemed paid or accrued) to any foreign country or to any possession of the
United States. The foreign tax credit is subject to various limitations and
restrictions under section 901.

Section 901(j)(1) imposes restrictions in the case of income and taxes
attributable to certain countries. Section 901(j)(1)(A) denies the credit for taxes
paid or accrued (or deemed paid or accrued under sections 902 or 960) to any
country described in section 901(j)(2)(A) if the taxes are with respect to income
attributable to a period during which section 901(j) applies. Section 901(j)(1)(B)
requires taxpayers to apply subsections (a), (b), and (c) of section 904 and
sections 902 and 960 separately with respect to income attributable to such a
period from sources within such country. In addition, section 952(a)(5) provides
that subpart F income includes income derived by a controlled foreign
corporation from any foreign country during any period during which section
901(j) applies to that foreign country.

Pursuant to section 901(j)(5), the restrictions of section 901(j)(1) will not apply
with respect to a country if the President determines that a waiver of the
application of that paragraph is in the national interest of the United States and
will expand trade and investment opportunities for U.S. companies in such
country. This provision provides for the President, not less than 30 days before

2
the date on which a waiver is granted, to report to Congress the intention to grant
such a waiver and the reason for the determination under section 901(j)(5)(A)(i).

The President issued Presidential Determination 2004-48 on September 20,
2004. In that Presidential Determination, the President determined that a
waiver of the application of section 901(j)(1) with respect to Libya is in the
national interest of the United States and will expand trade and investment
opportunities for U.S. companies in Libya. The Presidential Determination
directed the Secretary of the Treasury to report to Congress, in accordance
with section 901(j)(5)(B), the President’s intention to grant the waiver and
the reasons for the determination. The Secretary of the Treasury submitted
such report to Congress on October 7, 2004.

On December 10, 2004, the President issued Presidential Determination 2005-12
which waives the application of section 901(j)(1) with respect to Libya. Pursuant
to Presidential Determination 2005-12, sections 901(j)(1) and 952(a)(5) no longer
apply to Libya, effective December 10, 2004. Therefore, United States taxpayers
may be entitled to claim a foreign tax credit for income, war profits, and excess
profits taxes paid or accrued (or deemed paid or accrued under sections 902 and
960) to Libya, with respect to income attributable to the period beginning after
December 9, 2004.

HOLDING AND EFFECTIVE DATES

Sections 901(j)(1) and 952(a)(5) apply to the following countries for the following
periods:

Country Starting Date Ending Date
Afghanistan January 1, 1987 August 4, 1994
Albania January 1, 1987 March 15, 1991
Angola January 1, 1987 June 18, 1993
Cambodia January 1, 1987 August 4, 1994
Cuba January 1, 1987 still in effect
Iran January 1, 1987 still in effect
Iraq February 1, 1991 June 27, 2004
Libya January 1, 1987 December 9, 2004
North Korea January 1, 1987 still in effect
South Africa January 1, 1988 July 10, 1991
Sudan February 12, 1994 still in effect
Syria January 1, 1987 still in effect
Vietnam January 1, 1987 July 21, 1995
People's Democratic

Republic of Yemen January 1, 1987 May 22, 1990

For guidance on issues arising in a taxable year when section 901(j) ceases to
apply to a country, see Rev. Rul. 92-62, 1992-2 C.B. 193.

3
SECTION 911

LAW AND ANALYSIS

Section 911(a) of the Code allows a "qualified individual" to elect to exclude from
gross income his or her "foreign earned income" (as defined in section 911(b))
and "housing cost amount" (as defined in section 911(c)). Section 911(d)(1)
generally defines a "qualified individual" as a citizen or resident of the United
States whose tax home is in a foreign country and who meets certain
requirements of residence or presence in a foreign country.

Section 911(d)(8)(A) provides generally that if travel with respect to any foreign
country (or any transaction in connection with such travel) is proscribed by
certain regulations during any period, then: (1) foreign earned income does not
include income from sources within that country attributable to services
performed during that period; (2) housing expenses do not include any expenses
allocable to such period for housing in that country, or for housing of the
taxpayer's spouse or dependents in another country while the taxpayer is present
in that country; and (3) an individual is not treated as a bona fide resident of, or
as present in, a foreign country for any day during which the individual was
present in that country.

Section 911(d)(8)(B) provides that the regulations described in section 911(d)(8)
are those that have been adopted pursuant to the Trading With the Enemy Act,
50 U.S.C. App. 1 et seq., or the International Emergency Economic Powers Act,
50 U.S.C. 1701 et seq., and that include provisions generally prohibiting citizens
and residents of the United States from engaging in transactions related to travel
to, from, or within a foreign country. Section 911(d)(8)(C), however, provides that
the limitations of section 911(d)(8)(A) do not apply to any individual during any
period in which that individual's activities are not in violation of the regulations
described in section 911(d)(8)(B).

Rev. Rul. 92-63, 1992-2 C.B. 195, identifies three countries subject to regulations
described in section 911(d)(8)(B): Cuba (31 C.F.R. 515.560) (1989), Libya (31
C.F.R. 550.207) (1989), and Iraq (31 C.F.R. 575.207) (1991).

On July 29, 2004, the President issued Executive Order 13350 which effectively
lifted the sanctions against Iraq effective July 30, 2004. On September 20, 2004,
the President issued Executive Order 13357 which effectively lifted the sanctions
against Libya, effective September 21, 2004.

4
HOLDING AND EFFECTIVE DATES

Section 911(d)(8) applies to the following countries for the following periods:

Country Starting Date Ending Date
Cuba January 1, 1987 still in effect
Libya January 1, 1987 September 20, 2004
Iraq August 2, 1990 July 29, 2004

With respect to periods prior to (or ending on) the ending dates listed above for
Libya and Iraq, individuals whose activities in Libya and Iraq were not in violation
of the regulations described in section 911(d)(8)(B) are not subject to the
limitations of section 911(d)(8). See, e.g., Notice 2003-52, 2003-2 C.B. 296,
which states that pursuant to section 911(d)(8)(C), the limitations of section
911(d)(8)(A) do not apply to individuals engaged in activities in Iraq that are
permitted by a specific or general license issued by the United States
Department of Treasury Office of Foreign Assets Control.

EFFECT ON OTHER ADMINISTRATIVE GUIDANCE

This ruling modifies and supersedes Rev. Rul. 95-63, 1995-2 C.B. 85, and
supersedes Rev. Rul. 2004-103, 2004-45 I.R.B. 783, with respect to the list of
countries for which section 901(j) is applicable. This ruling modifies and
supersedes Rev. Rul. 92-63, 1992-2 C.B. 195, with respect to the list of countries
for which section 911(d)(8) is applicable.

DRAFTING INFORMATION

The principal author of this revenue ruling is Mark R. Pollard of the Office of
Associate Chief Counsel (International). For further information regarding this
revenue ruling, contact Mr. Pollard at (202) 622-3850 (not a toll-free call).