Rev Rul 2005-3, 2005-3 IRB IRS has updated the list of countries subject to the special foreign tax credit and other restrictions of Code Sec. 901(j) to reflect the recent waiver of such restrictions with respect to Libya. IRS previously issued guidance reflecting the removal of Iraq from this list (see RIA Weekly Alert Newsletter 10/28/2004). In addition, the new guidance updates the list of countries subject to the Code Sec. 911(d)(8) limitations on the foreign earned income exclusion to reflect the recent removal of travel-related restrictions with respect to Iraq and Libya.
Background on foreign tax credit restrictions. Under Code Sec. 901(j), no foreign tax credit is available for taxes paid to certain countries with which the U.S. does not maintain diplomatic relations, or which are designated by the State Department as countries which support international terrorism. A list of countries described in Code Sec. 901(j)(2)(A) and the periods for which they are subject to the Code Sec. 901(j) restrictions and related provisions is provided in Rev Rul 95-63, 1995-2 CB 85.
Restrictions waived for Libya. On Dec. 10, 2004, the President issued Presidential Determination 2005-12 waiving the application of Code Sec. 901(j)(1) with respect to Libya. Thus, U.S. 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) to Libya, with respect to income attributable to the period beginning after Dec. 9, 2004. Rev Rul 92-62 is modified to reflect this determination.
Background on foreign earned income exclusion. An individual who has a tax home in a foreign country and satisfies either the bona fide foreign residence test or the foreign physical presence test (qualified individual) may elect to exclude $80,000 of his foreign earned income from gross income in a tax year. A qualified individual may also separately elect to exclude or deduct the foreign housing cost amount paid or incurred during a tax year in which the bona fide foreign residence or foreign physical presence test is met. (Code Sec. 911) However, if U.S. government regulations issued under the Trading with the Enemy Act or the International Emergency Economic Powers Act prevent U.S. citizens and residents from engaging in travel (or transactions related to travel) to, from or within a foreign country during a period of time, income from sources within that country for services performed during that period won't be foreign earned income for purposes of Code Sec. 911 . (Code Sec. 911(d)(8)(A)) Rev Rul 92-63, 1992-2 CB 195 identifies three countries subject to such regulations: Cuba, Libya, and Iraq.
Removal from list. On July 29, 2004, the President issued Executive Order 13350 which effectively lifted the sanctions against Iraq effective July 30, 2004. On Sept. 20, 2004, the President issued Executive Order 13357 which effectively lifted the sanctions against Libya, effective Sept. 21, 2004. Thus, Rev Rul 2005-3 modifies Rev Rul 92-63 to reflect the lifting of the sanctions against Iraq and Libya. Code Sec. 911(d)(8) applies to the Libya from Jan. 1, '87 through Sept. 20, 2004 and Iraq from Aug. 2, '90 through July 29, 2004. (It remains in effect for Cuba from Jan. 1, '87.) Note, however, that with respect to periods prior to (or ending on) the ending dates for Libya and Iraq, individuals whose activities in these countries were not in violation of the regulations referred to above are not subject to the limitations of Code Sec. 911(d)(8) . For example, as stated in Notice 2003-52, 2003-2 CB 296, those limitations don't 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.
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