puting compensation for such services;

or

(iv) Evidence of the provision of foreign law.

(3) Statement required. If, for any taxable year, an individual who qualifies under paragraph (a) or (b) of this section receives an amount after December 31, 1962, which is attributable to services performed on or before that date, and excludes such amount from his gross income on the ground that a right to receive such amount existed on March 12, 1962, such individual shall attach a statement to the Form 2555, Statement to Support Exemption of Income Earned Abroad, filed by him for such taxable year setting forth the particulars on which he relies to support such exclusion.

(4) Illustrations. The application of the provisions of this paragraph may be illustrated by the following examples:

Example (1). A, a United States citizen who files his returns for the calendar year using a cash receipts and disbursements method of accounting, is privately employed and a bona fide resident of Sweden for the entire period January 1, 1962, through December 31, 1963. A is employed under a written employment contract in force throughout the entire period which provides for compensation of $3,000 per month payable on the 10th day of the succeeding month. A receives $3,000 on January 10, 1963, attributable to services performed on or before December 31, 1962; such amount is excludable from A's gross income under paragraph (a) of this section since the right to receive such amount existed on March 12, 1962, under an employment contract in force on that date.

Example (2). The facts are the same as in example (1), except that A's employment contract expires on October 31, 1962, and is renewed on that date without any change in terms. The result is the same as in example (1) since the new employment contract is essentially a continuation of the old contract.

Example (3). The facts are the same as in example (2), except that the renewed employment contract provides for an increase in A's salary to $3,200 per month. A receives $3,200 on January 10, 1963, which is attributable to services performed on or before December 31, 1962; $3,000 of the amount received on January 10, 1963, is excludable from A's gross income under paragraph (a) of this section since, to that extent, the new employment contract is essentially a continuation of the old contract; $200 of the amount received on January 10, 1963, is governed by the rules set forth in § 1.911-2.

Example (4). The facts are the same as in example (1), and, in addition, A and his

employer enter into a written agreement on December 15, 1961, that A shall receive as a supplementary salary payment for services performed during the calendar year 1962, an amount equal to 1 percent of his employer's net profit per books for the year 1962 is excess of $500,000, such amount to be payable as soon as practicable after audit of the employer's books. On March 10, 1963, A receives $5,000 pursuant to the agreement of December 15, 1961; such amount is excludable from A's gross income under paragraph (a) of this section since the right to receive the amount existed on March 12, 1962, under the agreement in force on that date.

Example (5). B, a United States citizen who files his returns for the calendar year using a cash receipts and disbursements method of accounting is privately employed and a bona fide resident of Spain from January 1, 1953, through December 31, 1972, the entire period of service to his employer. B is compensated at a rate of $30,000 per year for the years 1953 through 1957, $40,000 per year for the years 1958 through 1962, $50,000 per year for the years 1963 through 1967, and $60,000 per year for the years 1968 through 1972. B retires on December 31, 1972, and commences participation in his employer's pension program. The pension plan is embodied in a written document, is in existence on March 12, 1962, and unchanged after that date. B will receive $3,000 per month for life and the amounts will be paid out of his employer's current funds. B's pension is computed with reference to the amounts of salary set forth above. B's total compensation with respect to which his pension is computed is $900,000 and the amount of such compensation attributable to foreign services performed before January 1, 1963, is $350,000. The amount of B's pension attributable to foreign services performed before January 1, 1963, and excludable from his gross income for his taxable year 1973 and for taxable years thereafter is $14,000 (350/900 of $36,000).

[T.D. 6500, 25 F.R. 11910, Nov. 26, 1960, as amended by T.D. 6665, 28 F.R. 7247, July 16, 1963]

countries for an uninterrupted period which includes an entire taxable year, if such amounts are (i) from sources without the United States, (ii) attributable to such uninterrupted period, and (iii) not paid by the United States or any agency or instrumentality thereof. The exemption from tax thus provided is applicable to such amounts as are attributable to that portion of an uninterrupted period of bona fide foreign residence which falls within a taxable year during which the citizen begins or terminates bona fide residence in a foreign country, provided that such period includes at least one entire taxable year.

(2) What constitutes bona fide residence. Though the period of bona fide foreign residence must be continuous and uninterrupted, once bona fide residence in a foreign country or countries has been established, temporary visits to the United States or elsewhere on vacation or business trips will not necessarily deprive the citizen of his status as a bona fide resident of a foreign country. Whether the individual citizen of the United States is a bona fide resident of a foreign country shall be determined by the application, to the extent feasible, of the principles of section 871 and the regulations thereunder, relating to what constitutes residence or nonresidence, as the case may be, in the United States in the case of an alien individual.

(3) Test of bona fide residence. If an individual who has earned income from sources within a foreign country makes a statement to the authorities of that country that he is not a resident of that country, and such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earned income, such statement shall be conclusive evidence with respect to such earned income that such individual is not a bona fide resident of that country for purposes of this paragraph. If an individual has made such a statement of nonresidence to the authorities of a foreign country and, as of any date a determination is being made for purposes of this paragraph, no adverse determination has been made by the authorities of the foreign country with respect to such individual's nonresidence status, such individual shall be considered to have been held not subject to the income tax of the foreign country for purposes of this paragraph.

(4) Amount of exemption—(i) In general. Subject to the limitations in paragraph (d) of this section, the amount excluded from the gross income of an individual who qualifies under this paragraph shall not (except as provided in subparagraph (5) of this paragraph) exceed an amount which shall be computed on a daily basis at an annual rate of (a) $20,000, or (b) $35,000 with respect to taxable years (or a portion of a taxable year) occurring immediately after such individual has been a bona fide foreign resident of a foreign country or countries for an uninterrupted period of 36 consecutive months.

(ii) Rules of application—(a) Number of days. The amount excludable under this paragraph accrues on a daily basis throughout the taxable year. The number of days to be used in making the computation under subdivision (i) of this subparagraph on a daily basis shall be the number of days in the taxable year with respect to which the exclusion is claimed.

(b) Treatment of prior residence. For purposes of determining whether an individual is entitled to the annual rate of exclusion of $35,000 under subdivision (i) (b) of this subparagraph with respect to a taxable year ending after September 4, 1962, the period of bona fide residence in a foreign country or countries may include a period prior to the beginning of such taxable year, even though the tax for such prior period is computed under the rules set forth in § 1.911-1.

An in

(c) Interruption of residence. dividual who interrupts his foreign residence shall be entitled, upon resuming bona fide foreign residence, only to the benefits of the annual rate of exclusion of $20,000 under subdivision (i)(a) of this subparagraph until such individual has been a bona fide foreign resident of a foreign country or countries for another uninterrupted period of 36 consecutive months.

(iii) Illustrations. The application of this subparagraph may be illustrated by the following examples:

Example (1). A, a United States citizen who files his returns for the calendar year using a cash receipts and disbursements method of accounting, is unmarried, privately employed, and a bona fide resident of France for the period April 1, 1963, through December 31, 1964, and a bona fide resident of Germany for the period January 1, 1965, through June 30, 1968. A is compensated at a rate of $50,000 per year and he receives such amount as current compen

sation in the year in which the services to which the amount is attributable are performed. A receives no compensation in the form of the right to use property or facilities. The amounts excludable under this paragraph from A's gross income for services performed after December 31, 1962, for the various calendar years may be computed as follows: For the year 1963, $15,068.49 (275/365 $20,000); for the year 1964, $20,000 (366/366 X $20,000); for the year 1965, $20,000 (365/365 $20,000); for the year 1966, $31,301.37 (90/365 X $20,000 plus 275/365 $35,000); for the year 1967, $35,000 (365/365 X $35,000); and, for the year 1968, $17,404.37 (182/366 X $35,000).

Example (2). The facts are the same as in example (1), except that A is a bona fide resident of France for the period January 1, 1959, through December 31, 1963. The amount excludable under this paragraph from A's gross income for services performed after December 31, 1962, for the calendar year 1963 is $35,000 (365/365 $35,000).

Example (3). The facts are the same as in example (1), except that A is a bona fide resident of France for the period July 1, 1960, through December 31, 1964. The amounts excludable under this paragraph from A's gross income for services performed after December 31, 1962, for the calendar years 1963 and 1964 may be computed as follows: For the year 1963, $27,561.65 (181/ 365 X $20,000 plus 184/365 × $35,000); for the year 1964, $35,000 (366/366 × $35,000).

Example (4). The facts are the same as in example (1), and on July 1, 1968, A interrupts his foreign residence. On March 31, 1971, A takes private employment in Germany and becomes a bona fide resident of Germany through December 31, 1975. A is compensated at a rate of $50,000 per year and he receives such amount as current compensation in the year in which the services to which the amount is attributable are performed. A receives no compensation in the form of the right to use property or facilities. The amounts excludable under this paragraph from A's gross income for the calendar years 1971 through 1975 may be computed as follows: For the year 1971, $15,068.49 (275/365 $20,000); for the year 1972, $20,000 (366/366 $20,000); for the year 1973, $20,000 (365/365 X $20,000); for the year 1974, $31,301.37 (90/365 × $20,000 plus 275/365 × $35,000); for the year 1975, $35,000 (365/365 X $35.000).

(5) Treatment of certain noncash remuneration. (i) If an individual who qualifies under this paragraph receives earned income from sources without the United States (except from the United States or any agency thereof) in the form of the right to use property or facilities, the amount of exemption under subparagraph (4)(i) of this paragraph with respect to such individual (a) for

a taxable year ending in 1963, shall be increased by an amount equal to the amount of such earned income so received during such taxable year, (b) for a taxable year ending in 1964, shall be increased by an amount equal to twothirds of the amount of such earned income so received during such taxable year, and (c) for a taxable year ending in 1965, shall be increased by an amount equal to one-third of such earned income so received during such taxable year. The amount of such earned income taken into account under this subparagraph shall be the fair market value of the right to use such property or facilities.

(ii) The application of this subparagraph may be illustrated by the following examples:

Example (1). B, a United States citizen who files his returns for the calendar year using a cash receipts and disbursements method of accounting, is unmarried, privately employed, qualifies under the provisions of this paragraph, and becomes a bona fide resident of France on December 31, 1962. B is compensated at a rate of $40,000 per year and he receives such amount as current compensation in the year in which the services to which the amount is attributable are performed. During his taxable years ending December 31, 1963, 1964, 1965, and 1966, B also receives earned income in the form of the right to use a residence, such use having a fair market value of $6,000 per year. Under the provisions of this subparagraph, the applicable amount of B's exemption under subparagraph (4) (1) of this paragraph is increased in the following amounts:

Accordingly, B may exclude $26,000 from his gross income for his taxable year 1963, $24,000 for his taxable year 1964, $22,000 for his taxable year 1965, and $35,000 for his taxable year 1966.

Example (2). The facts are the same as in example (1), except that B interrupts his foreign residence on July 1, 1965. B is entitled to increase the applicable amount of exemption under subparagraph (4) (i) of this paragraph for his taxable year ending December 31, 1965, in an amount limited to $991.78 (181/365 × $2,000). Thus, the amount excludable under this paragraph from B's gross income for services performed after December 31, 1962, for his taxable year ending

December 31, 1965, is $10,909.59 (181/365 X $2,000 plus 181/365 $20,000).

(b) Presence in a foreign country—(1) Qualifications for exemption. Subject

to the limitations in paragraph (d) of this section and subparagraph (2) of this paragraph, amounts constituting earned income as defined in paragraph (c) of this section shall be excluded from gross income in the case of an individual citizen of the United States who during any period of 18 consecutive months is present in a foreign country or countries during a total of at least 510 full days, if such amounts are (i) from sources without the United States, (ii) attributable to such period, and (iii) not paid by the United States or any agency or instrumentality thereof. For purposes of determining the right to the exclusion under this paragraph for a taxable year ending after September 4, 1962, the period of presence in a foreign country may include a period prior to the beginning of such taxable year, even though the tax for such prior period is computed under the rules set forth in § 1.911-1.

(2) Amount of exemption. (i) Subject to the limitations in paragraph (d) of this section, the amount excluded from the gross income of an individual who qualifies under this paragraph shall not exceed an amount which shall be computed on a daily basis at an annual rate of $20,000 if the 18-month period includes the entire taxable year. If the 18-month period does not include the entire taxable year, the amount excluded from gross income under this paragraph

(3) Determination of 18-month period and application of 510-day rule. For rules governing the determination of an 18-month period, the definition of a "full day", and illustrations of the application of the 510-day rule, see paragraph (b) (8), (9), (10), and (11) of § 1.911-1. (c) Definition of earned income(1) In general. For purposes of this section, the term "earned income" means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to

for such taxable year shall not exceed an amount which bears the same ratio to $20,000 as the number of days in the part of the taxable year within the 18month period bears to the total number of days in such year.

(ii) The application of subdivision (i) of this subparagraph may be illustrated by the following example:

Example. A, a United States citizen who files his returns for the calendar year using a cash receipts and disbursements method of accounting, is unmarried, privately employed, and physically present in France from January 1, 1963, through June 30, 1964. A is compensated at a rate of $25,000 per year and he receives such amount as current compensation in the year in which the services to which the amount is attributable are performed. The amount excludable under this paragraph from A's gross income for services performed after December 31, 1962, for the calendar years 1963 and 1964 may be computed as follows: For the year 1963, $20,000 because the 18-month period includes his entire taxable year 1963. For the year 1964, $11,967.21, since only 219 days of his taxable year 1964 are included within such an 18-month period. The number of days (219) is determined by treating the first day of the 18-month period as coinciding with the first day of the 510-day period. The first day of the 510-day period ending June 30, 1964 (the last full day A was present in France), was February 7, 1963. Commencing with February 7, 1963, the 18-month period ends August 6, 1964. The number of days in that part of 1964 falling within the 18month period is, therefore, 219 (January 1, 1964, through August 6, 1964). The amount excludable from A's gross income in 1964 ($11,967.21) is computed on the basis of the following formula:

a corporation which represents a distribution of earnings and profits rather than a reasonable allowance for personal services actually rendered.

(2) Earned income and employed assistants. The entire amount received as professional fees shall be treated as earned income if the taxpayer is engaged in a professional occupation, such as a doctor or a lawyer, even though he employs assistants to perform part or all of the services, provided the patients or clients are those of the taxpayer and look to the taxpayer as the person responsible for the services performed.

(3) Earned income from business in which capital is material. In the case of a taxpayer engaged in a trade or business (other than in corporate form) in which both personal services and capital are material income-producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer shall be considered earned income, but the total amount which shall be treated as the earned income of the taxpayer from such a trade or business shall, in no case, exceed 30 percent of his share of the net profits of such trade or business.

(4) Source of income and place of receipt. An amount constituting earned income which is derived from sources without the United States shall not be included in gross income solely because it is received within the United States, since the place of receipt is immaterial in determining whether any items shall be excluded from gross income under the provisions of paragraph (a) or (b) of this section. No amounts received for services performed within the United States shall be excluded from gross income under such paragraphs. For the allocation or segregation as between sources within, and sources without, the United States in the case of compensation for labor or personal services, see sections 861, 862, 863, and 864 and the regulations thereunder.

(d) Special rules-(1) Attribution to year in which services are performed. (i) For purposes of applying paragraphs (a) (4) and (b)(2) of this section, amounts received (whether received before, during, or after the taxable year in which the services to which the amounts are attributable are performed) by an individual shall be considered received in his taxable year in which the services to which the amounts are attributable are performed by such individual.

(ii) The rule of subdivision (i) of this subparagraph applies only to determine the total amounts attributable to any one year for the purpose of determining the amount of the exclusion under paragraph (a) (4) or (b) (2) of this section and does not affect the time of reporting of any amounts which are includible in the individual's gross income.

(iii) Amounts received by an individual shall not, for purposes of subdivision (i) of this subparagraph, be attributed to any year in which the serv

ices performed by such individual are insubstantial in nature; thus, for example, amounts received by an individual under an arrangement which provides for future payments as additional compensation for current services and provides that during the future years the individual shall refrain from competitive activities and be available for consultation and advice shall not be attributed to a future year unless the consultative and advisory services actually rendered during such future year are substantial in nature.

(2) Requirement as to time of receipt. No amount received by an individual after the close of his taxable year following his taxable year in which the services to which the amount is attributable are performed may be excluded from his gross income under paragraph (a) or (b) of this section. Thus, an amount received by an individual is attributed under subparagraph (1) of this paragraph to his taxable year in which the services to which the amount is attributable are performed, but if such amount is received after the close of his taxable year following his taxable year in which the services to which the amount is attributable are performed, such amount may not be excluded from his gross income under paragraph (a) or (b) of this section.

(3) Illustration. The application of this paragraph may be illustrated by the following examples:

Example (1). A, a United States citizen who files his returns for the calendar year using a cash receipts and disbursements method of accounting, is privately employed and a bona fide resident of France for his entire taxable year 1963. For services performed during 1963, A receives a salary of $16,000 during 1963, and supplementary salary payments of $3,000 in each of the years 1964 and 1965. Under the provisions of subparagraph (1) of this paragraph, the supplementary payments of $3,000 are attributed to A's taxable year 1963. However, under the provisions of subparagraph (2) of this paragraph, the amount received by A in 1965 may not be excluded from his gross income under paragraph (a) or (b) of this section. Thus, A may exclude $19,000 from his gross income, $16,000 for his taxable year 1963 and $3,000 for his taxable year 1964.

Example (2). The facts are the same as in example (1), except that A is physically present in France for 510 days of an 18month period which includes his entire taxable year 1963. The result is the same as in example (1).