(ii) other income in the ratio that taxes paid or accrued to a foreign country or possession in the later year with respect to such other income bears to the total taxes paid or accrued in such year to such country or possession.

If the taxpayer uses the overall limitation provided in section 902 (a) (2) with respect to income other than the interest income to which paragraph (2) applies, the computation under subparagraphs (A) and (B) of paragraph (4) will, under the provisions of paragraph (3), be computed, with respect to such other income, on the basis of the overall limitation.

Example 1.-Corporation M, to which the per country limitation applies, has for the taxable year 1963 $50,000 of taxable income described in paragraph (2) from sources within country X, $100,000 of other taxable income from sources within that country, and $150,000 of taxable income (none of which is interest income) from sources within country Y. M has no other income (or losses) from sources without the United States in 1963 and has total taxable income from all sources (including countries X and Y) of $2 million. It pays or accrues income tax for 1963 to country X of $15,000 with respect to income described in paragraph (2), and $60,000 with respect to other income, and it pays or accrues $75,000 income tax to country Y. M's U.S. tax (before credit) is $1,040,000. M's country X foreign tax credit limitation with respect to interest described in paragraph (2), $50,000 is $1,040,000X2 or $26,000, so that the full amount of the $2,000,000' $15,000 of country X tax is allowed as a credit for 1963. M's country X limitation on credit for taxes with respect to other income is $100,000 $1,040,000X or $52,000 so that $52,000 of the $60,000 of $2,000,000' country X tax with respect to such other income is allowed as a credit. $150,000 for 1963. M's country Y limitation, $1,040,000X;

$2,000,000'

or

$78,000, is unaffected by the new subsection (f) since M has no taxable income described in paragraph (2) from sources within country Y. M's total foreign tax credit is therefore $142,000 ($15,000+$52,000+ $75,000).

$2,000,000'

or $26,000,

Example 2.-Assume the same facts as in example 1 except that M has elected the overall limitation. The limitation on the credit for foreign tax paid or accrued to country X with respect to the $50,000 income described in paragraph (2) is $1,040,000X; the same as in example 1, and would not change even if M also had taxable income described in paragraph (2) from sources within some other foreign country, since the overall limitation is unavailable with respect to income described in paragraph (2). M's overall limitation with respect to foreign tax on all other income is $1,040,000 $100,000+$150,000 , or $130,000, so that of the $135,000 ($60,000 +$75,000) foreign taxes paid or accrued with respect to income other than income described in paragraph (2), $130,000 is allowed as a credit. M's total credit is therefore $145,000 ($130,000+$15,000).

X

$2,000,000

Trample 3.-Corporation O, which does not elect the overall

'ion, paid or accrued to country X for the taxable year 1962

H

$100 of foreign tax in excess of the section 904 limitation. Corporation O has no income from sources within any other country. For 1963, O pays or accrues to country X $20 in tax on income described in paragraph (2) and $80 in tax on other income. The section 904 limitation for 1963 is $50 with respect to income described in paragraph (2) and $80 with respect to other income. With respect to the $100 carryover from 1962, corporation O is deemed to have paid or $20 accrued in 1963 $20, i.e., $100-$100. The remaining $80 of the carryover may be carried to 1964, and assuming the same amount of taxes are paid or accrued in 1964 as in 1963 and the same limitations are applicable, O is deemed to have paid or accrued in 1964 $16, i.e., $20 -X$80.

$1001

Example 4.-Assume the same facts as in example 3 except that the limitation under section 904 for 1962 exceeds the tax paid or accrued for that year by $10, and the limitation for 1964 with respect to income other than that described in paragraph (2) is $50. Under these facts, the excess of the $80 tax paid or accrued for 1964 with respect to other income over the limitation of $50, or $30, is carried back first to 1962, and $10 will be deemed paid or accrued for that year. The remaining $20 is carried to 1963, but no amount will be deemed paid or accrued in 1963 since the tax being carried back was paid or accrued with respect to income other than that described in paragraph (2) and the limitation for 1963 with respect to such income does not exceed the tax actually paid or accrued for such year with respect to such income.

Example 5.-Assume the same facts as in example 4 except that the limitation for 1964 with respect to income described in paragraph (2) is $10. The excess of the $20 tax paid or accrued for 1964 with respect to income described in paragraph (2) over the limitation of $10, or $10, is aggregated with the excess tax of $30 paid in 1964 with respect to other income, making a total of $40. Of this aggregate amount, $10 will be deemed paid or accrued in 1962 as in example 4. Of the $10.

remaining $30, $7.50 ($40×830) will be deemed paid or accrued in

1963 with respect to interest income described in paragraph (2). No amount will be deemed paid or accrued in 1963 with respect to other income because the limitation for that year with respect to other income ($80) does not exceed the tax actually paid or accrued for that year with respect to such other income ($80).

Effective date. The new subsection applies with respect to taxable years beginning after the date of enactment of the bill but only with respect to interest resulting from transactions consummated after April 2, 1962.

SECTION 11. EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES

This section is the same as section 12 of the bill as passed by the House except for the addition of a presumption in certain circumstances with respect to bona fide residence and a temporary exemption for certain noncash remuneration.

(a) Limitation on amount and type of income excluded.-Subsection (a) of section 11 of the bill amends section 911 of the 1954 Code. This amendment retains the provisions of section 911 which require, under certain circumstances, the exclusion of earned income from gross income of an individual who has been a bona fide resident, or is physically present, in a foreign country. However, under the amendment there will be dollar limitations on the amounts which may be excluded under section 911 by any individual. The amendment also imposes a requirement as to time of receipt and, for some purposes, attributes amounts received to the taxable year in which the services to which the amounts are attributable were performed. The amendment also provides that no amount received as a pension or annuity is excludable under section 911. Your committee has added amendments which provide a presumption in certain circumstances with respect to bona fide residence and a temporary exemption for certain noncash remuneration.

SECTION 911. EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES

(a) General rule. Subsection (a) of section 911, as amended by section 11 of the bill, is the same as existing law in that it provides that in the case of an individual citizen of the United States

(1) who has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

(2) who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period,

amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) which constitute earned income attributable to services performed during the uninterrupted period or during an 18-month period, whichever applies, may be excluded from gross income. However, the amended section 911(a) contains a new provision to the effect that the amount excluded under that provision will be computed by applying special rules contained in subsection (c). The new provision referring to the special rules in subsection (c) is in lieu of the unlimited exclusion provided by existing law with respect to bona fide foreign residence, and the $20,000 limitation with respect to physical presence in a foreign country provided by existing law. Subsection (a) also retains the provision of existing law that no deductions (other than the deductions allowed by sec. 151, relating to personal exemptions) will be allowed to the extent such deductions are properly allocable to or chargeable against amounts excluded from gross income under such subsection.

(b) Definition of earned income.-Subsection (b) of the amended section 911 continues, without change, the existing definition of "earned income.”

(e) Special rules. Subsection (c) of section 911, as amended by the bill, provides rules for purposes of computing the amount excludable from gross income of an individual under section 911(a).

Paragraph (1) of section 911 (c) contains the limitations on the amount excludable under section 911(a). It provides, as a general rule, that the amount excluded for any taxable year is not to exceed

an amount which is to be computed on a daily basis at an annual rate of $20,000. However, the annual rate is to be $35,000 in the case of an individual who qualifies as a bona fide resident of a foreign country or countries under section 911(a)(1), but only with respect to taxable years (or a portion of a taxable year) occurring immediately after such individual has been a bona fide foreign resident for any uninterrupted period of 3 consecutive years (36 consecutive months). The amount excludable accrues on a daily basis throughout the taxable The number of days to be used in making the computation on a daily basis is the number of days in the taxable year for which the exclusion is claimed.

The manner of computing the amount excludable under section 911(a) on a daily basis at the prescribed annual rates may be illustrated by the following example:

Example.-A, a U.S. citizen, who files his returns on a calendar year basis, is privately employed, and is a bona fide resident of France for the period April 1, 1963, through June 30, 1968. The amounts excludable from his gross income for the various calendar years under the provisions of section 911(a) which are computed by applying the special rules contained in section 911(c) are not to exceed the following amounts: For the year 1963, $15,068.49 (275/365X $20,000); for the year 1964, $20,000 (366/366X$20,000); for the year 1965, $20,000 (365/365X$20,000); for the year 1966, $31,301.37 (90/365X$20,000 plus 275/365X$35,000); for the year 1967, $35,000; and, for the year 1968, $17,404.37 (182/366X$35,000).

An individual who, on January 1, 1963, has been a bona fide foreign resident for an uninterrupted period in excess of 3 consecutive years is immediately entitled to the benefits of the annual rate of $35,000. An individual who returns and takes up residence in the United States is, upon resuming bona fide foreign residence, only entitled to the benefits of the annual rate of $20,000 until such individual completes another uninterrupted period of 3 consecutive years of bona fide foreign residence.

Paragraph (2) of section 911 (c) provides that, for purposes of applying the limitation in paragraph (1), amounts received are to be considered received in the taxable year in which the services to which the amounts are attributable are performed. For example, amounts received during the taxable year 1965 attributable to services performed during the taxable year 1964 will, for purposes of applying the limitation in section 911 (c) (1), be considered received in the taxable year 1964. Thus, if I (to whom the $20,000 limitation applies) receives $16,000 in 1964 and $7,000 in 1965, both amounts being attributable to his 1964 services, $3,000 of the $7,000 received in 1965 would be includible in his gross income for 1965.

Paragraph (3) of section 911(c) provides in effect that in applying the rules of paragraph (1), the amount excludable under section 911 (a) is to be neither increased nor decreased solely by operation of community property law.

The application of the rule contained in section 911(c)(3) may be illustrated by the following examples:

Example 1.-H, a U.S. citizen, qualifies under section 911(a) and receives $40,000 during a taxable year for services performed abroad during such taxable year. He has been abroad for less than 3 consecutive years. W, the wife of H, earns no income of her

own and continues to live in a community property State in the United States. The marital domicile also continues in such State. H and W file a joint return. The aggregate amount excludable from gross income under section 911 is $20,000. If H and W had filed separate returns, the aggregate amount excludable under section 911 would be $20,000.

Example 2.-The facts are the same as in example 1, except that W also resides abroad. Whether H and W file their returns separately or jointly, the aggregate amount excludable under section 911 is $20,000. If W also qualifies under section 911(a) and receives $10,000 during the taxable year for services she performed abroad during such taxable year, the aggregate amount excludable under section 911 is $30,000 (whether a joint return or separate returns are filed).

Similarly, in a noncommunity property jurisdiction, if H and W both qualify under section 911(a) and receive $40,000 and $10,000, respectively, for services performed abroad during the taxable year, the aggregate amount excludable under section 911 is $30,000.

Paragraph (4) of section 911 (c) establishes a requirement as to time of receipt by providing that no amount received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed may be excluded under section 911(a). For example, an amount received on or before the close of the taxable year 1965 which is attributable to services performed during the taxable year 1964 will satisfy the requirement as to receipt of section 911 (c) (4). However, an amount received after the close of the taxable year 1965 which is attributable to services performed during the taxable year 1964 will not satisfy the requirement as to receipt of section 911 (c) (4) and, therefore, will in no event be excludable under section 911(a).

Subparagraph (A) of section 911 (c) (5) provides that no amount received as a pension or annuity may be excluded under section 911(a). The result is the same whether the recipient of such pension or annuity is a resident or a nonresident of the United States. Subparagraph (B) provides that no amount included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust), section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or section 403 (d) (relating to taxability of beneficiary under certain forfeitable contracts purchased by exempt organizations) may be excluded under section 911(a). Thus, amounts contributed by an employer to certain plans which do not qualify under section 401 and in which an individual has nonforfeitable rights, must be included in such individual's gross income currently. The amounts of such contributions are not excludable under section 911(a).

Your committee has added a new paragraph (6) to section 911(c) which provides that a statement by an individual who has earned income from sources within a foreign country that he is not a resident of such country, if he is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings, shall be conclusive evidence that he is not a bona fide resident of that country for purposes of section 911(a)(1).

Your committee has also added a new paragraph (7) to section 911 (c) which provides that if an individual receives compensation from sources without the United States (except from the United