Rev. Rul. 55-191

Advice has been requested relative to the deductions properly allocable or chargeable against amounts excluded from gross income by a United States citizen under the provisions of section 116(a) of the Internal Revenue Code of 1939, under the following circumstances.

The taxpayer, a citizen of the United States and a bona fide resident of a foreign country, within the meaning of section 116(a) of the Code, received gross income amounting to 50 x dollars of which 25 x dollars was earned abroad and excludable from his gross income under the provisions of section 116(a) of the Code. Deductions were claimed for real estate taxes paid on his personal residence abroad as well as personal and family medical expenses. The specific question presented is whether such expenses must be apportioned, as provided in section 119 of the Code, as between amounts properly excluded from and amounts properly included in gross income or whether such amounts are deductible without apportionment.

Section 39.116-1(a)(3) of Regulations 118 provides that there shall not be allowed as a deduction from gross income any items of expenses or losses or other deductions properly applicable to or chargeable against the amounts excluded from gross income under section 116(a) of the Code. The apportionment and allocation of such expenses, losses, or deductions as between income from sources within and income from sources without the United States shall be determined in accordance with the principles of section 119 of the Code and the regulations thereunder.

Thus, any expenses, losses, or deductions directly applicable to income exempt under section 116(a) of the Code cannot be claimed as deductions from gross income. The apportionment and allocation of such expenses, losses, or deductions in accordance with the principles of section 119 of the Code and the regulations thereunder would have to be made only in those cases where they cannot be identified as being attributable exclusively to either includible or excludable income but are attributable to both. See section 11.02, Rev. Rul. 55-171, page 80, this bulletin. For example, where State income taxes are paid on income part of which income is, for Federal income tax purposes, excludable from gross income under section 116(a) of the Code, the deduction for State income taxes under section 23(c) of the Code would be apportioned between the includible and excludable income in accordance with the principles of section 119 of the Code and the regulations thereunder. See J. Haseltine Carstairs, Executor v. United States , 75 Fed.Supp. 683. However, a salesman, a citizen of the United States, residing and traveling abroad, who properly excluded from gross income under section 116(a) of the Code income earned abroad, may not deduct in his Federal income tax return traveling and other expenses incurred by him in earning such excluded income. See section 11.02, Rev. Rul. 55-171, supra .

In the instant case the real estate taxes paid on the taxpayer's personal residence abroad as well as the medical expenses are attributable neither to reportable income nor to income excludable under section 116(a) of the Code. Accordingly, the real estate taxes on his personal residence abroad are deductible from gross income, under section 23(c) of the Code, without any apportionment and the medical expenses may, subject to the limitations of section 23(x) of the Code, be deducted from the taxpayer's gross income, also without apportionment thereof, provided, in each instance, the taxpayer does not claim the optional standard deduction