As my dear Grandma used to say...."Oy vey!"
I've found some more materials on "blocked income" including some key
IRS documents. But the more I read, the less I know. I'm not sure if
these will add clarity to your situation, or muddy the waters...but
here they are!
So, this is probably as good a time as any to reiterate the same
cautions I gave you earlier. I am not a tax professional, and have a
hard time figuring out what to do with my own (meager) income from
Google Answers. If I had to deal with any 'blocked income' my head
Please make sure to talk with a professional on all this.
One place to start might actually be the IRS itself. I found some
names and phone numbers for the resident experts on "blocked income"
at the IRS:
IRS Code and Subject Telephone Directory
§ 964(b)--Blocked Income
INTL Barbara Felker (202) 622-3850
INTL Richard Chewning (202) 622-3870 [ UPDATE FROM PAF: His number is
now same as Felker's -- 202-622-3850 ]
I haven't spoken with either of them, but you may want to give them a
call at some point.
A number of documents mentioned two IRS rules pertaining to blocked
income. One of these is available online:
http://www.taxlinks.com/rulings/1981/revrul81-290.htm Rev. Rul. 81-290
CHANGE OF ACCOUNTING METHOD; BLOCKED FOREIGN INCOME December 14, 1981
Rev. Rul 81-920 actually modifies an earlier document, Rev Rul 74-351,
which I did not find anywhere online. However, I did locate the text
of the rule, and have provided it at the very end of this answer.
The importance of these documents is that they appear to be the most
recent official word on blocked income, so should certainly be given a
lot of weight in your considerations, along with any insights gleaned
from court cases or other sources.
Rev Rul 74-351, in particular, follows a pretty user-friendly Q&A
format, and even includes a question (Q7) on investments of blocked
income. Again, this material is at the end of this answer.
As for the other sources, here is what I've come up with (links are
provided when available, but some material is from databases that
cannot be directly linked to):
Another case from the CA Board of Equalization is here:
http://www.aca.ch/levelpl.pdf AN AMERICAN CITIZENS ABROAD BRIEFING BOOK
2. BLOCKED INCOME Another problem can arise when an overseas American
is living and working in a country whose currency is not legally
convertible into dollars. While U.S. tax laws recognize that problems
can arise in such a
situation, they also view the use of any blocked income to pay for
your normal living expenses as the act of its unblocking. Once
unblocked, this foreign currency is subject to U.S. tax payments,
which must be paid in U.S. dollars and without delay. In reality
terms, however, such a unilateral decision by the U.S. Government does
not change the problem: the foreign currency is still blocked and
still not legally convertible. If the government of the country of
residence does not follow the same bizarre logic and suddenly allow
conversion into dollars, what are you supposed to do? There is still
no sensible answer today. An overseas American in such a case is
forced to violate either the laws of his country of residence, by
obtaining dollars on the black market to pay the IRS, or of the United
States, by not paying the tax.
San Diego Law Review Winter, 1997 34 San Diego L. Rev. 1
Changing U.S. Tax Jurisdiction: Expatriates, Immigrants, and the Need
for a Coherent Tax Policy
...n272. 57 Fed. Reg. 11,024 (1992). The Service had previously
confronted the issue. In Rev. Rul. 74-351, 1974-2 C.B. 144, the
Service ruled that a taxpayer who makes the proper election does not
have to include in income any "deferred income," which is income not
readily convertible into U.S. dollars. Income will not constitute
deferred income, however, if it is disposed of by gift, bequest, or in
the case of an election by a resident alien, if U.S. residency is
terminated. The rationale for this treatment is not explicit, but
perhaps is based on the assumption that the alien will return to his
country and be able to use the funds. If so, it is not consistent with
the part of the ruling allowing the taxpayer to purchase property with
the blocked income without triggering gain. See Berman v.
Commissioner, 45 T.C. Memo. 1983-214 (1983) (upholding, in dicta, the
position of the Service).
Vanderbilt Law Review JANUARY, 1985 38 Vand. L. Rev. 101
United States Taxation of Its Citizens Abroad: Incentive or Equity
...Of course, the problem of those expatriates who reside in blocked
income countries merits special consideration. See, e.g., Constantine
v. Commissioner, 43 T.C.M. (CCH) 158 (1981) (discussed supra text
accompanying notes 33-34). Perhaps merely permitting them to pay their
United States taxes in the currency of the residence country might
alleviate the problem in many cases.
...n34 INTERNAL REVENUE SERVICE, U.S. DEP'T OF TREASURY, PUB. No. 54,
TAX GUIDE FOR U.S. CITIZENS ABROAD 20 (Nov. 1982) (explaining that
residents of countries, such as Greece, that restrict conversion of
unds may defer their tax payments until the income becomes unblocked
or readily convertible; but if, as was the case with George
Constantine, they actually spend the money for living expenses, then
the income is considered "unblocked and reportable") [hereinafter
cited as 1982 IRS PUBLICATION 54]; see 1981-1982 Miscellaneous Tax
Bills, IV: Hearings on S. 408, S. 436, S. 598, and S. 867 Before the
Subcomm. on Taxation and Debt Management Generally of the Senate Comm.
on Finance, 97th Cong., 1st Sess. 402-11 (1981) (statement of Roger D.
Conklin, Cook Electric Int'l) [hereinafter cited as 1981 Senate
Hearings]; see also 1980 Senate Hearings, supra note 3, at 468-69,
473-75 (statement of Roger D. Conklin, Cook Electric Int'l)
(discussing problem of paying taxes in United States currency while a
resident of Brazil and Peru).
...The situation of George Constantine, a dual citizen of the United
States and Greece, dramatically illustrates the problem of horizontal
equity. n33 George was employed by a Greek bank and was receiving his
pension from that bank. Although George was willing to pay United
States income taxes, his salary and pension were paid in Greek
currency, which he could convert to United States currency only by
violating the Greek Penal Code. Nevertheless, as soon as he used any
of his pension money or salary for his personal expenditures, his
United States taxes were due, and they had to be paid in United States
dollars. n34 If George was to be treated as a resident United States
taxpayer, the fact that he was subject to criminal charges in Greece
for compliance with our law would not be of concern. However, few
would argue that horizontal equity is not violated when a taxpayer,
such as George, must risk imprisonment for his tax obligation to the
United States while his domestic counterpart does not.
[The Constantine case is frequently mentioned, so I had a look at
it..There are only brief parts that pertain to blocked income]
GEORGE CONSTANTINE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
Respondent Docket No. 13105-79. UNITED STATES TAX COURT T.C. Memo
December 23, 1981
...Although [*3] petitioner did not submit a brief, he argued in his
petition herein that these amounts should be excludable from his gross
income in 1974 and 1975 because (1) Rev. Rul. 60-75, 1960-1 C.B. 281
and Stanford v. Commissioner, 297 F.2d 298 (9th Cir. 1961), affg. 34
T.C. 1150 (1960) are inapplicable to him since he received his pension
outside the United States as a foreign resident; (2) Section XI, Part
I, of the 1950 tax treaty between the United States and Greece
prevents taxation of these amounts; (3) the pensions were received in
local currency and, under the Greek Penal Code, may not be converted
into U.S. currency; and (4) his entire pension is a return of capital
and does not include any interest payments.
...Petitioner's argument that his pension was received in Drachmae,
local currency, whose conversion to U.S. currency is prohibited by the
Greek Penal Code, n5 does not prevent its taxation in the United
States. Where amounts received in "blocked currency" are freely
expendable within the foreign country or where the taxpayer received
an economic benefit from them, these amounts are income taxable by the
United States. See Cooper v. Commissioner, 15 T.C. 757 (1950); Marty
v. Commissioner, T.C. Memo. 1972-11; cf. International Mortgage and
Investment Corporation v. Commissioner, 3 B.T.A. 187 (1937). Because
petitioner has not shown that he was not able to use the amounts he
received herein for his personal enjoyment, petitioner must include
these amounts as income.
[other relevant cases are these]
CHARLES ALEXANDER McKEE AND MARY ANN McKEE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 23271-83.
UNITED STATES TAX COURT T.C. Memo 1985-574 November 26, 1985.
...It has long been settled that income subject to foreign exchange
controls, termed "blocked income," is recognized by a cash basis
taxpayer as gross income in the year of receipt if such income is
available as disposable income within the foreign country and can be
valued at a free market exchange rate in the United States. n7 Cooper
v. Commissioner, 15 T.C. 757 (1950); Eder v. Commissioner, 138 F.2d 27
(2d Cir. 1943); cf. Weil, Inc. v. Commissioner, 150 F.2d 950 (2d Cir.
1945), affg. a Memorandum Opinion of this Court; Credit & Investment
Corp. v. Commissioner, 47 B.T.A. 673 (1942). n8 Here, petitioners
clearly had the ability to use their quetzal denominated income in
Guatemala and that fact is sufficient to require income recognition.
Petitioners expended a substantial amount of quetzales to maintain
their aircraft in Guatemala and to move their personal property to the
United States. Petitioners, therefore, must recognize as gross income
the quetzal denominated payments. The dollar value of quetzal [*14]
denominated income is the free market rate of exchange in the United
States. Cooper, supra at 765. Petitioners assert that the free market
exchange rate in the United States was not the Guatemalan official
exchange rate of one quetzal to one dollar. Petitioners introduced a
bank memorandum from Seafirst Corporation dated October 4, 1984 to
support their contention. The Seafirst Corporation bank memorandum
indicated that the free market exchange rate in the United States at
that date was one quetzal to 62 cents. However, the issue for decision
here is the quetzal free market exchange rate in the United States
during 1980. IECO applied the official Guatemalan exchange rate to
determine the local allowance equivalent of $1,300 and applied the
official exchange rate to determine the value of the quetzal
denominated income for tax purposes on Charles' Form W-2. Respondent's
determination of value is presumptively correct, and petitioners bear
the burden of disproving that determination. Welch v. Helvering, 290
U.S. 111, 115 (1933); Rule 142(a). The Seafirst Corporation Bank
memorandum dated October 4, 1984 is not relevant to our determination
of the quetzal [*15] denominated income received during 1980.
Consequently, petitioners have not demonstrated that the quetzal free
market exchange rate in the United States during 1980 was not the
official Guatemalan exchange rate. Petitioners' gross income must
include the quetzal denominated income in the amount of $10,400.00.
SANFORD A. BERMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
Respondent. Docket No. 14875-79 UNITED STATES TAX COURT T.C. Memo
1983-214 April 19, 1983
...Respondent determined a deficiency in the Federal income tax of
petitioner Sanford A. Berman of $5,886 for the year 1975. The issues
for our decision are (1) whether petitioner is entitled to deduct the
amount of money he invested in shares of now worthless stock as a
theft loss under section 165(c)(3); n1 (2) whether petitioner is
entitled to a bad debt deduction of $865; and (3) whether petitioner
must recognize the full proceeds from the sale of his apartment in
Spain in 1975 notwithstanding his inability to exchange some of those
proceeds into U.S. dollars.
...Petitioner is a cash basis taxpayer and must, therefore, [*13]
report any gain from the sale of property in the year in which the
payment is either actually or constructively received. Section
1.446-1(c)(i), Income Tax Rags. Income is constructively received by a
taxpayer when "it is credited to his account, set apart for him, or
otherwise made available so that he may draw upon it at any time * *
*." Section 1.451-2(a), Income Tax Regs. If, however, the taxpayer's
control is subject to "substantial limitations or restrictions," there
is no constructive receipt. Section 1.451-2(a), Income Tax Regs.
...Evidence submitted by the petitioner shows unequivocally that the
entire sales price was either actually re-received by him or credited
to his account in 1975. He argues that the foreign exchange rules
substantially restricted his control within the meaning of the
regulation just quoted. In light of numerous cases decided by this and
other courts we cannot agree. Income subject to foreign exchange
regulations, termed "blocked income," was the subject of various suits
in the 1930's and 1940's. the cases [*14] hold that if the currency
is at the taxpayer's disposal in the foreign country, it must be
reported in the year received. Cooper v. Commissioner, 15 T.C. 757
(1950); Eder v. Commissioner, 138 F.2d 27 (2d Cir. 1943); cf. Weil,
Inc. v. Commissioner, 150 F.2d 950 (2d Cir. 1945), affg. a Memorandum
Opinion of this Court; Credit & Investment Corp. v. Commissioner, 47
B.T.A. 673 (1942). The crucial factors in these cases were (1) the
taxpayer's ability to use the blocked funds locally, and (2) the
existence of a market for the currency. n12 Here it is clear that
petitioner could spend the money locally in Spain and that is enough
to require taxation of any gain in 1975. We note that in Eder, supra
at 28, the court specifically refuted the position Dr. Berman takes
here: "We do not agree with taxpayer's argument that inability to
expend income in the United States, * * * necessarily precludes
taxability." Petitioner thus constructively received the full sales
price in 1975 and must include all gain from the sale in income for
[NOTE FROM PAF: the next paragraph ties in the Rev Rul documents from the IRS]
...The dearth of cases in recent years stems in part, from the
publication of Mimeograph 6475 in 1950, superseded by Rev. Rul.
74-351, 1974-2 C.B. 144. n13 This publication implicitly recognizes
the hardship faced by taxpayers who cannot repatriate their income,
and gives them the privilege of deferring recognition of the blocked
income until it can be freely exchanged into dollars. The Commissioner
requires those wishing to avail themselves of the deferral to file a
"Report of Deferrable Foreign Income, Pursuant to Rev. Rul. 74-351."
In this information return the taxpayer must report the amount of
deferrable income; agree to report it when it ceases to be deferrable;
and waive the right to claim that any part of it was includable in
earlier years. Rev. Rul. 74-351, supra.
[ and lastly, the Rev Rul 74-351 itself ]
Rev. Rul. 74-351 n1
n1 Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.
Section 446. - General Rule for Methods of Accounting
26 CFR 1.446-1: General rule for methods of accounting.
(Also Sections 61, 162; 1.61-1, 1.162-1.)
1974-2 C.B. 144; 1974 IRB LEXIS 156; REV. RUL. 74-351
Blocked foreign income; deferral. A series of questions and answers
explains the treatment of blocked foreign income; Mims. 6475, 6494,
6584, and I.T. 4037 superseded.
The purpose of this Revenue Ruling is to up-date and restate, under
the current statute and regulations, the positions set forth in Mim.
6475, 1950-1 C.B. 50; Mim. 6494, 1950-1 C.B. 54; Mim. 6584, 1951-1
C.B. 19; and I.T. 4037, 1950-2 C.B. 31.
The questions presented pertain to the treatment of blocked foreign
income for Federal income tax purposes.
Question 1. What does the term "deferrable income" mean in the context
of blocked foreign income?
Answer: For the purpose of this Revenue Ruling the term "deferrable
income" is used to describe income received by, credited to the
account of, or accrued a taxpayer that, owing to monetary, exchange or
other restrictions imposed by a foreign country, is not readily
convertible into United States dollars or into other money or property
which is readily convertible into United States dollars.
Question 2. How does a taxpayer account for and report "deferrable
income" for Federal income tax purposes?
Answer: A taxpayer, whether individual, corporate, [*2] or other,
may elect, pursuant to the provisions of section 446 of the Internal
Revenue Code of 1954, to use a method of accounting to which the
reporting of "deferrable income" as taxable income is deferred until
the income ceases to be deferrable.
A taxpayer who elects to use the deferred income method of accounting
shall file with his Federal income tax return an information return
upon which is affixed the heading "Report of Deferrable Foreign
Income, pursuant to Rev. Rul. 74-351," using for this purpose a
separate Federal income tax return of the same type as that with which
it is filed. The taxpayer shall declare in such information return
that the "deferrable income" will be included in taxable income for
the year in which such income, to the extent thereof, ceases to be
"deferrable income" and that he waives any right to claim that the
"deferrable income," or any part thereof, was includible in his gross
income for any earlier year.
All amounts reported on the information return shall be reported in
terms of foreign currency involved. If "deferrable income" is
received, credited, or accrued to the account of the taxpayer in more
than one foreign country, a separate information [*3] return shall be
included for each country.
Where the taxpayer adopts the method of accounting provided for by
this Revenue Ruling, losses incurred in the production of "deferred
income" shall be taken into account under the rules for the deferment
stated herein. See Rev. Rul. 57-166, 1957-1 C.B. 191, which pertains
to the treatment for Federal income tax purposes of capital gains and
losses allocable to blocked foreign income under the "deferred income"
method of accounting.
Question 3. When should the taxpayer make an election mentioned above?
Answer: An election to use the method of accounting described in this
Revenue Ruling shall be made no later than the time prescribed by law
(including any extension thereof) for filing the income tax return for
the first taxable year for which the election is made.
A taxpayer who adopts such method of accounting shall, before making
any changes or variation therein, secure the consent of the
Commissioner of Internal Revenue pursuant to the provisions of section
1.446-1(e) of the Income Tax Regulations.
Question 4. When will "deferrable income" cease to be "deferrable income?"
Answer: Income will cease to be "deferrable [*4] income" under the
(a) When such money or property in such foreign country is readily
convertible into United States dollars or into other money or property
which is readily convertible into United States dollars;
(b) When, notwithstanding the existence of any laws or regulations
forbidding the exchange of money or property into United States
dollars, conversion is actually made into United States dollars or
into other money or property which is readily convertible into United
States dollars; or
(c) When such income is used for non-deductible personal expenses, is
disposed of by way of gift, bequest, devise, inheritance, or by
dividend or other distribution, or, in the case of a resident alien,
such alien terminates his residence in the United States.
Question 5. How are expenses "paid or incurred" or "paid or accrued"
in the foreign country in which there is "deferrable income" treated
for Federal income tax purposes?
Answer: Expenses paid or incurred or paid or accrued in the currency
of the country in which there is "deferrable income" are not
deductible from the gross income reported in United States dollars,
except in the manner and to the [*5] extent provided in section
1.461-1(a)(4) of the regulations, which pertain to deductions
attributable to certain foreign income. Thus, such expenses will be
deductible in any subsequent taxable year in the same proportion as
the "deferrable income" is includible in gross income. The same
treatment shall be accorded depreciation, obsolescence and depletion
measured in terms of the currency of the foreign country involved.
Similarly, no credit may be taken for foreign taxes paid or accrued
with respect to "deferrable income" except in the manner and to the
extent provided in section 1.905-1(b) which pertains to foreign income
subject to exchange controls.
Question 6. How is the taxpayer to deduct costs and direct expenses
paid or incurred in United States dollars in a transaction that gives
rise to "deferrable income?"
Answer: Costs in United States dollars involved in a transaction that
gives rise to "deferrable income" are not deductible from gross income
as stated in the Answer to Question 5. When any part of such
"deferrable income" ceases to be "deferrable income" the unrecovered
costs in United States dollars shall be applied against the amount
released for the purpose [*6] of determining the amount to be
reported in gross income. The foregoing rules as to costs apply not
only to the cost of goods taken out of inventory but also to the cost
(or other basis) of other assets sold or exchanged. Direct expenses
paid or incurred in United States dollars involved in a transaction
giving rise to "deferrable income" are not deductible from gross
income until after recovery of costs. Such direct expenses are then
deductible but only in the proportion that the part of the released
"deferrable income" includible in gross income for the taxable year
bears to the proceeds from the transaction in excess of the amount
applied against costs (or such expenses may, with the consent of the
Commissioner, be deducted to the extent that such proceeds are
includible in gross income).
The above provisions may be illustrated by the following example: A
United States manufacturer sold merchandise in foreign country X for
2,000 units of country X currency. The cost of the merchandise sold
was $700 and the direct expenses attributable to the sale were $100.
One unit of country X's currency was worth 50 at the prevailing
foreign exchange rate. In the taxable [*7] year of the sale, the
manufacturer was allowed by the Government of country X to exchange
1,500 units into United States dollars at the exchange rate of 50 per
unit, or$750. The amount to be included in gross income is computed as
follows: Item Total Reportable Deferred Sale (2,000 units X 50 )
$1,000 $750 (1,500 units) (2,000 - 1,500 or 500 units) Cost 700 700
Proceeds from transaction in excess of amount applied against cost $
300 Released "deferrable income" includible in gross income $ 50
Deferred income in units of country X's currency (see Answer to
Question 2 of this Revenue Ruling for future reporting of its income)
The allocation of the direct expenses is computed as follows:
Direct Expenses X Released "deferrable income" included in gross
income/Proceeds from transaction in excess of amount applied against
cost = Deductible direct expenses
$100 X $50/ $300 = $16.67 (Deductible from gross income)
The remaining direct expenses of $83.33 ($100.00 - $16.67 would be
deferred until the "deferrable income" ceases to be "deferred income."
Rev. Rul. 57-379, 1957-2 C.B. 299, provides that a partial remittance
[*8] of unblocked foreign income from prior years, constituting that
part of deferred income that ceased to be deferrable, shall be
included in taxable income, with proper deductions allocated thereto,
in the year it is unblocked on the basis of first-in first-out, so
that such remittance shall be regarded as part of the earliest blocked
Where the same costs and direct expenses in United States dollars are
applied in foreign operations in more than one country (as, for
example, in the case of an article exhibited or circulated in various
countries), and the taxpayer in keeping its books does not regularly
allocate such costs and expenses on a country-by-country basis under a
recognized method, the taxpayer shall, for the taxable year in which
he elects "deferrable income" make an allocation under a recognized
method in "Report of Deferrable Foreign Income. ..." attached to the
taxpayer's Federal income tax return. See Answers to Questions 2 and 3
of this Revenue Ruling for rules relating to reporting of "deferrable
income" and time for election. The method of allocation will be
subject to verification and approval by the District Director upon
examination of the income [*9] tax return and "Report of Deferrable
Foreign Income. ..."
If and when it becomes apparent that any foreign holdings which
reflect the receipt of "deferrable income" are substantially
worthless, the taking into account for tax purposes of costs and
direct expenses pertaining thereto shall no longer be deferred.
Nothing contained in this Revenue Ruling shall be construed as passing
on the question of whether expenditures attributable to foreign
operations constitute ordinary and necessary business expense.
Question 7. How are the provisions of this Revenue Ruling to be
applied where funds representing "deferrable income" are used to
purchase investment or business property?
Answer: Where funds representing blocked income which have been
deferred are used for the purchase of investment or business property,
such property has a "deferred income basis" measured by its costs in
terms of the blocked foreign currency. This transaction must be
reported in the "Report of Deferrable Foreign Income. ..." filed for
the taxable year in which such transaction occurs. Such "report" must
show, in terms of foreigh currency, the amount of blocked income, the
amount invested in such [*10] property together with all the
adjustments thereto of the type authorized by the Internal Revenue
When such income ceases to be "deferrable income", the amount thereof,
translated into terms of United States currency at the rate of
exchange prevailing at that time, is includible in the taxpayer's
gross income and the amount invested in the property, as adjusted must
similarly be translated into United States dollars. The amount thus
translated is the actual basis of the property. See the Answer to
Question 5 with respect to depreciation on such property. Upon the
subsequent disposition of the property, such basis will be used in
ascertaining gain or loss under the provisions of the Code and
Mims. 6475, 6494, 6584, and I.T. 4037 are hereby superseded, since the
positions stated therein are restated under the current law in this
I've dumped a lot of information here, but I think you'll find it
useful. As you seem to have a pretty good capacity for reading and
understanding these things, I thought it best to provide the materials
themselves with a minimum of comment.
As always, if there's anything else you need, just holler.
search strategy -- Search of Google and several legal databases for [
"blocked income" OR "deferred income" ]