Air, Sea, and Below the Surface

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Preparing the material for a Foreign Tax workshop at Intuit this week, I made a rather startling discovery. A foreign country, for tax purposes isn’t quite what I always took for granted. Take a look at some of the things I ran across: 1) In the Air: The woman is a flight attendant, living in France with her French husband and children. She is a ‘bona fide resident.’ On her job, her route takes her from Paris to New York and back on a regular basis. Are her earnings qualified for the foreign earned income exclusion? 2) On the Sea: A fellow and his buddies work on Johnston Island in the Pacific. They work there year-round on a long-term contract. They get back to states for about a week or two for vacation, but that’s it. They are on Johnston Island for well over 330 days each year. Do their earnings qualify for the for the foreign earned income exclusion? 3) Below the Surface: Another fellow is a U.S. citizen and resident of Scotland. He works on a submarine, generally out near Singapore, Japan, Bahrain and other fascinating locales he probably never gets to experience. Do his earnings qualify for the for the foreign earned income exclusion? These are all real situations, drawn from the Tax Court's files. In each and every case above, it turns out that a part of their earnings do not qualify for the Foreign Earned Income Exclusion. Why? • The flight attendant spends a certain amount of time in international air space. That doesn’t qualify. So she must pro-rate her earnings between foreign air space and international air space. [LISA HAMILTON SAVARY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent – summary decision - http://www.ustaxcourt.gov/InOpHistoric/SavaryLisaHamilton.SUM.WPD.pdf ] • The guys on Johnston Island learned that, although the island is a United States “insular possession”, it isn’t one of the U.S. territories or possession – so it doesn’t qualify for the same exclusion of income as Guam or American Samoa (IRC 932). Nor does it qualify as a foreign country (IRC 911). And to top it all off, they can’t use the per diem rates for travel. Why? Because this is their tax home. Boy, nothing worked for these fellows! [JOSEPH D. SPECKING, ET AL., (3 petitioners) Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent http://www.ustaxcourt.gov/InOpHistoric/SPECKING.TC.WPD.pdf ] • And the guy in the submarine? Well, even underneath the sea, we have foreign countries and international space. He had to prorate his income for all the days they were in international waters. [EDWARD D. CLARK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent – Memorandum http://www.ustaxcourt.gov/InOpHistoric/Cl3ark.TCM.WPD.pdf ] Sheesh, who would have thought you’d actually have to track the air space or water you’re traveling in, on or over? Gee, do you think the folks in the International Space Station are in international air space? Or what?

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