Generally, if you’re a U.S. citizen or a resident alien of the U.S. living abroad, you are taxed on your global income. However, if certain requirements are met, you may qualify for a foreign earned income exclusion. In a new case, Bellwood TC Memo 2019-135, 10/7/19, a pilot who worked in a foreign country claimed the exclusion, but the Tax Court denied it.
For 2019, the inflation-indexed exclusion is $105,900. There are three main requirements:
1. Your "tax home" for the tax year in question is in a foreign country.
2. You are either a U.S. citizen who is a bona fide resident of a foreign country for an entire tax year or a U.S. citizen or resident who is present in a foreign country (or countries) for at least 330 full days of a 12-month period.
3. You have foreign earned income.
Frequently, the first requirement is the main hangup. Typically, the tax home is the individual’s principal place of business, not where he or she resides most of the time. However, the tax law also provides that an individual isn’t treated as having a tax home in a foreign country for any period in which his or her abode is within the U.S.
In the new case, the taxpayer was a helicopter pilot in Saudi Arabia. He worked for 28 days and then had 28 days off. During the “on” time, he lived in employer-provided housing in Saudi Arabia. At “off” times, he flew home to Georgia and lived there in a house with his wife and child. He kept his U.S. citizenship, driver's license, voter registration and healthcare.
The taxpayer was in Saudi Arabia for work approximately 204 days in 2013, 210 days in 2014 and 161 days in 2015. When he claimed the foreign income exclusion for his pilot income, the IRS challenged his eligibility.
First, the Tax Court ruled that the taxpayer must show, by a preponderance of evidence, that his tax home was in a foreign country. Clearly, Saudi Arabia was his principal place of business, but the Court then analyzed whether his “abode” was in the U.S. This term is not specifically defined in the tax code.
According to the Court, an abode is not one's place of business. It also said that an individual's abode can’t be determined by simply identifying the location where he or she spends the most days during a given period. This is especially true in this instance where the taxpayer spent fewer days at the family home in Georgia than in Saudi Arabia. The Court called this a “domestic vs. vocational distinction” for determining a person's abode
When he was in Saudi Arabia, the taxpayer’s regular activities were primarily vocational. His domestic activities in Saudi Arabia were limited because of the demanding nature of his work. Occasionally, he went to the barber or grocery store and ate at restaurants, but most of his time in Saudi Arabia was spent working or resting and preparing for his next shift.
In contrast, when the taxpayer returned to his home in the U.S., he spent time with his family, pursued his hobbies and managed the day-to-day affairs of his personal life. He maintained his registration to vote in Georgia, received his mail there and updated his driver's license and registered his vehicle there.
Thus, the Court determined that the taxpayer’s abode was in in the U.S. and that he traveled to Saudi Arabia only for work. Unhappy tax landing: The denial of the foreign earned income exclusion was upheld.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...