IRS Decides New Tax Home Case on Individual Basis

If you have clients who spend much of the year living outside the United States, they might qualify for the foreign earned income exclusion. However, as a new Tax Court case shows, they (and you) need to be careful in determining where their "tax home" is. It's not necessarily where they have what they consider to be their main residence.

Dec 2nd 2020
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Do you know where your ”tax home” is? It’s not necessarily the place where you reside most of the time. In a new case, Cutting, TC Memo 2020-158, 11/19/30, a pilot who spent more time in Thailand than another place claimed that it was his tax home. But the IRS, and eventually the Tax Court, disagreed. As a result, he could not qualify for the foreign earned income exclusion.

Background: If you meet certain requirements, you may claim the foreign earned income exclusion on amounts earned abroad, up to a specified maximum indexed for inflation. For 2020,the maximum exclusion is $107,600 (scheduled to increase to $108,700 in 2021).

Generally, the exclusion is available to a taxpayer whose tax home is in a foreign country and who is either a bona fide resident of that country for an uninterrupted period including the entire tax year or is physically present in a foreign country for a certain period. An individual’s tax home is his or her regular or principal place of business. If a taxpayer has no regular or principal place of business due to the nature of the business, his or her regular place of abode is the tax home.

Facts of the new case: During the tax years in question—2012 through 2014—the taxpayer was employed as a pilot, mostly transporting military personnel around the world. As he was required to do so by contract, he designated San Jose airport, near where his father lived, as his U.S. base station. He also used his father’s address as his employment address of record.

But the taxpayer actually lived in Thailand with his wife and her daughter. He resided there for 153 days in 2012, 171 days in 2013 and 114 days in 2014. The taxpayer claimed the foreign earned income exclusion for each of those years. He argued that he had no regular or principal place of business because he traveled al over the world. Therefore, his regular place of abode should be his tax home.

The IRS challenged this assertion and assessed deficiencies for the three tax years. Now the Tax Court has sided with the IRS.

In the past, the courts have used the designation of a pilot’s home base as the location of the tax home. The taxpayer selected San Jose to be his home base. This choice involved substantive rights and obligations under the terms of his contract. Furthermore, the taxpayer never sought to establish a more substantial relationship with Thailand than obtaining 30-day transit visas.

Dismissing other arguments, the Court opined that the taxpayer’s choice of Thailand as his tax home was a purely personal decision that was not required by his work. Result: The exclusion was denied for all three years.

Reminder: Each case is decided on its own merits. Make sure that your clients who claim the foreign earned income exclusion are standing on firm ground.

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