U.S. income tax laws can be challenging for U.S. citizens who live outside of the U.S. This is particularly true for airline pilots who accept jobs overseas. The recent Acone v. Commissioner, T.C. Memo. 2017-162, case addresses the challenge of determining whether an airline pilot stationed overseas qualifies for the Section 911 foreign income exclusion.
Facts and Procedural History
The facts and procedural history are as follows:
The taxpayer is a U.S. citizen. He was an airplane pilot employed by Korean Air Lines from 2006 thru 2013. He was stationed at an airport on South Korea during this time. He also lived a a hotel in Korea that was owned by his employer. He was not assigned a specific hotel room, however. He stayed in any room that was available at the time. The taxpayer had some ties to South Korea, including social activities, etc. The taxpayer spent most of his time off in the U.S.
The taxpayer’s wife and three kids remained in the U.S. The taxpayer maintained his U.S. voter registration, church membership in the U.S., and he returned to the U.S. to live with his wife after he stopped working for the airline. He kept his U.S. bank account and had is wages deposited into the account.
The taxpayer’s employer filed his Korean tax returns for 2010 and 2011 and didn’t consult with the taxpayer in preparing them. The taxpayer paid approx. 4% tax to Korea.
On his joint U.S. income tax returns for 2010 and 2011, the taxpayer claimed a Section 911 exclusion for his wages earned in Korea. The IRS denied the Section 911 exclusion and litigation ensued.
The question for the court was whether the taxpayer was entitled to the Section 911 exlucsion for the wages he earned while working in Korea.
The Section 911 Exclusion
Section 911 allows a “qualified indivdiual” to exclude from income “foreign gross income.”
A “qualified indivdual” includes individuals:
- Who have a tax home in the foreign coutnry and
- Who are either:
- Physically present in the foreign country for 330 or more days during the year or
- A bona fide resident of the foreign country.
For the “tax home,” the individual cannot maintain an abode in the U.S. The court had little difficulty finding that the taxpayer maintained an abode in the U.S. This was driven by the fact that his wife maintained a home in the U.S. and the taxpayer spent his time off in the U.S. with his family. This evidence was substantially less than the temporary hotel rooms the taxpayer stayed in while in South Korea.
The taxpayer also admitted that he was not physically present in Korea for 330 days or more.
Bona Fide Resident Factors
This only left the question as to whether the taxpayer was a bona fide resident of the foreign country. The following factors are considered in determining where a taxpayer is a bona fide resident of a foreign country:
- intention of the taxpayer;
- establishment of his home temporarily in the foreign country for an indefinite period;
- participation in the activities of his chosen community on social and cultural levels, identification with the daily lives of the people and, in general, assimilation into the foreign environment;
- physical presence in the foreign country consistent with his employment;
- nature, extent and reasons for temporary absences from his temporary foreign home;
- assumption of economic burdens and payment of taxes to the foreign country;
- status of resident contrasted to that of transient or sojourner;
- treatment accorded his income tax status by his employer;
- marital status and residence of his family;
- nature and duration of his employment; whether his assignment abroad could be promptly accomplished within a definite or specified time;
- good faith in making his trip abroad; whether for purpose of tax evasion.
While no one factor is determinative, the courts generally accord the first factor the most weight.
In evaluating these factors given the facts in this case, the court noted that:
eight Sochurek factors weigh against finding bona fide residence in South Korea, and three weigh in favor. These three favorable factors do not constitute the “strong proof” of bona fide residence that a taxpayer must provide.
Section 911: The Facts Matter
What facts would have helped support the taxpayer’s position this case?
As noted by the court, it would have been helpful if the taxpayer intended to reside in Korea permanently rather than temporarily while he was working for Korean Air Lines. This intent was negated by the taxpayers testimony and by the fact that he spent most of his time off in the U.S. and he kept signficant ties to the U.S.
The cases cited by the taxpayer and court are also instructive. The taxpayer cited and the court noted the Jones v. Commissioner, 927 F.2d 849 (5th Cir. 1991). In that case the taxpayer was allowed a Section 911 exclusion. The facts showed that the taxpayer was only in the U.S. when he was on vacation from his home in Japan. The taxpayer in Jones also returned a dividend check that the State of Alaska issued to him as a resident.
The court also distinguished the Cobb v. Commissioner, 62 T.C.M. (CCH) case, which also involved an airline pilot. In Cobb, the taxpayer accepted a permanent job overseas and had limited visits to the U.S.