There are a number of tax issues that U.S. citizens and residents who live abroad have to consider. One of these is whether they qualify to exclude their foreign-earned income in computing U.S. income taxes. This exclusion has resulted in a number of tax disputes. The Leuenberger v. Commissioner, T.C. Summary Opinion 2018-52, case addresses the limitation for taxpayers who maintain a U.S. residence while working abroad.
The Foreign-Earned Income Exclusion
Citizens or residents of the U.S. living abroad still have to report their income to the IRS and, in most cases, pay tax to the U.S.
Section 911 allows citizens or residents of the U.S. living abroad to exclude a certain amount of foreign-earned income. There are several requirements to qualify for this exclusion, including the prohibition on having a U.S. tax home. The term “tax home” means:
with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.
There have been quite a few court cases that address this “tax home” rule.
The Tax Home With a U.S. Abode
An abode is generally the place where the taxpayer intends to reside long term. It is where his family lives, where he has connections to, etc.
For example, last year, the court considered a case where an airline pilot was temporarily stationed overseas. The court had little difficulty concluding that the pilot did not qualify for the foreign-earned income exclusion as he maintained a home in the U.S. and had no intent to remain overseas absent his flights to and from the foreign country.
The court has also considered the “tax home” concept in the domestic arena too. For example, the court considered a case involving an airline pilot that maintained a home in Chicago, but who flew to Dallas for work. The court concluded that the pilot’s tax home was in Chicago, as he had little to no connection to Dallas besides his work assignments.
In the present case, the court concluded that the taxpayers tax home was in the U.S.:
petitioner was an authorized contractor working for the Department of Defense in rotational shifts. Petitioner did not leave the air base where he lived and worked because of safety concerns. His family continued to reside in the United States while he worked overseas. In addition to returning to his home in the United States where he lived during the “off” periods of his rotational shifts, petitioner owned and managed multiple investment properties in the United States in 2013, one of which was a “residential apartment complex”. Petitioner also owned and registered various vehicles in Washington during 2012 and 2013 and maintained a number of bank accounts, brokerage accounts, and retirement accounts. In contrast petitioner has not shown any connection with Afghanistan other than the location of his employment.
This is consistent with the general rule and the holdings in prior cases. The general rule is that to the extent the taxpayer has an abode in the U.S., he cannot have a foreign tax home even if his principal place of business is in a foreign country.
The Tax Home Combat Zone Language
But this case is somewhat different than other cases. The taxpayer here was assisting the U.S. military in Afghanistan. The dispute involved the 2012 and 2013 tax years. To restate the Code section cited above:
An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.
If the underlined exception applies, the taxpayer may have had a tax home in a foreign country even if he had an abode in the U.S. at the same time. The court did not address the “combat zone” language. Presumably the war in Afghanistan that started in 2001 was not “officially” an ongoing war in 2012 and 2013. Or perhaps the court didn’t address the issue because the taxpayer did not raise the issue.
Regardless, the court case serves as a reminder that, absent the taxpayer who is assisting the military in a combat zone, a taxpayer cannot have a U.S. abode and qualify for the foreign earned income exclusion.