Taxing Lessons Case Summaries

Case — Foreign Earned Income Exclusion

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TL Case Summ

THE QUESTION

Where is the tax home of a US citizen working on an oil rig in a foreign country?

THE DISPUTE

Taxpayer Says: Tax home is in Kuwait. The income earned while living and working on an oil rig there is foreign earned income, and is excluded from being taxed.

Internal Revenue Service Says: The income does not qualify for the foreign earned income exclusion because the taxpayer’s place of abode is in the US.

THE LAW

From Internal Revenue Code Section 61(a): US citizens are required to include in gross income all income from whatever sources derived, unless a specific income exclusion applies.

From Internal Revenue Code Section 911(a), (d): There is a specific income exclusion for a qualified individual whose tax home is in a foreign country.

From Internal Revenue Code Section 911(a)(1): At the election of a qualified individual, the foreign earned income of such individual is excluded from gross income and exempt from taxation.

From Internal Revenue Code Section 911(d)(1): A qualified individual is an individual whose tax home is in a foreign country and who is either: (1) A citizen of the United States and a bona fide resident of a foreign country for an uninterrupted period which includes an entire taxable year (the bona fide residence test) or (2) a citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country during at least 330 full days in such period (the physical presence test).

From Internal Revenue Code Section 911(d)(3): The term “tax home” means an individual’s home for purposes of section 162(a)(2) [relating to travel expenses while away from home]; however, an individual shall not be treated as having a tax home in a foreign country during any period for which his abode is within the United States.

From Bassett v. Commissioner, T.C. Memo. 1988-218: Abode has been variously defined as one’s home, habitation, residence, domicile or place of dwelling. Black’s Law Dictionary 7 (5th ed. 1979). While an exact definition of abode depends upon the context in which the word is used, it clearly does not mean one’s principal place of business. Thus abode has a domestic rather than vocational meaning, and stands in contrast to tax home as defined for purposes of section 162(a)(2).

THE CAUSE OF THE DISPUTE

When you live and work in a foreign country, you may be able to elect to exclude a certain amount of the income you earn from taxation on your US income tax return. In addition to earning foreign income, to qualify for the exclusion you generally must have a tax home in the foreign country and meet one of two tests involving the amount of time you spend in the foreign country.

For purposes of the exclusion, your tax home is either your principal business headquarters (including the place where you work), or your “abode”, the place where you have strong domestic ties, such as family.

Disputes arise because neither the code nor the regulations clearly define “tax home” or “abode”.

During the two years in question in this case (2004 and 2005), the taxpayer lived and worked on an oil rig in Kuwait. On a rotating schedule, he spent 35 consecutive days at the oil rig, then 35 days in Oklahoma with his family. He owned a house in Oklahoma and had a bank account there, as well as an Oklahoma driver’s license. He also had a US passport, a resident visa sponsored by his employer and issued by the Kuwaiti Government, and a Kuwaiti identification card. The taxpayer believes his tax home is in Kuwait, making him eligible for the foreign earned income exclusion.

The IRS says the taxpayer’s place of abode is Oklahoma, where his family lived and where his paycheck was deposited into his bank account. Because taxpayers are not considered to have a tax home in a foreign country for any period in which their abode is in the US, the foreign earned income exclusion election is not available.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 17KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
For the IRS. Taxpayer’s economic, family, and personal ties were in Oklahoma during 2004 and 2005. Taxpayer’s abode was in Oklahoma; therefore, he could not have a tax home in a foreign country. Taxpayer is not entitled to the foreign earned income exclusion for 2004 and 2005.
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