Case — Foreign Earned Income

Thanks for sharing!

TL Case Summ

THE QUESTION

Can a US citizen who is a resident of France exclude income from her US return under a tax treaty?

THE DISPUTE

Taxpayer Says: Under the tax treaty with France, none of her income is subject to US tax because she is a resident of France and paid tax to France. Paying tax on the same income would amount to double taxation, for which the treaty grants relief.

Internal Revenue Service Says: The income is subject to US tax because the tax treaty with France allows for US citizens to be taxed under US law.

THE LAW

From Internal Revenue Code SectionSection 911(a): Allows a “qualified individual” to exclude from gross income “foreign earned income”.

From Internal Revenue Code Section 911(b)(1)(A): Foreign earned income is “the amount received by such individual from sources within a foreign country * * * which constitute earned income attributable to services performed by such individual”.

From Internal Revenue Code Section 911(d)(1): A qualified individual is a U.S. citizen whose tax home is in a foreign country if that individual is a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year.

From United States-France Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital, Aug. 31, 1994, 1963 U.N.T.S. 67, Article 15, paragraph 3: Notwithstanding the preceding provisions of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised as a member of a regular complement of a ship or aircraft operated in international traffic shall be taxable only in that State.

From United States-France Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital, Aug. 31, 1994, 1963 U.N.T.S. 67, Article 29, paragraph 2: Notwithstanding any provision of the Convention except the provisions of paragraph 3, the United States may tax its residents, as determined under Article 4 (Resident), and its citizens as if the Convention had not come into effect.

THE CAUSE OF THE DISPUTE

As a US citizen or resident, you are taxed on your worldwide income. If you’re also a resident of another country, you may be eligible for benefits under a tax treaty, which is an agreement between counties to help limit double taxation and other effects of the tax laws of both countries. Benefits under tax treaties include credits, deductions, exemptions, and reductions in tax rates.

US tax treaties generally include a “saving clause” that allows the US to tax its citizens and residents as if the treaty did not exist.

In this case, the taxpayer, a flight attendant, is a US citizen who was a bona fide resident of France. In the course of her job, she worked on airline flights from France to the US and back. She reported her wages on income tax returns for both France and the US. On her US return, she claimed an exclusion for those wages as foreign earned income.

Because the US-France tax treaty has a provision related to the taxation of international transportation income (Article 15 above), and because she paid tax to France on her wages, she believes the treaty allows her to avoid double taxation by excluding the wages from her US return.

The IRS says the income is taxable in the US due to the saving clause, which takes precedence over Article 15 of the treaty. In addition, international airspace is not a foreign country for purposes of the foreign earned income exclusion (code section 911 above). Therefore, income earned while working in international airspace is not foreign earned income and must be included on the US return.

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, 19KB)

***

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.

***

Other posts you might enjoy

Decisions — Taxing choices Image source: Free Picture © Semen Barkovskiy Dreamstime Stock Photos   How many options can you consider before you find yourself longing for simplicity? Whatever your answer, part of the desire for less complexity comes from not wanting to make the wrong choice. That's especially true ...
Decisions — Where’s your refund? Image source: By U.S. National Archives and Records Administration, Public domain, via Wikimedia Commons Where's your refund? Possibly helping to reduce the federal budget deficit, if you failed to file a return to get an overpayment back within the applicable time period. That's because the gov...
Case — Fun and games Image source: openclipart.org (public domain image) THE QUESTION Does an organization that offers a recreational activity to achieve a charitable purpose qualify as a charitable organization? THE DISPUTE Taxpayer Says: It operates for charitable purposes because it provides relief for the p...
Case — Carry On THE QUESTION Can an IRA deduction that is disallowed due to active participant status in an employer plan be carried forward and deducted in a future year? THE DISPUTE Taxpayer Says: The 2008 IRA contribution was an “excess contribution” and should be allowable as a deduction in 2010. Intern...
Sorry, wrong answer :(
Right answer!
For the IRS. Taxpayer is not entitled to exclude her entire income earned as a flight attendant pursuant to Article 15, paragraph 3, of the US-France tax treaty, and her income is taxable under the provisions of the Internal Revenue Code. (Editorial Note: Some of her wages were considered as earned in France, and that part was excluded on her US return.)
Posted in Taxing Lessons Case Summaries Tagged with: