Taxing Lessons From Court Decisions

Decisions — Controlled by the Army

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As a citizen of the US, you’re taxed on your worldwide income “from whatever source derived”…unless an exclusion applies. Foreign earned income (internal revenue code section 911) is one of those exclusions.

To qualify for the section 911 foreign income exclusion, you have to meet two requirements. First, your tax home must be in a foreign country. Second, you must either be a “bona fide resident” of one or more foreign countries or be physically present in such countries during at least 330 days in a 12-month period.

There’s also an exclusion from the exclusion. When you’re paid by the US as an employee, those payments are not considered foreign earned income.

In T.C. Memo. 2015-248 (Striker), the question of whether the taxpayer could claim the foreign earned income exclusion depended on whether he was employed by the US.

The taxpayer was a social scientist with a PhD in his field. He wanted to use his skills to assist the NATO mission in Iraq or Afghanistan, and he applied to the US Army for a position. (NATO, the North Atlantic Treaty Organization, is a political and military alliance of countries that have joined together to provide security to all members.) The US Army deployed him to a NATO post in Afghanistan where a Canadian general was the base commander.

During 2010 and 2011, the taxpayer performed services as a civilian and served in units led by NATO commanders. The US Army decided where the taxpayer was to be deployed and specified the dates, times, and other terms of his departures to and from Afghanistan. The taxpayer did not know where he would be assigned or what his specific “special mission” would be.

In Afghanistan, the taxpayer acted as a liaison between the NATO command and the local people. The taxpayer regularly participated in NATO sponsored training and workshops, some of which were mandatory. He wore a NATO civilian name tag and a NATO badge. The team he worked with was composed of citizens from various NATO countries. The team leader conducted performance evaluations but had no authority to discipline the taxpayer or discharge him from his post.

The NATO base commander exercised ultimate operational control over the taxpayer’s work. While the base commander could not terminate the taxpayer from his position with the US Army, he could refuse the taxpayer access to the base. This would have the effect of removing the taxpayer from the regional command and rendering him unable to perform his work. If this were to happen, the taxpayer would have to fly back to the US and either apply for another deployment with the Army or return home.

The US Army paid the taxpayer on the basis of government pay scales. The Army provided standard Department of Defense fringe benefits, including health and retirement benefits. The Army furnished a biweekly “Civilian Leave and Earnings Statement” showing the taxpayer’s gross pay and deductions, reported his wages to the IRS on Form W-2, Wage and Tax Statement, and withheld from his paychecks the required federal income and employment taxes.

The taxpayer did not maintain a permanent residence in the US during the years he was deployed. He listed his mother’s residence as his address on his tax returns for 2010 and 2011 and claimed the foreign earned income exclusion for those years. He listed his occupation as “Defense Contractor” and his employer as “Defense Finance & Accounting Services.” He stated his employer was a “US company” and listed his employer’s US address as a location in Cleveland, Ohio, and his employer’s foreign address as a location in Afghanistan.

The IRS agreed the taxpayer met the two requirements for foreign income exclusion. However, the IRS disallowed the foreign earned income exclusion, saying the taxpayer was an employee of the US Government because the Army had the right to control his work and the right to discharge him.

The taxpayer argued that he was actually working for NATO because NATO officers supervised his activities on a daily basis, and that the NATO commander, by excluding him from the base, could effectively bring his mission to an end.


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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

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.


Sorry, wrong answer :(
Right answer!

For the IRS.

The US involvement in Afghanistan was conducted as part of a coalition. Like other NATO members, the US participates in NATO-led missions by volunteering troops and civilian personnel. The fact that the US participates in NATO-led operations by volunteering its personnel indicates that the US exercises control over those who are thus contributed.

The taxpayer has not shown that his position upon deployment to Afghanistan differed in any material way from the position occupied by hundreds of thousands of other Army military and civilian employees who have been deployed or seconded to NATO and other allied commands worldwide.

In determining whether his wages are excludable under section 911(b)(1)(B)(ii), it is not dispositive that he was “stationed overseas in an allied command” rather than stationed overseas in a US Army base.

The taxpayer has not carried his burden of proving that he was an employee of NATO rather than the Army during 2010 and 2011. As an employee of the US during those years, he is subject to the exception set forth in section 911(b)(1)(B)(ii) and is not entitled to a foreign earned income exclusion.

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