With tax filing time looming, US taxpayers abroad should take heed when claiming the Section 911 “Foreign Earned Income” and “Foreign Housing Exclusion” benefits (FEIE). Two recent cases show how easy it is to lose the FEIE benefits granted to qualifying taxpayers living and working in a foreign country. (My blog post here explains the general FEIE rules). In addition, these cases demonstrate how easy it is for the Internal Revenue Service (IRS) to win when it asserts accuracy-related penalties if you get things wrong. You cannot be too careful if you are a taxpayer abroad claiming entitlement to Section 911 benefits.
The speed with which the COVID-19 pandemic has spread has resulted in a near halt on all kinds of cross-border travel. With the COVID-19 pandemic raging, many people are now immobilized and stuck someplace where they do not choose to remain. As a result, some expatriates are powerless to leave the United States and are spending more time in the US residence. What might this mean?
Your “Tax Home” and Your “Abode”
US taxpayers living overseas are usually somewhat familiar with the benefits of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. I often see many misconceptions with regard to the rules. Here is one of the most common. Not understanding the concept can mean losing the benefits that might otherwise be possible. In order to qualify for any of the benefits, the taxpayer is required to have (among other things) a “tax home” in a foreign country. In defining what is meant by a “tax home” the law provides that the taxpayer 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.” What is the difference between one’s “tax home” and one’s “abode”?
Explanation of “Tax Home”
Under the tax rules, one’s tax home” is defined generally as the main place of business, employment, or post of duty, regardless of where the individual maintains his family home. The tax home test focuses on the place of one’s vocation or employment. It is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you do not have either a regular or main place of business or a place where you regularly live, you are considered an “itinerant”. In that case, your tax home is wherever you work.
Explanation of One’s “Abode”
A taxpayer is not considered to have a tax home in a foreign country for any period in which the taxpayer’s abode is in the United States. Here is where many people can get tripped up. One’s “abode” is generally defined to mean one’s home, habitation, residence, domicile, or place of dwelling. Unlike the term “tax home”, it does not mean the principal place of business. One’s “abode” has a domestic meaning rather than a vocational one. The location of a taxpayer’s abode often depends on where he maintains his economic, family, and personal ties. “Home is where the heart is”, might be a good way for a layman to understand this tax concept of “abode”.
Recent Tax Court Cases – Taxpayers Lose! “Abode” in the US and Penalties Applied
The two recent cases to be discussed demonstrate that each taxpayer had a “tax home” in a foreign country since in each case, the taxpayer had to live abroad for purposes of employment. The IRS disallowed the Section 911 exclusion because each of the taxpayers maintained an “abode” in the US during the relevant periods. The Tax Court agreed with the IRS in each case. It is very noteworthy that in both cases, the accuracy-related penalties assessed by the IRS were sustained by the court. I advise my readers to look carefully at the court opinions on this issue – Mr. Bellwood used TurboTax for his return preparation and Mr. Cambria used a tax professional.
Joseph S. Bellwood And Jacqueline E. Bellwood v. Commissioner, T.C. Memo 2019-135 (October 7, 2019)
For tax years 2013, 2014 and 2015 the Bellwoods sought to exclude from gross income amounts Mr. Bellwood earned from working in Saudi Arabia for a company that provided air ambulance services. The Tax Court opinion provided that during each of those years Mr. Bellwood “was a full-time employee, based out of Saudi Arabia”. Mr. Bellwood’s employer provided him with housing, initially in a hotel, and later in an apartment. During his employment, Mr. Bellwood was on-duty for 28 days and then off-duty for 28 days. While he was “on duty”, Mr. Bellwood lived in Saudi Arabia, but once the 28 days elapsed he immediately returned to his home in Georgia for 28 days off duty. With little variation, for the three years at issue, this was Mr. Bellwood’s habit with regard to his time in Saudi and time in Georgia. The Tax Court noted that Mr. Bellwood retained his US citizenship, driver’s license, voter registration, bank account, and healthcare in the United States. Furthermore, he generally conducted his affairs indirectly through his Georgia address while he was in Saudi Arabia or directly while in Georgia during his days off duty. Mr. Bellwood was unable to receive mail or make phone calls while he was in Saudi Arabia, and he continually used his Georgia address as his mailing address. It was clear to the court that Mr. Bellwood’s stronger domestic connection was with the Georgia house and not the Saudi Arabian hotel and apartment. During the time Mr. Bellwood spent in Saudi Arabia, his regular activities were primarily vocational. Mr. Bellwood testified that his non-work-related activities in Saudi Arabia were limited because of the demanding nature of his work–he went to the barber or grocery store as needed and visited the occasional restaurant, but most of his time in Saudi Arabia was spent either working or resting and preparing for his next shift. The court stated that all of this was true “only because when Mr. Bellwood had spare time, he did not wish to spend it in Saudi Arabia.” Rather he returned as soon as possible to Georgia and spent his time there on his hobbies, friends and personal matters. In other words, if in determining the location of Mr. Bellwood’s “abode” we look to the adage “home is where the heart is”, all factors point to Georgia. On these facts, the court ruled that Mr. Bellwood maintained his “abode” in the US and the FEIE was denied.
James M. Cambria v. Commissioner, T. C. Summary Opinion 2019-28 (September 30, 2019)
Mr. Cambria’s case involved a single tax year, 2014. Commencing August 5, 2014, Mr. Cambria was employed by a private company to provide security services in Camp Dwyer, Afghanistan. At that time, the entire country of Afghanistan was designated as a combat zone pursuant to an Executive Order. Mr. Cambria went to Camp Dwyer and stayed there for one year, until August 11, 2015. During that year, the Tax Court noted that Mr. Cambria “was not permitted to leave the base for safety reasons. He did not leave Camp Dwyer during his contract except for one trip to the United States from December 12, 2014, through January 1, 2015, for the birth of his child.” Throughout the tax year at issue, Mr. Cambria maintained a Colorado residence where his wife and child lived. He had a Colorado driver’s license, registered and maintained a vehicle in Colorado, had bank and credit card accounts in Colorado and New York, and was registered to vote in New York, where he had resided before moving to Colorado. After his contract ended in August 2015, Mr. Cambria returned to Colorado and began taking college classes, and was eventually employed by a Police Department in Colorado. The Tax Court noted that he had not shown any connection with Afghanistan other than the location of his employment. He “did not own land or vehicles in Afghanistan, he did not maintain a bank account there, and he did not want to bring his family with him……[he] had ties to Afghanistan that were severely limited and transitory during the year at issue.” Based on the facts, Mr. Cambria maintained his “abode” in the US and the FEIE was denied. Again in finding the “abode” for purposes of Section 911, think: “home is where the heart is”.
Facts are Critical – What about COVID-19?
The facts of each case will determine the outcome. When it is possible to do, advance planning can help the taxpayer create a better fact pattern supportive of taking the foreign earned income / housing exclusion (or housing deduction). Some facts will prove difficult because they will fall into a very gray area. Now, one lesson learned with the pandemic is that some events create facts that are firmly out of the taxpayer’s control.
Significantly, the tax rules provide that your abode is not necessarily in the United States while you are “temporarily” in the United States (think summer vacation). Taxpayers who cannot leave the US due to COVID-19 travel restrictions or health reasons may now be concerned with claiming the FEIE benefits. In addition, too many days in the US can affect other FEIE eligibility tests – such as the “bona fide residence” or “physical presence” tests (more on those tests here). To date, the Internal Revenue Service has not provided any guidance on this problem, but one would imagine that a prolonged stay in America caused by circumstances beyond one’s control (such as the pandemic) should be taken into account when examining eligibility for the FEIE. I plan to write another blog post delving into this issue in greater detail.
The IRS states that your abode is also not necessarily in the United States “merely” because you maintain a dwelling in the United States, “whether or not your spouse or dependents use the dwelling.” If you are in this type of situation you are well advised to do all that you can to show your “abode” is in the foreign country.
The stakes are high. Don’t risk assessment of the accuracy-related penalty. Contact me if you are uncertain of your situation or if you need advice as to what you can do to help tip the scale in your favor if challenged by the IRS as to the location of your “tax home”.
Posted April 9, 2020
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