Aircraft Captain in Afghanistan Loses Foreign Exclusion Case
Continuing the trend of recent cases, the Tax Court again disallowed the foreign earned income exclusion (“FEIE”) in the case of a contractor for the U.S. military who worked in Afghanistan during 2012 and 2013.
While the law has changed to allow the foreign exclusion in the case of contractors supporting the U.S. Armed Forces in designated combat zones, Afghanistan was not designated as such at the time, so the Tax Court analyzed whether the taxpayer satisfied the basic foreign exclusion requirements.
Basics of the Foreign Earned Income Exclusion
Provided that an individual can satisfy either the bona fide residence test (substantive change in residence based on facts and circumstances) or the physical presence test (present in a foreign country for 330 full days during any period of 12 consecutive months) and is able to establish a tax home in a foreign country and no abode in the United States, such individual can exclude from income a portion of his or her foreign earned income.
Foreign earned income is generally pay for personal services performed overseas, such as wages, salaries, or professional fees. It does not include passive income items, such as dividends, royalties, rent, pensions, and capital gains. It also does not include amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof.
The foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2018, the maximum exclusion amount is $103,900 per qualifying person.
What Is a “Tax Home” and What Is an “Abode”?
In order for an individual to qualify for the FEIE, his or her “tax home” must be in a foreign country. The general rule is that a “tax home” is located in the vicinity of the taxpayer’s regular or principal (if more than one regular) place of business or employment, regardless of where you maintain your family home.
Your tax home 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 principal place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither (no regular place of business or living), then you are considered an “itinerant” and your tax home is wherever you work.
The “tax home” rule is subject to an important overriding exception – an individual is not considered to have a tax home in a foreign country for any period during which the individual’s “abode” is in the United States. “Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. Thus, in contrast to “tax home,” “abode” has a domestic rather than vocational meaning. The location of your abode often will depend on where you maintain your economic, family, and personal ties.
The Leunberger Decision
In a series of cases decided over the last several years, the Tax Court has analyzed the FEIE in the context of taxpayers working under their employers’ contracts with the Department of Defense. Generally, these cases have achieved mixed results in the Court, with the key issue being whether the taxpayer was considered to have an abode in the United States.
In this most recent case, Leunberger vs. Commissioner (T.C. Summary Opinion 2018-52), the taxpayer worked full time as an aircraft captain for Berry Aviation, Inc. (Berry Aviation), a company which supported multiple Department of Defense contracts related to Operation Enduring Freedom in Afghanistan. During 2012 and 2013, the taxpayer split his time in rotational shifts between the United States and Bagram Air Base in Afghanistan.
The Tax Court denied Mr. Leunberger the foreign exclusion, because it concluded that he failed to show that he satisfied the “abode” requirement. The Court noted that the taxpayer did not leave the air base where he lived and worked because of safety concerns, and that 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, the taxpayer also owned and managed multiple investment properties in the United States. In contrast, the taxpayer did not show any connection with Afghanistan other than the location of his employment.
The Takeaway for U.S. Expats
In light of the continuing trend of courts and legislators focusing on the foreign earned income exclusion, it’s important for expats to have solid justification for their FEIE claims.
At Expat Tax Professionals, our experts have extensive experience in utilizing all of the tax benefits available to U.S. expats, including the FEIE, foreign tax credits, foreign housing exclusion, treaty benefits, and more.
We have helped many expats significantly reduce or eliminate their U.S. tax obligations using one or more of these benefits. We are ready to help you with your U.S. tax filings. Contact us today!
By Joshua Ashman, CPA & Nathan Mintz, Esq.