Qualification for claiming the foreign tax credit was the key issue for Joel Evans in the case of Evans v. Commissioner, TC Memo 2015-12. Mr. Evans worked in the oil industry. While he was from Louisiana, he often was assigned to work overseas.
During the period in question he was promoted to a management position at his employer’s facility on Sakhalin Island in Russia. The island is in a remote location and weather there is harsh. He had a base of operations at Yuzhno, a relatively large city in Russia.
His work schedule had 30 days on-duty followed by 30 days off-duty. When on-duty he lived in a four-bedroom apartment provided by his employer in Yuzhno that he shared with other employees of the organization. About three times a year he would spend periods of from one to three weeks on an offshore oil platform. During those stints we would take meals and sleep on the platform.
He had occasional interaction with the general population of Sakhalin Island. While he learned some Russian phrases, he generally relied on an employer provided translator to interact with others when necessary.
During this time he retained his home back in the United States. While his first wife left the residence in 2007 when the parties divorced, his mother helped him keep up his home back in Louisiana. His daughter moved in with Joel’s mother following the divorce, and his mother took the daughter to stay at Joel’s home from time to time so she could visit friends in the area.
During his 30 day off periods Joel would fly back to Louisiana, paying for the flights personally, and stay in the residence in Louisiana. He normally was at his Louisiana residence for 23 days during such periods and his daughter normally resided with him during these periods.
Joel remained registered to vote in Louisiana, his driver’s license was issued by Louisiana and he had his bank account there.
In 2009 Joel got married again. His new spouse moved into the Louisiana home and resided there full time.
Family members never accompanied Joel to Russia. In fact, the visa he held, while allowing him to remain in Russia long term, did not allow him to bring family members with him. He once unsuccessfully sought to obtain a visa for his daughter to accompany him.
When tax returns were prepared for Joel, the foreign earned income exclusion under IRC §911(a) was claimed on Form 2555. The IRS claimed Joel was not entitled to the exclusion.
The key issue in this case was whether Joel met the requirements under IRC §911(d)(1) to be an individual qualified to claim the foreign earned income exclusion. It’s not enough for Joel to have worked in a foreign country and received income from that country.
Rather, pursuant to the law, Joel must be able to show:
- Joel’s tax home was in the foreign country and
- Joel met one of two requirements:
- He was a bona fide resident of Russia during the years in question or
- During any period of 12 consecutive months he was physically present in the country during at least 330 full days in such period [IRC §911(d)(1)]
There is a special qualification on the “tax home” test—while normally we look to where someone’s principal place of business is to determine a tax home, for purposes of qualifying for foreign earned income exclusion another qualification is added.
IRC §911(d)(3) provides, in addition to meeting the general “tax home” test for §162 purposes, that “[a]n individual 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.” The Tax Court, citing its opinion in Bujol v. Commissioner, T.C. Memo. 1987-230, noted that an “abode” does not mean an individual’s principal place of business. Rather, the Court continued in the Bujol opinion, “‘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 Tax Court had previously found a taxpayer under similar circumstances failed the “abode” test in the case of Lemay v. Commissioner, T.C. Memo. 1987-256. That taxpayer had a similar on-duty/off-duty cycle where he returned to the United States during each off-duty period.
As the Court noted:
Petitioner’s ties to Louisiana during 2007-2010 were at least as strong as, if not stronger than, those of the taxpayer in Lemay. Throughout this period petitioner owned a house in West Monroe that he had built. While he was overseas his first wife, his second wife, and his daughter lived in this house or in his parents’ house, also in West Monroe. During his off-duty periods petitioner regularly returned to West Monroe for an average of 23 days per period to be with his family. His business affairs were generally handled by his mother, whose address in West Monroe he used as his mailing address. His driver's license, voter registration, bank accounts, and motor vehicles were all centered in Louisiana. His ties to Sakhalin Island, by contrast, were entirely transitory and did not extend much beyond the bare minimum required to perform his duties there.
The taxpayer argued that because he split his time between two residences, he did not “abide” in either. However the Court found that it did not have to find a specific home in which it is found that he “abided” in, but rather whether his abode was in the United States—which the Court held it clearly was.
The taxpayer argued that, while the Fifth Circuit, which is where his appeal would go, had upheld the Tax Court in the Lemay case, the later decision of the Fifth Circuit, overturning the Tax Court in the case of Jones v. Commissioner, (927 F.2d 849, 856 (5th Cir. 1991), rev’g TC Memo. 1989-616) changed the law.
The Tax Court disagreed. The Court noted that in Jones the issue involved a Japan Airlines pilot who moved with his family to Japan when he began employment. When he was transferred to JAL’s only U.S. base in Alaska, his family moved there. When he was later reassigned back to Japan his family did not join him. However, Mr. Jones paid for his own housing in Japan (rather than using company housing like Joel did) and lived there except when traveling for the airline or going on vacation.
The Tax Court notes that the Court of Appeal found the provision was meant to give the benefit to taxpayers who maintained the costs of two separate residences, which Mr. Jones did—and which, it noted, Joel did not. As well, the Fifth Circuit, rather than overturning its prior ruling in Lemay, specifically pointed out the differences between the Jones situation and that faced by the oil industry employees, including noting that the oil industry cases involved situations where the employees were prohibited from bringing their families with them. The Tax Court concluded that Joel’s fact pattern was clearly more in line with Lemay than Jones and, therefore, under the tests used by the Fifth Circuit, his abode remained in the United States.