A taxpayer found that he could not take advantage of the foreign earned income exclusion found at IRC §911 because he failed the “abode” test in the case of Lock II v. Commissioner, TC Summary Opinion 2017-10.
Mr. Lock’s employment situation was briefly described by the Court as follows:
During most of 2010 and 2011 and for six months in 2012 Mr. Lock lived and worked primarily in the International Zone (IZ) (formerly known as the Green Zone) and neighboring areas in Baghdad. The IZ was a large area in central Baghdad, with secured points of entry, that housed the U.S. Embassy and civilian and military personnel. The IZ was controlled by the Iraqi military and police, and Mr. Lock reported that the area was frequently the target of mortar and rocket attacks.
He also had a temporary assignment in Israel during a portion of the period in question. His employer was a private security company and Government contractor. He was charged with protecting various U.S. Government personnel.
Mr. Lock filed a Form 2555, Foreign Earned Income, to his return for the years in question claiming an exclusion for some or all of this earned income for each of the years in question. But the IRS claimed he failed to qualify for the credit.
Mr. Lock clearly met some of the requirements. The earnings had been earned in a country other than the United States, not just outside the United States. So he didn’t fall into the trap that others have fallen into of having earnings in international airspace (such as the taxpayer in LeTourneau v. Commissioner, TC Memo 2012-45) or waters (the taxpayer in Wilson v. Commissioner, TC Summary Opinion 2016-19). Nor was he an employee of U.S. Government agency, which tripped up the taxpayer in Dinger v. Commissioner, TC Memo 2015-145, 8/6/15.
However, Mr. Lock’s problem arose under IRC §911(d). To be eligible for the exclusion, Mr. Lock must be an individual whose tax home is outside the United States. Generally a tax home is tied to the taxpayer’s principal place of business, but a special rule is applied at IRC §911(d)(3) to limit that rule.
As the law provides:
(3) Tax home.—The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An 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 last sentence was the issue the IRS was disputing—while Mr. Lock was located in Israel and Iraq for the period in question, his adobe remained in the United States.
As the Court points out, the law does not itself define “abode” in this context. But there has been prior case law on this issue:
The Court has explained in prior cases involving the foreign earned income exclusion that the term “abode” has a domestic connotation that stands in contrast to the taxpayer’s principal place of business. See Bujol v. Commissioner, T.C. Memo. 1987-230, aff’d without published opinion, 842 F.2d 328 (5th Cir. 1988). In determining the taxpayer’s abode under section 911(d), the Court evaluates “the taxpayer’s domestic ties (i.e., his familial, economic, and personal ties) to the United States with his ties to the foreign country in which he claims a tax home” during a particular period. See Harrington v. Commissioner, 93 T.C. at 307-308; see also Eram v. Commissioner, T.C. Memo. 2014-60; Daly v. Commissioner, T.C. Memo. 2013-147.
In this case the Court found Mr. Lock maintained his most significant ties with the United States rather than in either Iraq or Israel.
The Court continues:
Mr. Lock had strong family and personal ties in the United States throughout the period in question. Ms. Lock and the couple’s son resided in the marital home in Florida, and he took them on vacations when he was not working overseas. Although the Locks’ marriage apparently was failing, Mr. Lock stayed in contact with Ms. Lock from Iraq, and he relied on her to send him items that he requested. Likewise, Mr. Lock’s mother, grandmother, and siblings resided in Kentucky where he visited them at least once a year. Mr. Lock also maintained a Florida driver’s license, and he owned two trucks, a boat and a trailer, and numerous firearms that he kept at his home in Florida.
Mr. Lock had numerous economic ties to the United States. He maintained his status as a reserve deputy sheriff in Florida, owned and helped to manage three rental properties there, and organized and served as the resident agent for three startup businesses. He managed his financial affairs through numerous personal and business bank accounts in Florida.
In contrast, Mr. Lock’s primary, if not sole, tie to Iraq was his work for TCI. Although he spent a considerable amount of time in Iraq, and we have no doubt that he developed strong bonds with his coworkers and acquaintances there, Mr. Lock clearly looked forward to leaving Iraq whenever he could to spend time with his family and friends in the United States. Mr. Lock was permitted to enter Iraq only on visas of fairly limited duration, and he did not pursue any business opportunities, open a banking account, or purchase any property there. The austerity of his living quarters in Iraq is strong evidence that his presence in Iraq was transitory and temporary.