In the case of Redfield v. Commissioner, TC Memo 2017-71 the Tax Court was presented with a taxpayer that the Court clearly respected. Mr. Redfield had served as a Marine, with tours of duty in Afghanistan, tours from which, in the words of the Court, “he emerged far from unscathed…” But, unfortunately for Mr. Redfield, these considerations did not change the application of the rules regarding the time by which a taxpayer must file an election to claim the foreign earned income exclusion under IRC §911(a)(1).
The Court summarizes the facts of the taxpayer’s situation as follows:
Petitioner served for 12 years in the U.S. Marine Corps, including several tours of duty in Afghanistan. Sometime before 2010 he left the Marines as a disabled veteran suffering from memory loss and post-traumatic stress disorder. In late 2009 he was offered a civilian position at the Kandahar Air Field in Kandahar Province, Afghanistan. Believing that he had made sufficient progress toward recovery, he accepted that position, arriving in Kandahar in January 2010. Unfortunately, his physical and mental condition worsened, and he was forced to return to the United States before completing his one-year assignment.
Mr. Redfield, still dealing with those physical and mental issues, failed to file his 2010 as the Court continues:
Petitioner received an extension of time until October 15, 2011, to file his 2010 Federal income tax return. He did not file a return by that date. On May 27, 2014, the Internal Revenue Service (IRS or respondent) prepared a substitute for [*3] return (SFR) that met the requirements of section 6020(b). On September 4, 2014, the IRS sent petitioner a timely notice of deficiency based on that SFR, determining a tax deficiency of $55,217 and various additions to tax.
The law requires that an election to invoke the foreign earned income exclusion must be made by the taxpayer in accordance with regulations issued by the IRS. (IRC §911(d)(9)). The IRS is granted the authority to determine the timing of elections absent specific guidance in the Code overriding that authority by IRC §7805(d).
In the case of the foreign earned income exclusion, Reg. §1.911-7(a)(2)(i) governs when an election must be made by the taxpayer and provides five rules. They are:
- On a timely filed original income tax (including any extensions of time to file);
- On an amended return filed while the statute for claiming a refund is open revising a prior timely filed return;
- On an original return filed within one year of the unextended due date of that return;
- On an original return filed more than one year late if either:
- There is no tax due on the return after the application of the earned income exclusion or
- If there is tax due on the return, the return is filed before the IRS becomes aware of the failure to make the election. (Reg. §1.911-7(a)(2)(i))
Following the receipt of the SFR, Mr. Redfield submitted to the IRS a delinquent return with a Form 2555, Foreign Earned Income, attached claiming an exclusion for $49,136 of his civilian earnings in Afghanistan, reducing his tax for 2010 to $28,622. The IRS processed the delinquent return, but denied the foreign earned income exclusion, arguing that he had not timely filed made the election to exclude foreign earned income, as it was made after the IRS discovered the election had not been made, there was tax due after applying the exclusion and return was filed more than one year after the original due date.
The taxpayer argued that the issuance of an SFR did not amount to the IRS discovery of his failure to make an election. Unfortunately for the taxpayer, the Tax Court had already rejected this argument in prior cases. Citing the case of McDonald v. Commissioner, TC Memo 2015-169 the Court held:
By preparing for petitioner on May 27, 2014, an SFR that treated all of his wages for 2010 as gross income, the IRS evidenced its “discovery” that he had failed to elect the FEIE for that year by filing a Form 1040 accompanied by a properly completed Form 2555. Petitioner did not file his delinquent 2010 return accompanied by a Form 2555 until October 7, 2014, more than four months later.
The Court held that Mr. Redfield was barred from receiving the benefits of a foreign earned income exclusion because he had not made a timely election. As the opinion concludes:
We acknowledge petitioner’s military service to this country and recognize that he emerged far from unscathed from his tours of duty in Afghanistan. We understand that the procedural requirements for making a timely FEIE election are not exactly intuitive and that the scars petitioner incurred during his military service may have contributed to the tax delinquency at issue. While these facts may be relevant to the penalty and additions to tax that the IRS determined, they do not alter the requirement of a timely election. As to that requirement we must give effect to the regulations that the Secretary has issued under his delegated authority from Congress and to this Court’s prior construction of those regulations. That being so, we unfortunately have no alternative but to hold that petitioner did not make a timely and valid FEIE election for 2010. He is therefore not entitled to exclude from gross income any foreign earnings under section 911.