Lack of local ties results in denial of foreign earned income exclusion
On January 20, a U.S. Tax Court found that Joel B. Evans, an oil drilling employee stationed in Russia, couldn’t claim the foreign earned income exclusion because he couldn’t show that his tax home was in Russia. The court ruled that Evans’ home was in the United States (Louisiana) because he had stronger economic, family, and personal ties in the U.S. than he did in Russia and therefore was precluded from the exclusion.
In order to qualify for the foreign earned income exclusion under section 911 of the Tax Code, taxpayers must satisfy two requirements:
- They must have their tax home in a foreign country, and
- They must either be a bona fide resident of one or more foreign countries or be physically present in a foreign country during at least 330 days in a 12-month period.
Code section 911(d)(3) provides that an individual shall not be treated as having a tax home in a foreign country for any period in which his abode is within the U.S. In Evans case, the court stated that during the time Evans worked in Russia his “abode” was not in Russia but in the U.S. as he came back to Louisiana for a month at a time six times per year, sometimes staying at his parents’ house, and sometimes at his own house.
In a footnote, Judge Lauber said the court didn’t need to decide whether Evans met the “bona fide residence” test for the foreign earned income exclusion under tax code Section 911(d)(1)(A), because his “possession of an ‘abode’ within the U.S. is fatal to his claim.”
Despite the ruling, Evans faces no penalties for his behavior. The court found that Evans was entitled to the reasonable cause and good faith exception to an accuracy-related penalty under tax code Section 6662, because for the four tax years at issue, his returns were prepared by a competent tax professional and his mother, acting under a power of attorney, made full disclosure of all relevant facts to the professional.
If you have questions about whether you qualify for the foreign earned income exclusion, contact a ShindelRock tax professional today.