[IMGCAP(1)]It takes a heap o’ living just to make a house a home, as the old poem teaches. In Joel Evans’ case, he did enough living in two houses in Louisiana to make the U.S. his tax home.
Perhaps he should have joined the Sakhalin Island Chamber of Commerce or become active in the local Russian branch of Kiwanis. It was that lack of local ties in Russia that was a factor in the Tax Court’s recent decision in Evans v. Commissioner, T.C. Memo 2015-12, that Evans’ tax home was in the U.S., not Russia, and therefore precluded his foreign earned income exclusion.
In order to qualify for the foreign earned income exclusion under section 911 of the Tax Code, taxpayers must satisfy two requirements: first, they must have their tax home in a foreign country, and second, 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.
Evans, who supervised oil rigs in Russia during the years at issue (2007-2010), failed to satisfy the first test despite living in Russia during his employment there. 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 for which his abode is within the U.S. The Tax Court said that during the time that Evans worked in Russia his “abode” was not in Russia but in Louisiana. 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.
“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,” the court noted. “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 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.”
An abode doesn’t necessarily mean one distinct house, the court observed. “Section 911(a) does not require that we determine which particular building in West Monroe constituted petitioner’s abode.’
Rather, as applied here, the statute asks whether his abode’ was in the United States or in Russia. Because of petitioner’s family situation, he necessarily had ties both to his own home and to his parents’ home. These two residences, together with his other ties to Louisiana, gave rise to an abode’ within the United States.”
The court refused the Service’s request to impose the 20 percent accuracy-related penalty since Evans’ tax returns were prepared by a tax professional who advised him that he qualified for the exclusion. “Although this advice was incorrect, this is a technical area of tax law, and we are satisfied that petitioners reasonably relied on the advice they were given,” the court stated.
The court observed that because Evans’ possession of an abode within the United States is fatal to his claim, it did not need to decide whether he met the second requirement for the exclusion by satisfying the bona fide residence test. It noted that the requirement that he have his abode outside the U.S. is distinct from the requirement that he be a bona fide resident of or be physically present in a foreign country.
“The tests for abode and residence are clearly distinct; since petitioner fails the former, it does not matter whether he can satisfy the latter,” the Court said.
“The Tax Court got it right,” said Linda de Marlor, president of Rockville, Md.-based Tax-Masters, Inc. “In this case, the taxpayer was an employee. If taxpayers are self-employed, they don’t get the whole $99,200 exclusion because they lose a percentage based on what their deductions are for being self-employed. And the exclusion itself is prorated based on the number of qualifying days spent in the foreign country.”
“By choosing corporate status, a self-employed person can become salaried,” she advised. “Then they would be eligible for the whole exclusion, assuming they spent the entire year in the foreign country.”
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