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By Edward Tanenbaum, Esq. Alston & Bird LLP New York, New York
A recent Tax Court Summary Opinion in Qunell v. Commissioner highlights the different meanings of the terms “tax home” and “abode” in concluding that the taxpayer had not met the requirements of §911 of the Internal Revenue Code.
Subject to various limitations, §911 provides for an election by a qualified individual to exclude from gross income the foreign earned income and the housing cost amount of such individual for any taxable year.
A qualified individual is one whose tax home is in a foreign country and, in the case of a U.S. citizen, who establishes that he/she is a bona fide resident of a foreign country for an uninterrupted period which includes the entire year or, in the case of a U.S. citizen or resident, who during any period of 12 consecutive months, is present in a foreign country during at least 330 full days in such period.
The term “tax home” means an individual's home for purposes of §162(a)(2) (relating to travel expenses while away from home). Generally, this means the place where the individual's principal or regular place of business is located or, if the taxpayer has no regular or principal place of business, the taxpayer's regular place of abode in a real and substantial sense. However, for purposes of the §911 exclusion, an individual will not be treated as having a tax home in a foreign country for any period for which the individual's abode is in the United States.
The facts of Qunell involved a U.S. citizen taxpayer who, after serving in the U.S. Army, began working for a technology company in Afghanistan in connection with a contract that the company had with the U.S. Department of Defense. The employment lasted for about a year and a half. While working for the technology company, the taxpayer lived on a U.S. military facility in Afghanistan. Passport records indicated that he left that country from time to time for vacation. He traveled to the U.S. in early 2011, got married in February of that year and returned to Afghanistan shortly thereafter without his wife. During the year in issue, he and his wife owned a home in Illinois in which his wife and children lived while the taxpayer worked in Afghanistan. The taxpayer's wife and children did not visit him while he was working in Afghanistan. Finally, the taxpayer maintained several bank accounts in the United States.
On his 2011 return, the taxpayer took the position that his tax home was in Afghanistan under the authority of §911(a) and, therefore, excluded his wages from income. The IRS took issue with that, arguing that because the taxpayer had his place of abode in the U.S., that fact, per §911(d)(3), precluded a finding that the taxpayer's tax home was in Afghanistan.
The Tax Court agreed that, per the statute, an individual whose abode is in the U.S. cannot establish that his or her tax home is in a foreign country. In considering the meaning of “abode” as used in §911, the court pointed out that the term “abode” has traditionally been defined as one's home, habitation, residence, domicile or place of dwelling. The court flatly rejected the notion that “abode” means one's principal place of business. Stating that “abode” has a domestic rather than vocational meaning, the court observed that the term has a meaning which stands in contrast to “tax home” and is generally the country in which the taxpayer has the strongest economic, family and personal ties.
On the facts, the Tax Court found that, although the taxpayer had connections with Afghanistan, his ties to the U.S. were much stronger and, thus, his abode remained in the United States. The court cited the fact that the taxpayer owned a home in Illinois where his wife and children lived and that he maintained all his bank accounts in the United States. Further, while living on a military base in Afghanistan, his family did not visit him there and he terminated his employment with the technology company because he wanted to return to the United States. Thus, in the court's view, his ties to Afghanistan were entirely transitory and did not extend beyond the bare minimum required to perform his duties there.
Thus, other than the location of his employment, the taxpayer did not establish to the court's satisfaction that he had any economic, family, or permanent ties to Afghanistan. The court was convinced that the taxpayer's economic, family and personal ties to the U.S. were “sufficiently strong” for the U.S. to be considered the location of his abode (thereby precluding establishing a tax home in Afghanistan under §911(d)(3)).
There can be no doubt that the taxpayer's tax home — i.e., the location of his regular or principal place of business — was Afghanistan. However, by definition, §911(d)(3) mandates that such a tax home will not be recognized, at least for §911 purposes, if the taxpayer's abode is within the United States. Whether this is the right policy is debatable.
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