The Tax Court’s recent decision in Linde v. Commissioner, T.C. Memo. 2017-180, brought good news to taxpayers working outside the United States. In Linde, the Tax Court held that Linde, who worked for a government contractor in Iraq, could exclude the income he earned in Iraq under the foreign earned income exclusion of section 911. Linde served in the military for almost 25 years as helicopter pilot and instructor. After he retired from the military, he began working for a government contractor called DynCorp in Iraq flying government officials around the country. Linde’s work schedule in Iraq was strenuous. He worked 60 to 90 days straight before getting 30 days off. During his 30 day breaks, DynCorp required Linde to leave Iraq. Linde lived in Iraq for 248 days in 2010, 240 days in 2011, and 249 days in 2012. He spent his breaks with his wife and children at their home in Alabama. He kept his vehicles, voter registration, and driver’s license in Alabama too. On his return, Linde claimed he could exclude the income he earned in Iraq between 2010 and 2012 under the foreign earned income exclusion of section 911. The IRS disagreed.
Section 61 says that gross income includes “all income from whatever source derived.” United States citizens must pay tax on their income – even income earned outside the United States – unless there is a specific exclusion. Section 911(a) provides just such an exclusion. It allows a “qualified individual” to exclude from gross income his foreign earned income (subject to annual limitations). To be eligible, a taxpayer must meet two requirements. First, his “tax home” must be in a foreign country. Second, he must be either (1) a “bona fide resident” of a foreign country or countries for an uninterrupted period which includes an entire taxable year or (2) be physically present in one or more foreign countries for at least 330 days during a 12-month period. Linde agreed that he did not meet this physical presence test, so to win, he had to show that his tax home was in Iraq and he was a bona fide resident there during the years at issue.
A taxpayer’s “tax home” is generally his principal place of employment. For Linde, that was Iraq. The concept of a “tax home” can become murky though. A taxpayer cannot have a tax home in a foreign country if his “abode” is in the United States. To determine Linde’s “abode”, the Tax Court compared his ties to the United States to his ties to Iraq, and found that his ties to Iraq were stronger. He spent two-thirds of each year there; he opened a bank account and accepted a promotion there. He used his free time to make improvements to his living quarters and visit local markets and restaurants. The IRS focused on the fact that Linde owned a home in Alabama and visited his family there. But the Tax Court pointed out that Linde did not have the same opportunities to be a pilot in the United States as he did in Iraq because of his age. It also noted that Linde would have wanted his family to meet him in Europe, but his son-in-law – an Army veteran who was seriously injured fighting in Iraq – made traveling overseas difficult for Linde’s family. That was enough, and the Tax Court held that Linde’s abode was not in the United States, and that his tax home was in Iraq.
As for the second requirement – whether Linde was a bona fide resident of Iraq – the Tax Court focused on the fact that Linde planned to stay in Iraq indefinitely (in fact, he was still working in Iraq when the trial rolled around). He spent two-thirds of each year there; he left during his breaks because DynCorp required him to leave. The court did not buy the IRS’ argument that Linde’s employment was not indefinite because he only signed one-year contracts. Linde’s contracts were routinely renewed and the expectation was that he would stay indefinitely. The IRS also thought it was important that Linde did not plan to retire in Iraq. But the Tax Court was satisfied because Linde did not plan to retire soon. That means Linde was a bona fide resident of Iraq, and he could exclude the income he earned there.