The Tax Court put out three helpful decisions on the Foreign Earned Income Exclusion (FEIE) in 2016. Hirsch v. IRS, Summary Opinion 2016-37 (Aug. 8); Gerencser v. IRS, TC Memo 2016-151 (Aug. 10); Co v. IRS, TC Memo 2016-19 (Feb. 8).
This week, I will address Hirsch, which should be of particular interest to members of the Foreign Service Community who telework for U.S. employers they would otherwise work for in a traditional setting if they were not called away to be with family overseas.
Although non-binding and not of any precedential value, Hirsch was the most helpful of this year’s (2016) FEIE cases because the taxpayer’s “tax home” was placed directly at issue. There, Mr. Hirsch was a US employee (investment advisor licensed in New York and New Jersey) of a US Company – Merrell Lynch. However, he lived and worked in Israel, where he maintained a home and lived with his wife.
The IRS agreed that Mr. Hirsch was indeed a bona fide resident of Israel, so he had to show whether his “tax home” was also abroad (in Israel) to qualify for the exclusion. (Recall, the Foreign Earned Income Exclusion has two distinct requirements: (1) Either (a) physical presence in a foreign country during 330 days in the last 12 months or (b) bona fide residence abroad; AND (2) foreign tax home). As to “tax home,” the Tax Court explained:
"… a taxpayer’s tax home is generally considered to be the location of his regular or principal place of business, and not where his personal residence is located.
Mitchell v. Commissioner, 74 T.C. 578, 581 (1980). A taxpayer’s “abode” is his personal residence, and for purposes of section 911(d)(3) “abode” has a “domestic rather than vocational meaning”.
"The Court determines the taxpayer’s country of abode by considering where he has the strongest economic, family, and personal ties.
"A principal place of business can be identified by looking at the employer’s practices and the place the employer has identified as the taxpayer’s principal place of business in its records."
Applying these standards and some older Tax Court precedent, the Court in Hirsch concluded the taxpayer’s abode was in Israel, where his strongest economic, family and personal ties were. However, his tax home was in Israel:
"According to Merrill Lynch’s records, petitioner [Mr. Hirsch] worked out of the New Jersey offices and had an address where he received his mail from Merrill Lynch, including his Forms W-2, in nearby New York. Petitioner was also authorized to work out of other locations in New Jersey and New York, but according to employment records he was not authorized to work out of his home in Israel or out of the Merrill Lynch office in Tel Aviv, Israel. Merrill Lynch did not provide petitioner with an Israeli telephone number or office space."
The Court found Mr. Hirsch’s arguments that his place of business was in Israel because the research and financial management he performed from there could have been done in the U.S.:
"There was nothing about the nature of his work or Merrill Lynch’s requirements that necessitated his conducting the research while in Israel. The choice to work in Israel was made solely for personal reasons." (emphasis added.)
Mr. Hirsch’s arguments that he was an “international” employee were not persuasive to the Court. Similarly unpersuasive facts and arguments can be found in Sislik v. IRS, TC Memo 1989-495 (Sept. 7 1989).
Next week, I'll move on to summarize Co v. IRS (in which the petitioner was an OBO personal services contractor), Gerencser (a military serviceman who unsuccessfully tried to claim foreign income tax credits and the FEIE), and an appellate court case creating binding law on what does qualify for a Foreign Earned Income Exclusion.
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