Last week’s discussion of Jones v. IRS, the definition of “tax home” in IRC 911, and Tax Reg. 1.911-2(b) all left something to be desired. The authorities I have discussed over the last several weeks clarify that a person with an abode in the US definitely does not have a foreign tax home. A taxpayer who has duplicate housing costs in a foreign country and whose main place of business is abroad goes a long way toward establishing a foreign tax home. However, Hirsch v. IRS makes clear that just living and working abroad does not necessarily create the foreign tax home. A taxpayer who wishes to establish a foreign tax home must do things that connect him or her to that foreign country (not necessarily learning the language, but perhaps registering a car) and tend to show separation from the US (like living separately from one’s spouse).
The IRS has embraced these features of a foreign tax home for the FEIE. Its position on is summarized well in Publication 54 Tax Guide for US Citizens and Resident Aliens Abroad. An example (number 2) demonstrates what the IRS would consider a foreign tax home:
"For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Before you left, you distributed business cards showing your business and home addresses in London. You kept ownership of your home in Toledo but rented it to another family. You placed your car in storage. In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London.
"Shortly after moving, you leased a car and you and your spouse got British driving licenses. Your entire family got library cards for the local public library. You and your spouse opened bank accounts with a London bank and secured consumer credit. You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Your abode is in London for the time you live there. You satisfy the tax home test in the foreign country."
In this way, the IRS has “sandwiched” the issue of foreign tax home between the code, Jones v. IRS and non-binding Tax Court cases like Hirsch v. IRS.
Don’t forget that there are two prongs to the FEIE. Follow the flow chart provided by IRS Publication 54 (Figure 4-A) before claiming the FEIE on Form 2555 and your 1040.
This is the closest thing to a "black letter" rule on what does and does not qualify for FEIE that there is. It carries some authority as it is produced by the IRS. The case law on this topic appears to support both the above image and the examples provided by the IRS.
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