Last week, I began explaining how Jones v. IRS, 927 F.2d 849 (5th Cir. 1991) created binding case law on the FEIE issue of bona fide residence. The case also established binding law on the interpretation of the “tax home” element of the FEIE. (Some might argue this portion of the case is non-binding dicta. However, this determination was necessary for the court to resolve the issue before it – whether Mr. Jones met both threshold requirements of claiming the FEIE. Admittedly, the extent to which this portion of the opinion is binding is more arguable. The repeal of IRC 913 in the 1980s also weakens this portion of the Jones opinion.)
In any case, the definition provided by the FEIE law is not very good. It merely prevents a person whose abode (place of normal residence) is in the US from establishing a foreign tax home.
The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). 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 United States.
Treasury Regulation 1.911-2(b) is equally unhelpful because it keys on “place of business or employment, ” concepts Hirsch demonstrated were not as simple as the location in which a person works, “an individual's tax home is considered to be located at his regular or principal (if more than one regular) place of business…”
So the Fifth Circuit in Jones dove into the Congressional record (something courts tend to avoid doing). It interpreted the Congressional record to indicate “ that the Congressional purpose in adding the abode limitation was to make these tax benefits available only to those individuals who actually incurred increased living expenses while living abroad.”
The fifth Circuit found the following details of Mr. Jones’ life demonstrated his Japanese Tax Home:
"Jones had to pay for his vacation travel to the United States. Jones also paid for his meals and his housing while abroad. Jones also incurred the additional cost of paying Japanese income taxes. In addition, Mrs. Jones had the opportunity to move to Japan if she had so desired, but she elected to keep her job in Anchorage for her own personal reasons. Therefore, Jones' abode was in Japan and not in the United States, and his tax home was also in Japan during the relevant period."
The Jones case thus establishes the strongest case law for the concept of a foreign “tax home.” It fails, however, to establish a very useful test. The recent Hirsch case demonstrates that a duplicate cost of a foreign home is not sufficient for the FEIE.
Next week, I’ll discuss guidance provided by the IRS, which may actually help resolve the issue.
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