 In short, no. Virginia does not recognize the doctrine of judicial instructions, which permits an award of attorney’s fees from the estate when beneficiaries must ask a court to clarify ambiguity in a will or trust. Even if this were recognized, such an award would be improper when the beneficiaries have asserted the language of the testamentary instrument is clear and unambiguous throughout the litigation.
Also in the case of Freeney v. Freeney, No. 170031 (Va. Apr. 12, 2018), the attorneys for the remainder beneficiaries argued that the circuit court also erred by failing to award attorney’s fees under the doctrine of judicial instructions. That is, “[if] judicial instructions are needed to interpret an ambiguous will or trust, all expenses of that litigation, including attorney’s fees, are to be paid by the estate.” W. Hamilton Bryson, Bryson on Virginia Civil Procedure Section 14.04 at 14-15 (5th ed. 2017). This doctrine had not been recognized by the Virginia Supreme Court previously. See DuPont v. Shakelford, 235 Va. 588, 596 (1988). The Court declined to do so in Freeney. Moreover, the Court opined that even if it had decided to recognize the doctrine, it would not have awarded fees to the plaintiff beneficiaries here because they had argued, even stipulated, that the language of the residuary clause at issue was plain and unambiguous. In summary, the doctrine of judicial instructions does not apply in Virginia to compel an estate to pay attorney’s fees to construe the language of an ambiguous will or trust. So if you must sue to have a judge interpret a will or a trust, you will be paying your own attorney's fees.
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 In short, yes. A will (or testamentary trust) may create a life estate in property without the magic words “for life” in a bequest a beneficiary.
In the case of Freeney v. Freeney, No. 170031 (Va. Apr. 12, 2018), the Virginia Supreme Court determined that a will’s residuary clause granted the testator’s wife a life estate by implication and not with any magic words. There, the testator made a will, which gave the residue of his estate to his second wife, Marjorie. That clause read, “It is my intention that she use the assets of my estate to provide for her health and support, and to continue providing for the health, support and education of my son SEAN [sic] while he is a minor, and in matters past the age of eighteen (18) at her discretion; and that upon her death any remaining assets of this estate pass to him, IN TRUST, per stirpes.” The will further limited the use of the residuary from being used for the benefit of three other family members. Some of those beneficiaries sued, arguing that this clause created a life estate in which they would share after Marjorie’s death. Both they and Marjorie agreed that the language was unambiguous, the meaning of which could be determined by a judge. The circuit court held that the language did not create a life estate. The Virginia Supreme Court disagreed and reversed. Although a will is generally construed to pass the greatest estate which the language employed is capable of conveying, indicia of a contrary intent (such as restrictions on a beneficiary’s use of the estate and plans for its use after a first beneficiary dies), can manifest an intention to create a life estate by implication. Edwards v. Bradley, 227 Va. 224, 229, 315 S.E.2d 196, 199 (1984). On these facts, the Court found that “the residuary clause in this case places limitations on Marjorie’s use of the property during her life.” Freeney at 7. It concluded on this issue by holding that these “limitations on Marjorie’s ability to use the estate … demonstrates that the residuary clause grants Marjorie a life estate by implication in the residual property....” Id at 8. In summary, a will or trust whose terms impair a primary beneficiary’s ability to use and dispose of the estate can demonstrate an intent to create a life estate without adding the magic words “for life” as qualifiers to a bequest.   The final 2017 Tax Court Case in which the Foreign Earned Income Exclusion was an issue was Redfield v. IRS, T.C. Memo 2017-71. Unfortunately, Redfield is more about paying attention to deadlines and administrative limits to claiming tax benefits in general (as opposed to the Foreign Earned Income Exclusion in particular). In short, the Tax Court agreed with the IRS: the taxpayer was not entitled to the Foreign Earned Income Exclusion for 2010 because he failed to make an election for the Foreign Earned Income Exclusion within the amount of time stated by Treasury Regulation 1.911-7(a)(2). In this case, the relevant portions of that Regulation are:
(i) In general.--In order to make a valid election under this paragraph (a), the election must be made: (A) With an income tax return that is timely filed (including any extensions of time to file), (B) With a later return filed within the period prescribed by section 6511(a) amending the foregoing timely filed return, [or] (C) With an original income tax return that is filed within one year after the due date of the return (determined without regard to any extension of time to file) * * * The parties agree that petitioner did not make a timely election under any of these methods. He did not file his 2010 Federal income tax return by October 15, 2011, the extended due date. The return that he filed in October 2014 did not amend a “timely filed return.” And that delinquent return was not “filed within one year after the due date” of his 2010 return. The taxpayer thus lost due to the timing of his election in Redfield. The full opinion is available here: https://scholar.google.com/scholar_case?case=1461363916649994071&q=T.C.+Memo+2017-71&hl=en&as_sdt=6,47. Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.   Late in the year, the Tax Court issued Hudson v. IRS, T.C. Memo 2017-221 (November 8, 2017), in which it affirmed the IRS’s denial of the Foreign Earned Income Exclusion for failure to establish a bona fide foreign residence and failure to meet the physical presence test. Unfortunately, it was not necessary to analyze, and the court did not analyze, the tax home element of the Foreign Earned Income Exclusion law (IRC Section 911).
Recall, that the Foreign Earned Income Exclusion law permits a taxpayer to establish either bona fide foreign residence or meet a physical presence test (in addition to establishing a foreign tax home). In this case, the facts convinced the Tax Court that Mr. Hudson only intended a transient resident of Korea, intended to return to the United States after retiring from Korean Airlines, and intended to spend all his time off in the United States. He spent 132 days per year in the United States, so Mr. Hudson did not meet the physical presence test. Having failed to meet the first element of the Foreign Earned Income Exclusion, the Tax Court declined to analyze whether he had established a foreign tax home. Although the Tax Court analyzes eleven factors when evaluating a taxpayer’s bona fides of foreign residence, Hudson demonstrates that transience, intending to return to the U.S. after retirement, and spending all of one’s time off in the United States are strong enough factors to defeat one’s Foreign Earned Income Exemption claims. The full facts of the case and the Court’s analysis can be found here: https://scholar.google.com/scholar_case?case=16892230118188014447&q=T.C.+Memo+2017-221&hl=en&as_sdt=6,47. Hudson thus presents yet another example of what not to do for the Foreign Earned Income Exemption. Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.   Concessions, get it? Larkin v. IRS, T.C. Memo 2017-54 was the strongest case of 2017 for claiming the Foreign Earned Income Exclusion. This is a factually complicated case because four years of tax partnership and individual tax returns were assessed deficiencies by the IRS. Further, the Court set out ten issues, one of which was whether the Foreign Earned Income Exclusion (IRC Section 911) allowed the taxpayers to exclude foreign earned income and housing costs of over $175,000 for four years (2003, 2004, 2005, 2006).
At trial, the IRS only contested the petitioners’ exclusion of the half their claimed Foreign Earned Income Exclusions they claimed for their housing expenses. Ultimately, the Court agreed with the IRS and affirmed the denial of Foreign Earned Income Exclusions for the housing costs (on top of the exclusion they were claiming for W-2 income). The Court’s analysis was as follows (beginning on page 41): "The parties each frame their dispute as concerning whether petitioners may exclude any housing cost amounts for each subject year. But, as respondent [a.k.a. the IRS] argues elsewhere with respect to Mr. Larkin’s liability for self-employment taxes, Mr. Larkin was self-employed during the subject years, and consequently the only housing cost benefits to which petitioners may be entitled are deductions of those amounts pursuant to section 911(c)(3)(A). [footnote 26 citations omitted] Under that section, a self-employed individual’s housing cost amount may be deducted in computing adjusted gross income, subject to certain limitations not applicable here. [footnote 27 citations omitted] A taxpayer’s housing cost amount comprises the “housing expenses” paid or incurred during the taxable year for the taxpayer’s foreign housing above a “base housing amount” floor. [fn 28] Sec. 911(c)(1); sec. 1.911-4(a), (c), Income Tax Regs. For taxable years 2003 through 2005 the base housing amount floor is determined by multiplying 16% of the salary of a U.S. employee compensated at an annual rate of grade GS-14, step 1, by a fraction representing the number of days during the taxable year in which the taxpayer’s tax home is in a foreign country and the taxpayer satisfies either the bona fide residence test of section 911(d)(1)(A) or the presence test of section 911(d)(1)(B). 29 Sec. 911(c)(1)(B). For the 2006 taxable year the base housing amount floor is determined by multiplying 16% of the foreign earned income exclusion amount by that same fraction. Id. Petitioners have offered four sets of invoices to substantiate expenses incurred in connection with their U.K. residence during the subject years: (1) mortgage interest payments, (2) local property tax payments, (3) utility payments, and (4) home repair and maintenance payments. Home mortgage interest and local property tax payments are not eligible housing expenses. See sec. 911(c)(2)(A)(ii). Although utility and maintenance expenses are eligible housing expenses, see sec. 911(c)(2)(A)(i); sec. 1.911-4(b)(1), Income Tax Regs., even if we treat the proffered invoices for those expenses as substantiating the listed amounts as paid, those expenses total only £450, £3,052, £5,453, and £903 for 2003, 2004, 2005, and 2006, respectively. In order to be deductible petitioner’s housing expenses for those years must have exceeded base housing amount floors of $11,581, $11,894, $12,191, and $13,184, respectively. [fn 30] After we converted the pound amounts listed in the invoices to dollar figures, giving petitioners the benefit of using the strongest pound to dollar exchange rate that occurred within each subject year, [fn 31] their substantiated housing costs still fall far below the foregoing base housing amount floors, as the substantiated amounts converted to dollars in the manner described would equal $801, $5,951, $10,524, and $1,788 for the subject years, respectively. Consequently, petitioners are not entitled to any housing cost amount deductions for the subject years." The IRS’s concession in Larkin (full opinion available here: https://scholar.google.com/scholar_case?case=2513909798963178077&q=T.C.+Memo+2017-54&hl=en&as_sdt=6,47) limits its usefulness for planning purposes because the relevant facts for establishing the two elements of the Foreign Earned Income Exclusion are completely glossed over. Larkin is, however, useful for a self-employed taxpayer who hopes to take advantage of the Foreign Earned Income Exclusion to receive some benefit (a deduction) for his foreign housing cost benefits that are large enough (greater than the floor set by the IRS each year) to be deductible under the Foreign Earned Income Exclusion. Despite the strength of the taxpayers’ position in this case, the dispositive issues reduce its informativeness and planning value. Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.   Where Lock and Acone fell short, Linde v. IRS, T.C. Memo 2017-180 succeeded in establishing a foreign tax home. Therein, the Tax Court provided this analysis:
"Section 911(d)(3) defines the term “tax home” as an individual’s home for purposes of section 162(a)(2). Section 162(a)(2) provides for a deduction for ordinary and necessary expenses paid during the taxable year in carrying on a trade or business, including travel expenses incurred while away from home in the pursuit of a trade or business. See also Commissioner v. Flowers, 326 U.S. 465, 470-472 (1946). For purposes of section 162(a)(2) an individual’s tax home is generally “the vicinity of the taxpayer’s principal place of employment and not where his or her personal residence is located.” Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); see also Rev. Rul. 75-432, 1975-2 C.B. 60. An individual, however, shall not be treated as having a tax home in a foreign country for any period during which his abode is within the United States. Sec. 911(d)(3); see also Harrington v. Commissioner, 93 T.C. 297, 307 (1989). Temporary presence of the individual in the United States does not necessarily mean that the individual’s abode is in the United States. Sec. 1.911-2(b), Income Tax Regs. Moreover, “[m]aintenance of a dwelling in the United States by an individual, whether or not that dwelling is used by the individual’s spouse and dependents, does not necessarily mean that the individual’s abode is in the United States.” Id. Mr. Linde’s principal place of employment during the years in issue was in Iraq. Therefore, whether his tax home was in Iraq rests on whether his abode was in the United States during the years in issue. Neither section 911 nor the regulations thereunder define “abode”. Thus we turn to our caselaw. In prior section 911 cases, we have examined and contrasted a taxpayer’s domestic ties (i.e., his familial, economic, and personal ties to the United States) with his ties to the foreign country in which he claims a tax home in order to determine whether his abode was in the United States during a particular period. (citations omitted) Even though a taxpayer may have some limited ties to a foreign country during a particular period, if the taxpayer’s ties to the United States remain strong, we have held that his abode remained in the United States, especially when his ties to the foreign country were transitory or limited during that period. See Harrington v. Commissioner, 93 T.C. at 308. On the basis of the record before us, we conclude that Mr. Linde had stronger ties to Iraq than he did to the United States during the years in issue. At all relevant times Mr. Linde’s economic and social life was centered in Iraq. Mr. Linde credibly testified that, while it was becoming nearly impossible for him to work as a helicopter pilot in the United States, he could do so in Iraq for the foreseeable future.9 Mr. Linde did not work in any other country besides Iraq, and he spent two-thirds of each year in issue there. Mr. Linde’s economic ties to Iraq grew stronger over the years in issue. He opened a bank account there in 2010, and in 2012 he accepted a promotion from DynCorp. Moreover, Mr. Linde’s use of his free time in Iraq--socializing with other contractors and Iraqi interpreters, making physical improvements to his CHU, and visiting local markets and restaurants--evidences an effort to create a domestic and personal life for himself there. We encountered similar facts involving a pilot in Cobb v. Commissioner, T.C. Memo. 1991-376, 1991 Tax Ct. Memo LEXIS 420. In Cobb, the taxpayer resided with his spouse and children in Alaska for several years before accepting a permanent transfer assignment in Japan. Id., 1991 Tax Ct. Memo LEXIS 420, at *3-*4. During the years at issue in that case the taxpayer lived in a Japanese hotel when he was not in transit; his family remained in the United States. Id. at *5, *7. While he did not participate extensively in Japanese cultural or social activities, he attended dinner parties with Japanese friends and was a member of the hotel’s swim club. Id. at *6. During flight layovers in Los Angeles, the taxpayer stayed with his family in Redlands, California.10 Id. at *7, *19. The taxpayer maintained a joint checking account with his wife in California. Id. at *8. His personal physician and dentist were also there. Id. at *9. After concluding that the Mr. Cobb had intended to become a resident of Japan, we held that he did not have an abode in the United States despite his U.S.-based family and “other substantial ties” to the United States. See id. at *15, *18-*19. While Mr. Cobb spent time in the United States with his family, such trips were “mere visits” and “limited by convenience and * * * [the taxpayer’s] flight schedule”. Id. at *19. Mr. Linde’s ties to the United States were equal to those of Mr. Cobb. Both took permanent work assignments in foreign countries while their families remained in the United States. Like Mr. Cobb, Mr. Linde had limited opportunities to return to his family in the United States because of his work schedule and his employer’s demands. Meanwhile, Mr. Linde’s ties to Iraq were stronger than Mr. Cobb’s ties to Japan. Mr. Linde exclusively occupied and even improved his living quarters, whereas Mr. Cobb lived in various hotel rooms. While Mr. Cobb had little contact with the Japanese community, Mr. Linde had regular contact with Iraqi citizens at work and socialized with several Iraqi interpreters during his free time. .. The IRS (Respondent) also contends that Mr. Linde’s abode was in Alabama because he visited his family there and owned a home there. Respondent cites Mr. Linde’s Alabama driver’s license and voter registration as additional evidence of his ties to Alabama. However, Mr. Linde credibly testified about the lack of piloting opportunities in the United States, his desire to remain in Iraq indefinitely, and the effort he has made to create a domestic and personal life for himself there. We also credit Mr. Linde’s testimony that he would have preferred to meet his family in Europe but could not do so because of his son-in-law’s disability. In the light of this and other evidence, we find that Mr. Linde’s ties to the United States were not as strong as respondent contends. Petitioners’ ownership of a home in Alabama and Mr. Linde’s occasional visits there do not compel a different conclusion. The regulations explicitly state that “[m]aintenance of a dwelling in the United States by an individual, whether or not that dwelling is used by the individual’s spouse and dependents, does not necessarily mean that the individual’s abode is in the United States.” Sec. 1.911-2(b), Income Tax Regs. (emphasis added). Furthermore, temporary presence of the individual in the United States does not necessarily mean that the individual’s abode is in the United States. Id. Considering the unique facts and circumstances of this case, including Mr. Linde’s continuous employment in Iraq up to the date of trial, we find that Mr. Linde’s ties to Iraq were stronger than his ties to the United States during the years in issue. We therefore hold that Mr. Linde’s abode was not in the United States and that his tax home was in Iraq. The Court’s full account of the facts in Linde (available here: https://scholar.google.com/scholar_case?case=15108540579991505396&q=T.C.+Memo+2017-180&hl=en&as_sdt=6,39) along with the above analysis provide a very recent, helpful example on which a taxpayer might model his or her plans to successfully claim the Foreign Earned Income Exclusion. Contrasting these facts with Lock and Acone will improve one’s ability to plan on claiming the Foreign Earned Income Exclusion under the most recent authority. Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.   Conversations with family over New Year's brunch led me to compile the following analyses of the Tax Cuts and Jobs Act of 2017 and it's impact on the ability of taxpayers to recharacterize contributions to their Traditional IRAs any time prior to tax day.
Internal Revenue Code Section 408A governing Individual Retirement Accounts (IRAs) (last amended in 2008) provided: (a) General rule Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan. *** (6) Taxpayer may make adjustments before due date (A) In general Except as provided by the Secretary, if, on or before the due date for any taxable year, a taxpayer transfers in a trustee-to-trustee transfer any contribution to an individual retirement plan made during such taxable year from such plan to any other individual retirement plan, then, for purposes of this chapter, such contribution shall be treated as having been made to the transferee plan (and not the transferor plan). (B) Special rules (i) Transfer of earnings Subparagraph (A) shall not apply to the transfer of any contribution unless such transfer is accompanied by any net income allocable to such contribution. (ii) No deduction Subparagraph (A) shall apply to the transfer of any contribution only to the extent no deduction was allowed with respect to the contribution to the transferor plan." (there's a lot more, but that's the operative part of the old law). Here's the 2017 language amending that Internal Revenue Code provision: SEC. 13611. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZATION OF ROTH CONVERSIONS. (a) IN GENERAL.—Section 408A(d)(6)(B) is amended by adding at the end the following new clause: ‘‘(iii) CONVERSIONS.—Subparagraph (A) shall not apply in the case of a qualified rollover contribution to which subsection (d)(3) applies (including by reason of subparagraph (C) thereof).’’. (b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017." KPMG released the following interpretation of the change when it was still in the conference committee: "The conference agreement would provide that the special rule allowing contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA would not apply to a conversion to a Roth IRA. The proposal provides that a conversion contribution to a Roth IRA during a tax year could no longer be recharacterized as a contribution to a traditional IRA and unwinding the conversion. Recharacterization would still be permitted for other contributions. This provision would not prohibit a contribution to an IRA and a conversion to a Roth IRA." Their analysis is consistent with the joint explanatory statement by the conference committee: "Under current law, a taxpayer making a contribution to an individual retirement arrangement (either a traditional IRA or Roth IRA) may recharacterize the contribution as a contribution to the other type of IRA before the due date for the individual’s income tax return for that year. The Act revises the conversion rule so that a taxpayer may no longer reverse a rollover or conversion to a Roth IRA and treat the contribution as made to a traditional IRA. However, recharacterization is still permitted with respect to other contributions. For example, a taxpayer may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA before the due date for the individual’s income tax return for that year." So if you have a private IRA, you will only be able to recharacterize contributions to traditional accounts as contributions to Roth accounts after they have been made. This would mean you pay taxes on the income now, not when the minimum mandatory distributions must be made. That limits a taxpayer's ability to influence the top marginal tax bracket in which they pay taxes when they take the distributions. Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.   In Lock v. IRS, T.C. Summary Opinion 2017-10 (a summary opinion with less precedential weight than a memorandum opinion), the Court provided the following analysis of the taxpayer’s circumstances under the Foreign Earned Income Exclusion law (IRC Section 911):
"Section 911(d)(3) defines the term “tax home” as follows: (3) 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. … regardless of the location of an individual’s principal place of business, he will not be treated as having a tax home in a foreign country for any taxable period during which his abode is in the United States. [citations omitted] Neither section 911 nor the regulations underlying that provision define the term “abode”. The Court has explained in prior cases involving the foreign earned income exclusion that the term “abode” has a domestic connotation that stands in contrast to the taxpayer’s principal place of business. See Bujol v. Commissioner, T.C. Memo. 1987-230, aff’d without published opinion, 842 F.2d 328 (5th Cir. 1988). In determining the taxpayer’s abode under section 911(d), the Court evaluates “the taxpayer’s domestic ties (i.e., his familial, economic, and personal ties) to the United States with his ties to the foreign country in which he claims a tax home” during a particular period. See Harrington v. Commissioner, 93 T.C. at 307-308; see also Eram v. Commissioner, T.C. Memo. 2014-60; Daly v. Commissioner, T.C. Memo. 2013-147. Throughout the period in question Mr. Lock maintained extensive familial, economic, and personal ties to the United States, while his ties to Iraq were quite limited. Mr. Lock had strong family and personal ties in the United States throughout the period in question. Ms. Lock and the couple’s son resided in the marital home in Florida, and he took them on vacations when he was not working overseas. Although the Locks’ marriage apparently was failing, Mr. Lock stayed in contact with Ms. Lock from Iraq, and he relied on her to send him items that he requested. Likewise, Mr. Lock’s mother, grandmother, and siblings resided in Kentucky where he visited them at least once a year. Mr. Lock also maintained a Florida driver’s license, and he owned two trucks, a boat and a trailer, and numerous firearms that he kept at his home in Florida. Mr. Lock had numerous economic ties to the United States. He maintained his status as a reserve deputy sheriff in Florida, owned and helped to manage three rental properties there, and organized and served as the resident agent for three startup businesses. He managed his financial affairs through numerous personal and business bank accounts in Florida. In contrast, Mr. Lock’s primary, if not sole, tie to Iraq was his work for TCI. Although he spent a considerable amount of time in Iraq, and we have no doubt that he developed strong bonds with his coworkers and acquaintances there, Mr. Lock clearly looked forward to leaving Iraq whenever he could to spend time with his family and friends in the United States. Mr. Lock was permitted to enter Iraq only on visas of fairly limited duration, and he did not pursue any business opportunities, open a banking account, or purchase any property there. The austerity of his living quarters in Iraq is strong evidence that his presence in Iraq was transitory and temporary. Consistent with the foregoing, we conclude that Mr. Lock’s abode was within the United States during the years in issue and therefore we sustain respondent’s determination that he was not eligible for the foreign earned income exclusion under section 911." Again, Lock is not binding, but it provides a good example of the Tax Court’s reasoning when it denied the Foreign Earned Income Exclusion to a taxpayer earning foreign income. The full account of the facts in that case is available in the Tax Court opinion (available here: https://scholar.google.com/scholar_case?case=4354396953454429531&q=Lock+v.+Commissioner+2017&hl=en&as_sdt=4,192.) Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.   Three Tax Court cases addressed the issue of establishing a foreign tax home in 2017. Of these, the taxpayers in Acone v. IRS, T.C. Memo 2017-162 and Lock v. IRS, T.C. Summary Opinion 2017-10 failed to persuade the Court they had successfully established a foreign tax home. In the third, Linde v. IRS, T.C. Memo 2017-180, the taxpayer successfully established a foreign tax home. A taxpayer can improve planning for the Foreign Earned Income Exclusion deduction by comparing the legal analysis in these three cases is.
In Acone, the Tax Court summarized the facts and its holding as follows: "Petitioner (Husband) flew airplanes for a South Korean airline company in 2011 and 2012, but he spent only about a third of each year in South Korea and more than 40% of each year in the United States. The Petitioner returned to his home in the United States frequently during those years and spent most of his days off in the United States, where his wife and house remained. He stayed in South Korea only when work required it, and stayed in the United States whenever he could. When Petitioner stayed in South Korea, he always stayed in the same hotel, provided to him at no cost by the airline, but stayed in various rooms in that hotel. Petitioner retained his U.S. citizenship, voting registration, driver’s license, bank accounts, and church membership. On their tax returns for 2011 and 2012, Petitioners (including the wife because it was a joint return) claimed an exclusion for “foreign earned income” under I.R.C. sec. 911(a)(1). The IRS disallowed the exclusions and determined tax deficiencies. The Tax Court held, For 2011 and 2012, Petitioner (Husband) was not a “qualified individual” for purposes of the foreign earned income exclusion of I.R.C. Section 911(a), because his “abode” was “within the United States” for purposes of I.R.C. Section 911(d)(3) and because he was not a “bona fide resident” of South Korea for purposes of I.R.C. sec. 911(d)(1)(A)." Many more specific factual details are available in the full opinion (available here https://scholar.google.com/scholar_case?case=8835087071946842576&q=T.C.+Memo+2017-162&hl=en&as_sdt=6,39). These are, however, of limited use for tax planning purposes because the Foreign Earned Income Exclusion was denied in these circumstances. Barring a successful appeal of this decision, a taxpayer should attempt to do more than Mr. Acone did to establish a foreign tax home in another country. Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein.   2017 was a productive year for Foreign Earned Income Exclusion cases in the U.S. Tax Court. The Court issued opinions in six cases, several of which addressed the “tax home” or abode portion of the Foreign Earned Income Exclusion statute (recall IRC Section 911 requires two things – (1) a foreign tax home and either a (2-a) bona fide foreign residence or (2-b) physical presence in a foreign location for 330 days of the year). Although the inquiry remains fact dependent, this year’s cases offer several examples from which to model behavior to successfully claim the Foreign Earned Income Exclusion.
The cases are: 1. Acone v. IRS, T.C. Memo 2017-162, in which the taxpayer failed to establish a foreign tax home. 2. Hudson v. IRS, T.C. Memo 2017-221, in which the Tax Court affirmed the IRS’s denial of the Foreign Earned Income Exclusion for failure to establish a bona fide foreign residence and failure to meet the physical presence test. The tax home element was not analyzed. 3. Larkin v. IRS, T.C. Memo 2017-54, in which the IRS actually conceded the taxpayers had a foreign tax home and bona fide foreign residence. 4. Linde v. IRS, T.C. Memo 2017-180, in which the IRS found the taxpayer to have established a foreign tax home and bona fide foreign residence even though he was not present in the foreign country for 330 of the previous 365 days (physical presence test not met, but taxpayer still had a bona fide foreign residence). 5. Lock v. IRS, T.C. Summary Opinion 2017-10, in which a Department of State contractor failed to establish a foreign tax home. 6. Redfield v. IRS, T.C. Memo 2017-71, in which the IRS denied the Foreign Earned Income Exclusion because the taxpayer filed a late Foreign Earned Income Exclusion election. A final note, all of these cases can be obtained directly from the Tax Court website by searching for the party's name in 2017: https://www.ustaxcourt.gov/UstcInOp/OpinionSearch.aspx Circular 230 Notice: Pursuant to U.S. Treasury Department Regulations, all tax advice herein is not intended or written to be used, and may not be used, for the purposes of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing or recommending advice on any tax-related matters addressed herein. |
Sam SchmittThe EFM Lawyer. Archives
April 2018
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