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.
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