The last Foreign Earned Income Exclusion (FEIE) case for 2016 was Gerenscer v. IRS TC Memo 2016-151 (Aug. 10). This is the least significant of the FEIE cases because the results are logical. That is, the IRS generally doesn’t let taxpayers double dip—you cannot deduct expenses you did not actually pay.
In this case, Mr. Gerenscer was a US citizen living and working for NATO in Germany. He claimed both the foreign tax credit (on his US 1040) for German income taxes AND the FEIE. As you may have already guessed, the IRS and Tax court determined Mr. Gerenscer could not take credits for taxes he had not paid—he had excluded that income from income tax under the FEIE. The Court further determined he was not entitled to the credits even after including that income despite the FEIE. He couldn’t do so because the rules that apply to the credit required him to actually pay that tax to Germany before claiming the credit in the U.S. Too much time had passed for Mr. Gerenscer to receive credit for taxes he owed to Germany.
This case further illustrates the risks of what might be called an aggressive tax position. The more a taxpayer attempts to reduce their tax bill, the more aggressive their tax position. The more aggressive your position, the more planning and professional advice you should have because the IRS accuracy-related penalties increase the financial risk of aggressive positions. As you might imagine, an attempt to double dip is extremely aggressive, something that cost Mr. Gerenscer an additional $13,000 (on top of the $65,000 he owed in back taxes).
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.
The EFM Lawyer.