Tax Court in Brief | Morgan v. Commissioner | Foreign Earned Income and Foreign Tax Home

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Tax Litigation:  The Week of June 20th, 2022, through June 24th, 2022

Alfred Christopher Morgan, v. Comm’r, T.C. Summary Opinion 2022-10| June 23, 2022 | Wells, J. | Dkt. No. 20912-19S

Short SummaryThis case discusses the applicability of the foreign earned income exclusion (FEIE) for a U.S. citizen residing in Saudi Arabia deriving income in such jurisdiction.

Alfred Christopher Morgan (Mr. Morgan) a U.S. citizen and retired military, resided in Saudi Arabia during 2016. He worked there as a quality control manager for a Saudi Arabian’ company. He worked 9 hours per day, 5 days a week. During the weekends, he traveled to close foreign countries (Bahrain, Dubai, etc.) for recreational purposes. In Saudi Arabia, he was the president of a social club, the Worldwide Fraternity of Turtles. He lived in an employer-facility and he had obtained Saudi Arabian proof of residence (Iqama), medical insurance and a driver’s license in Saudi Arabia. Mr. Morgan also was engaged to a long-term resident of Saudi Arabia.

In the U.S., Mr. Morgan had a home where his daughter used to live. He was the sole financial responsible person for maintaining the property. Although Mr. Morgan had his family (mother, daughter, brother, and sisters) living in the U.S., he barely visited them. During 2016, he visited his mother and daughter for approximately two and one week respectively. He did not provide financial assistance to his immediate family. He did not visit any medical provider in the U.S., but he retained medical insurance provided to retired military and his driver’s license.

Mr. Morgan did not file his 2016 tax return. The IRS prepared a substitute for return including in his gross income the income he derived from Saudi Arabia. Mr. Morgan challenged the deficiency in the Tax Court and claimed that the FEIE applied and thus, his foreign earned income should be excluded under I.R.C. § 911(a)(1). The Court determined that his income should have been excluded as he met the requirements of the FEIE.

Key Issues: Whether Petitioner was entitled to exclude his income from Saudi Arabia under the FEIE  § 911(a)(1) of the I.R.C.

Primary Holdings: Petitioner was entitled to exclude his foreign earned income as he met the FEIE requirements, because he met the “physical presence” test and his tax home was determined to be located in Saudi Arabia.

Key Points of Law:

Section § 911(a)(1) allows a U.S. person to exclude (the FEIE) from gross income his foreign earned income. Foreign earned income is any amount received by such individual from sources within a foreign country which constitute earned income attributable to services performed by such individual. I.R.C § 911(b)(1)(A).

To qualify for the FEIE, two tests must be met: (1) the “physical presence” test or the “bona fide resident test and (2) the tax home of the taxpayer must be in a foreign country. I.R.C. § 911(d)(1).

The physical presence test requires that the taxpayer spends at least 330 days in a 12-month period. I.R.C. § 911(d)(1)(B). In this case, Mr. Morgan met this test because during 2016 he spent more than 330 days in Saudi Arabia. Although he made a minor error on the calculation of his visiting days during 2016 (he claimed 25 days on his return but testified at trial a number of 21 days), the Court found that such number did not exceed the 35-day threshold permitted by the physical presence test to be in the U.S.

Having met the first requirement, the Court analyzed whether Mr. Morgan had his tax home in Saudi Arabia. “Tax home” for purposes of the FEIE is defined in reference to the definition provided in section § 162(a)(2) -tax home for purposes of traveling expenses-. “Tax home” is the “the vicinity of the taxpayer’s principal place of employment and not where his or her personal residence is located.” See Mitchell v. Commissioner, 74 T.C. 578, 581 (1980).

However, if the taxpayer has an “abode” in the U.S., such individual cannot be treated as having his tax home in a foreign country. I.R.C. § 911(d)(3). Temporary presence of the individual in the U.S. does not translate in the tax home being in the U.S. Also, the maintenance of a dwelling in the U.S. does not necessarily mean that the individual has an abode in the U.S. Treas. Reg. § 1.911-2(b). Abode for these purposes depends on the fact and circumstances but generally does mean one’s home, not the principal place of business, and a concept in contrast to the “tax home” definition. See Bujol v. Commissioner, T.C. Memo. 1987-230, 1987 Tax Ct. Memo LEXIS 234, at *8–9, aff’d without published opinion, 842 F.2d 328 (5th Cir. 1988).

For the FEIE, the determination of abode is made by the comparison between the taxpayer’s domestic ties with the ties to the foreign country in which he claims the tax home. See Haskins v. Commissioner, 820 F. App’x 994, 995 (11th Cir. 2020) (quoting Harrington, 93 T.C. at 307–08), aff’g T.C. Memo. 2019-87. Among the relevant considerations to establish an “abode” include property located in such jurisdiction, community involvement (Mr. Morgan was greatly involved in the Saudi Arabia community as president of a local organization), recreational activities, amount spent by the taxpayer in such location (he spent the majority of time in Saudi Arabia and had obtained an Iqama or resident alien visa, plus he had medical insurance an driver’s license in Saudi Arabia) and residence of the taxpayer’s family (although not married, he was engaged to his fiancé who had lived in Saudi Arabia for more than 30 years). In contrast, in the U.S., Mr. Morgan own a property that was used exclusively by his daughter, had a U.S. bank account (which was required by his employer in Saudi Arabia) and a U.S. driver’s license.

Based on these circumstances, the Court concluded that his ties were stronger to Saudi Arabia and accordingly determined that his tax home was there, and he had no U.S. abode.

Insight:  Although this case has not precedential implication, it is relevant to review the basics of the FEIE. As a result of the COVID-19 pandemic, a great number of individuals have moved abroad to work remotely. For these remote workers, the determination of whether they do have a U.S. abode is the utmost relevance as the existence of such could prevent them from qualifying to the FEIE. Careful determination must be given to the concept of “abode” as this is relevant for a taxpayer trying to qualify for the Streamlined Foreign Offshore Procedures. If such individual has a U.S. abode, he/she may be prevented from joining such procedure.

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