Qualifying for Foreign Earned Income Exclusion

In a recent US Tax Court case (Hirsch, TC Summ. Op. 2016-37), a US citizen who lived in Israel "for convenience" was not allowed to exclude his income which he "earned" in Israel.

From the judgment :

To be entitled to this exclusion, a taxpayer must satisfy two distinct requirements. First, he must be
an individual “whose tax home is in a foreign country.” Sec. 911(d)(1). Second,
he must be either a “bona fide resident of a foreign country or countries for an
uninterrupted period which includes an entire taxable year” or a U.S. resident or
citizen present in a foreign country during at least 330 days in a 12-month period.
Sec. 911(d)(1)(A) and (B).
Section 911(d)(3) defines the term “tax home” for an individual taxpayer as
his “home for purposes of section 162(a)(2)”. Under section 162(a)(2) a
taxpayer’s tax home is generally considered to be the location of his regular or
principal place of business, and not where his personal residence is located.
A principal place of business can be identified by looking at the employer’s
practices and the place the employer has identified as the taxpayer’s principal
place of business in its records.
We find that petitioner’s abode was in Israel. Petitioners lived in Israel and
owned a house on which they paid real estate taxes. Petitioners had Israeli
citizenship, voted in Israeli elections, and were members of a synagogue and
ESRA in Israel. Petitioner traveled to the United States only to meet with clients
and perform other work-related duties. Petitioner did not maintain a residence in
the United States. When he was in town for work, he stayed at his daughter’s
house in New York. Thus, petitioner’s strongest economic, family, and personal
ties were in Israel.

We conclude that petitioner’s tax home was in the United States and not
Israel. Similar to the taxpayer’s employer in Sislik, which designated JFK airport
in New York as the base of operations, petitioner’s employer identified the
Lynnvest Group’s New Jersey offices as petitioner’s authorized work location, his
principal place of business. According to Merrill Lynch’s records, petitioner
worked out of the New Jersey offices and had an address where he received his
mail from Merrill Lynch, including his Forms W-2, in nearby New York.
Petitioner was also authorized to work out of other locations in New Jersey and
New York, but according to employment records he was not authorized to work
out of his home in Israel or out of the Merrill Lynch office in Tel Aviv, Israel.
There was nothing about the nature of his work or Merrill Lynch’s requirements that
necessitated his conducting the research while in Israel. The choice to work in
Israel was made solely for personal reasons.
There is nothing in Merrill Lynch’s records to indicate that petitioner
was considered an employee of a location other than the Lynnvest Group’s offices
in New Jersey.

Petitioner also suggests that he was not licensed as a financial adviser or
registered with FINRA because of his desire to continue his arrangement with Mr.
Lipton while in Israel. This may have been the case when petitioner moved to
Israel in 1993, but the parties agree that laws restricting U.S. citizens working in
foreign countries prevented petitioner from registering and working as a financial
adviser and soliciting clients in Israel during the years in issue. This restriction
was affirmed by policies set forth in memoranda issued by both Advest and
Merrill Lynch. Additionally, this arrangement with Mr. Lipton to work under one
broker number was a personal decision and was not required or requested by
Merrill Lynch.

On the basis of this record we are satisfied that petitioner’s tax home was in
the New York metropolitan area, and not Israel. We conclude that petitioner failed
to meet both requirements for the foreign earned income exclusion under section
911(d)(1). The parties agree that petitioner qualified as a bona fide resident of a
foreign country and thus met the second requirement under section 911(d)(1).
Petitioner did not meet the first requirement of the foreign earned income
exclusion since his tax home was in the United States and not in a foreign country
as required by section 911(d)(1). Accordingly, petitioner is not entitled to claim
the foreign earned income exclusion for 2009, 2010, or 2011.


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