In several Lessons From The Tax Court (here, here, and here) we have seen how the concept of a tax home is important for deciding when §162 allows a deduction for the expenses of travel away from home. The lessons teach that a tax home is where one must live to earn a living. One’s personal choice of abode may or may not be one’s tax home. That is the law for §162 purposes. For §911 purposes, however, Congress has made the taxpayer’s personal choice of abode part of the definition of tax home. That definition is what tripped up the taxpayers in Joseph S. Bellwood And Jacqueline E. Bellwood v. Commissioner, T.C. Memo 2019-135 (October 7, 2019)(Judge Gustafson) and in James M. Cambria v. Commissioner, T. C. Summary Opinion 2019-28 (September 30, 2019)(Judge Nega). Details below the fold.
The Law: The §911 Exclusion and the Concept of Tax Home
U.S. citizens are subject to U.S. income tax on all the income they earn, no matter where in the world it comes from. See discussion in Specking v. Commissioner, 117 T.C. 95 (2001), aff'd sub sub nom. Umbach v. Comm'r, 357 F.3d 1108 (10th Cir. 2003).
Congress cuts some breaks, however, for U.S. citizens who earn income from working in other countries. First, §911 allows a “qualified individual” to exclude from gross income their “foreign earned income.” Second, §27 allows taxpayers a foreign tax credit. You can find details in Publication 514. Third, sometimes the United States has a tax treaty with a foreign country that could affect how a U.S. taxpayer reports gross income. The IRS has this helpful webpage listing all the tax treaties currently in force.
Today’s lesson involves only §911 and only what it takes to be a “qualified individual.” As a threshold matter, §911(d)(1) says that a “qualified individual” is “an individual whose tax home is in a foreign country.” Section 911(d)(3) defines “tax home” for §911 purposes. For the tax years at issue in these two cases, subsection (d)(3) provided that a tax home for §911 was the same as “such individual’s home for purposes of section 162(a)(2)” but with one really, really, important qualifier: “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...”
So what does that qualifier mean? What is one’s “abode”? That is the lesson for today.
Facts of the Two Cases
For tax years 2013, 2014 and 2015 the Bellwoods sought to exclude from gross income amounts Mr. Bellwood earned from flying helicopters for a U.S. company that provided air ambulance services for the Saudi Arabia Red Crescent Authority (the equivalent of the U.S. Red Cross). During those years Mr. Bellwood “was a full-time employee, based out of Saudi Arabia,” writes Judge Gustafson. While in Saudi Arabia, his employer provided him with housing, first in a hotel, then in an apartment. During his employment, Mr. Bellwood was on-duty for 28 days then off-duty for 28 days. He lived in Saudi Arabia for each 28 day period on duty, but returned to his home in Georgia for each 28 days off duty. That pattern repeated with little variation for the entire three years: during his days on duty he did not leave Saudi Arabia, during his days off duty he booked outta there.
Mr. Cambria’s case involves tax year 2014. Starting August 5, 2014, Mr. Cambria was employed by a private company to provide security services in Camp Dwyer, Afghanistan. The entire country of Afghanistan was designated as a combat zone in Executive Order No. 13239. Mr. Cambria went to Camp Dwyer and stayed there a year, until August 11, 2015. During that year, writes Judge Nega, Mr. Cambria “was not permitted to leave the base for safety reasons. He did not leave Camp Dwyer during his contract except for one trip to the United States from December 12, 2014, through January 1, 2015, for the birth of his child.”
While in each case the taxpayers' tax home was in the foreign country (that is where they had to live to work), the IRS disallowed the §911 exclusion because it found that their abodes remained in the United States during the relevant periods. Both petitioned the Tax Court for review. The Tax Court agreed with the IRS in both cases.
Lesson: Abode Is Where The Heart Lives
If one’s tax home is where one lives to work, I think the lesson from today's cases is that one’s abode is where one lives to love, or perhaps loves to live.
I like how Judge Gustafson puts it:
“One’s abode is where [one] abides. However, an individual’s abode cannot be determined by simply identifying the location where he spent the greatest number of days during a given period, especially if a location where he spent fewer days was his family home where he spent those days with his wife and youngest son. This Court and at least one Court of Appeals have recognized a domestic-vs.-vocational distinction for determining one’s abode under section 911. Consequently, ...we consider the domestic or vocational nature of the time spent in each location in addition to counting the number of days. Accordingly, we compare the domestic and vocational qualities of Mr. Bellwood’s respective dwellings, and the time he spent at each, to help determine whether his abode remained in the United States.” (citations and internal quote marks omitted).
Judge Nega, citing to the same cases as Judge Gustafson, puts it this way: “a taxpayer’s abode is generally in the country in which he has the strongest economic, familial, and personal ties.”
One quickly sees that the test for abode is highly fact-dependent. As applied to Mr. Bellwood, Judge Gustafson said “we compare the domestic and vocational qualities of Mr. Bellwood’s respective dwellings, and the time he spent at each, to help determine whether his ‘abode’ remained in the United States.” In doing that comparison, Judge Gustafson had no difficulty concluding that Mr. Bellwood’s “stronger domestic connection was with the Georgia house and not the Saudi Arabia hotel and apartment.” The reason was partly that Mr. Bellwood invariably returned to Georgia for each 28-day off duty period. His heart remained in Georgia “where he spent time with his family, pursued his hobbies...managed the day-to-day affairs of his personal life...maintained his registration to vote, receive his mail, updated his driver’s license, and registered his vehicle.” In contrast, during each 28 day period in Saudi Arabia, his time was spent “either working or resting and preparing for his next shift.” Emphasizing Mr. Bellwood's lack of personal ties to Saudi Arabia, Judge Gustafson writes, “Mr. Bellwood’s only ties to Saudi Arabia were his contract for employment with PHI [his employer] and a toaster oven that he purchased for his apartment.”
As applied to Mr. Cambria, the test is somewhat easier because...well...he lived in a combat zone. He was not even permitted to leave Camp Dwyer. He was not permitted to bring his family to Camp Dwyer and he testified that he would not have moved them there even if allowed. Well, duh! Who would want to move their family into a combat zone? Judge Nega also found it significant that Mr. Cambria testified that he had no intention of staying in Afghanistan after his employment ended and “wanted to progress into working in a more livable, less hostile country.” As a consequence, Judge Nega had no real choice but to find that Mr. Cambria “has not shown any connection with Afghanistan other than the location of his employment” and that his ties to Afghanistan “were severely limited and transitory during the year at issue.” Yes, yes, living in a combat zone will do that! Thus, as with Mr. Bellwood, while Mr. Cambria’s body lived in the foreign location for work, his heart remained in Colorado where his wife and children lived, where he returned for the birth of his child, and where he “was eventually selected for a position with the Parker Police Department in Colorado, where he works to this day.”
Bottom line: to qualify for the §911 exclusion, you not only have to change your tax home, but you also have to move your abode. That is today’s lesson.
Coda 1: In Mr. Cambria's case, the §911 definition of tax home created a Catch 22: the statute requires taxpayer to move their abode but Mr. Cambria's employment made it virtually impossible for him to do that. If you think the result was unfair, you are not alone. In 2018, in the Bipartisan Budget Act of 2018, 132 Stat. 64, P.L. 115-123, Congress added an exception to the abode requirement. Section 911(d)(3) now provides that taxpayers do not have to worry about the location of their abode if they are “serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.” Unfortunately for Mr. Cambria, this language came too late.
Coda 2: Tax Court decisions take time. The IRS disallowed the §911 exclusion for the Bellwoods in March 2017. They timely petitioned for Tax Court review. Some 30 months later, they received a decision. Mr. Cambria timely petitioned the Tax Court in July 2018. However, he elected into the §7463 small case procedures and he received his decision in about half the time of the Bellwoods: 14 months later. Of course, electing into the small case procedures waives all rights to appeal an adverse Tax Court judgment. However, notice how this issue was highly fact-dependent. That is one factor that favors a §7463 election, because any appeal would be under a clear error standard of review, which is very, very difficult to win.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law