Douglas H. Cutting v. Commissioner, T.C. Memo. 2020-158 (Nov. 19, 2020) (Judge Pugh), teaches a useful lesson about that puzzling concept called “tax home” as it relates to the §911 foreign earned income exclusion. Taxpayers can claim the §911 exclusion if their tax home is in a foreign country. Mr. Cutting's wasn’t, even though his personal home — the place he returned to when not flying — was Thailand, where he lived with his wife and step-daughter. A tax home, however, is not where the heart is. Details below the fold.
The Law: The §911 Exclusion
U.S. citizens must pay tax on their world-wide income. Specking v. Commissioner, 117 T.C. 95 (2001). 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)” So let’s take a brief look at that area of the tax law.
The Law: Tax Homes
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 basic idea is that taxpayers generally need to live somewhere to earn income. That is the idea of your tax home: it's where you need to live to work. A choice of where to live does not allow a deduction in the cost of going to work because choosing where to live is generally a personal choice, and §262 denies deductions for personal expenses. However, expenses for travel away from where you need to live for work purposes can be deductible if they are incurred because of business needs. That is because now your work is creating duplicative living expenses. The classic case on the subject is Commissioner v. Flowers, 326 U.S. 465 (1946), where the Court held that when a taxpayer’s job moved to a different city, his choice to continue living in the old city and travel 165 miles to the new job was a personal choice. His “tax home” was the new city where his employer required him to work. So his choice to remain in the old city just created a long commute.
Some taxpayers have no tax home. That was the situation in Rosenspan v. Commissioner, 438 F.3d 905 (2n Cir. 1971). There, the taxpayer was an itinerate jewelry salesman who spent 300 days a year on the road. While his employer was headquartered in Manhattan, Mr. Rosenspan did not need to live there in order to work. In fact, he neither owned nor rented any residence in any location and used two different addresses — a cousin’s house in Cincinnati and his brother’s house in Brooklyn — to receive mail. He also used his brother’s house to store personal belongings. Accordingly, both the Tax Court and the 2d Circuit found he had no tax home to be away from. His travel expenses were simply not duplicative of his personal expenses and therefore were not deductible under §162.
The concept of tax home is more complex when applied to airline flight crews. That is because flight crews perform their services while flying. So in some sense, the location of their tax home is, to pardon the pun, up in the air.
On the one hand, there does not appear to be any one location where they must live in order to work. They seem like the itinerant salesman in Rosenspan. On the other hand, unlike Mr. Rosenspan, flight crews are not on the road for almost the entire year. They own or rent actual homes in locations where they actually return to and lay down their head.
Courts have grounded their rulings on flight crew tax homes in the concept of “base station.” That is, airlines contractually require flight crews to designate an airport to be their base station. That designation creates benefits such as entitlement to reimbursement for travel away from the base station for job training and the like, and entitlement to be transported to and from the base station at the beginning or end of a duty assignment. Judge Pugh well explains the concept in her opinion. For more, see Dougherty v. Commissioner, T.C. Memo. 1991-442, and Wojciechowski v. Commissioner, T.C. Memo. 1999-239.
Just as with other taxpayers, however, flight crews can have only one tax home. Thus, in Folkman v. U.S., 615 F.2d 493 (1980) a pilot had two base stations because the he had two employers, a large commercial airline and the Air National Guard. The taxpayer’s base station for the former was San Francisco. The Air National Guard, however, required the taxpayer to live in Reno. Using an objective 3-part test, the 9th Circuit decided that San Francisco was the tax home. Therefore, the costs of travel between Reno and San Francisco for the commercial airline work were simply commuting costs. However, travel costs between San Francisco and Reno could qualify as “travel away from home” when undertaken in performance of duties for the Air National Guard, a factual matter that had to be sorted out on remand.
The years at issue are 2012, 2013, and 2014. During that time Mr. Cutting was employed by Omni Air International as a pilot, mostly transporting military personnel and cargo pursuant to Omni’s Department of Defense contracts, and mostly doing this on international routes. His employment contract required him to designate a U.S. base station and he chose San Jose International Airport, near where his parents and brother lived. Mr. Cutting used his father’s address as his employment address of record. But he did not live there. Instead he lived in Thailand with his wife and step-daughter. During the years at issue, Mr. Cutting lived in Thailand for 153 days in 2012, 171 days in 2013, and 114 days in 2014.
Mr. Cutting timely filed returns for each of the years and claimed the §911 exclusion, submitting Form 2555 in support. His positions on his tax returns, however, conflicted significantly with his testimony at trial and with Judge Pugh’s findings of fact. For example, although Mr. Cutting filed his U.S. tax returns for each of those years claiming the filing status of “single,” he testified at trial that he was actually married to a Thai woman during those years and lived in Thailand with her and her daughter. In addition, Mr. Cutting asserted on his tax returns that his visa did not limit either the length of his stay in Thailand or his ability to be employed. He did that by checking “no” in box 15c on Form 2555. Judge Pugh, however, found that Mr. Cutting relied excluively on 30-day transit visas, because in fact most of his stays at home were for less than 30 days. So that was the easy path, as Mr. Cutting testified at trial. The Thai government apparently granted such visas automatically at that time but one had to request extensions. A couple of times Mr. Cutting asked for the extensions but was denied.
Thus, even though Mr. Cutting made his home in Thailand in some significant sense, he never sought to establish a more substantial relationship with Thailand than the 30-day transit visas. As Judge Pugh writes: “his failure to pursue a more permanent option had real consequences as he could not lawfully work or hold any interest in real property in Thailand.” Op. at 18.
Lesson: Tax Home Is Where The Wallet Is, Not The Heart
Judge Pugh had no trouble finding that Mr. Cutting’s tax home was San Jose, California because he had designated the San Jose International Airport as his base station. She writes: “Petitioner selected San Jose to be his mone base and disngated SJC as his gateway travel airport. These selections came with substantive rights and obligations under the terms of [his contract].” She then piles on the precedent that a flight crew’s tax home is their base station.
While the tax home analysis is the holding, Judge Pugh also adds some educational dicta, pointing out that even if Mr. Cutting’s tax home were Thailand, he would still fail the additional requirement that he either (1) spent more than 330 days in Thailand in any give 12 month period, or (2) was a “bona fide” resident of Thailand. Judge Pugh explains the multi-factor test to determine bona fide residency and applies it, finding that Mr. Cutting was not a bona fide resident. The chief fact working against him was his choice to simply rely on repeated 30-day transit visas rather than seeking a more secure right to live in that country.
Mr. Cutting’s choice to call Thailand his home was a personal decision that not only was not required by his work, but was actually irrelevant to his work in light of his contractual obligation to designate a U.S. airport as his base station.
Coda: It does not appear that Mr. Cutting will have to pay any penalty for lying on his tax return. That may be because he had good representation. The IRS apparently conceded all penalties. Op. at 2.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each Monday for a new Lesson From The Tax Court.