Military Contractor Doesn’t Qualify for Foreign Income Exclusion



The Tax Court has held that an aircraft captain for a military contractor was not entitled to exclude under Code Sec. 911(a) income that he earned working in Afghanistan, finding that his "abode" was within the U.S. during his deployment. The Court also rejected the taxpayer's argument that he nonetheless was entitled to the exclusion under Code Sec. 911(d)(4), which waives certain requirements for individuals who are required to leave a foreign country on account of war or civil unrest, because Afghanistan wasn't listed as a country eligible for such a waiver during the years at issue.

Background of Case

Code Sec. 911(a) provides that a qualified individual may elect to exclude from gross income, subject to limitations set out in Code Sec. 911(b)(2), his or her foreign earned income.

To be entitled to this exclusion, a taxpayer must:

  1. Be an individual "whose tax home is in a foreign country" and
  2. Either be a "bona fide resident" of one or more foreign countries (bona fide foreign residence test) or be physically present in such country during at least 330 full days in a 12-month period (foreign physical presence test). (Code Sec. 911(d)(1))

The term "tax home" means in the case of an individual, "such individual's home for purposes of Code Sec. 162(a)(2)". (Code Sec. 199(d)(3)) Under Code Sec. 162(a)(2), a person's home is generally considered to be the location of his or her regular or principal place of business. (Mitchell, (1980) 74 TC 578)

However, Code Sec. 911(d)(3) also provides that an individual will not be treated as having a tax home in a foreign country for any period for which his or her abode is within the U.S. That is, an individual whose "abode" is within the U.S. cannot establish that his or her "tax home" is in a foreign country. (Harrington, (1989) 93 TC 297) Although the term "abode" is not defined by Code Sec. 911 or the regs, the Tax Court has held that it generally means the country in which the taxpayer has the strongest economic, familial, and personal ties. (Bujol, TC Memo 1987-230)

Effective for tax years beginning after Dec. 31, 2017 —years not at issue in this case— the Bipartisan Budget Act of 2018 (the Budget Act, P.L. 115-123, 2/9/2018) amended Code Sec. 911(d)(3) by providing that an individual will not be treated as having a tax home in a foreign country for any period for which his or her abode is within the U.S., unless such individual is serving in an area designated by the President by Executive Order as a combat zone.

Code Sec. 911(d)(4) allows a waiver of the bona fide foreign residence and foreign physical presence tests, such that a taxpayer will be treated as having met this tests even where the relevant time requirement has not been met, if the individual:

  1. Was an actual bona fide resident of, or present in, a foreign country for a period of time;
  2. Before meeting the time requirements for the foreign residence test or foreign presence test, had to leave the foreign country during a period in which IRS determines, after consultation with the State Department, that individuals had to leave the foreign country because of war, civil unrest or similar adverse conditions in that country which prevented the normal conduct of business by those individuals; and
  3. Establishes to IRS's satisfaction that he or she could reasonably have been expected to meet the time requirements, but for the war, civil unrest or similar adverse conditions.

Facts of Case

 In 2012 and 2013, Larry Leuenberger worked full time as an aircraft captain for Berry Aviation, Inc., which supported multiple Department of Defense contracts related to Operation Enduring Freedom in Afghanistan and other regions at that time. Leuenberger, a U.S. citizen, worked for Berry Aviation as an authorized contractor piloting an aircraft in support of the U.S. Armed Forces. His employment offer letter stated that "a typical rotation" for his assignment would generally be 60 days on and 60 days off.

During 2012 and 2013, Leuenberger split his time in rotational shifts between the U.S. and Bagram Air Base in Afghanistan. He worked outside the U.S. for 173 days in 2012 and 203 days in 2013. When on deployment, he was furnished governmental housing, meals, and transportation, among other services.

Throughout 2012 and 2013, Leuenberger, who had family in the U.S., maintained a residence in Washington, owned and registered three vehicles there, had banking accounts at Wells Fargo Bank, and maintained brokerage and retirement accounts at First Trust Co. of Onaga, Jackson National Life Insurance Co., and Pershing, LLC. In 2013, he also owned and maintained two other residential properties in Washington.

On his 2012 and 2013 returns, Leuenberger excluded wage income of $95,100 and $52,948, respectively, relying on the foreign earned income exlusion. IRS disallowed the exclusion in full, and Leuenberger sought redetermination by the Tax Court.

"Tax home" in U.S.; no exclusion. The Tax Court determined that Leuenberger failed to show that he satisfied the "tax home" requirement of Code Sec. 911(d)(3).

The Court observed that, while "tax home" is generally defined in reference to a person's regular place of employment, under Code Sec. 911(d)(3), an individual isn't treated as having a tax home in a foreign country for any period during which his "abode" is in the U.S. While "abode" itself isn't defined, the Court noted that the term is generally construed as meaning the country in which the taxpayer has the strongest economic, familial, and personal ties—which in this case was clearly the U.S.

Notably, while Leuenberger did regularly and principally work in Afghanistan during the years at issue, his abode was within the U.S., as shown by facts that his family continued to reside in the U.S., he returned to the U.S. during the "off" periods of his rotational shifts, he owned and managed several investment properties in the U.S., he owned several vehicles there, and he maintained a number of bank, brokerage, and retirement accounts in the U.S. To the contrary, he had no connection to Afghanistan beyond the location of his employment, and in fact didn't leave the air base where he worked due to safety concerns.

Leuenberger also argued that, in spite of the above, he was nevertheless a "qualified individual" because he was eligible for a waiver under Code Sec. 911(d)(4). The Tax Court disagreed, finding that Afghanistan wasn't on the list of countries which qualified for a waiver during 2012 and 2013. While Leuenberger argued that it would be incomprehensible to exclude Afghanistan from this list, the Court found that it couldn't deviate from the express condition in the statute.

And in any event, the Court found that Leuenberger failed to show that he could have reasonably been expected to meet the Code Sec. 911(d)(1) requirements but for the adverse conditions in Afghanistan. He had a rotational work schedule that, by design, had him returning to the U.S. several times a year. The Court stated that the waiver wasn't intended to be available when a taxpayer, who began employment in an already unstable foreign country where there was no expectation of meeting the "qualified individual" requirements, then periodically left that country, as Leuenberger did in this case, with the expectation of then returning in accord with his contract.