The Tax Court has determined that a taxpayer who worked for a security company in Iraq was a "qualified individual" entitled to the foreign earned income exclusion for the years at issue. The taxpayer's overall course of conduct, including the facts that he repeatedly sought employment opportunities in Iraq, returned to the U.S. only as required by his employer, and had very limited ties to the U.S., showed that he was a bona fide resident of Iraq and that his "tax home" was in Iraq.
Foreign Income Exclusion
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:
- Be an individual "whose tax home is in a foreign country" and
- 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
An individual's status as a bona fide resident of a foreign country depends on the facts and circumstances of the case. The U.S. Court of Appeals for the Seventh Circuit—i.e., the relevant Appellate Court in this case—has identified eleven factors (the Sochurek factors) as relevant to an analysis of bona fide residency, outlined in greater detail below. (Sochurek v. Comm., (CA 7 1962) 9 AFTR 2d 883)
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)
Facts of this Case
Andrew Wentworth, a Wisconsin native, joined the U.S. Marine Corps Reserves in 2000 after graduating from high school and began college at the University of Wisconsin that fall. He was called to active duty from May 24 to Dec. 31, 2002, resumed his studies upon return, then was again called to active duty from June 1, 2004, to May 31, 2005. During the second tour of duty, he spent six months and 16 days in Kuwait and Iraq and "developed a fondness for the Iraqi people he met".
In March 2006, Wentworth left Wisconsin and returned to Iraq to work in the private sector, providing security services to U.S. military personnel through April 2007. During this time, he returned to the U.S. one time for 10 days.
In 2009, Wentworth was hired for a position to provide security services to State Department personnel, primarily in Iraq. From May 15, 2009 through Apr. 22, 2011, his deployment schedule was generally 105 days on duty (which was occasionally extended) followed by 35 days off, during which he was required to leave Iraq and the travel costs for which were covered by his employer. He listed his home of record as a friend's home in Tennessee, which he chose because he had started taking online courses at Middle Tennessee State University and enjoyed country music. Had he not been required to leave Iraq, he would have stayed there.
When on duty, Wentworth worked six days per week for at least 12 hours per day. He was required to live in the International Zone of Baghdad, Iraq and his living quarters and meals were provided at no cost to him during his on-duty periods. He interacted with Iraqi people who lived and worked in the area, regularly ate lunch with the Iraqi police, and purchased goods from Iraqi vendors.
Wentworth left Iraq on Apr. 20, 2011 then voluntarily ended his employment. While in Iraq, Wentworth decided to pursue a different career path in the petroleum industry in northern Iraq. He continued his courses at Middle Tennessee State University and earned a bachelor's degree in geoscience in December 2012, then earned a certificate in geographic information systems from the University of Wisconsin in May 2014. However, he ultimately chose not to pursue employment in Iraq because of new dangers in areas that he had previously considered safe.
On his tax returns for 2010 and 2011 (the years at issue), Wentworth, on the advice of a CPA, claimed the foreign earned income exclusion. For 2010, he reported $140,782 in wages and claimed a foreign earned income exclusion of $91,500. The corresponding amounts for 2011 were $63,208 and $28,520. U.S. federal tax was withheld both years, and he paid no income tax to Iraq.
IRS determined that Wentworth wasn't eligible for the foreign earned income exclusion and determined deficiencies for both years.
Taxpayer was "bona fide resident". The Tax Court found that, while Wentworth didn't satisfy the physical presence test under Code Sec. 911(d)(1)(B), he was nonetheless a bona fide resident of Iraq during the years at issue.
The Tax Court analyzed the facts of the case under the Sochurek factors:
- Intent. The Court found Wentworth's testimony that he intended to remain and work in Iraq both sincere and supported by objective evidence, including the employment opportunities he chose to pursue. This factor favored Wentworth.
- Establishment of home for indefinite period. The Court found that there was an expectation that Wentworth's employment would continue indefinitely, and that his employer-provided housing eliminated the need for him to secure his own. This factor favored Wentworth.
- Activities and assimilation. The Court found only limited evidence of Wentworth's activities and interactions with Iraqi people and culture outside of his work, but also acknowledged that he had very little time or opportunity for social activities. This factor was slightly adverse to Wentworth.
- Physical presence. Wentworth, during his employment, spent more days in Iraq than in the U.S., so this factor favored him.
- Temporary absences. The nature, extent, and reasons for Wentworth's temporary absences from Iraq—namely, the fact that they were required by his employer—weighed slightly in his favor.
- Economic burdens and taxes. Wentworth didn't incur additional expenses in Iraq because his meals and housing were provided at no cost, and he didn't pay income tax to Iraq, so this factor was adverse to Wentworth.
- Legal status. While Wentworth's legal status under Iraqi law wasn't established, his presence was such that he was more than transient, so this factor was neutral.
- Employer's tax treatment. Wentworth's employer withheld federal tax from his wages, but he could have opted to not have taxes withheld, so this factor was neutral.
- Marriage and family. Wentworth didn't have a spouse or children during the years at issue, but his parents were in the U.S. and he stayed with a friend in Tennessee on each return, so this factor was slightly adverse to Wentworth.
- Nature and duration of employment. Wentworth worked 6 days per week for at least 12 hours per day doing serious and dangerous work. This weighed in his favor.
- Good faith vs. tax evasion. The Court found no bad faith or tax evasion motive, noting that Wentworth timely and accurately reported his income and sought the advice of a CPA with experience dealing with foreign earned income. This factor favored Wentworth.
Taxpayer's "tax home" was Iraq. The Tax Court then determined that Wentworth's "tax home" during the years at issue was Iraq. His principal place of employment was there, and the Court found that ties to the U.S. weren't strong enough to find that his "abode" remained in the U.S. Specifically, he didn't have a spouse or children at the time, and he didn't stay with his parents when he visited the U.S. The facts that he had a U.S. driver's license and bank account were insufficient to establish an abode in the U.S.
The Court noted that its consideration of Wentworth's ties to Iraq took into account "the unique circumstances of his work and the nature of the region". He worked long hours and had limited time for a social life, and he wouldn't have left at all during the years at issue if not required to do so by his employer.
Accordingly, since Wentworth's tax home was in Iraq and he was a bona fide resident of Iraq, he was a "qualified individual" entitled to claim the foreign earned income exclusion for the years at issue.