Earned Income Exclusion Disqualification

Military Contractor in Afghanistan Didn’t Qualify for Earned Income Exclusion

The U.S. Tax Court has held that an aircraft captain for a military contractor wasn’t entitled to exclude income that he earned working in Afghanistan. It found that for tax purposes, his “abode” was within the U.S. during his deployment.

In TC Summary Opinion 2018-52, the court also rejected the taxpayer’s argument that, because Afghanistan was a country eligible for the waiver at the time, he was entitled to the exclusion under a tax code section that waives certain requirements for individuals who are required to leave a foreign country because of war or civil unrest.

Operation Enduring Freedom

In 2012 and 2013, the contractor worked full time as an aircraft captain for a corporation that supported multiple U.S. Department of Defense contracts. The work was related to Operation Enduring Freedom in Afghanistan and other regions at that time. The contractor, a U.S. citizen, worked 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 be 60 days on and 60 days off.

During the two years in question, the pilot split his time in rotational shifts between the United States 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.

The pilot also had family in the U.S., maintained a residence, owned and registered three vehicles, had banking accounts, and maintained brokerage and retirement accounts there. In 2013, he also owned and maintained two other residential properties in the United States.

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

U.S. Tax Home Means No Exclusion

The court determined that the contractor failed to show that he satisfied the “tax home” requirement of the relevant section of the U.S. tax code.

While “tax home” is generally related to a person’s regular place of employment, the court observed that 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 a taxpayer has the strongest economic, familial, and personal ties. In this case, it was clearly the United States.

Notably, while the pilot did regularly and principally work in Afghanistan during the years at issue, his abode was within the United States, as shown by facts that:

  • His family continued to reside there.
  • He returned there during the “off” periods of his rotational shifts.
  • He owned and managed several investment properties there.
  • He owned several vehicles there.
  • He maintained several bank, brokerage, and retirement accounts there.

To the contrary, the contractor had no connection to Afghanistan beyond the location of his employment. In fact, he didn’t leave the air base where he worked due to safety concerns.

The pilot argued that he was nevertheless a “qualified individual” because he was eligible for a waiver under a tax code section dealing with citizens or residents of the United States living abroad. The court disagreed, finding that Afghanistan wasn’t on the list of countries that qualified for a waiver during 2012 and 2013. While the taxpayer 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.

Questions of Expectations

And in any event, the court found that the taxpayer failed to show that he could have reasonably been expected to meet tax code requirements but for the adverse conditions in Afghanistan. He had a rotational work schedule that, by design, had him returning to the United States several times a year. The court stated that the waiver wasn’t intended to be available to a taxpayer, who began employment in an already unstable foreign country where there was no expectation of meeting the “qualified individual” requirements, but periodically left that country with the expectation of returning in accord with his contract.

Questions? Contact Brady Ware’s International Tax experts for assistance.

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