Since many Texas companies send employees on international assignment, they should be mindful that the U.S. federal income tax rules don’t apply to everyone in the same way. A case in point is a recent Tax Court Memorandum decision, In that case, the Tax Court held that even though the taxpayer was employed in Afghanistan for 16 months, he was not entitled to exclude his income earned in Afghanistan for 2011 from U.S. tax because he was deemed to have a U.S. abode. For those who have only a high-level understanding of the foreign earned income exclusion under Section 911 of the Internal Revenue Code (see previous post here), this result may not be obvious. But the statute is clear that even if a taxpayer otherwise qualifies to exclude foreign earned income under Section 911, that exclusion is not available if the taxpayer has an abode within the United States.
So, what is an “abode”?
Well, it is not the taxpayer’s principal place of business. It has been defined as one’s home, habitation, residence, domicile, or place of dwelling. It has a domestic rather than a vocational meaning, and stands in contrast to “tax home” as defined in Section 162(a) of the Internal Revenue Code. In Qunell, the Tax Court held that a taxpayer’s abode is generally in the country in which the taxpayer has the strongest economic, family, and personal ties. The taxpayer in this case owned a home in Illinois where his wife and children lived and he maintained bank accounts in the United States. His family did not visit him in Afghanistan, where he lived on a U.S. military facility. The Tax Court concluded that the taxpayer did not establish that he had any economic, family or personal ties to Afghanistan. Accordingly, his abode was deemed by the Tax Court to be within the United States.
The result in Qunell is consistent with other similar cases, including Evans v. Commissioner of Internal Revenue, decided in 2015, where a rotator for a Texas-based drilling company worked on Sakhalin Island in Russia on a 30 days on / 30 days off rotational schedule. Another case was Lemay v. Commissioner of Internal Revenue, decided in 1987, where an employee worked for an oil company in Tunisia on a rotational schedule that was 28 days on / 28 days off. In each of those cases, the Tax Court concluded that the taxpayer’s economic, family or personal ties remained within the United States during his assignment. This result is often likely in the case of a rotator, where, like the taxpayer in Qunell, the ties to the host country are transitory and often do not extend much beyond the bare minimum required to perform one’s duties there.
It is best practice to anticipate the tax liabilities that will result from any international assignment or from any work outside of the United States. When possible, the employee should meet with a tax preparer to understand the U.S. and foreign tax consequences of working outside of the United Sates, and in particular whether the foreign earned income exclusion of Section 911 will even be available. While the facts of every case are different, special attention should be paid to the following four categories of international assignments or non-U.S. work where the employee’s abode is likely to be within the United States:
- Rotational assignments (as in Evans and Lemay)
- Short-term assignments (less than 12 months)
- Frequent business travel outside of the United States
- Commuting from a home in the United States to work in another country
Even if the employee is protected from additional income tax by the employer under a tax equalization or tax protection program, understanding the tax consequences of the international assignment in advance will be helpful for both the employer and the employee.