The Tax Court determined that a US citizen, living and working on a US military base in Afghanistan, was not eligible for the foreign earned income exclusion because her tax home was still in the US. With reference to a Code Sec. 6662 understatement penalty, the court also found that she did not have reasonable cause or act in good faith when she took the exclusion.
Background. A qualified individual may elect to exclude foreign earned income from gross income (the foreign earned income exclusion). (Code Sec. 911(a))
One requirement for an individual to be a qualified individual is that he has a tax home is in a foreign country. (Code Sec. 911(d)(1)) Another requirement is that the individual, during any period of 12 consecutive months, be present in a foreign country or countries during at least 330 full days in that period (330-day test). (Code Sec. 911(d)(1)(B))
An individual is not treated as having a tax home in a foreign country for any period for which his abode is within the US. (Code Sec. 911(d)(3))
In Code Sec. 911 cases, the Tax Court has compared a person's domestic ties (i.e., his or her familial, economic, and personal ties to the US) with his or her ties to the foreign country in which he or she claims a tax home in order to determine whether his or her abode was in the US during a particular period. Even though a person may have some limited ties to a foreign country during a particular period, if the person's ties to the US remain strong, the Tax Court has held that his or her abode remained in the US, especially when his or her ties to the foreign country were transitory or limited during that period. (Harrington, (1989) 93 TC 297)
A 20% penalty is imposed on the portion of an underpayment of tax attributable to a substantial understatement of income tax. (Code Sec. 6662(a) and Code Sec. 6662(b)(1))
Code Sec. 6664(c)(1) provides that the Code Sec. 6662(a) penalty does not apply to any portion of the underpayment to the extent that the taxpayer had reasonable cause for that portion of the underpayment and acted in good faith with respect to that portion.
Facts. In September 2011, Ms. Haskins retired from the U.S. Army. Immediately before her retirement she had been stationed in Afghanistan working in Army intelligence.
When Ms. Haskins retired from the Army, her husband, Mr. Haskins, and the Haskinses's two children, were living in the family home in Arizona. After retiring, Ms. Haskins traveled from Afghanistan to Arizona.
On September 26, 2011, Ms. Haskins began working for Science Applications International Corp. (SAIC). Initially she had a short training assignment in the Washington, DC area. During this training she attended a tax briefing by SAIC. One of the subjects of the tax briefing was the foreign earned income exclusion. She said SAIC mentioned that if she met the 330-day test then she would qualify for the exclusion.
On October 29, 2011, still a SAIC employee, Ms. Haskins began working in Afghanistan again. While in Afghanistan, Ms. Haskins lived and worked on U.S. military bases. She spent all of her time on the bases, as required by SAIC, because of the danger in leaving the bases.
She kept her US bank account while in Afghanistan. Her SAIC paychecks were deposited into this account.
While in Afghanistan, she remained registered to vote in Arizona. Ms. Haskins's family did not have the option of moving to Afghanistan with her.
When she heard that her mother was diagnosed with cancer, she returned to the US to visit her.
On June 10, 2012, while in Afghanistan, Ms. Haskins wrote an email to SAIC employee asking about the foreign earned income exclusion. The response back merely said, "You are not eligible for tax free status until you hit the 330-day mark in country". The response did not mention the tax home requirement.
On November 6, 2012, Ms. Haskins left her job at SAIC. She traveled from Afghanistan to Arizona, where the Haskinses's son was, then to Florida to live in the family home where her husband and other child lived.
On both her 2011 and 2012 joint tax returns, which she prepared, she claimed the foreign earned income exclusion. For both years, on Form 2555, "Foreign Earned Income", she left blank line 9, which asks, "List your tax home(s) during the tax year and date(s) established" was left blank.
While IRS conceded that Ms. Haskins met the 330-day test, it contended that she did not qualify for the foreign earned income exclusion because her abode was in the US and hence her tax home was not in a foreign country.
After IRS found that Ms. Haskins was not eligible for the foreign earned income exclusion, it also found that she had a substantial understatement of tax and imposed a penalty under Code Sec. 6662(a). Ms. Haskins conceded that, if she was not eligible for the foreign earned income exclusion, her understatement of tax would be substantial. But she argued that the penalty should not apply because she had reasonable cause and acted in good faith with respect to that portion because of the information she received by SAIC at the tax briefing and in the email.
Decision on foreign earned income exclusion. The Tax Court, using the comparison in Harrington, found that Ms. Haskins had strong ties to the United States during the relevant period.
Her husband and two children lived in the family home, which was in Arizona until August 2012 and in Florida after that.
Though Ms. Haskins had lived in Afghanistan during a portion of her time with the Army and then from October 2011 through November 2012 while working for SAIC, she did not have strong nonwork ties to Afghanistan. When she was with SAIC in Afghanistan, she worked and lived on forward operating bases. These bases were often under attack by rocket-propelled grenades and suicide bombers. She could not leave the bases.
When her mother was diagnosed with cancer, Ms. Haskins returned to the US.
Therefore, the Tax Court agreed with the IRS that Ms. Haskins's abode was in the US and that she did not qualify for the foreign earned income exclusion in either 2011 or 2012.
Decision on substantial understatement of tax. Regarding the September 2011 SAIC tax briefing, the Tax Court found that Ms. Haskins did not prove that her participation in the briefing justified the conclusion that she made a reasonable attempt to comply with the provisions of Code Sec. 911. The record left unanswered several important questions about the SAIC tax briefing. Were the persons who gave the tax briefing knowledgeable enough to give tax advice to Ms. Haskins? Did they know facts specific to Ms. Haskins? What exactly did they tell Ms. Haskins?
Second, Haskins contended that the June 11, 2012 email from a SAIC employee confirmed that she was entitled to the foreign earned income exclusion. The Tax Court found that, although the email discussed the 330-day test, the email did not say this was the only requirement for claiming the exclusion. There was no reason to think that the employee was qualified to give tax advice anyway. Haskins did not prove that the exchange of emails in June 2012 justified the conclusion that she made a reasonable attempt to comply with the provisions of Code Sec. 911.
The Tax Court found that Ms. Haskins did not have reasonable cause for taking the foreign earned income exclusion and, hence, the Code Sec. 6662(a) penalty applied.