foreign earned income

The Supreme Court Denies Certiorari for USC Taxpayer Who Claimed Foreign Earned Income Exclusion

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The U.S. Supreme Court only rarely takes tax cases for certiorari review. It is common that no more than one federal tax case is reviewed by the U.S. Supreme Court during their entire annual term.*8938*

Accordingly, it was not surprising that the U.S. Supreme Court refused to hear a decision of a Hong Kong-based flight attendant who as a U.S. citizen took the foreign earned income exclusion (“FEIE”) pursuant to IRC Section 911 on all of her income.  The  Treasury Regulations §1.911-3(a) have a specific rule regarding source of income and provides: “Earned income is from sources within a foreign country if it is attributable to services performed by an individual in a foreign country or countries.”

The IRS assessed tax and a 20% “negligence” penalty against the Hong Kong based flight attendant Ms. Yen-Ling K. Rogers.  Judge Cohen of the U.S. Tax Court wrote the 2013 opinion, Rogers vs. Commissioner, TC Memo. 2013-77 – U.S. Tax Court

The Court found the following facts and made the following legal determinations:
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“Yen-Ling K. Rogers (petitioner) was a U.S. citizen and a bona fide resident of Hong Kong. She worked as a flight attendant for United Airlines (United) on international flights based out of Hong Kong International Airport. . . Section 61(a) specifies that “[e]xcept as otherwise provided”, gross income includes “all income from whatever source derived”. Although most countries employ territorial tax systems, the United States employs a worldwide tax system–it taxes its citizens on their income regardless of its geographic source.  See  Crow v. Commissioner, 85 T.C. 376, 380 (1985) (“The United States was historically, and continues to be, virtually unique in taxing its citizens, wherever resident, on their worldwide income, solely by reason of their citizenship.”) . . .” [emphasis added]
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The Tax Court went on to find that the working time of the flight attendant over international waters could not be apportioned to or treated as “foreign earned income” as defined by the statute.  Accordingly, it said:
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“Consistent with this regulation, this Court has held that a U.S. taxpayer is allowed the foreign earned income exclusion only with respect to wages earned while in or over foreign countries and not for wages earned in international airspace or in or over the  United States.”

 

See prior posts on the FEIE; The Foreign Earned Income Exclusion is Only Available If a U.S. Income Tax Return is Filed, April 21, 2014.

See also USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms, dated March 17, 2014 that discusses in some detail IRS Form 2555.

The Court of Appeals for the District Of Columbia upheld the Tax Court and the Supreme Court let stand the Court of Appeals decision.

This entry was posted in Penalties, Tax Compliance and tagged , .

See WSJ = World/Expats – For an Excellent Overview of U.S. Taxation for U.S. Citizen Individuals in Plain English

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For an excellent overview (without penalty hype or exaggeration of the U.S. tax law), read the following article from Eric Scali of H&R Block’s expat-focused service titled –Puncturing 7 Common Myths about U.S. Expat Tax Rules, Nov. 15, 2015, WSJ = Globe, EXPAT, For global nomads everywhereI-407 Abandonment Form

The following 7 myths are accurately addressed with respect to U.S. citizens residing outside the U.S. (although caution should be taken if you are a lawful permanent resident – “LPR”- residing inside a country with a U.S. income tax treaty – see, Does the IRS have access to the USCIS immigration data for former lawful permanent residents (LPRs)?, posted April 11, 2015 and the discussion of how many LPR individuals will have “expatriated” without actually having filed USCIS Form I-407.  See, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9):

Myth #1: Individuals living outside of the U.S. and filing tax returns with a foreign government don’t have to file annual U.S. tax returns. 

Myth #2: Expats only need to report their U.S. income on their U.S. tax return.

Myth #3: If their foreign income is below the Foreign Earned Income Exclusion (FEIE), expats don’t need to file a U.S. tax return.IRS Form 1040 p1

Myth #4: Work performed by an expat within the U.S. but paid by an expat’s foreign employer is foreign income because it’s paid by the foreign employer and not issued on a W-2.

Myth #5: Expats’ non-U.S.-based pension plans have the same tax treatment in the U.S. as they do in their country of residence.

Myth #6: When expats receive certain items of income, they’re only taxable in their country of residence under the rules provided for in the income tax treaty the foreign country has with the U.S.

Myth #7: An expat’s foreign investments are treated the same as they are in the foreign country.

Unfortunately, I have heard all of these and more (many times over) during my professional career as an international tax lawyer (and an accountant in the late 1980s) from both individuals and their tax advisers both inside the U.S. and outside the U.S.  As someone who lives with their family outside the U.S., I have a good understanding about the difficulty of finding good U.S. tax resources that accurately and simply explain these very complex laws.

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