SEAMEN ON YACHT QUALIFY FOR FOREIGN EARNED INCOME EXCLUSION

Myron and Thelma Struck, TC Memo 2007-42 The Tax Court has concluded that taxpayers employed on a yacht that was operated primarily in foreign territorial waters met the foreign physical presence requirement and could claim the foreign earned income exclusion under Code Sec. 911.
Background. A U.S. citizen who has a tax home in a foreign country and meets either the bona fide foreign residence test or the foreign physical presence test can elect to exclude foreign earned income from his gross income. (Code Sec. 911(a)(1)) The exclusion can't exceed his foreign earned income for the year, as computed on a daily basis at an annual rate of $80,000, indexed for inflation for post-2005 years ($82,400 for 2006; $85,700 for 2007). (Code Sec. 911(b))
A taxpayer meets the foreign residence test if he is a bona fide resident of one or more foreign countries for an uninterrupted period including an entire tax year. A taxpayer meets the foreign presence test if, in any period of 12 consecutive months, he is present in one or more foreign countries during at least 330 full days. (Code Sec. 911(d)(1)) A foreign country includes airspace, lands, and territorial waters under the sovereignty of a country, territory, or possession other than the U.S. Because international waters are not under the sovereignty of any one country, time spent in international waters generally does not apply toward the 330 foreign day requirement.
A taxpayer who has an abode in the U.S. is not treated as having a tax home in a foreign country. (Code Sec. 911(d)(3))

Facts. Myron Struck was employed as a yacht captain and his wife, Thelma, was employed as a chef and stewardess on a yacht that was operated primarily in foreign territorial waters. Except for approximately 2 weeks when on vacation in the U.S., the Strucks lived on the yacht. In addition to unimproved property, they owned a townhouse in California, which was rented out and managed by real estate professionals. They apparently claimed a state property tax homeowner's exemption (allowed to a owner-occupied principal residence) on the townhouse. They also maintained bank accounts, registered and garaged two vehicles at a relative's property, and maintained their driver's licenses in California.
For the years at issue, 2001 and 2002, the Strucks each claimed the foreign earned income exclusion, including with their returns a Form 2555-EZ, Foreign Earned Income Exclusion. On the Forms 2555-EZ, they listed the address of a relative in California for their “foreign address” and indicated an applicable period of Jan. 1 to Nov. 30, 2001, and Jan. 1 to May 15, 2002.
Concluding that the Strucks did not have a foreign tax home for 2001 and 2002, IRS disallowed the exclusions. During the audit, the Strucks amended their Forms 2555-EZ, listing a Costa Rica foreign address and new applicable periods of Nov. 30, 2000 to Nov. 30, 2001, and May 16, 2001 to May 15, 2002.

Taxpayers qualify for the exclusion. The Tax Court concluded that the Strucks met the foreign physical presence requirement for both years in issue. They were physically present in foreign countries—including foreign waters that counted as part of foreign countries—for 330 days for 2001 (using an applicable period of Jan. 7, 2001 to Jan. 6, 2002) and for 333 days for 2002 (using an applicable period of May 16, 2001 to May 15, 2002). The Court based its conclusion on Myron's testimony, which it found credible, and other evidence, including a review by the U.S. Navy of the log in which Myron entered the yacht's longitude and latitude coordinates every 4 hours while at sea.

During 2001 and until May 5, 2002, the Strucks' business consisted principally of traveling in international and foreign waters to foreign countries on the yacht. They had neither a regular or principal place of business, nor a specific abode in a real and substantial sense during this time. However, while the Court concluded that the Strucks were itinerants, it also found that they had a foreign tax home during the 300-plus days they were physically present in a foreign country during the applicable periods and that they therefor they had a foreign tax home for purposes of the claimed foreign earned income exclusion.

RIA observation: The Court noted—without further comment—that IRS didn't argue that as itinerants the taxpayers had no foreign tax home for purposes of the Code Sec. 911 foreign earned income exclusion. For purposes of Code Sec. 162(a)(2), an itinerant taxpayer is treated as having no tax home and so denied an “away from home” business travel expense deduction.
Noting that neither Code Sec. 911 nor its regs define “abode,” the Court concluded that the Strucks, who had limited ties to the U.S. and whose townhouse was leased to others and unavailable to them, did not have an abode in the U.S. during the applicable periods.

It also found that IRS had erred when it treated each day that involved a partial day of travel in international waters as a nonforeign day in calculating the Strucks' foreign physical presence. Reg. § 1.911-2(d)(2) and Reg. § 1.911-2(d)(3) clearly provide that a partial day of travel in international waters in traveling from one foreign country to another foreign country is to be treated as a full foreign day.

IRS again boosts housing cost allowances for those working abroad in some high-cost areas

Notice 2007-25, 2007-12 IRB
A new Notice effectively increases the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. It not only increases the higher maximums authorized by an earlier notice but also adds new high cost locations to the pre-existing list of such locations.

Background. A qualified individual may elect to exclude from U.S. gross income his foreign earned income and housing cost amount. (Code Sec. 911(a)) Under Code Sec. 911(c)(1), as amended by the Tax Increase Prevention and Reconciliation Act (TIPRA, P.L. 109-222), the maximum excludable housing cost amount is calculated by way of a complex formula.

The excludable housing cost amount is the excess, if any, of (1) the individual's allowable housing expenses for the year over (2) a base amount. For 2006, a taxpayer's allowable housing expenses, assuming he is eligible for entire year, generally is $24,720; subtracting his base amount of $13,184 yields a generally applicable maximum housing amount exclusion of $11,536 (see Federal Taxes Weekly Alert 06/15/2006 and 10/12/2006 for details).

Increases for high-cost areas. In Notice 2006-87, 2006-43 IRB 766, IRS made adjustments for high-cost foreign areas (see Federal Taxes Weekly Alert 10/12/2006). Specifically, it contains a table that (1) identifies locations within countries with high housing costs relative to U.S. housing costs, and (2) provides an adjusted limitation on allowable housing expenses for a qualified individual incurring housing expenses in one or more specified high cost localities in 2006 to use (instead of the otherwise applicable limitation of $24,720) in determining his housing expenses. A qualified individual incurring housing expenses in one or more of the high cost localities identified in the table for the year 2006 may use the adjusted limit provided in the table (in lieu of $24,720) in determining his housing cost amount on Form 2555, Foreign Earned Income.

Additional increases. Notice 2007-25 increases the limitation on housing expenses for a few foreign locations. For example, the full year limitation on housing expenses is $28,824 for Vienna, Austria, and $75,720 for Moscow, Russia, (versus $27,200 and $27,500, respectively, in Notice 2006-87). Notice 2007-25 also carries modified housing expense limits for some foreign locations not carried in Notice 2006-87, such as Beijing and Shanghai, China, Mumbai and New Delhi, India, and Zurich, Switzerland.

In Notice 2007-25, IRS says it intends to provide guidance for housing expenses for 2007 as soon as possible, but warns that this year's adjusted limitations on housing expenses for some high-cost foreign locations may be lower than the 2006 limitations in Notice 2006-87.

IRS to Waive Estimated Tax Penalty for US Citizens or Residents Living or Working Abroad

IRS to Waive Estimated Tax Penalty for U.S. Citizens or Residents Living and Working Abroad

IR-2007-32, Feb. 13, 2007
WASHINGTON — The Internal Revenue Service and U.S. Treasury today announced that they have released guidance on the estimated tax penalty for citizens or residents of the United States living and working abroad.
The Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, 120 Stat. 345 (TIPRA), enacted in May 2006, changed the maximum amount of foreign earned income and housing costs that may be excluded from gross income under section 911 of the Internal Revenue Code.

TIPRA increased the maximum amount of foreign earned income that may be excluded from gross income to $82,400. The law also limited the amount of housing costs that may be excluded or deducted under section 911. TIPRA further provides that the tax applicable to income not covered by the foreign income exclusion will now be calculated as though the exclusion had not been elected. These changes are effective for taxable years beginning after December 31, 2005.
Because these changes are retroactive to the beginning of the taxable year, persons relying on the law as it existed prior to the enactment of TIPRA may have underpaid their estimated tax liabilities for 2006 and may be liable for an addition to tax under section 6654(a). The IRS will waive additions to tax under section 6654(a) to the extent that the underpayment is attributable to the changes enacted under TIPRA.

This waiver is only available to qualified individuals who file a Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, with their timely filed Form 1040, U.S. Individual Income Tax Return, or Form 1040X, Amended U.S. Individual Income Tax Return.

Proof of Mailing - Leaving with Deskclerk Not Sufficient

A recent Tax Court decision holds that leaving a Fed Express envelope with a hotel desk clerk with the understanding that the package would go out that day with Federal Express and hand marking the date on the package is not sufficient to prove that the tax materials were timely mailed. No one knows what happened, but the Federal Express package was officially marked by Federal Express in its printed code the next day (a day too late to avoid problems). The Tax Court stated that the Official Federal Express date was for filing purposes the only valid date that could be accepted. It is important that you make certain if filing by UPS, DHL or Fed Express that it has been dated in print by Federal Express the date you intended it to be sent. You cannot rely on others and you must be certain Federal Express does not date it the next day in error.