The
Tax Court has held that an international flight attendant (this ruling would apply to pilots also) could not use
the foreign earned income exclusion to shield
all of her wages from tax.
Rather, she could only exclude that portion of her wages that was
allocable to her flight time that occurred
within or over foreign countries.
A
qualified individual may exclude foreign earned income from gross
income. (Code Sec. 911(a)) Foreign earned income is earned income
received by an individual from sources within a foreign country. (Code
Sec. 911(b)(1)(A)) Code Sec. 911 does not define “foreign
country.” But the regs provide that the term “foreign country” when used
in a geographical sense includes any territory under the sovereignty of
a government other than that of the U.S. They go on to provide
that the term includes the territorial waters of the foreign country
(determined in accordance with the laws of the U.S.), the air space over
the foreign country, and the seabed and subsoil of those submarine
areas which are adjacent to the territorial waters
of the foreign country and over which the foreign country has exclusive
rights, in accordance with international law, with respect to the
exploration and exploitation of natural resources. (Reg. § 1.911-2(h))
Consistent
with this reg, the Tax Court has held that a U.S. taxpayer is allowed
the foreign earned income exclusion only for wages earned while in or
over foreign countries
and not for wages earned in international
airspace or in or over the U.S. (LeTourneau, TC Memo 2012-45)
Facts. Yen-Ling
K. Rogers 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.
Under an agreement between
United and the union for flight attendants, (1) Yen-Ling accrued
nonflight time, such as sick and vacation hours, based on the period of
her flight attendant service; and (2) United compensated her for
additional categories, such as required training and meetings
and the performance incentive program.
United required Yen-Ling
to perform preboarding and postarrival services on every flight on
which she worked. She was required to report to work 1 hour and 45
minutes before the departure of a flight and to perform approximately 30
minutes of postarrival
services. The flight time begins at “out time,” when the plane's brake
is released and the plane pushes back from the airport. The flight time
ends at “in time” when the plane's parking brake is set after landing.
Yen-Ling was not separately compensated
for the time spent performing preboarding and postarrival services.
In
2007, Yen-Ling worked the following flights: 16 flights between Hong
Kong (HK) and San Francisco (SFO); 16 flights between SFO and HK; 14
flights between HK and Chicago (CHI); 14 flights between CHI and HK; 5
flights between HK and Ho Chi Minh City; 5
flights between Ho Chi Minh City and HK; 2 flights between SFO and
Nagoya; and 2 flights between Nagoya and SFO.
The percentage of Yen-Ling's flight time within or over foreign countries during 2007 was as follows:
- HK-SFO-HK, 63.38% foreign flight time,
- HK-CHI-HK, 86.05% foreign flight time,
- HK-Ho Chi Minh City-HK, 100% foreign flight time, and
- SFO-Nagoya-SFO, 29.19% foreign flight time.
United
reported $41,762 of wages to Yen-Ling for 2007 on Form W-2, Wage and
Tax Statement. United
provided her a duty time apportionment for
her flights during 2007 that apportioned the minutes of her flight times
within or over the U.S., international waters, and foreign countries.
Yen-Ling excluded 100% of her United wages as “other” income on a
joint return she filed with her husband for 2007. The “other” income
reported on her Form 1040 was specified by reference to the attached
Form 2555EZ, Foreign Earned Income Exclusion.
On the Form 2555-EZ, she reported $41,762 as the total amount of foreign
earned income she earned and received in 2007 and the same amount as
their foreign earned income exclusion.
Exclusion limited. The
Tax Court observed that even though Yen-Ling excluded wages as foreign
earned income, she stipulated that only a percentage of her flight time
occurred within or over foreign countries. Therefore, the Court
concluded that
only a percentage of her United wages qualified for the Code Sec.
911(a) exclusion.
The Tax Court concluded that her
stipulated flight time percentages applied
to any of her wages that are allocable to nonflight time that was based
on international flight attendant services she performed for United. The
Court said that there was no rational basis for allocating these forms
of compensation 100% to foreign earned income.
Visit our website at
www.expatattorneycpa.com to learn more about IRS International Tax Rules that affect pilots, flight crews, and crew who work on ships, cruise lines, etc. Let us help you with your tax returns.
