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March 18, 2013

International Flight Attendants & Pilots Use of Foreign Earned Income Exclusion is Limited

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 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.

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