BAD NEWS FOR CIVILIANS WORKING FOR PRIVATE CONTRACTORS IN COMBAT ZONES

The IRS office of chief counsel has held that private citizens working for contractors in a Combat Zone must pay taxes on all of their income. The income tax exclusion for combat pay only applies to members of the Armed Forces and not to civilian contractors and employees.

They can qualify for the physical presence foreign earned income exclusion of $91,400 (for 2009) if the live and work in the foreign country for a full 12 month fiscal year and are present in that foreign country for 330 days out of that 12 month fiscal year period. This is called the "physical presence test." It is almost impossible for a private employee or contractor working in a combat zone such as Iraq or Afghanistan to qualify as a bonafide resident in order to secure the foreign earned income exclusion. AM2009-003

NEW 2009 US INCOME TAX LAW FOR INDIVIDUAL TAXPAYERS

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. Some of the provisions concerning individuals include:
“Making Work Pay” credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.
Economic recovery payment. The new law provides for a one-time payment of $250 to retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S.Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit.
Refundable credit for certain federal and state pensioners. The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit.
Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.
Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.
Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).
Expanded and revised higher education tax credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.
Computers as an education expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.
Expanded first-time credit for first-time home buyers. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.
Tax break for new car purchasers. The new law allows taxpayers to deduct State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to nonitemizers. However, the deduction cannot be taken by a taxpayer who elects to deduct State and local sales taxes in lieu of State and local income taxes.
Alternative minimum tax (AMT) patch. To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

Don D. Nelson is an Attorney and CPA who has assisted US Citizens with real estate, businesses, and residences in Los Cabos for the last 20 years. He is an expert on expatriate and international taxation. He assists hundreds of clients in Mexico with tax planning, and return preparation. He can be reached at (949) 481-4094 or emailed at ustax@hotmail.com. His website is located www.TaxMeLess.com and contains a lot of valuable tax planning information.

US Tax Filing Requirements for a Mexican or Foreign Corporation

If you, a US Citizen, own your Mexican real estate or small business through a Mexican corporation you have a U.S. Tax filing obligation with the IRS each year. This form is generally required if you own 10% or more of the stock or equitable interest in the foreign corporation.

• The form is due yearly on the extended due date of your US. Income tax return. It is filed with your personal return and includes information on the foreign corporation's ownership, formation, income and expenses, and assets and liabilities. Usually it will not result in any additional tax due with your personal return, but that is possible if it has Subpart F income.

• In most situations (unless the flow through election is made as explained below) the form 5471 does not result in any additional tax on your US tax return. However, if the foreign corporation has a sufficient amount of investment income, income from the sole owners personal services, or income from reselling goods made by an affiliate in the US, its income may become immediately taxable to you the shareholder. Subpart F income is complex which means a careful analysis of the sources of the corporations income must be made to determine if it is immediately taxable to its shareholder. If another owner of the foreign corporation files the form, you just need to identify data on that owner in an attachment to your tax return.

• If the corporation owns real estate, and possible for other reasons, it is advisable that it is formed a a Sociedad de Responsibilidad Limitada (SRL). You as the owner of the SRL can make an election for US income tax purposes to treat it as a flow through entity on the US return of its owner. (This is the same as the treatment of an LLC or partnership for US tax purposes.) This means all of its income or losses flow through to you on your personal tax return and becomes a part of your US taxable income each year. It also allows you to take a foreign tax credit on your personal return for any taxes the foreign corporation pays in Mexico on its income. This election also stops any possibility of double taxation or converting capitals gains into ordinary income on your US income tax return.

• If the IRS discovers you filed late or you should have been filing this form and did not the penalty is $10,000 per year for each unfiled form. There is a tax treaty between Mexico and the U.S which allows both countries access to the other countries records. Your US passport is included with other documents in the bureau where your Mexican corporation is is registered in Mexico.

• We recommend to you that you file this form each year if you have the requisite stock ownership in a Mexican Corporation. Failure to file could result in extreme IRS penalties if they discovered you failed to file.

FOREIGN CORPORATION FORM 5471 NON-FILING OR LATE FILING

The IRS recently announced that starting in 2009 they will start imposing the $10,000 penalty onf corporations that file Form 5471 late or not at all. This form is required of anyone (US corporation, LLC, trust, individual or partnership) owning more than 10% of a foreign corporation. It usually includes a yearly income and expense statement and balance sheet and information on the corporation, its distributions, business, owners, etc. This form is due with the regular or extended due date of the owner's regular tax return and is attached to the regular tax return.

It appears a large number of US taxpayers operating businesses abroad (and often also living abroad) form a corporation to operate their small business, but never file this form due to lack of knowledge or neglect. Often attaching a written excuse to the form will abate the penalty but ater the end of 2008, it appears this might not be as successful as it has been.

It is entirely possible that in the future the IRS will extend the automatic penalty assessment to individuals who file Form 5471 late or fail to file it. Right now they often will waive that penalty if the taxpayer attaches a reasonable excuse.

Watch Out for Foreign Mutual Fund Investments

We have learned that a lot of US expats are being sold foreign mutual funds or shares in foreign corporations that invest solely in securities. They are being told that those investments will grow tax free (legally) until such time as they decide to take a distribution. That statement is true but the brokers and sales people are not telling their US citizen and permanent resident clients all of the facts how a distribution will be taxed when it is finally made.

When you purchase a foreign investment company or mutual funds it is general classified for US tax purposes as a Passive Foreign Investment Company (PFIC). These have special treatment under US tax law. To learn the technical details read the instructions to IRS Form 8621.

It is true that you are not taxed until a distribution is made, but unless you file a special election and special IRS form to have the fund marked to market each at the end of each calendar year the results can be disastrous. When the distribution is finally made (if no election has been made and no form 8621 filed) it will all be taxed at the highest personal income tax rate then in effect and the profit included in that distribution will be treated as if earned ratably during each year the investment was held without distribution. You cannot get capital gains rates on capital gains or any qualified dividend rate on dividends. In addition to paying the highest tax rate, you must pay interest calculated on those ratable earnings for each year on the taxes you should have paid if it were taxed in each of those years you did not take a distribution. The interest added onto the tax rate can mean you pay 50 to 75 percent or more of the distribution in taxes and interest on your US tax return. .... depending on how long you held it without making a distribution, leaving you with little net cash profit.

If you own a PFIC you can avoid this result by electing to mark the fund value up to market at the end of each year and paying tax on any gain at ordinary income rates with your tax return that year. You will not then owe any interest on past distributions and if you are not in the highest tax bracket, you will only pay taxes at the rate you are in for that year. Their is a third choice which is difficult to comply with and rarely used.

So if you do own a PFIC, it is important under most circumstances to file Form 8621 each year and make the mark to market election (you can also take losses if that is the result of the year) on your tax return. If you delay, you may have to pay a lot or almost all of your profits as taxes and interest. How do you avoid this problem? Invest directly in a foreign stockof an individual foreign company. Then the dividends will be taxed as such each year (and if there is a treaty with the country of incorporation those dividends might be qualified) and when you sell the stock you can pay tax on the gain at long term capital gains rates.

TOUGH NEW EXPATRIATION TAX LAW ABOUT TO BECOME LAW

Hidden in the Soldiers Relief Act is new tax law which is about to be signed by the President and has been passed by Congress. The law will cause many of those who wish to expatriate and surrender their US residency or Citizenship to pay a significant amount of tax on the appreciation of their assets upon surrender of their citizenship as well as other measures. Click on the title to this article to go to our webpage which contains two links to articles about the new tax law.

Foreign Bank and Financial Account Information Report Deadline is 6/30, and IRS is Enforcing Penalties

The IRS has announced that it intends to enforce penalties for FBAR noncompliance – as far back as 6 years. It might be possible to negotiate for one year of penalties if compliance is started. Effective March 24, 2008, IRS has delegated the authority (Delegation Order 4-35) to handle such enforcement to various government officials, including: investigation of possible civil violations of the FBAR requirements; issuance, service and recommendation of enforcement of summonses; preparation and filing of proofs of claims for FBAR penalties; referral to the Justice Department for the institution of proceedings; issuance of administrative rulings; and approval of written agreements relating to a person’s civil liability for a FBAR penalty.

Tax practitioners with clients with foreign bank accounts should notify clients of their responsibility to file the "Report of Foreign Bank and Financial Accounts" (Treasury Form TD F 90-22.1, referred to as FBAR) on or before June 30, 2008. The AICPA also reminds tax practitioners that when gathering information for Form 1040s and Form 1120s to ask clients about the existence of foreign bank accounts and to disclose the information in Question 7, Part III of Form 1040, Schedule B, Interest and Ordinary Dividends, and disclose it on Line 6a of Schedule N of Form 1120. Taxpayers who are currently filing Form 5471, Form 8858, Form 8865 or Form 3520 may also be subject to FBAR reporting requirements. Be aware that a new TD F 90-22.1 is being developed and expected to be released possibly over the next year.

This TD F 90-22.1 form is required to be filed by U.S. citizens and residents (including an individual, corporation, partnership, trust or estate) who have a financial interest in or signature or other authority over any financial accounts (including bank, securities, mutual funds or other types of financial accounts in a foreign country), if the aggregate value of such accounts exceeded $10,000 at any time during 2007. For more information on this, see the forms and instructions for TD F 90-22.1 and see related IRS international tax forms instructions and publications for the definition of a financial interest, frequently asked questions on FBAR,.

Making False Statements to IRS is a Crime

Former NFL player Dana Stubblefield pleaded guilty to lying to an IRS agent. AP report dated Jan. 18, 2008. Under a plea agreement he may spend up to 6 months in the federal penitentiary. He lied about using steroids.

We generally think of persons getting into criminal difficulties with IRS when they affirmatively make false statements in writings that were signed subject to stated penalties of perjury (maybe appearing back in the instructions). Indeed, Code Sec. 7206 imposes such a rule. However, there are other federal statutes that can turn an oral statement made to a revenue agent in the course of an audit into a trip to the penitentiary.

Code Sec. 7201 is the general “attempt to evade or avoid” section, which can apply to such oral misstatements. U.S. v. Beacon Brass Co, (1952, S Ct) 42 AFTR 654 , 344 US 43 . More threateningly, 18 USCS 1001 can apply. This is the general statute making it a crime to make false statements to federal agents.

Brogan v. U.S., 118 S. Ct. 105 (1998) ruled that a taxpayer that falsely says “no” when asked if he engaged in tax evasion can be criminally liable. Apparently this means that the correct answer is to plead the Fifth Amendment in that case, and otherwise say nothing.

The presence of these statutes, and the way they have been historically applied, makes it very difficult for IRS to carry off the model of being a customer service agency. Taxpayers need to remember that they can be liable for criminal prosecution for even casual conversations with IRS agents in the course of their duties, without any written penalties of perjury statement being violated.

ANTARTIC CONTINENT DOES NOT QUALIFY AS FOREIGN COUNTRY FOR EXPATRIATE FOREIGN EARNED INCOME EXCLUSION

The U.S. Tax Court just held that a married couple and 150 similarly situationed taxpayers could not exclude form their income amounts earned for services performed in Antarctica because Antarctica (the South Pole) is not a foreign country. Kunze v. Comissioner T.C. Memo 2007-179 (7/5/07).

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.

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.

2006 IRS AUDIT STATISTICS - ARE YOU IN DANGER?

As reported in a statement issued by IRS Commissioner Mark W. Everson, IRS has continued its strong audit enforcement efforts for Fiscal Year 2006. Principally because of a strong rise in collections, enforcement revenues—the monies from collection, examination, and document matching activities—has increased 3% to a record $48.7 billion.

Individual enforcement. For the 2006 fiscal year that ended Sept. 30, total individual returns audited increased by over 6% to 1,293,681 from 1,215,000 in 2005. This is the highest number since '98. While correspondence or letter exams increased, there was an even bigger increase of nearly 23% from the previous year in the traditional, sit-down field audits.

As an important part of its enforcement effort, IRS has targeted high-income taxpayers. Audits of individuals with income of $1,000,000 and higher increased to 17,015 from 12,835, a nearly 33% increase. This translates into about 1 in every 16 of these taxpayers being audited last year. In addition, audits of individuals with incomes over $100,000 exceeded 257,000, an 18% increase from 2005. This is the highest figure in more than a decade.

Business enforcement. IRS has placed more emphasis in the area of flow-through returns involving S corporations and partnerships. Efforts to review S corporations and partnerships increased while other IRS activity involving small business and large corporations remained relatively stable. Audits of S corporation returns increased to 13,984 from 10,417, a 34% increase; this is the highest level since 2000. Audits of partnerships increased to 9,777 from 8,489, a 15% increase; this is the highest level since '98.

Audits of small businesses organized as corporations remained about the same: 17,871 audits were completed in 2006, up slightly from 17,858 in 2005. Audits of larger corporations—those with assets over $10 million—declined by 2.2%, to 10,591 from 10,829 in 2005.

Don D. Nelson, is one of the world's acknowledged U.S. Expatriate Tax Experts with over 31 years experience in providing services to clients everywhere in the world. This Blog will be updated regularly with the latest developments in expatriate and US international tax laws which will affect US Citizens living and working abroad.

Visit his website to for answers to most of your questions about US expatriate and foreign taxation at http://www.taxmeless.com or email Don at donnelsonattycpa@yahoo.com

Taxation of Civilian Workers in Combat Zones

Some confusion regarding taxation of civilian workers in combat zones [IRS Headliner Volume 178, 08/31/2006]: The IRS has become aware of some misunderstanding of the income exclusion rules for non-military personnel. Under IRC §112, certain compensation received for active service in a combat zone by members of the Armed Forces is excludable from gross income, and, therefore not subject to federal income tax withholding. However, this exclusion only applies to compensation paid by the U.S. Armed Forces to members of the Armed Forces. Under current law, neither federal civilian employees nor civilian defense contractors deployed with U.S. forces qualify for the exclusion while working in a combat zone or qualified hazardous duty area. (Note that members of the merchant marines are not considered members of the U.S. Armed Forces under IRC §7701(a)(15), and do not qualify for the exclusion either.) Contract workers in combat zones may still qualify for other income exclusions. For example, a U.S. citizen or resident alien living abroad, while taxed on their worldwide income, may qualify to exclude up to $82,400 of their foreign earnings from income, as well as qualify for the foreign housing exclusion and the foreign housing deduction. In addition, if certain requirements are met, contract workers may be able to exclude the value of meals and lodging provided by their employer from income.

Guantanamo Bay Civilians Now Elgible for Foreign Earned Income Exclusion

Notice 2006-84, 2006-41 IRB
IRS has issued a notice which provides that the U.S. Naval Base at Guantanamo Bay is not located within a restricted country and that qualified individuals who are performing services at the U.S. Naval Base there are eligible for the income and housing exclusion under Code Sec. 911 .

Terminating US Residency Permanently Requires Yet Another Form

Past U.S. residents or residents are reminded that individuals who have expatriated or terminated their U.S. residency status must file Form 8854, Initial and Annual Expatriation Information Statement. Form 8854 must also be filed to comply with the annual information reporting requirements of Internal Revenue Code section 6039G, if the person is subject to tax under Section 877 of the Code. A $10,000 penalty may be imposed for failure to file Form 8854 when required.

IRS is sending notices to expatriates who have not complied with the Form 8854 requirements, including the imposition of the $10,000 penalty where appropriate. Failure to file or not include all the required information or the inclusion of incorrect information could lead to a penalty.

WWW.IRS.gov contains information about the Expatriation Tax including changes made to expatriation tax rules due to the American Jobs Creation Act of 2004

Employer Provided Housing is Taxable to Expat Employees

The taxpayers were liable for taxes on the value of the lodging provided by a government contractor. Hargrove et al. v. Commissioner, T.C. Memo 2006-159 (8/8/2006).

During at least some of the time during the 1999 – 2002 tax years, several couples worked for TRW Overseas Inc. at the Joint Defense Space Research Facility/Joint Defense Space Communication Station (defense facility) in Pine Gap, Australia. TRW was a U.S. government contractor that provided services at the facility.

The work for TRW required accepting assigned housing in Alice Springs, Australia, which was approximately 22 miles from the defense facility and was outside of its physical boundaries. The housing was scattered throughout Alice Springs and was on publicly accessible roads that were adjacent to homes available to the general public. While living in Alice Springs, the taxpayers did not pay any rent or utility expenses and did not conduct any TRW or defense facility work from the homes.

The IRS determined that the couples were liable for deficiencies for one or more years for the 1999 – 2002 tax years as the result of excluding the value of their housing from income and that some of them owed corresponding accuracy-related penalties. The taxpayers filed Tax Court petitions in which they argued that Code Section 119 gave them the right to exclude the value of their employment-related housing from their income and that Code Section 912 provided an exclusion for certain living allowances. The taxpayers also asked the Tax Court to review the accuracy-related penalties’ propriety.

The Tax Court held that the couples were liable for the taxes assessed. According to the Tax Court, the couples could not exclude the value of the housing that TRW provided from their taxable income because – although accepting the lodging was a condition of employment and it was furnished for TRW’s convenience – the lodging was not on TRW’s business premises. It said Dole v. Commissioner, 43 T.C. 697 (1965), established that the phrase “on the business premises” means either living quarters that are an integral part of the business property or premises on which an employer conducts some of its business activities. The Alice Springs housing was not integral to TRW’s business, and the couples’ occupancy of that housing did not serve any important TRW business function. The court also concluded that the income exclusion under Code Section 912 did not apply to the living allowances because that provision is limited to civilian officers and employees of the U.S. government.

Finally, the court upheld the accuracy-related penalties because the couples did not show any reasonable cause for the underpayment or that they acted in good faith regarding it. More specifically, they did not provide adequate justification for the disallowed exclusions under Code Sections 911 and 912.

Form 926 Required for Transfers to Foreign Corps.

U.S. persons, domestic corporations and domestic estates or trusts who exchange or transfer property to a foreign corporation must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation,to report the transaction.

Required U.S. entities should make sure they file timely to avoid any potential failure to file penalties. They also must file Form 5471 in most situations with their annual income tax return.

US Enterepreneurs Living Abroad May Need To File Special Forms

If you live abroad and have your own business, you may need to file special forms with your tax return. If you own more than 10% of a foreign corporation, you may be required to file Form 5471 or pay penalties of $10,000 US for each failure to file the form. This forms reports on the ownership, income and expenses of the foreign corporation.

If you operate through a foreign partnership, you may be required to file Form 8865 which reports on the ownership, income and expenses of that partnership. Again failure to file this form can result in a $10,000 per year penalty.

If you have a foreign bank account, stock market account, or other financial accounts that any tiem during the year had more than $10,000US in it or a group of such accounts, you must file Form TDF 90.22-1 which is not filed with your tax return, but is due 6/30 of each year. It reports information on the account and its ownership.

Corporate Tax Equilization Policies for Executives Working Abroad

Corporate tax equilization policies are not always fair to corporate executives working abroad. If you participate in such a program and suspect it is not fair, you can have it reviewed by an expert to determine if you are actually benefiting. If you live in a low tax country, in most instances no tax equilization is better than equiliztion. That will often leave you with much more money in your pocket.