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August 30, 2006

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.

March 8, 2006

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.

August 29, 2004

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.

June 26, 2004

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.

June 11, 2004

1031 Tax Free Exchanges Outside of US

1031 Tax Free Real Estate Exchanges are not allowed out of or into the US to or from a foreign country. Therefore, taxes must be paid if you sell your US property and want to reinvest it abroad. However, 1031 exchanges are allowed between one foreign property and another (so long as both are located outside of the US).

June 10, 2004

Voting While Living Abroad in US Presidential Elections

Even though you no longer have a residence in any US state, you can still vote in any US presidential election by following certain procedures mandated by the federal government. It can all be done by mail and you will vote by mail with an absentee ballot. Just click the title to this piece and you will be brought to a page that tells you how.

Status of Forces Agreements May Cause Problems

If you are living in a foreign country and do not have to pay income taxes in that country due to a status of forces agreement because you work for a civilian contractor hired by the US military or government, it may adversely affect you ability to claim the Section 911 foreign earned income exclusion. Revenue Rulings have held that for Vietnam and Japan such an agreement will not allow you to use the bonafide residence test to qualify for the exclusion. One ruling does hold that due to the facts and circumstances and wording of the status of forces agreement with the UK, a residence can still claim the exclusion.