The Tax Court has determined in Cutting, TC Memo 2020-158, that a pilot who spent most of his time in Thailand and had a Thai wife was not entitled to the foreign earned income exclusion. He was not a bona fide resident of Thailand and his principal place of business was in the U.S.
Foreign earned income is income an individual receives from sources within a foreign country that is attributable to services performed by the individual. (Code Sec. 911(b)(1)(A)) A “qualified individual” may exclude from gross income foreign earned income. (Code Sec. 911(a))
A qualified individual is an individual whose tax home is in a foreign country and who is either (1) a bona fide resident of that country for an uninterrupted period that includes the entire tax year, or (2) physically present in a foreign country or countries for a certain period. (Code Sec. 911(d)(1))
An individual’s tax home is considered to be his regular place of business (or principal place of business if more than one regular place exists). If the individual has no regular or principal place of business, the individual’s tax home is his or her regular place of abode in a “real and substantial sense.” (Reg §1.911-2(b)) The principal place of business for a pilot is his or her duty station. (Wojciechowski, TC Memo 1991-239)
Douglas Cutting, an American citizen living in Thailand, worked as a pilot for an airline with a contract with the U.S. Department of Defense. He flew mostly international routes transporting military personnel and cargo. Cutting’s income came, primarily, from his piloting work.
Cutting's employment was governed by a collective bargaining agreement that required him to designate a home base (primary residence for records purposes) and a gateway travel airport. Cutting selected San Jose, California, to be his home base and San Jose Airport (SJC) to be his gateway travel airport.
Cutting used his father’s address in San Jose as his mailing address because he did not own or lease a residence in the U.S. during the relevant years.
On His IRS Form 2555, Foreign Earned Income,
He Stated That He Was Not A Resident Of Thailand and
Did Not Live With Any Family Members Abroad.
In Thailand, Cutting held only temporary transit and nonimmigrant visas, which expired after 30 days. These visas were renewed automatically each time he left Thailand to work as a pilot, giving him a fresh 30-day period each time he returned. On at least two occasions the Thai government denied Cutting's requests to extend his visas. He could not own or lease property in Thailand and did not pay any taxes to Thailand.
For 2012, 2013, and 2014, Cutting filed his returns as a single taxpayer and claimed the maximum allowable foreign earned income exclusion under Code Sec. 911. IRS disallowed these exclusions on the basis that Cutting had not established either bona fide residence or physical presence in Thailand for those years.
The Tax Court, After Analyzing The Factors Pertinent To Determining Bona Fide Residency, Found That Cutting Was Not A Bona Fide Resident Of Thailand And, Therefore, Couldn't Claim For Foreign Earned Income Exclusion.
The Court pointed out that most of the determining factors weighed against him:
- there was no evidence that Cutting intended to become a bona fide resident of Thailand;
- there was no evidence that he established a home in Thailand for an indefinite period;
- there was no showing that Cutting made any attempt to assimilate into the Thai culture, although his wife was Thai;
- he did not assume any economic burdens of life in Thailand (such as buying or renting a home) or pay taxes to Thailand;
- he was not a legal resident of Thailand because he only had temporary transit and nonimmigrant visas and he stated on his Form 2555 that he was not a resident of Thailand.
Further, the Court noted that Cutting choose San Jose, California, as his principal place of business when he designate it as his home base; his employer was based in the U.S. and withheld U.S. taxes from his wages; and he filed his U.S. taxes as a single taxpayer.
On the other hand, only two factors weighed in his favor: Cutting had a physical presence in Thailand and spent most of his time in Thailand when not working.
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