Acone, TC Memo 2017-162

The Tax Court has held that a commercial airline pilot failed both the "tax home" test and the "bona fide residence" test, despite the fact that he was stationed in South Korea, and that therefore he did not qualify for the foreign earned income exclusion.

Background. Code Sec. 911(a) provides that a qualified individual may elect to exclude from gross income, subject to limitations set out in Code Sec. 911(b)(2), his or her foreign earned income. To be entitled to this exclusion, a taxpayer must satisfy several requirements.

One of those requirements is that he or she must be an individual "whose tax home is in a foreign country". (Code Sec. 911(d)(1)) Code Sec. 911(d)(3) provides that the term "tax home" means in the case of an individual, "such individual's home for purposes of Code Sec. 162(a)(2)". Under Code Sec. 162(a)(2), a person's home is generally considered to be the location of his or her regular or principal place of business. (Mitchell, (1980) 74 TC 578)

However, Code Sec. 911(d)(3) also provides that "[an] individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the U.S.". That is, an individual whose "abode" is within the U.S. cannot establish that his or her "tax home" is in a foreign country. (Jones, (CA 5 1991) 67 AFTR 2d 91-795, Harrington, (1989) 93 TC 297)

Another of those requirements is that he must be either:

  1. A U.S. citizen who is "a bona fide resident of a foreign entire tax year" (Code Sec. 911(d)(1)(A)); or
  2. A U.S. citizen or resident who is "present in a foreign country or countries during at least 330 full days" of a 12-month period. (Code Sec. 911(d)(1)(B))

The Sochurek standard (Sochurek, (CA 7 1962) 9 AFTR 2d 883) sets out the following factors for determining whether a taxpayer is a bona fide resident of a foreign country:

  1. Intention of the taxpayer;
  2. Establishment of the taxpayer's home temporarily in the foreign country for an indefinite period;
  3. Participation in the activities of the chosen community;
  4. Physical presence in the foreign country consistent with the taxpayer's employment;
  5. Nature, extent and reasons for temporary absences from the taxpayer's temporary foreign home;
  6. Assumption of economic burdens and payment of taxes to the foreign country;
  7. Status contrasted to that of transient or sojourner;
  8. Treatment of taxpayer's income tax status by his or her employer;
  9. Marital status and residence of taxpayer's family;
  10. Nature and duration of his employment;
  11. Good faith in making the trip abroad, e.g., whether for purpose of tax evasion.

Facts. The taxpayer, Mr. Acone, flew airplanes for a South Korean airline company, Korean Air Lines (KAL), in 2011 and 2012. KAL considered him to be "stationed" in Incheon, Korea, which meant that Incheon was the airport that Mr. Acone most frequently flew out of and flew into.

During the time he spent in South Korea, he played tennis and golf and participated in dinner engagements, largely with other airplane pilots. He took assorted lessons from individuals as well as KAL to learn various phrases in Korean as well as other things about South Korea.

But he spent only about a third of each year in South Korea and more than 40% of each year in the U.S. Acone returned to his home in the U.S. frequently during those years and spent most of his days off in the U.S., where his wife and house remained. The mean length of Mr. Acone's stays in the U.S. in 2011 was 7.95 days, while the mean length of his stays in South Korea that year was 2.45 days.

He stayed in South Korea only when work required it and stayed in the U.S. whenever he could. When Acone stayed in South Korea, he always stayed in the same hotel, provided to him at no cost by the airline, but stayed in various rooms in that hotel.

Acone retained his U.S. citizenship, voting registration, driver's license, bank accounts, and church membership.

On their tax returns for 2011 and 2012, the Acones claimed an exclusion for "foreign earned income" under Code Sec. 911(a)(1). IRS disallowed the exclusions.

Taxpayer failed the tax home and bona fide resident tests. The Court held that the taxpayer failed both the tax home and the bona fide residence tests and therefore did not qualify for the foreign earned income exclusion.

Tax home/abode test. The Court said that "abode" has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. (Black's Law Dictionary 7 (5th ed. 1979)) While an exact definition of "abode" depends upon the context in which the word is used, it clearly does not mean one's principal place of business. Thus, "abode" has a domestic rather than vocational meaning, and stands in contrast to "tax home" as defined for purposes of Code Sec. 162(a)(2).

The Court said that one's abode is where he abides. The word connotes stability, not transience. Mr. Acone's housing in Seoul, however, was a hotel — the quintessence of transience. Admittedly, it is not impossible that a person may reside permanently in a hotel, but Mr. Acone did not have even a particular hotel room to call his own. The facts about his hotel life in Seoul were not absolutely dispositive of the issue of his "abode", but they were significant. The Court said that even though a taxpayer may have some limited ties to a foreign country, if the taxpayer's ties to the U.S. remain strong, the Tax Court has previously held that his abode remained in the U.S., especially when his or her ties to the foreign country were transitory or limited. See, e.g., Harrington, (1989) 93 TC 297. Mr. Acone's ties to South Korea were indeed limited; and his ties to the U.S. remained strong.

The Court said that the record clearly indicated that, while Mr. Acone spent significant periods in both South Korea and the U.S. during the years in issue, when he had the choice, he preferred to be in the U.S. A comparison of days off-duty in South Korea and the U.S. during the years in issue showed that, using Mr. Acone's own figures, he spent over 80% of the combined total of such days in the U.S. The mean lengths of his visits to each country during the years in issue indicated a similar conclusion: during both years, the mean duration of Mr. Acone's stays in the U.S. was days longer than the mean duration of his stays in South Korea. That is, when Mr. Acone was in America, he tended to stay there longer than he stayed in South Korea when he was there. "It would be difficult to conclude that Mr. Acone's 'domestic' home, as opposed to his professional home, was in a country where he largely declined to spend his personal days."

Bona fide residence test. The parties agreed that Acone didn't meet the "330 full days" test of Code Sec. 911(d)(1)(B). And the Court found that eight Sochurek factors weighed against finding bona fide residence in South Korea and three weighed in favor, so it concluded that the taxpayer failed the bona fide residence test. Included in its analysis were:

  1. Intention. The Court stated that intent plays perhaps the most important part in determining the establishment and maintenance of a foreign residence. And it said that it took as sincere Mr. Acone's testimony that he intended to be a bona fide resident of South Korea. But the relevant intention is not merely the intention to make plausible a claim of the foreign earned income exclusion. Rather, courts look for objective indicia of an intention to actually establish residence in the foreign country. The Court said that it did not see any concrete, objective fact which persuasively demonstrated Mr. Acone's intent. Mr. Acone testified very credibly that in 2006 he intended to work for KAL until retirement — an intention that he accomplished — but he did not convince the Court that, while so employed, he intended to be anything more than a transient in South Korea. So this factor was adverse to Mr. Acone.
  2. Establishment of home. Mr. Acone did not establish a home in South Korea for any period, let alone an indefinite one. He simply stayed in whatever hotel room was made available to him at the Hyatt Regency Incheon. His actual home remained in the U.S., and he returned to it as frequently as practically possible. This factor was adverse to Mr. Acone.
  3. Activities and assimilation. Mr. Acone testified credibly that he attempted to learn Korean to a modest extent and that he made friends with whom he ate and played golf and tennis in South Korea. To some extent, he did assimilate into the local environment, although the extent was not great, given how little of his free time he spent in South Korea. This factor was moderately favorable to Mr. Acone.

The Tax Court also distinguished the facts in the current case from two cases involving pilots who were deemed to qualify for the foreign earned income exclusion.

In Jones, (CA 5 1991) 67 AFTR 2d 91-795, the taxpayer was only away from his home in Japan when his business required it, or when he was on vacation. Mr. Acone, on the other hand, was away from South Korea and in the U.S. whenever his work permitted. The taxpayer in Jones returned a dividend check that the State of Alaska issued to him as a resident, fairly clearly establishing his intent (the first and most important Sochurekfactor) not to be a resident of Alaska but instead to be a resident of the foreign country, Japan.

In Cobb, TC Memo 1991-376, the taxpayer accepted a permanent transfer to, and had a permanent duty assignment in Japan. While he did sometimes visit with his family when laid over in Los Angeles, the occasions were merely visits.

References: For the foreign earned income exclusion, see FTC 2d/FIN ¶ O-1101 et seq.; United States Tax Reporter ¶ 9114.01 et seq.