Taxpayer Who Split Time Between Kuwait and Oklahoma Not Eligible For Foreign Earned Income Exclusion

Paul Musshafen was assigned to work on an oil rig in Kuwait. The question of whether he was eligible to claim the foreign earned income exclusion on his earnings was addressed in the case of Musshafen v. Commissioner, TC Summary Opinion 2009-115.

While Paul worked on the rig in Kuwait full time, and had no other job, his assignment had him “on site” for 35 straight days, with duty periods that covered 12 hours, as well as being on call at all times. Following that 35 day period, he had 35 days off—during which he returned to be with his wife and daughter in Chickasha, Oklahoma. When he was in Kuwait he mainly spent his time at the rig, and his employer provided him with housing, food and medical services during his 35 day on duty periods in Kuwait.

Paul consulted with his CPA about the proper tax treatment for his income. His CPA, after consulting with other CPAs and an attorney, concluded that the foreign earned income exclusion under §911(a) applied to this income and prepared his return claiming the exclusion.The IRS did not agree. The IRS noted that the exclusion under §911(a) is limited to individuals whose tax homes are in a foreign country and who meet certain other conditions. The IRS claimed that Paul’s tax home never ceased to be Oklahoma in this case, noting that under §911(d) that person’s whose abode is in the United States shall not treated as having a tax home in a foreign country.

The Tax Court agreed with the IRS, citing its decision in Bujol v. Commissioner for the holding that the taxpayer’s abode is “where he has strong economic, family and personal ties.” The court noted that due to the rotating work schedule, Paul spent approximately the same number of days in Oklahoma and Kuwait. But his wife and daughter lived in Oklahoma, he had an Oklahoma driver’s license, a U.S. passport, and he admitted he generally was confined to the jobsite for security reasons and thus had only limited interactions with the residents of Kuwait.

But the Tax Court did not agree with the IRS that Paul should be assessed the accuracy related penalties. While he relied upon the advice of a tax professional whose conclusions did end up being sustained in court, the Court noted that the matter was a complex one, he had taken reasonable steps to obtain competent advice, and CPA herself took significant steps that lead to a reasonable, if ultimately incorrect, conclusion about Paul’s entitlement to claim the exclusion.

Advertisement