Idaho Board of Tax Appeals Supports Foreign Earned Income Exclusion

Adam Boone Little  

    Companies recruiting to hire abroad for extended periods of time use the foreign earned income exclusion under IRC § 911 to promote the tax benefits of working abroad. Taxpayers with assistance from their CPAs have evaluated whether to work abroad away from their families in reliance on a consistent interpretation of the exclusion.

   The Idaho Tax Commission has challenged numerous taxpayers’ qualification for the exclusion. The Commission has been denying the exclusion even though taxpayers meet the requirement of being in a foreign country for 330 days during the 12-month period. The Commission has been focusing on taxpayers working in Iraq or Afghanistan because of a misperception that the unique risks in working there destroy the exclusion. The Commission has sent numerous summary notice of deficiency letters to taxpayers stating that the taxpayers fail to qualify for the exclusion because, among other reasons, they own a house in Idaho in which their spouse or family live. Ad hoc interpretation of the exclusion undermines the ability to tax plan and creates hardships on taxpayers who relied on the exclusion.

     The Tax Commission was recently reversed in an appeal presented to the Idaho Board of Tax Appeals. The Board of Tax Appeals addressed the Tax Commission’s argument in detail. The Board pointed out that the Commission was mistaken in relying upon Harrington v. Comm., 93 T.C. 297 (1989) and Daly v. Comm., 105 T.C. 1850 (2013). In both of those cases, the taxpayers were in the foreign country for no more than half the year and, therefore, did not meet the 330 day test. The Board pointed out that the appealing taxpayer qualified for the strict 330 day physical presence test set out by Congress. Additionally, the Board rejected the Commission’s interpretation of “abode,” which was highly subjective. The Board provided that the “abode” requirement does not give the Commission the unbridled discretion to deny the exclusion to taxpayers legitimately working abroad. The Board followed the guidance set out by the IRS in Treasury Regulation § 1.911-2.

     While this is only one of many similar cases, the Board’s adherence to the principles that CPAs and taxpayers have been relying upon in understanding the tax benefits of taking employment in foreign countries is instructive guidance.


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