Tax Court in Brief | Domdom v. Comm’r | Foreign Earned Income and Tax Home for U.S. Income Tax

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Tax Litigation:  The Week of August 29th, 2022, through September 2nd, 2022

Domdom v. Comm’r, T.C. Summary Opinion 2022-17 | August 30, 2022 | Carluzzo, J. | Dkt. No. 18270-17S


Short Summary: Petitioner Ruben Domdom, Jr. (“Petitioner”) is a U.S. citizen that lived in San Diego, California, before enlisting in the U.S. Navy in 1989. After his military service, from May 23, 2014, until August 21, 2015, T-Solutions, Inc. employed Petitioner as a port engineer in Iraq. While working in Iraq, Petitioner’s employer provided him living quarters, which Petitioner generally left only to travel to his worksite. Petitioner’s wages, net of U.S. federal income taxes, were deposited into his U.S. bank account; Petitioner’s wages were not subject to Iraqi income taxes.

During tax years 2014 and 2015, Petitioner leased a condominium in San Diego, left most of his personal belongings in San Diego, and stored two vehicles in a storage facility located in San Diego. Additionally, Petitioner purchased a Nevada home in 2014 where his former spouse and three children resided during the tax years at issue.

Petitioner timely filed his 2014 and 2015 personal income tax returns. Both returns were prepared by a paid tax preparer, and the returns reflected head of household status and a taxpayer address located in Las Vegas, Nevada. On Form 2555, Foreign Earned Income, Petitioner disclosed his wages earned in Iraq but took the position that his tax home was in Iraq and, therefore, excluded his wages from income.

The IRS issued Petitioner a timely notice of deficiency for tax years 2014 and 2015. The IRS determined that Petitioner was not entitled to the foreign earned income exclusion for either tax year and that Petitioner was liable for an accuracy-related penalty under Section 6662(a). Petitioner timely filed his petition for redetermination of the deficiencies and accuracy-related penalties, and the case was heard pursuant to Section 7463 of the Internal Revenue Code.

Key Issue:

  • (1) Whether petitioner’s wages earned in Iraq are excludable from his gross income under Section 911(a); and
  • (2) Whether petitioner is liable for a Section 6662(a) accuracy-related penalty.

Primary Holding:

  • (1) Petitioner’s wages earned in Iraq are not excludable from his gross income under Section 911(a); and
  • (2) Petitioner is not liable for a Section 6662(a) accuracy-related penalty.

Key Points of Law:

  • The Commissioner’s determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving them erroneous. See Rule 142(a).
  • Citizens of the United States are taxed on their worldwide income unless a specific exclusion applies. Specking v. Comm’r, 117 T.C. 95, 101–02 (2001), aff’d sub nom. Haessly v. Comm’r, 68 F. App’x 44 (9th Cir. 2003), and aff’d sub nom. Umbach v. Comm’r, 357 F.3d 1108 (10th Cir. 2003).
  • Section 911(a)(1) provides that a “qualified individual” may, subject to limitations set forth in subsection (b)(2), elect to exclude from gross income his or her “foreign earned income.” The taxpayer must meet two requirements: (1) the taxpayer must be an individual “whose tax home is in a foreign country;” and (2) the taxpayer met either be a “bona fide resident” or one or more foreign countries or be physically present in a country or countries during at least 330 days in a 12-month period. See R.C. § 911(d)(1).
  • 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 United States. See I.R.C. § 911(d)(3); Jones v. Comm’r, 927 F.2d 849, 856 (5th Cir. 1991), rev’g T.C. Memo. 1989-616.
  • For purposes of federal income taxation, a taxpayer’s “abode” is generally in the country in which the taxpayer has the strongest economic, family, and personal ties. See, e.g., Bujol v. Comm’r, T.C. Memo. 1987-230, 53 T.C.M. (CCH) 762, 764.
  • The Section 6662(a) accuracy-related penalty does not apply to any portion of an underpayment as to which that was reasonable cause and the taxpayer acted in good faith. See R.C. § 6664(c)(1); Treas. Reg. § 1.6664-4(b)(1).

Insight: Domdom highlights the importance of determining a taxpayer’s tax home for purposes of U.S. federal income taxes. A taxpayer must be able to meet the threshold requirements for claiming the foreign earned income exclusion. In particular, the taxpayer needs to be able to affirmatively demonstrate his or her economic, family, and personal ties are in the foreign jurisdiction rather than the United States. The Taxpayer in Domdom undermined his tax home position by, among other things, claiming head of household status on his tax returns. Additionally, although the taxpayer would have generally been subject to an accuracy-related penalty for the substantial understatements of income tax, he reasonably relied on the advice of his paid tax preparer with respect to Section 911(a). Taxpayers should note that the petitioner in Domdom provided his preparer all pertinent information (e.g., Forms W-2, employment circumstances, etc.) justifying, in part, his reliance on his tax preparer’s foreign earned income determination.

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