This is Part II of a two-part blog series. After establishing that they have a tax home in a foreign country, taxpayers must still establish that they satisfy the 330 day physical presence test or the bona fide residence test. See IRC section 911(d)(1).
I. 330 Day Physical Presence Test
The 330 day physical presence test is the epitome of a “hard and fast rule.” To satisfy the test, the taxpayer must establish the following (there are “no ifs, ands, or buts about it”):
(1) That he is a U.S. citizen or resident of the United States, and
(2) That he was physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Because the second requirement presents some of the biggest challenges, I’d like to focus on it. To determine the number of days of physical presence in a foreign country during the applicable period of 12 consecutive months, the taxpayer must add together all full days in a foreign country or countries within that period.
These 330 full days need not be consecutive and may be interrupted by periods during which the individual is not present in a foreign country. See Treas. Reg. section 1.911-2(d)(2). Except as provided under IRC section 911(d)(4),[i] there are no exceptions to the 330 day requirement. For example, a taxpayer may not request a waiver of any part of the 330 day requirement if he must return to the United States unexpectedly due to special circumstances (i.e., family emergency).
The burden is on the taxpayer to prove that he is physically present for 330 days in a foreign country or countries during the relevant 12 month period. What type of proof is acceptable? Acceptable proof includes, but is not limited to, just the type of proof that you would expect: (1) passport entries; (2) official records of employment in the foreign country; or (3) other reliable documentation that proves presence in the foreign country.
A taxpayer that satisfies the 330 day physical presence test need not also satisfy the bona fide residence test.
II. Bona Fide Residence Test
The rules for determining bona fide residence are found in Treas. Reg. § 1.911-2(c). Under Treas. Reg. § 1.911-2(c), a taxpayer can establish bona fide residence in a foreign country or countries for an uninterrupted period, despite the fact that he made temporary visits during that period to the United States or elsewhere for business or for pleasure.
The regulation explicitly states when an individual with foreign earned income is not a bona fide resident of a foreign country. Two requirements must be satisfied:
(1) The individual denies being a resident of the foreign country in a statement submitted to the authorities of that country, and
(2) The individual’s earned income is not subject, by reason of nonresidency in the foreign country, to the income tax of that country.
If these requirements are satisfied, the individual is not a bona fide resident of the foreign country. In that case, it is not necessary to analyze the taxpayer’s specific facts under the factors listed below. To the extent that the foreign country’s tax law exempts the earned income of nonresidents who live and work in the foreign country due to the fact that the foreign country is a “combat zone,” then whether a statement described in Treas. Reg. § 1.911-2(c) has been made is meaningless.
If no such statement has been made, then whether a U.S. citizen is a bona fide resident of a foreign country requires an analysis of all the facts and circumstances. Under IRC section 911(d)(1)(A), the taxpayer must establish bona fide residence to the “satisfaction of the Secretary.”
Courts have interpreted this statutory language as requiring taxpayers to demonstrate residence in a foreign country by “strong proof,” as opposed to the lesser preponderance of the evidence standard for proving tax home status. See Schoneberger v. Commissioner, 74 T.C. 1016, 1024 (1980).
Among the factors that courts consider for determining bona fide residence include the following:
(1) The taxpayer’s intention;
(2) Establishment of a temporary home in the foreign country for an indefinite period;
(3) Participation in the activities in the community on social and cultural levels, identification with the daily lives of the people, and, in general, assimilation into the foreign environment;
(4) Physical presence in the foreign country consistent with the taxpayer’s employment;
(5) The nature, extent, and reasons for temporary absences from the foreign home;
(6) Assumption of economic burdens and payment of taxes to the foreign country;
(7) Status of a resident of the foreign country as compared to that of a transient or sojourner;
(8) The treatment of the taxpayer’s income tax status by his employer;
(9) Marital status and residence of the taxpayer’s family;
(10) Nature and duration of employment, whether his assignment abroad could be promptly accomplished within a definite or specified time; and
(11) Good faith in making his trip abroad; whether for purposes of tax evasion.
See Sochurek v. Commissioner, 300 F.2d 34 (7th Cir. 1962), revg. 31 T.C. 131 (1961), accepted by the Tax Court in Dawson v. Commissioner, 59 T.C. 264, 268 (1972).
In light of the foregoing, it is difficult to envision a scenario whereby civilian contractors and other civilian employees – who are not employees of the United States or an agency of the United and who are working in foreign country combat zones – will satisfy the bona fide residence test under IRC section 911.[ii]
[i] IRC section 911(d)(4) provides an exception to the eligibility requirements of IRC section 911(d)(1). If a taxpayer leaves the country during a period for which the Secretary of the Treasury, after consultation with the Secretary of State, determines that individuals were required to leave because of war, civil unrest, or similar adverse conditions that prevented the normal conduct of business by such individuals, such taxpayer will be treated as a “qualified individual.” In order for this exception to apply, the taxpayer must establish that but for those conditions, he could reasonably have been expected to satisfy the IRS section 911 eligibility requirements.
[ii] Taxpayers in the alternating blocks of time cases have taken the position that they were bona fide residents of a foreign country. In these cases, the courts have either disregarded this issue altogether or have concluded that the taxpayer was not a bona fide resident of a foreign country. See Harper v. Commissioner, 58 T.C.M. (CCH) 1509 and Ritchie, 57 T.C.M. 1282.
Original Post By: Michael DeBlis