Flight attendant cannot claim foreign earned income exclusion for wages earned in international airspace and U.S.

BY SALLY P. SCHREIBER, J.D.

On Wednesday, the Tax Court held that a flight attendant who was a resident of Hong Kong and a U.S. citizen could not claim 100% of her wages were excludable under the Sec. 911 foreign earned income exclusion (Rogers, T.C. Memo. 2013-77). The court also upheld an accuracy-related penalty under Sec. 6662, pointing to the taxpayer’s earlier Tax Court case in which she had made the same claim of 100% exclusion under the same facts (Rogers, T.C. Memo. 2009-111).

The taxpayer, who worked for United Airlines on flights between Hong Kong and Vietnam, Hong Kong and Chicago, Hong Kong and San Francisco, and San Francisco and Japan, received pay statements from the airline apportioning her flight time within or over the United States, over international waters, and in or over foreign countries. The taxpayer excluded 100% of her income on her 2007 tax return, classifying it all as foreign earned income. (Her income was below the 2007 exclusion amount of $85,700, and she was a “qualified individual” under Sec. 911.)

Sec. 911(b)(1)(A) defines “foreign earned income” to generally mean amounts earned “from sources within a foreign country.” Regs. Sec. 1.911-2(h) defines “foreign country” as “any territory under the sovereignty of a government other than that of the United States.” The Tax Court held, therefore, that only her wages earned while in or flying over foreign countries qualify as foreign earned income, and wages earned while in international airspace or over the United States do not qualify.

The taxpayer also tried to claim that 100% of her vacation and sick pay should be excluded under Sec. 911. The court, however, concluded that it must look to where the services were performed, not where the compensation was paid or where the taxpayer was when it was paid, to determine whether compensation is treated as income from sources within a foreign country. The labor agreement between United and the union based the accrual of sick and vacation time on hours worked. Therefore, the court held it was appropriate to apportion this income based on where the taxpayer was when she earned it, not where she was when she took the vacation or sick leave.

Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.

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