Tax & AccountingSeptember 16, 2021

Foreign Earned Income Exclusion Case: A Glimpse Into a Contractor's Life in Afghanistan


A U.S. defense contract employee's foreign earned income exclusion case provides a glimpse into a contractor's life in Afghanistan.


Foreign Earned Income Exclusion

To be a “qualified individual” for the foreign earned income exclusion a taxpayer must satisfy (1) either a bona fide residency or physical presence test, and (2) show that her tax home is in a foreign country. The physical presence test is straightforward: during any period of 12 consecutive months, the taxpayer must be present in a foreign country or countries during at least 330 full days. However, the bona fide residency and tax home tests are more subjective.


Life in Afghanistan

The Tax Court decided whether the taxpayer met the foreign earned income exclusion tests based on her life as a contract employee in Afghanistan. The taxpayer worked in transportation management at U.S. air bases in Afghanistan, primarily at Kandahar Airfield. She typically worked a 12 hour shift daily. She had a one hour lunch break and a half day off every two weeks. Her housing was provided on the base as part of her employment. For the first several months, this housing consisted of a large tent shared with other women. Later, she lived in modular housing made of retrofitted shipping containers. She shared a bathroom and often shared her modular housing unit with a roommate. The U.S. Government provided her three meals a day at the base's dining facility.

She socialized with others on the base and formed close friendships. She enjoyed celebrating holidays and birthdays on the base, as well as traveling internationally with her friends. She visited Thailand, Australia, Monaco, France, Romania, Tanzania, Kenya, the United Arab Emirates, and the Maldives during her vacation periods.

The taxpayer embraced the diversity of the base, sharing recipes from her Jamaican heritage and learning to make dishes from other cuisines. Much of the social life was centered around the “boardwalk” area, which consisted of shops and restaurants surrounding a soccer field and encircled by a running track. The boardwalk had a cigar club and a beauty parlor, as well as American chain restaurants, including Popeye's and TGI Fridays. This was a popular place to hang out.

For security reasons, she was not permitted to leave the base except when departing for international travel. She could not travel within Afghanistan because it was a war zone.


Bona Fide Residency Test

The bona fide residency test requires a taxpayer to establish that she has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

The court listed eleven factors used in determining bona fide residency. Of these, the court found only one adverse to the taxpayer. She assumed few economic burdens by living in Afghanistan because she did not pay for lodging or most meals, and she paid no tax in Afghanistan. However, for one year she was not a bona resident because her employment in Afghanistan ended, and she moved to her home in Texas.


Tax Home Test

Under the tax home test, the taxpayer must show that her tax home is in a foreign country. The court considered this in the light of the nature of the region and the unique circumstances of her work. The taxpayer had a Texas driver's license, but it was a condition of her employment that she be licensed to drive in the country that issued her passport. She had a U.S. bank account, but that was necessary to enable her employer to make direct deposit of her paychecks. Opening a local bank account or buying property in Afghanistan would have been impracticable if not impossible. She had limited family and personal ties to the United States. She was unmarried and had no children; although she visited her parents in Boston occasionally, she spent a significant amount of her vacation time traveling to other foreign countries.

Most of her close friends were other contractors who also lived and worked in Afghanistan. She credibly testified that she felt closer to these colleagues than she had felt (for example) to her former co-workers when she was employed in the United States. At one point she dated another contractor working overseas. She planned to work as a contractor in the Middle East for as long as such jobs remained open to her.

The Court noted that civilian defense contractors working overseas can have abodes outside the United States, so long as they have stronger ties to the foreign country than to the United States.

Thus, her tax home was in Afghanistan.

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