US tax court rules against Is­raeli who claimed ‘911 ex­clu­sion’

The Jerusalem Post - - BUSINESS & FINANCE - YOUR TAXES • By MONTE SIL­VER and LEON HAR­RIS

Each year many US cit­i­zens and res­i­dents liv­ing over­seas take ad­van­tage of the up to $100,800 a year for­eign earned in­come ex­clu­sion (FEIE), pur­suant to Sec­tion 911 of the US In­ter­nal Rev­enue Code. How­ever, en­ti­tle­ment to FEIE is not au­to­matic as the US Tax Court re­cently ruled in a case in­volv­ing an Is­raeli cit­i­zen.

The con­di­tions for FEIE en­ti­tle­ment are that the tax­payer be a bona fide res­i­dent of a for­eign coun­try, and have a tax home in a for­eign coun­try. A tax­payer’s “tax home” may be dif­fer­ent from the tax­payer’s ac­tual coun­try of res­i­dence.

The first test is whether a US tax­payer is a bona fide res­i­dent of a for­eign coun­try.

If the tax­payer is a US cit­i­zen or US tax res­i­dent, then the tax­payer must be a “bona fide” res­i­dent of a for­eign coun­try or coun­tries for an un­in­ter­rupted pe­riod which in­cludes an en­tire tax­able year. For­eign res­i­dency may be es­tab­lished by show­ing the tax­payer was present in a for­eign coun­try dur­ing at least 330 days in a 12-month pe­riod.

The sec­ond test is whether the tax­payer has a for­eign “tax home.” The con­cept of “tax home” is sub­jec­tive in na­ture and re­quires an analysis of all the facts and cir­cum­stances. Gen­er­ally speak­ing, a tax­payer’s tax home is con­sid­ered to be his or her reg­u­lar or prin­ci­pal place of busi­ness, and not nec­es­sar­ily where his or her per­sonal res­i­dence is lo­cated. To iden­tify the prin­ci­pal place of busi­ness, the court can look at the em­ployer’s prac­tices and where the em­ployer has iden­ti­fied the tax­payer’s prin­ci­pal place of busi­ness on its records.

The Hirsch Case

In this case, Hirsch was a cit­i­zen of both Is­rael and the US (Michael D. Hirsch and Jane Hirsch vs. CIR, Tax Court Sum­mary Opin­ion 2016-37). The court ac­cepted that the tax­payer was a bona fide res­i­dent of Is­rael with­out dis­cus­sion. How­ever, in look­ing at Hirsch’s “tax home,” the court fo­cused par­tic­u­larly on Hirsch’s em­ployee records. If the per­son is an em­ployee, as was the case here, the in­quiry fo­cuses on em­ployer prac­tices and the place the em­ployer has iden­ti­fied as the tax­payer’s prin­ci­pal place of busi­ness.

First, Hirsch was em­ployed full time by Mer­rill Lynch as an in­vest­ment as­so­ciate. Dur­ing the tax years at is­sue, the em­ployer’s of­fices were in the US as were most of the clients. Hirsch trav­eled to the US once a month to meet with clients and ended up spend­ing about one-third of the year in the US. Mer­rill Lynch did not re­im­burse Hirsch for this travel.

Sec­ond, the court looked at Mer­rill Lynch’s in­ter­nal poli­cies reg­u­lat­ing Hirsch’s ac­tiv­i­ties in Is­rael, in­clud­ing what he could and could not do in Is­rael. Spe­cial at­ten­tion was given to whether or not var­i­ous Fed­eral reg­u­la­tions were fol­lowed with re­gard to be­ing al­lowed to con­duct such fi­nan­cial ac­tiv­ity out­side the US.

In this case, Hirsch was listed in com­pany records as be­ing lo­cated in the com­pany’s US of­fice in New Jer­sey. His busi­ness mail was de­liv­ered to the US of­fice, as were his W-2 forms. More im­por­tantly, em­ploy­ment records specif­i­cally stated that he was not au­tho­rized to work out­side of his home in Is­rael or out of the com­pany’s Tel Aviv of­fice. The com­pany did not pro­vide him with an Is­raeli tele­phone num­ber or of­fice space. In fact there was noth­ing in com­pany records to in­di­cate that Hirsch worked out of any­where else but the New Jer­sey of­fice.

Fi­nally, Hirsch, be­ing em­ployed in the fi­nan­cial sec­tor, was sub­ject to FINRA – the Fi­nan­cial In­dus­try Reg­u­la­tory Author­ity. Un­der FINRA, a US cit­i­zen can­not work in for­eign coun­tries, un­less spe­cific con­di­tions are met, which Hirsch did not meet.

In light of all the above, the court ruled that Hirsch’s prin­ci­ple place of busi­ness, and thus his tax home, was the US. This oc­curred de­spite the fact that the tax­payer moved to Is­rael in 1993, al­most 20 years be­fore the time sub­ject to the lit­i­ga­tion.

The Is­raeli tax side:

As an Is­raeli res­i­dent liv­ing and work­ing in Is­rael, Hirsch was pre­sum­ably tax­able in Is­rael, but Is­raeli in­come tax should be cred­itable against US fed­eral tax. But that’s not all. The US em­ployer cor­po­ra­tion may also have a “per­ma­nent estab­lish­ment” (i.e. a branch) in Is­rael be­cause of Hirsch. If so, it would also be tax­able in Is­rael on the profit gen­er­ated in Is­rael – and VAT would be due.

To Sum Up:

US cit­i­zens and res­i­dents liv­ing in Is­rael and trav­el­ing reg­u­larly to the US for busi­ness must ex­er­cise care in con­duct­ing their af­fairs in light of the Hirsch ruling. This ar­ti­cle does not con­sti­tute le­gal ad­vice. As al­ways, con­sult ex­pe­ri­enced tax ad­vis­ers in each coun­try at an early stage in spe­cific cases.

[email protected]­ver­co­law.com, [email protected]

Monte Sil­ver is a US lawyer based in Is­rael spe­cial­iz­ing in US tax mat­ters. He for­merly worked for the In­ter­nal Rev­enue Ser­vice and the US Tax Court. Leon Har­ris is an Is­raeli cer­ti­fied pub­lic ac­coun­tant and tax spe­cial­ist at Har­ris Con­sult­ing & Tax Ltd.

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