When it comes to conjuring badass imagery, international airspace will always live in the shadow of its cousin, international waters. To wit:
International airspace = miniature bags of Rold Gold pretzels and insufferable Sandra Bullock films.
International waters = pirate ships and legalized monkey knife-fights.
Winner: International waters.
Both areas, however, are equally troublesome to the tax law. Consider the case of Andrea Ready (Ready). Ready was a dual citizen of the U.S. and U.K. who resided in France. Ready was employed as a flight attendant for United, where she regularly worked international flights.
On her 2006 and 2007 U.S. tax returns, Ready properly reported her wages earned from United.[i] Attached to each return, however, was From 2555-EZ, Foreign Earned Income Exclusion, claiming that all of Ready’s wages during those years represented foreign earned income excludable from gross income under I.R.C. § 911.
By way of background, I.R.C. § 911(a) permits a qualifying individual to elect to exclude “foreign earned income” from taxable income. Foreign earned income is defined as income received by a qualifying individual from sources within a foreign country which constitutes earned income attributable to services performed.[ii] Earned income is from sources within a foreign country only if it is attributable to services performed by the individual within a foreign country or countries.”[iii].
The IRS argued that the wages earned by Ready on flights in the U.S. and in international airspace did not constitute foreign earned income, as they were not earned in France or another foreign country, and thus were not eligible for exclusion from her taxable income.
While the Tax Court quickly agreed with the IRS with regards to Ready’s services performed within the U.S., the court had to dig a little deeper before reaching the conclusion that income earned in international airspace is not earned in a foreign country. Luckily, they’d already covered this seemingly obscure issue:
In Rogers v. Commissioner, T.C. Memo. 2009-111, 97 T.C.M. 1573, we concluded that income earned by a flight attendant while in international airspace was not foreign earned income and had to be included in the taxpayer’s gross income. The taxpayer in Rogers, like petitioner, was a U.S. citizen residing abroad and working as a flight attendant for United. In holding that the taxpayer in Rogers could not exclude income earned while in international airspace, we reasoned that income earned in international airspace was akin to income earned in international waters. We see no cause for disturbing our holding in Rogers, and we rely upon its reasoning to hold that petitioner may not exclude income earned in international airspace under section 911.
The lesson? There’s nothing new under the sun, or apparently, in the U.S. Tax Court.