Section 911 Exclusion Disallowed - Late Filing

In a recent case, Damon A. Redfield v. Commissioner, (2017) TC Memo 2017-71​, the tax court held that the taxpayer was ineligible for the Section 911 exclusion because the taxpayer did not timely file tax returns. 

First, the court reviewed the facts of the case. In this case, the Taxpayer was a former member of the U.S. Marine Corps, including several tours of duty in Afghanistan. Sometime before 2010 he left the Marines as a disabled veteran suffering from memory loss and post-traumatic stress disorder. Later, in 2009 he was offered a civilian position at the Kandahar Air Field in Kandahar Province, Afghanistan. Believing that he had made sufficient progress toward recovery, he accepted that position, arriving in Kandahar in January 2010. Unfortunately, his physical and mental condition worsened, and he was forced to return to the United States before completing his one-year assignment.

Petitioner received an extension of time until October 15, 2011, to file his 2010 Federal income tax return. He did not file a return by that date. On May 27, 2014, the Internal Revenue Service (IRS or respondent) prepared a substitute for return (SFR) that met the requirements of section 6020(b). On September 4, 2014, the IRS sent petitioner a timely notice of deficiency based on that SFR, determining a tax deficiency of $55,217 and various additions to tax.

Petitioner did not petition this Court in response to that notice. Instead, on October 7, 2014, he submitted to the IRS a delinquent return for 2010 on which he reported wages of $240,211 and total income of $241,140. He included with this return Form 2555, Foreign Earned Income, on which he sought to exclude $49,136 of earnings from his work in Afghanistan. After giving effect to that exclusion, he reported total tax of $28,622, payments of $22,510, and tax due of $6,189.

The court then went on to review the application of the Section 911 exclusion in some detail. Then, the court turned to what was the main issue of this case, the requirement of a timely filing of IRS Form 2555 in order to make a proper election under Section 911. While the statute is silent as to the timing of a valid election, Section 911(d)(9) directs the Secretary to "prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section". This is done by Treasury under Reg. Sec. 1.911-7(a)(2), which provides alternative timing requirements for a valid election. 

Reg. Sec. 1.911-7(a)(2) provides four alternative methods under which a valid Section 911 election may be made on a Form 2555. Specifically, the regulations provide: 

 

In order to make a valid election under this paragraph ...the election must be made:

(A) With an income tax return that is timely filed (including any extensions of time to file),

(B) With a later return filed within the period prescribed in section 6511(a) amending the foregoing timely filed income tax return,

 

(C) With an original income tax return that is filed within one year after the due date of the return (determined without regard to any extension of time to file); this one year period does not constitute an extension of time for any purpose - it is merely a period during which a valid election may be made on a late return, or

 

(D) With an income tax return filed after the period described in paragraphs (a)(2)(i)(A), (B), or (C) of this section provided -

 

(1) The taxpayer owes no federal income tax after taking into account the exclusion and files Form 1040 with Form 2555 or a comparable form attached either before or after the Internal Revenue Service discovers that the taxpayer failed to elect the exclusion; or

 

(2) The taxpayer owes federal income tax after taking into account the exclusion and files Form 1040 with Form 2555 or a comparable form attached before the Internal Revenue Service discovers that the taxpayer failed to elect the exclusion.

 

(3) A taxpayer filing an income tax return pursuant to paragraph (a)(2)(i)(D)(1) or (2) of this section must type or legibly print the following statement at the top of the first page of the Form 1040: “Filed Pursuant to Section 1.911-7(a)(2)(i)(D).”

At issue in this case was the applicability of Reg. Sec. 1.911-7(a)(2)(D)(2). Taxpayer argued that he met this exception by filing his Form 1040 with Form 2555 attached [and] paid the income tax due, before the IRS discovered that [he] failed to elect the exclusion. The IRS disputed that contention, urging that the IRS discovered [that] petitioner failed to report his income for 2010, filed a substitute for return, and issued a notice of deficiency before petitioner eventually filed his 2010 return in October 2014.

The Tax Court held in favor the IRS. The court stated that, "By preparing for petitioner on May 27, 2014, an SFR that treated all of his wages for 2010 as gross income, the IRS evidenced its "discovery" that he had failed to elect the FEIE for that year by filing a Form 1040 accompanied by a properly completed Form 2555. Petitioner did not file his delinquent 2010 return accompanied by a Form 2555 until October 7, 2014, more than four months later." 
 

Ultimately, this case continues to show the importance of timely filing Form 2555 in order to obtain a Section 911 Exclusion.