Tax Court Holds That Veteran’s Submission of Election to Exclude Foreign Earned Income is Too Late When Submitted After Service Issues a Substitute Return

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This week’s Redfield v Commissioner illustrates the harsh and sometimes unfair results that sometimes attach when a taxpayer misses a deadline. The taxpayer in this case was a disabled 12-year Marine veteran who served in Afghanistan; he was suffering from PTSD and memory loss. After leaving the Marines he returned in 2010 to accept a civilian position at an airfield in Kandahar. Unfortunately his physical and mental condition worsened and he returned back to the States later in 2010. The case illustrates perhaps a gap in our tax system: the Service is required to enforce most deadlines without regard to whether the taxpayer’s disability contributed to the taxpayer’s delinquency.

Redfield’s tax troubles arose from his failing to file a tax return for the 2010 year, the year in which he had some foreign source income from the time he was working as a civilian in Kandahar. In 2014, IRS eventually prepared a substitute for return under Section 6020(b). Redfield did not respond to the stat notice that accompanied the SFR; instead he filed a delinquent 2010 return, which attempted to exclude the foreign source income from his shortened civilian gig in Kandahar.

Section 911 provides that citizens and residents living and working outside the US can exclude some of that earned income (the cap is adjusted for inflation and is about $100,000 these days). I will not spend much time on the nuances of the foreign earned income exclusion but Section 911 states that a taxpayer wishing to avail himself of the exclusion has to elect its application. The statute also directs the Treasury to issue regs to implement the regime. Treasury issued regs under Section 911 that fill in the details of that election: the when and the how are spelled out in detail.

The case considers whether Redfield satisfied the regulation’s timing requirement. The regs establish 4 methods of making the election 2 of them require the election to be made either with or in response to a timely filed return; a third requires that the election be made within one year of a timely filed return. That did not happen here.

The main issue revolved around the fourth method. It allows a taxpayer to file the election if it is made before the Service “discovers that the taxpayer failed to elect the exclusion.” In particular, the Tax Court considered whether the Service’s SFR amounted to its discovering that Redfield did not elect to exclude the wages he earned while working in Afghanistan.

Unfortunately for Redfield, in McDonald v. Commissioner, T.C. Memo. 2015-169 the Tax Court held that the Service discovers the failure to make the election no later than the issuance of the substitute for return. Redfield’s election was submitted years after the SFR, and the Tax Court held that he was out of luck.

The Tax Court acknowledged the harshness of the outcome, but felt that its hands were tied:

We acknowledge petitioner’s military service to this country and recognize that he emerged far from unscathed from his tours of duty in Afghanistan. We understand that the procedural requirements for making a timely [foreign earned income exclusion] election are not exactly intuitive and that the scars petitioner incurred during his military service may have contributed to the tax delinquency at issue.

While these facts may be relevant to the penalty and additions to tax that the IRS determined, they do not alter the requirement of a timely election. As to that requirement we must give effect to the regulations that the Secretary has issued under his delegated authority from Congress and to this Court’s prior construction of those regulations. That being so, we unfortunately have no alternative but to hold that petitioner did not make a timely and valid [foreign earned income exclusion] election for 2010. He is therefore not entitled to exclude from gross income any foreign earnings under section 911.

Some Parting Thoughts

Keith has written extensively on the impact of disability and time deadlines in the Code. An article he co-wrote a few years ago suggests that Congress should more directly apply the concepts of financial disability to other deadlines that taxpayers may not meet.

Deadlines by their nature may at times work and produce an unfair substantive result. The Service administers a complex tax system and processes many million tax returns. Yet it seems that for taxpayers who suffer from mental and physical disabilities, especially for veterans whose injuries arose in service for our country, there should be a safety valve for the Service or the court to provide relief when the failure to meet a deadline  is connected to the taxpayer’s disability.

Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.


  1. Carl Smith says

    For those of you who remember the Lantz cases involving the 2-year regulatory period by which one had to previously request 6015(f) innocent spouse relief, I argued in an amicus brief in Mannella v. Commissioner, 631 F.3d 115 (3d Cir. 2011), that since the time period was not in the Code, it was not jurisdictional and could be tolled under the judicial doctrine of equitable tolling. (In Mannella, the husband hid the NOIL that commenced the 2-year period from his taxpayer-wife.) In response, the DOJ made the curious argument that equitable tolling only applied to periods created in statutes, not regs. The 3d Cir. seemed dubious of the DOJ argument. While upholding the reg.’s validity, it remanded the case for the Tax Court to decide whether equitable tolling should apply to the 2-year time period. Of course, there never was a remand because in July 2011, the Commissioner abandoned enforcement of the 2-year time period.

    Also, earlier in a concurring opinion in Hall v. Commissioner, 135 T.C. 374, 387 n.5 (2010), joined by five other judges, Judge Wells wrote:

    Even if the period of limitations in sec. 1.6015-5(b)(1), Income Tax Regs., is valid, I believe that such a period of limitations would be subject to the “doctrine” of equitable tolling. In that regard, the “doctrine” of equitable tolling may apply if the litigant can prove that (1) the litigant has been pursuing the litigant’s rights diligently, and (2) that some extraordinary circumstance stood in the litigant’s way and prevented timely filing. Holland v. Florida, 560 U.S. , , 130 S. Ct. 2549, 2562, 177 L. Ed. 2d 130 (2010). The facts before us include a statement that petitioner was advised by respondent that she still had two years to make her claim.

    I am not sure why equitable tolling couldn’t help in the case of this disabled vet — though the facts may show he still dawdled, and equitable tolling is a doctrine that needs to be specifically pleaded.

  2. Norman Diamond says

    “Section 911 provides that citizens and residents living and working outside the US can exclude some of that earned income”

    Sorry this will be a nuance, but it’s a lot more than a nuance for flight attendants and others who get hurt by it.

    Section 911 provides that citizens and some others living and working IN NON-US COUNTRIES can exclude some of that earned income. Flight attendants and others have been taxed, sometimes double taxed, and penalized for inaccuracy for excluding income earned over international waters even when never going anywhere near the US.

    Meanwhile, if Afghan income taxes were accrued and/or paid on civilian income in Afghanistan, the person has unti about 2020 (10 years) to file an amended return claiming foreign tax credit on Form 1116.

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