Jiang, Yan

English

San Jose State University

The Contemporary Tax Journal
Volume 3
Issue 1 Spring/Summer 2013 Article 6
7-2013
A Tax Haven in the Friendly Skies?
Yan Jiang
Follow this and additional works at: http://scholarworks.sjsu.edu/sjsumstjournal
Part of the Taxation-Federal Commons, and the Taxation-Transnational Commons
This Tax Enlightenment is brought to you for free and open access by the Graduate School of Business at SJSU ScholarWorks. It has been accepted for
inclusion in The Contemporary Tax Journal by an authorized editor of SJSU ScholarWorks. For more information, please contact
scholarworks@sjsu.edu.
Recommended Citation
Jiang, Yan (2013) "A Tax Haven in the Friendly Skies?," The Contemporary Tax Journal: Vol. 3 : Iss. 1 , Article 6.
Available at: http://scholarworks.sjsu.edu/sjsumstjournal/vol3/iss1/6
  24   25Spring/Summer 2013 Spring/Summer 2013 The Contemporary Tax Journal :A publication of SJSU MST prgram
You may know that U.S. expatriates are eligible for special tax benefits, but have you ever wondered about the tax treatment for flight 
attendants who fly intermittently between the U.S. and 
foreign countries? In 2012,  the United States Tax Court 
issued a memorandum opinion, Christina J. Letourneau v. 
Commissioner, TC Memo 2012-45, addressing the use of the 
IRC §911 Foreign Earned Income Exclusion and IRC §901 
Foreign Tax Credit as applied to flight attendants whose work 
causes them to travel between countries and in international 
air space. 
The Taxpayer, a U.S. citizen, was a permanent resident 
of France. In 2005, the year in question, she commuted from 
France to London for her work as a flight attendant for United 
Airlines, Inc. She primarily flew between London and the 
United States. Her work time could, therefore, be allocated 
among activities such as flying over the United States, 
flying over international waters, and flying over foreign 
countries. The Taxpayer allegedly paid income taxes to the 
tax authorities in France and the U.K. In her 2005 U.S. tax 
return, the Taxpayer applied the IRC §911 Foreign Earned 
Income Exclusion and excluded her entire W-2 wages from 
her gross income. Under audit, the IRS determined that only 
a portion of her wages were eligible for the exclusion and 
denied her Foreign Tax Credit. 
The issues involved in this case were: 
1. Whether the Taxpayer’s wages were exempt from U.S. 
taxation according to Article 15(3) of the 1994 U.S.- 
France Income Tax Treaty (‘‘Treaty’’); 
2. Whether she was entitled to a larger Foreign Earned 
Income Exclusion than the IRS had allowed; and 
3. Whether she was entitled to any amount of Foreign Tax 
Credit.
In analyzing the first issue, the Tax Court rejected the 
Taxpayer’s contention that her total wages were exempt 
from U.S. tax under Article 15(3) of the Treaty. This article 
generally exempts from U.S. income taxation wages earned 
by a French resident who is a crew member of an aircraft 
operated in international traffic. The court agreed with the 
IRS that the ‘‘saving clause’’ contained in Article 29(2) of 
A Tax Haven in the 
Friendly Skies?
By: Yan Jiang, MST student
the Treaty takes precedence and the U.S. reserves the 
right to tax its own citizens as though Article 15(3) of the 
Treaty does not exist. The Tax Court also objected to the 
Taxpayer’s argument that the application of the saving clause 
discriminated against her in violation of Article 25(1) (Non-
Discrimination clause) of the Treaty. The court explained that 
the clause is not intended to provide the Taxpayer relief from 
U.S. income taxation; it merely ensures that France does not 
impose a more burdensome tax on a U.S. taxpayer than it 
would impose on French citizens and residents.
On the issue of Foreign Earned Income Exclusion, the 
Taxpayer contended that her entire wages earned in the year 
was foreign earned income as defined under IRC §911(b)
(1)(A); hence eligible for exclusion. The IRS, however, only 
allowed exclusion for wages attributed to activities performed 
in a foreign country and over foreign airspace calculated 
using United’s standard time apportionment tables. Because 
only income earned from sources within a foreign country 
is eligible for  exclusion,1  the key issue evaluated by the 
Tax Court was whether or not international airspace meets 
the definition of a foreign country under IRC §911. The 
court cited Rogers v. Commissioner2 which concluded that 
international airspace is not under the sovereignty of a foreign 
government; hence it is not a “foreign country” under IRC 
§911.  Therefore, the wages earned by the Taxpayer while 
working in international airspace is not treated as foreign 
earned income and ineligible for IRC §911 exclusion.  
The Taxpayers also contended that the use of United’s 
apportionment tables to calculate the allowable foreign 
income amount does not accurately reflect her actual times 
spent on specific flights. This contention was discounted by 
1 IRC §911(b)(1)(A) provides that the “foreign earned income” is amount 
received by a taxpayer from sources within a foreign country.
2  TC Memo 2009-111.
Wages earned by the Taxpayer while working in 
international airspace is not treated as foreign 
earned income and ineligible 
for IRC §911 exclusion
1
Jiang: A Tax Haven in the Friendly Skies?
Published by SJSU ScholarWorks, 2013
  26   27Spring/Summer 2013 Spring/Summer 2013 The Contemporary Tax Journal :A publication of SJSU MST prgram
the court because the Taxpayer failed to provide any proof 
that it is inaccurate or present other more reliable methods.
As a last resort, the Taxpayer suggested that she was 
entitled to exclude all her wages from gross income in 2005 
because she did so in prior years without any challenge 
from the IRS. The court reminded the Taxpayer that IRS is 
“not precluded from challenging treatment of an item merely 
because he has failed to challenge it in the past.” 
On the last issue regarding Foreign Tax Credit, the 
court found that the French taxes allegedly paid by the 
Taxpayer in 2005 were for tax liability of a previous year 
and were refunded to her later in that year. Furthermore, 
the Taxpayer failed to provide any evidence that she paid 
taxes to France in 2005.  With respect to taxes paid to the 
U.K., the court agreed with the IRS that the Taxpayer is 
not entitled to the IRC §901 Foreign Tax Credit because 
the Taxpayer already excluded the income earned in the 
U.K. from gross income under IRC §911. Double benefits is 
denied under IRC §911(d)(6). 
The most significant message from this Tax Court 
decision is that international airspace is not a tax haven. 
Income earned in international airspace is not eligible for 
IRC §911 Foreign Earned Income Exclusion because it is 
not earned within a foreign country. Recent similar cases, 
including this one, indicate that there has been confusion 
surrounding the definition of “foreign country” in the context 
of IRC §911. Perhaps Congress will clarify the definition 
down the road. Meanwhile, it is advisable for practitioners 
to ensure that U.S. expatriates are not erroneously taking 
double benefits in applying the IRC §901 Foreign Tax Credit 
and IRC §911 Foreign Earned Income Exclusion on the 
same income.
2
The Contemporary Tax Journal, Vol. 3, Iss. 1 [2013], Art. 6
http://scholarworks.sjsu.edu/sjsumstjournal/vol3/iss1/6


A Tax Haven in the Friendly Skies?

SJSU ScholarWorks

The Contemporary Tax JournalVolume 3Issue 1 Spring/Summer 2013 Article 67-2013A Tax Haven in the Friendly Skies?Yan JiangFollow this and additional works at: http://scholarworks.sjsu.edu/sjsumstjournalPart of the Taxation-Federal Commons, and the Taxation-Transnational CommonsThis Tax Enlightenment is brought to you for free and open access by the Graduate School of Business at SJSU ScholarWorks. It has been accepted forinclusion in The Contemporary Tax Journal by an authorized editor of SJSU ScholarWorks. For more information, please contactscholarworks@sjsu.edu.Recommended CitationJiang, Yan (2013) "A Tax Haven in the Friendly Skies?," The Contemporary Tax Journal: Vol. 3 : Iss. 1 , Article 6.Available at: http://scholarworks.sjsu.edu/sjsumstjournal/vol3/iss1/6  24   25Spring/Summer 2013 Spring/Summer 2013 The Contemporary Tax Journal :A publication of SJSU MST prgramYou may know that U.S. expatriates are eligible for special tax benefits, but have you ever wondered about the tax treatment for flight attendants who fly intermittently between the U.S. and foreign countries? In 2012,  the United States Tax Court issued a memorandum opinion, Christina J. Letourneau v. Commissioner, TC Memo 2012-45, addressing the use of the IRC §911 Foreign Earned Income Exclusion and IRC §901 Foreign Tax Credit as applied to flight attendants whose work causes them to travel between countries and in international air space. The Taxpayer, a U.S. citizen, was a permanent resident of France. In 2005, the year in question, she commuted from France to London for her work as a flight attendant for United Airlines, Inc. She primarily flew between London and the United States. Her work time could, therefore, be allocated among activities such as flying over the United States, flying over international waters, and flying over foreign countries. The Taxpayer allegedly paid income taxes to the tax authorities in France and the U.K. In her 2005 U.S. tax return, the Taxpayer applied the IRC §911 Foreign Earned Income Exclusion and excluded her entire W-2 wages from her gross income. Under audit, the IRS determined that only a portion of her wages were eligible for the exclusion and denied her Foreign Tax Credit. The issues involved in this case were: 1. Whether the Taxpayer’s wages were exempt from U.S. taxation according to Article 15(3) of the 1994 U.S.- France Income Tax Treaty (‘‘Treaty’’); 2. Whether she was entitled to a larger Foreign Earned Income Exclusion than the IRS had allowed; and 3. Whether she was entitled to any amount of Foreign Tax Credit.In analyzing the first issue, the Tax Court rejected the Taxpayer’s contention that her total wages were exempt from U.S. tax under Article 15(3) of the Treaty. This article generally exempts from U.S. income taxation wages earned by a French resident who is a crew member of an aircraft operated in international traffic. The court agreed with the IRS that the ‘‘saving clause’’ contained in Article 29(2) of A Tax Haven in the Friendly Skies?By: Yan Jiang, MST studentthe Treaty takes precedence and the U.S. reserves the right to tax its own citizens as though Article 15(3) of the Treaty does not exist. The Tax Court also objected to the Taxpayer’s argument that the application of the saving clause discriminated against her in violation of Article 25(1) (Non-Discrimination clause) of the Treaty. The court explained that the clause is not intended to provide the Taxpayer relief from U.S. income taxation; it merely ensures that France does not impose a more burdensome tax on a U.S. taxpayer than it would impose on French citizens and residents.On the issue of Foreign Earned Income Exclusion, the Taxpayer contended that her entire wages earned in the year was foreign earned income as defined under IRC §911(b)(1)(A); hence eligible for exclusion. The IRS, however, only allowed exclusion for wages attributed to activities performed in a foreign country and over foreign airspace calculated using United’s standard time apportionment tables. Because only income earned from sources within a foreign country is eligible for  exclusion,1  the key issue evaluated by the Tax Court was whether or not international airspace meets the definition of a foreign country under IRC §911. The court cited Rogers v. Commissioner2 which concluded that international airspace is not under the sovereignty of a foreign government; hence it is not a “foreign country” under IRC §911.  Therefore, the wages earned by the Taxpayer while working in international airspace is not treated as foreign earned income and ineligible for IRC §911 exclusion.  The Taxpayers also contended that the use of United’s apportionment tables to calculate the allowable foreign income amount does not accurately reflect her actual times spent on specific flights. This contention was discounted by 1 IRC §911(b)(1)(A) provides that the “foreign earned income” is amount received by a taxpayer from sources within a foreign country.2  TC Memo 2009-111.Wages earned by the Taxpayer while working in international airspace is not treated as foreign earned income and ineligible for IRC §911 exclusion1Jiang: A Tax Haven in the Friendly Skies?Published by SJSU ScholarWorks, 2013  26   27Spring/Summer 2013 Spring/Summer 2013 The Contemporary Tax Journal :A publication of SJSU MST prgramthe court because the Taxpayer failed to provide any proof that it is inaccurate or present other more reliable methods.As a last resort, the Taxpayer suggested that she was entitled to exclude all her wages from gross income in 2005 because she did so in prior years without any challenge from the IRS. The court reminded the Taxpayer that IRS is “not precluded from challenging treatment of an item merely because he has failed to challenge it in the past.” On the last issue regarding Foreign Tax Credit, the court found that the French taxes allegedly paid by the Taxpayer in 2005 were for tax liability of a previous year and were refunded to her later in that year. Furthermore, the Taxpayer failed to provide any evidence that she paid taxes to France in 2005.  With respect to taxes paid to the U.K., the court agreed with the IRS that the Taxpayer is not entitled to the IRC §901 Foreign Tax Credit because the Taxpayer already excluded the income earned in the U.K. from gross income under IRC §911. Double benefits is denied under IRC §911(d)(6). The most significant message from this Tax Court decision is that international airspace is not a tax haven. Income earned in international airspace is not eligible for IRC §911 Foreign Earned Income Exclusion because it is not earned within a foreign country. Recent similar cases, including this one, indicate that there has been confusion surrounding the definition of “foreign country” in the context of IRC §911. Perhaps Congress will clarify the definition down the road. Meanwhile, it is advisable for practitioners to ensure that U.S. expatriates are not erroneously taking double benefits in applying the IRC §901 Foreign Tax Credit and IRC §911 Foreign Earned Income Exclusion on the same income.2The Contemporary Tax Journal, Vol. 3, Iss. 1 [2013], Art. 6http://scholarworks.sjsu.edu/sjsumstjournal/vol3/iss1/6

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A Tax Haven in the Friendly Skies?

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