Section 911.—Citizens or Residents of the United States Living Abroad

(Also, Sections 6662, 6663, 6702.)

Frivolous tax returns; excluding gross income under section 911. This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with frivolous tax schemes, that there is no basis for excluding income earned in a State, Commonwealth, or Territory of the United States under section 911 of the Code. The ruling also describes many of the possible civil and criminal penalties that apply to people who claim tax benefits on their return based on frivolous claims under section 911.

Rev. Rul. 2004–28

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the position that their wages or other income are excluded from gross income under section 911 of the Internal Revenue Code because the State, Commonwealth, or Territory of the United States in which they resided or performed services is a foreign country. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with this scheme, that there is no basis under section 911 for excluding income earned in a State, Commonwealth, or Territory of the United States. This argument has no merit and is frivolous. Section 911 of the Internal Revenue Code permits a taxpayer to elect to exclude income from gross income for U.S. income tax purposes only when the taxpayer earns income and resides outside the United States under the conditions and limitations set forth in that section. For purposes of section 911, States, Commonwealths, and Territories of the United States are not foreign countries.

The Service is committed to identifying taxpayers who attempt to avoid their tax obligations by taking frivolous positions, such as frivolous positions based on meritless section 911 arguments. The Service will take vigorous enforcement action against such taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions.

Frivolous returns and other similar documents submitted to the Service are processed through its Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. The Service

also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether a court injunction should be sought to halt such activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov .

ISSUE

Whether an individual may exclude income under section 911 by claiming that he met the requirements of section 911 because a State, Commonwealth, or Territory of the United States is considered to be a foreign country under section 911.

FACTS

Situation 1. A, an individual, resides in State X, a State or Commonwealth of the United States, and performs services exclusively in State X. A was present in State X for all of his taxable year and is therefore not eligible in that taxable year for the exclusion from income under section 911 for citizens or residents of the United States living abroad. Based on the advice of a person who promotes the view that section 911 excludes income earned in a State, Commonwealth, or Territory of the United States because such State, Commonwealth or Territory is a foreign country, A files a return including a Form 2555, Foreign Earned Income, or a Form 2555–EZ, For- eign Earned Income . On the Form 2555 or Form 2555–EZ, A asserts that he is entitled to the exclusion from gross income under section 911 because he earned such income by performing services in, is a bona fide resident of, and has a tax home in, a foreign country ( i.e., State X). A acknowledges on Form 2555 or Form 2555–EZ that the services were performed in State X and that he was a bona fide resident of State X, but contends that State X is a foreign country and not a part of the United States.

Situation 2. Same as Situation 1 except that A, a resident of State X, claims an exclusion from gross income under section 911 based upon his physical presence in State X. Specifically, A claims he satisfies the physical presence test of section 911 because he was physically present in a foreign country for at least 330 days during his taxable year. A acknowledges on Form 2555 or Form 2555–EZ that he was present

March 22, 2004 624 2004-12 I.R.B.

HOLDING

Any position that the exclusion from gross income under section 911 applies to a taxpayer’s income because a State, Commonwealth, or Territory of the United States is considered to be a foreign country is frivolous. Taxpayers attempting to reduce their federal tax liability by taking frivolous positions based on this argument will be liable for the actual tax due plus statutory interest. In addition, the Service will determine civil penalties against taxpayers where appropriate, and those taxpayers also may face criminal prosecution. The Service also will determine appropriate civil penalties against persons who prepare frivolous returns or promote frivolous positions, and those persons also may face criminal prosecution. Promoters and others who assist taxpayers in engaging in these schemes also may be enjoined from doing so under section 7408.

DRAFTING INFORMATION

This revenue ruling was authored by the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622–4910 (not a toll-free call).