I Left My Home In Georgia: New Guidance On Becoming A Bona Fide Resident Of Puerto Rico

• Published date: 06 July 2022
• Subject Matter: Tax, Income Tax, Tax Authorities
• Law Firm: Mayer Brown
• Author: Mr Mark Leeds and Juan F. Lopez Valek

The US Tax Court's June 23, 2022, decision in Morgan v. Commissioner¹ addressing whether a taxpayer had a tax home in Saudi Arabia didn't directly consider whether an individual was a bona fide resident of Puerto Rico, but it hit pretty close to home. An individual who is a bona fide resident of Puerto Rico isn't subject to US federal income tax on items of Puerto Rico-source income.² An individual can achieve this exalted status only if they satisfy three tests: (i) the presence test, (ii) the tax home test, and (iii) the closer connection test. In Morgan, supra, the court shed light on when an individual satisfies the tax home and closer connection tests. Accordingly, the case is instructive for individuals seeking to be treated as bona fide residents of Puerto Rico.

In Morgan, the taxpayer was both an immigrant to the United States and a US Army veteran. He retired from the Army in 2008 and bought a home in Georgia.³ He resided at the house with his daughter until 2013, at which time he moved. His daughter stayed in the house. The taxpayer's other family members also resided in the northern Georgia/Chattanooga, Tennessee, area.

In 2013, the taxpayer took a job with Vinnell Arabia ('Vinnell') in Saudi Arabia training Saudis to pilot helicopters. Our taxpayer was hard-working, putting in nine-hour days, five days per week. Vinnell stated that the taxpayer's performance was excellent. He joined a charitably-minded Saudi-based social club and was active in Saudi charitable outreach programs. He stayed in Vinnell-provided housing in Saudi Arabia and spent his time using amenities (gym, grocery store, etc.) at the housing compound. At the time of the trial, the taxpayer was still living in Saudi Arabia and was engaged to a woman who had lived and worked in Saudi Arabia for over 20 years. The taxpayer had Saudi Arabian medical insurance and a Saudi Arabia resident alien card (Iqama) and driver's license. Except for value-added taxes, the taxpayer did not pay any Saudi Arabian tax.

The taxpayer did not relinquish his US driver's license. He used his vacation time to visit his daughter (at the home he owned in Georgia) and mother in the US. The taxpayer also kept his veteran's US health insurance.

The taxpayer claimed that his income from Vinnell was exempt 'foreign earned income' within the meaning of Code ' 911(a)(1) and, therefore, not subject to US federal income tax. The foreign earned income exclusion only is available if the taxpayer has a 'tax home in a...