Ralph Sampson was hired last year by a small international trading company. You have prepared Ralph's tax returns for a number of years while he worked in the U.S. offices of a large international bank. You continue to perform tax services for Ralph while he is overseas to manage the trading company's office in Country T (a non-treaty country). Ralph has been assigned abroad since November 1 of Year 1, and has continuously resided in a company-provided apartment located in Country T's capital. His wife and child have maintained their old residence in the United States to enable Mrs. Sampson to continue her career as a university professor and their son to finish high school. During Year 1, Ralph was in Country T and other foreign countries for all of November and December. During Year 2, Ralph was in the United States for 93 days (spread out evenly throughout the four quarters of that year) and in Country T and other foreign countries for the remainder of the year. Ralph wants you to file an amended Year 1 tax return and an initial Year 2 tax return claiming on each return the maximum possible foreign earned income exclusion. (The Year 1 return originally was filed without claiming the foreign earned income exclusion because Ralph had not yet qualified for the exclusion when the return was due.) Ralph knows that he does not meet the physical presence test, but he has assured you that he meets the bona fide residence test. However, because of his heavy Year 2 travel schedule, he has not yet been able to document that he is a Country T resident.
In June of Year 3, the Sampsons' son will graduate from high school. Mrs. Sampson plans to join her son overseas and obtain a teaching position in an American school for U.S. expatriates. The Sampsons' son will spend 21/2 months of summer with his parents overseas but will return to the United States to attend the University of Tennessee. He will join his parents for an additional four weeks in December and January during the university's holiday break.
Required:
Should you file the Sampson's amended Year 1 tax return and new Year 2 income tax return claiming the maximum foreign-earned income exclusion for which Ralph has asked? What information should you ask Ralph to provide before you prepare his return? What ethical issues are raised by your filing the return based on Ralph's promise to obtain the requisite information? When will Mrs. Sampson first be eligible for the foreign earned income exclusion? Under which of the two tests will she likely qualify after she begins her Country T teaching job in June of Year 3?