On March 13th, 2026, the U.S. Tax Court issued an opinion—Ayers v. Commissioner, 2026 BL 91583 (T.C. Mar. 13, 2026)—which provides important insight regarding the requirements for claiming the exclusion of Puerto Rico-source income amounts under Sections 933 and 937 of the U.S. Internal Revenue Code for Puerto Rico bound change of residency. The Court reaffirmed a strict, text-based interpretation of the statute and its accompanying regulations, emphasizing that eligibility for the exclusion depends on the taxpayer’s compliance with the bona fide resident standard, while highlighting possible pitfalls for PR residency considerations in mid-year moves.
Under Section 933, the exclusion applies only to individuals who are bona fide residents of Puerto Rico for the entire taxable year. Although Section 933 establishes the operative income exclusion, the determination of whether a taxpayer qualifies for such exclusion as a bona fide resident is governed by Section 937 and the accompanying Treasury Regulations under §1.937-1. Specifically, taxpayers must satisfy:
- Physical Presence Test – generally requiring sufficient physical presence in Puerto Rico (e.g., the 183-day rule);
- Tax Home Test – requiring that the taxpayer does not have a tax home—principal place of business—outside of Puerto Rico during any part of the taxable year; and
- Closer Connection Test – requiring that the taxpayer does not maintain a closer connection to the United States or a foreign country than to Puerto Rico.
The Treasury Regulations confirm that all three elements must be satisfied, and failure to meet any one of them precludes bona fide residency status. The Court emphasized that these tests are objective and must be satisfied in accordance with the statutory and regulatory framework. Furthermore, it emphasized that subjective intent to become or remain a resident of Puerto Rico is not determinative.
The Court highlighted a narrow regulatory provision applicable in the year a taxpayer moves to Puerto Rico, under Treasury Regulation §1.937-1(f). While this provision can, in limited circumstances, treat a taxpayer as satisfying certain tax home and closer connection requirements during a transition year, the Court underscored that the rule is not standalone relief. Instead, it operates as a conditional, forward-looking framework where a taxpayer may benefit from the transition-year treatment only if the taxpayer (a) was not a bona fide resident of Puerto Rico in any of the three (3) tax years immediately preceding the move; (b) does not have a tax home outside Puerto Rico or a closer connection to the United States or a foreign country than to Puerto Rico during any of the last 183 days of the tax year of the move; and (c) remains a bona fide resident of Puerto Rico for each of the three (3) taxable years following the year of the move. Thus, the rules governing bona fide residency are highly technical, and even minor deviations can result in the loss of favorable tax treatment.
In this particular case, the taxpayer (i) moved to Puerto Rico in June 2021, (ii) maintained a tax home outside of Puerto Rico during part of the first 183 days of the year of the move, and (iii) relocated outside of Puerto Rico in the fall of the following year.
Because the taxpayer maintained a tax home outside Puerto Rico during part of the first 183 days, he could not claim being a bona fide residency for the entire year of the move. His only option was to qualify under the year-of-the-move exception of Treasury Regulation §1.937-1(f). However, that exception requires the taxpayer to remain a bona fide resident of Puerto Rico for each of the three (3) taxable years following the year of the move, a requirement he failed to meet by relocating out of Puerto Rico the following year. As a result, he was not considered a bona fide resident of Puerto Rico for 2021.
This case illustrates how future events can retroactively undermine bona fide residency for the year of the move when a taxpayer relies on the §1.937-1(f) exception. Notably, the court also appeared to treat the taxpayer’s ownership of a U.S. residence through a revocable trust as effectively equivalent to direct ownership in evaluating the taxpayer’s continued connections outside Puerto Rico.
This document has been prepared for information purposes only and is not intended as and should not be relied upon as legal advice. If you have any questions or comments about the matters discussed in this notice, wish to obtain more information related thereto, or about its possible effect(s) on policy or operational matters, please contact us.