Moving to Puerto Rico Mid-Year Does Not Qualify You for the Section 933 Exclusion: Lessons from Ayers v. Commissioner

Ayers v. Commissioner, No. 5336-24, 2026 BL 91583 (T.C. Mar. 13, 2026)

For individuals relocating to Puerto Rico to take advantage of favorable tax treatment, the timing of your move matters enormously. In a recent bench opinion, the U.S. Tax Court made clear that moving to Puerto Rico partway through a taxable year does not entitle you to exclude Puerto Rico-source income under Internal Revenue Code Section 933 — even if you genuinely intend to stay permanently.

The Facts: A Mid-Year Move with an Unexpected Departure

Scott Ayers lived in Gilbert, Arizona with his wife until approximately June 1, 2021, when he relocated to Puerto Rico. He stayed in a series of rentals, purchased a truck, and obtained a Puerto Rico driver's license. He lived on the island until the Fall of 2022, when his Japanese father-in-law suffered a heart attack, prompting Ayers to move to Japan. He did not return to Puerto Rico for the remainder of 2022, nor at any time during 2023 or 2024. At the time of trial, he was still living in Japan.

Critically, Ayers never purchased real property in Puerto Rico. He continued to own a home in Arizona through a revocable trust throughout this period. He did maintain a mailbox and store household items and a truck in Puerto Rico after his departure.

During 2021, Ayers realized a short-term capital gain of $933,782, received a $1,650 distribution from a health savings account, and earned $30 in interest income. He did not report any of these amounts on his 2021 federal income tax return, apparently believing his Puerto Rico-source income was excludable under Section 933. The IRS disagreed and issued a notice of deficiency for $332,594, plus a $33,260 late-filing penalty under Section 6651(a)(1).

The Legal Framework: Sections 933 and 937

Section 933(1) of the Internal Revenue Code provides that income from sources within Puerto Rico is excluded from gross income if the taxpayer is a bona fide resident of Puerto Rico "during the entire taxable year." The statute is unambiguous on this point — partial-year residency does not suffice.

Section 937, enacted in 2004, defines "bona fide resident" for these purposes. To qualify, a person must satisfy three requirements: (1) be present in Puerto Rico for at least 183 days during the taxable year; (2) not have a tax home outside Puerto Rico during the taxable year; and (3) not have a closer connection to the United States or a foreign country than to Puerto Rico.

The Treasury Regulations under Section 937 provide a special "year-of-move" exception for taxpayers who change their residence to Puerto Rico during a taxable year. Under this exception, the tax home and closer connection requirements are deemed satisfied for the move year if three conditions are met: (1) the taxpayer was not a bona fide resident of Puerto Rico for the three years preceding the move; (2) for the last 183 days of the move year, the taxpayer had no tax home outside Puerto Rico and no closer connection elsewhere; and (3) the taxpayer remains a bona fide resident of Puerto Rico for each of the three taxable years following the move.

The Court's Analysis: Why Ayers Failed Every Test

The Statutory Test. The court's analysis was straightforward on the statutory requirements. Ayers conceded he had a tax home in Arizona for approximately five months in 2021 before moving to Puerto Rico. Because Section 937(a)(2) requires that a bona fide resident "not have a tax home outside [Puerto Rico] during the taxable year," and Section 933(1) requires bona fide residency "during the entire taxable year," Ayers could not satisfy the statute. A mid-year move, by definition, means you had a U.S. tax home for part of the year.

The Regulatory Year-of-Move Exception. The regulations offered a potential lifeline — but Ayers could not use it. The year-of-move exception requires the taxpayer to remain a bona fide resident of Puerto Rico for three years after the move. Ayers moved to Japan in the Fall of 2022 and never returned. He could not have been a bona fide resident of Puerto Rico in 2023 or 2024 — he was not present on the island, he had a closer connection to Japan and Arizona, and he continued to own property in Arizona while residing with family in Japan. Maintaining a mailbox and truck in Puerto Rico was, the court noted, insufficient to outweigh his full-time residence, family relationships, and property ownership elsewhere.

Ayers's Arguments Rejected. Ayers raised several arguments, none of which persuaded the court. He argued that his intent was always to return to Puerto Rico, and that Section 933 was designed to benefit individuals who moved to the island and engaged in economic activity there. The court responded that the statutory and regulatory tests are objective — they do not turn on a taxpayer's subjective intent. Ayers also pointed to his father-in-law's unexpected health emergency as the reason he left Puerto Rico, arguing the circumstances were beyond his control. The court acknowledged the difficulty of his situation but held that unforeseen circumstances do not alter the statutory requirements.

Perhaps most notably, Ayers appeared to question the validity of the year-of-move regulations themselves, making a passing reference to the Supreme Court's decision in Loper Bright Enterprises v. Raimondo. The court was unpersuaded, observing that this argument was self-defeating: the regulations are the only source of the year-of-move exception that could have helped Ayers. Without the regulations, Ayers would be left with only the statute — which plainly denies the exclusion to anyone who was not a bona fide resident for the entire year.

Late Filing Penalty Upheld

The court also sustained the Section 6651(a)(1) addition to tax for failure to timely file. Ayers's return was due October 15, 2022 (with extension) but was not filed until November 28, 2022. At trial, Ayers cited his father-in-law's health emergency as the reason for the delay, but he failed to connect that event to the late filing or otherwise establish reasonable cause. The penalty of $33,260 was upheld.

Key Takeaways for Individuals Considering a Move to Puerto Rico

The Section 933 exclusion requires full-year residency. Moving to Puerto Rico partway through a taxable year does not entitle you to exclude Puerto Rico-source income for that year. The statute is explicit: you must be a bona fide resident "during the entire taxable year."

The year-of-move exception has strict conditions. The Treasury Regulations offer a special rule for the year of your move, but it requires you to remain a bona fide resident of Puerto Rico for the three full taxable years following the move. If life circumstances force you to leave, the exception is lost — retroactively.

Intent does not control the analysis. Neither Section 933 nor Section 937 considers a taxpayer's subjective intent to remain in or return to Puerto Rico. The tests are objective: where was your tax home, how many days were you present, and where was your closer connection?

Maintaining minimal connections is not enough. A mailbox, stored belongings, and a parked truck in Puerto Rico will not outweigh full-time residence and family ties elsewhere. Bona fide residency requires a genuine, sustained connection to the island.

File your return on time — regardless of uncertainty. Even if you believe your income is excludable, filing late without reasonable cause will result in penalties. When in doubt, file on time and amend later if necessary.

If you are considering a move to Puerto Rico or have questions about Section 933, Section 937, or Act 60 tax incentives, contact Riefkohl Law for a consultation. Proper planning before your move is essential to ensuring you qualify for the tax benefits you expect.