T.C. Memo. 2003-236
UNITED STATES TAX COURT
ANDRAS HAUTZINGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9501-02. Filed August 8, 2003.
Andras Hautzinger, pro se.
Sean R. Gannon, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined a $15,098 deficiency
in, and a $3,019.60 accuracy-related penalty under section
6662(a)1 on, petitioner’s Federal income tax (tax) for 1998.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
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The issues for decision are:
(1) Are the wages that petitioner received during 1998 while
he was residing and working in Johnston Island excludable from
petitioner’s gross income for that year under section 931 or
section 911? We hold that they are not.
(2) Is petitioner liable for the year at issue for the
accuracy-related penalty under section 6662(a)? We hold that he
is.
FINDINGS OF FACT
Most of the facts have been stipulated by the parties and
are so found.
At the time petitioner filed the petition in this case, he
resided in Aurora, Illinois.
During the year at issue, petitioner was a resident of
Johnston Island, a possession of the United States located
southwest of Hawaii.
During the year at issue, while petitioner was a resident of
Johnston Island, Raytheon Demilitarization Company (Raytheon)
employed him as a utility worker, for which he received total
wages of $67,482.2
2
Raytheon issued to petitioner Form W-2, Wage and Tax State-
ment (Form W-2), for 1998 showing wages of $18,498.18 and a
separate Form W-2 for that year showing additional wages of
$48,983.38.
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During the year at issue, Raytheon required petitioner to
take a two-week leave following each two-month period that he
spent working in Johnston Island. Petitioner usually spent each
two-week leave in Hawaii.
When petitioner arrived for each two-week leave at the
airport in Honolulu, Hawaii, he (1) usually passed through the
section of that airport designated for foreign travelers and
was required to show his passport to U.S. Customs officials and
(2) occasionally was required to complete U.S. Customs forms. In
the event that petitioner or other Raytheon employees did not
have their passports with them, U.S. Customs officials allowed
them to enter Hawaii but directed them to carry their passports
with them upon their next visit to Hawaii.
On April 15, 1999, petitioner filed Form 1040, U.S. Individ-
ual Income Tax Return (return), for his taxable year 1998. In
that return, petitioner reported wage income of $67,482 and
claimed an exclusion from gross income of $67,482. In support of
that claimed exclusion, petitioner attached Form 4563, Exclusion
of Income for Bona Fide Residents of American Samoa (Form 4563),
to his 1998 return. In that form, petitioner claimed that: He
began residing in American Samoa on June 4, 1997; he was residing
there throughout 1998; he did not maintain any home outside
American Samoa during that year; and he was entitled to exclude
from his gross income for 1998 the entire amount (i.e., $67,482)
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of the wages that he received during that year while residing and
working in American Samoa. Petitioner did not disclose anywhere
in Form 4563 that he attached to his return for 1998 that he was
residing and working in Johnston Island during that year.
Respondent issued to petitioner a notice of deficiency
(notice) with respect to his taxable year 1998. In that notice,
respondent determined to disallow petitioner’s claimed exclusion
from gross income of his wages of $67,482 on the ground that
petitioner was not a resident of American Samoa during 1998.
Respondent further determined in the notice that petitioner is
liable for that year for the accuracy-related penalty under
section 6662(a).
OPINION
Petitioner filed his 1998 return on April 15, 1999. We
presume that respondent’s examination of that return began after
July 22, 1998, and that section 7491(a) is applicable in the
instant case. However, there are no factual issues remaining in
dispute relevant to ascertaining the liability of petitioner for
the deficiency that respondent determined for the year at issue.
We find that the burden of proof does not shift to respondent
under section 7491(a) and that petitioner has the burden of
proving that respondent’s deficiency determination is wrong.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
It is petitioner’s position that he is entitled for the year
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at issue to exclude from his gross income under section 931 the
wages that he received from Raytheon during that year. In
support of that position, petitioner relies on section 1.931-1,
Income Tax Regs. Although not altogether clear, it appears that
petitioner is arguing that, because section 1.931-1(a)(1), Income
Tax Regs., provides that the term “possession of the United
States” includes Johnston Island, he is entitled for 1998 to
exclude the wages that he received while residing and working
there during that year. Respondent counters that petitioner’s
wages for the year at issue are not excludable under section
931.3 We agree with respondent.
The Treasury Department promulgated section 1.931-1, Income
Tax Regs., under section 931 prior to its amendment (old section
931) by section 1272(a) of the Tax Reform Act of 1986 (TRA 1986),
Pub. L. 99-514, 100 Stat. 2593.4 Old section 931 permitted
citizens of the United States to exclude income derived from
sources within possessions of the United States, except Puerto
Rico, the U.S. Virgin Islands, and Guam, if certain conditions
were satisfied. Although old section 931 did not define the term
“possession of the United States”, regulations promulgated under
3
Respondent also argues that petitioner’s wage income for
1998 is not excludable under sec. 911.
4
The Treasury Department promulgated the last amendment to
section 1.931-1, Income Tax Regs., in 1975. T.D. 7385, 1975-2
C.B. 298.
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old section 931 on which petitioner is relying provided that the
term “possession of the United States” included Johnston Island.5
Section 1272(a) of the TRA 1986 amended old section 931 to
exclude from income, in the case of an individual who is a bona
fide resident of a “specified possession” during the entire
taxable year, gross income derived from sources within any such
“specified possession”. Section 931, as amended by section
1272(a) of the TRA 1986 and as in effect for the year at issue
here, defines the term “specified possession” to mean only Guam,
American Samoa, and the Northern Mariana Islands. Sec. 931(c).
In Specking v. Commissioner, 117 T.C. 95 (2001), affd. sub
nom. Haessly v. Commissioner, __ Fed. Appx. __ (9th Cir., June
16, 2003), we addressed the precise argument under section 1.931-
1, Income Tax Regs., that petitioner advances in the instant
case. We concluded in Specking:
Petitioners’ reliance on section 1.931-1, Income
Tax Regs., is misplaced. The regulatory language on
which petitioners rely defines the term “possession”
for purposes of old section 931. As we have concluded
above, that provision no longer applies to petitioners.
Consequently, the regulatory provision also has no
5
Sec. 1.931-1, Income Tax Regs., provided in pertinent part:
§ 1.931-1. Citizens of the United States and domestic
corporations deriving income from sources within a
possession of the United States.--(a) Definitions.--
(1) As used in section 931 and this section, the term
“possession of the United States” includes American
Samoa, Guam, Johnston Island, Midway Islands, the
Panama Canal Zone, Puerto Rico, and Wake Island. * * *
[Emphasis added.]
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application to them and is obsolete as to petitioners.
Id. at 110-111.
We reject petitioner’s reliance on section 1.931-1, Income
Tax Regs., in the instant case for the same reasons we rejected
the taxpayers’ reliance on that regulation in Specking v. Commis-
sioner, supra.
On the record before us, we find that for the year at issue
petitioner may not exclude under section 931 any of the wages
that he received from Raytheon during that year while he was
residing and working in Johnston Island.6 Specking v. Commis-
sioner, supra; see also Farrell v. United States, 313 F.3d 1214
(9th Cir. 2002).
We turn now to the determination in the notice that peti-
tioner is liable for the year at issue for the accuracy-related
penalty under section 6662(a). According to respondent, peti-
tioner is liable for that penalty because of negligence or
6
Petitioner does not rely on sec. 911 in support of his
position that his wage income for 1998 is excludable from his
gross income. For the sake of completeness, respondent nonethe-
less argues on brief that sec. 911 does not entitle petitioner to
exclude his wages for 1998 from his gross income for that year.
We agree with respondent. In Specking v. Commissioner, 117 T.C.
95, 111-116 (2001), affd. sub nom. Haessly v. Commissioner, __
Fed. Appx. __ (9th Cir., June 16, 2003), we rejected the
taxpayers’ alternative argument that, in the event the Court were
to hold that their compensation was not excludable from gross
income under sec. 931, such compensation was excludable under
sec. 911. For the reasons set forth in Specking, we conclude
that sec. 911 does not entitle petitioner to exclude from his
gross income for 1998 the wages that he received during that year
while he was residing and working in Johnston Island. Id.
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disregard of rules or regulations under section 6662(b)(1) or a
substantial understatement of income tax under section
6662(b)(2). Respondent has the burden of production under
section 7491(c) with respect to that penalty. To meet that
burden, respondent must come forward with sufficient evidence
indicating that it is appropriate to impose the relevant penalty.
Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
For purposes of section 6662(a), the term "negligence"
includes any failure to make a reasonable attempt to comply with
the Code, and the term "disregard" includes any careless, reck-
less, or intentional disregard. Sec. 6662(c). Negligence has
also been defined as a lack of care or failure to do what a
reasonable person would do under the circumstances. Leuhsler v.
Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), affg. T.C. Memo.
1991-179; Antonides v. Commissioner, 91 T.C. 686, 699 (1988),
affd. 893 F.2d 656 (4th Cir. 1990).
The record establishes that petitioner attached Form 4563 to
his 1998 return, in which he claimed that he resided in American
Samoa throughout 1998. The record further establishes petitioner
resided and worked in Johnston Island throughout that year. On
the record before us, we find that respondent has satisfied
respondent’s burden of production under section 7491(c) with
respect to the accuracy-related penalty under section 6662(a)
determined in the notice.
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The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). The
determination of whether the taxpayer acted with reasonable cause
and in good faith depends on the pertinent facts and circum-
stances, including the taxpayer's efforts to assess his or her
proper tax liability, the knowledge and experience of the tax-
payer, and the reliance on the advice of a professional, such as
an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner argues that he was not negligent and did not
disregard rules or regulations. That is because, according to
petitioner, he relied upon the advice of Dina Caleda (Ms.
Caleda), a certified public accountant who prepared his return
for 1998, when he excluded from the gross income that he reported
in that return the wages that he received during that year while
he was residing and working in Johnston Island. A taxpayer
claiming reliance on an accountant (or other professional) must
show that the taxpayer supplied such accountant with all the
correct and necessary information and that the error in the
return was the result of the accountant’s error. Westbrook v.
Commissioner, 68 F.3d 868, 881 (5th Cir. 1995), affg. T.C. Memo.
1993-634; Weis v. Commissioner, 94 T.C. 473, 487 (1990); Ma-Tran
Corp. v. Commissioner, 70 T.C. 158, 173 (1978).
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The only evidence that petitioner presented to establish his
reliance on Ms. Caleda’s purported advice was his uncorroborated
and questionable testimony, on which we are unwilling to rely.
Assuming arguendo that we were to accept petitioner’s claim that
he relied on Ms. Caleda’s advice, petitioner has failed to
establish that he supplied correct information to Ms. Caleda and
that the error in his 1998 return in excluding his wage income
from his gross income was the result of Ms. Caleda’s error. In
fact, the record strongly suggests that petitioner provided Ms.
Caleda with incorrect information as to where he resided during
19987 and that the error in petitioner’s return was the result of
that incorrect information and not Ms. Caleda’s error.
On the instant record, we find that petitioner has failed to
show that he was not negligent and did not disregard rules or
regulations within the meaning of section 6662(b)(1), or other-
wise did what a reasonable person would do, with respect to the
underpayment for the year at issue. On that record, we further
find that petitioner has failed to show that he acted with
reasonable cause and in good faith with respect to the underpay-
7
In this connection, petitioner attached Form 4563 to his
1998 return in which he claimed, inter alia, that he resided in
American Samoa throughout 1998. Nowhere in that form did peti-
tioner indicate that he resided and worked in Johnston Island
throughout that year. Information about where petitioner resided
during 1998 is information that petitioner would have provided to
Ms. Caleda, and he evidently misinformed her about the location
of his residence during that year.
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ment for the year at issue. See sec. 6664(c)(1). On the record
before us, we find that petitioner has failed to establish that
he is not liable for the year at issue for the accuracy-related
penalty under section 6662(a).8
To reflect the foregoing,
Decision will be entered for
respondent.
8
We have found that petitioner is liable for the year at
issue for the accuracy-related penalty under sec. 6662(a) because
of negligence or disregard of rules or regulations under sec.
6662(b)(1). In light of that finding, we shall not address
respondent’s alternative argument that petitioner is liable for
the year at issue for the accuracy-related penalty under sec.
6662(a) because of a substantial understatement of income tax
under sec. 6662(b)(2).