T.C. Memo. 2007-42
UNITED STATES TAX COURT
MYRON R. STRUCK AND THELMA C. STRUCK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7900-05. Filed February 22, 2007.
David S. Greenberg, for petitioners.
Joseph P. Wilson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies in and
penalties on petitioners’ Federal income taxes as follows:
Year Deficiency Sec. 6662 Penalty
2001 $27,555 $5,511
2002 6,790 1,358
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After concessions by the parties, the primary issue for
decision is whether petitioners qualify for the foreign earned
income exclusion of section 911 (hereinafter sometimes
“exclusion”) under the two conjunctive requirements thereof.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2001 and 2002, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
This case was tried on April 27, 2006, in San Diego,
California. Some of the facts have been stipulated and are so
found.
At the time the petition was filed, Myron and Thelma Struck
resided in San Diego, California.
For approximately 27 years, from 1975 through early May
2002, Myron was employed full time as a yacht captain for owners
of private yachts. Thelma also was employed on the yachts as a
chef and stewardess.
Beginning in 1991 through May of 2002, Myron and Thelma were
employed on a yacht that was owned by Cush Automotive, a
California company, and that was operated primarily in foreign
territorial waters. Each year, Cush Automotive paid Myron and
Thelma a salary, their living expenses while on the yacht, and
their vacation travel expenses back to the United States.
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When underway, every 4 hours Myron would note in a log the
yacht’s longitude and latitude coordinates.
Except for approximately 2 weeks when on vacation in the
United States, and even when docked in foreign ports, Myron and
Thelma lived on the yacht.
Based on testimony and exhibits in evidence, including a
review of the log coordinates that was performed by personnel of
the U.S. Navy for purposes of this case, the charts below set
forth (for Myron and Thelma’s taxable years 2001 and 2002) our
findings as to the number of days during the applicable 12-month
periods on which Myron and Thelma were not physically present in
foreign territorial waters and the number of days they were
physically present in foreign territorial waters.1
As indicated in the charts, the two 12-month applicable
periods we utilize to establish petitioners’ 330 or more days of
foreign physical presence requisite to qualify Myron and Thelma
for the foreign earned income exclusion for 2001 and 2002 overlap
each other and do not correspond to calendar years.
1
We refer to each period of 12 consecutive months used in
the calculation of a taxpayer’s foreign earned income exclusion
as an “applicable period”.
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For 2001
Applicable Period of January 7, 2001, to January 6, 2002
Number of Days
Dates Nonforeign Days Foreign Days
1/7/01 - 1/13/01 7
1/14/01 - 1/26/01 13
1/27/01 - 2/2/01 7
2/3/01 - 2/7/01 5
2/8/01 - 2/9/01 2
2/10/01 - 8/20/01 192
8/21/01 - 8/23/01 3
8/24/01 - 12/19/01 118
12/20/01 - 1/4/02 16
1/5/02 - 1/6/02 2
Total 35 330
For 2002
Applicable Period of May 16, 2001, to May 15, 2002
Number of Days
Dates Nonforeign Days Foreign Days
5/16/01 - 8/20/01 97
8/21/01 - 8/23/01 3
8/24/01 - 12/19/01 118
12/20/01 - 1/4/02 16
1/5/02 - 3/31/02 86
4/1/02 - 4/3/02 3
4/4/02 - 5/5/02 32
5/6/02 - 5/15/02 10
Total 32 333
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On December 20, 2001, Myron and Thelma left the yacht in
Costa Rica and flew to the United States for their annual 2-week
vacation. On January 4, 2002, Myron and Thelma returned to the
yacht in Costa Rica.
On May 6, 2002, Myron and Thelma docked the yacht in the
harbor in San Diego, California, and retired from working on
yachts.
From 1986 through 2002, Myron and Thelma owned unimproved
real property in Julian, California, and occasionally they camped
on this unimproved real property. During 2001 and 2002, Myron
and Thelma were listed on the San Diego, California, county tax
rolls as absentee owners of this unimproved real property.
From 1993 through 2002, Myron and Thelma also owned a
townhouse in Coronado, California (townhouse), and they
apparently claimed a California property tax homeowners’
exemption relating to the townhouse.2 During all of 2001 and the
first half of 2002, Myron and Thelma rented out the townhouse to
tenants, and the townhouse was managed by real estate
professionals. Because it was rented out, Myron and Thelma did
not stay in their townhouse while vacationing in California in
2001 and the first half of 2002.
2
Cal. Const. art. 13, sec. 3(k), exempts $7,000 of a home’s
taxable value from California property tax assessment when the
home constitutes the owner’s principal residence and is occupied
by the owner.
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During 2001 and the first half of 2002, in California Myron
and Thelma also maintained bank accounts, registered and garaged
two vehicles at a relative’s property, and maintained their
driver’s licenses.
Myron and Thelma’s combined salaries from their employment
on the yacht totaled $82,768 for 2001 and $71,063 for 2002.
On petitioners’ 2001 joint Federal income tax return,
petitioners reported their total $82,768 in salaries, and they
claimed the foreign earned income exclusion with regard to that
total amount. With the filing of their 2001 joint Federal income
tax return, petitioners included a Form 2555-EZ, Foreign Earned
Income Exclusion, relating to each petitioner. On these Forms
2555-EZ, petitioners entered the address of a relative in
California in the blanks for “foreign address” and indicated an
applicable period of January 1 to November 30, 2001.
On petitioners’ 2002 joint Federal income tax return,
petitioners reported their total $71,063 in salaries, and they
claimed the foreign earned income exclusion with regard to
$55,120 thereof (based on the number of days in petitioners’ 2002
applicable period that fell within petitioners’ 2002 taxable
year).
With the filing of their 2002 joint Federal income tax
return, petitioners included a Form 2555-EZ relating to each
petitioner. On these Forms 2555-EZ, petitioners entered the
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address of a relative in California in the blanks for “foreign
address” and indicated an applicable period of January 1 to
May 15, 2002.3
During respondent’s audit, petitioners filed with respondent
amended Forms 2555-EZ for 2001 and 2002 indicating a Costa Rica
foreign address for both years and new applicable periods of
November 30, 2000, to November 30, 2001, and May 16, 2001, to
May 15, 2002, respectively, and petitioners cooperated with all
of respondent’s documented requests for information and otherwise
cooperated with respondent.
Respondent’s revenue agent concluded that petitioners did
not have a foreign tax home for 2001 and 2002, and the revenue
agent disallowed the total foreign earned income exclusions
petitioners claimed for each year.
In their briefs, for purposes of calculating their foreign
earned income exclusions for 2001 and 2002, petitioners request
revised applicable periods for 2001 and 2002 respectively of
January 1 to December 31, 2001, and May 6, 2001, to May 5, 2002.
Alternatively, for each year, petitioners request that we apply
whatever applicable periods would maximize petitioners’ foreign
earned income exclusions.
3
The record does not explain why petitioners indicated on
their filed Forms 2555-EZ, Foreign Earned Income Exclusion, for
2001 and 2002, respectively, applicable periods of only 11 months
and 4-1/2 months.
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In his briefs, respondent states that the only applicable
periods we should consider for petitioners for 2001 and 2002 are
January 1 to December 31, 2001, and May 16, 2001, to May 15, 2002.
OPINION
Taxpayers generally have the burden of proof. Rule 142(a).
However, because petitioners submitted credible evidence,
maintained records, and cooperated with respondent, the burden of
proof regarding petitioners’ physical presence during 2001 and
2002 is on respondent. Sec. 7491(a)(1), (2)(A) and (B).
Generally, section 911 provides to U.S. taxpayers a limited
elective exclusion from gross income for income earned overseas.
To qualify for this foreign earned income exclusion for a
particular year, a taxpayer: (1) Must have a foreign tax home,
sec. 911(d)(1), and (2) must either be a bona fide resident of a
foreign country for the taxpayer’s full taxable year (bona fide
residence requirement) or be physically present in a foreign
country or countries for at least 330 days during any consecutive
12 months which overlap the taxpayer’s taxable year (physical
presence requirement), sec. 911(d)(1)(A) and (B).
A qualified taxpayer may only exclude the lesser of actual
foreign earned income or the maximum amount set by statute. Sec.
911(b)(2)(A). Married taxpayers may each use their exclusions
separately on separate returns or combine their exclusions on a
joint return, sec. 1.911-5(a)(2), Income Tax Regs., and without
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regard to community property laws, sec. 1.911-5(b), Income Tax
Regs.
For 2001 and 2002, the maximum exclusions for a married
couple filing a joint Federal income tax return totaled $156,000
and $160,000, respectively. Sec. 911(b)(2)(D).
Foreign Tax Home Requirement
The foreign tax home requirement of section 911(d)(1) is to
be evaluated during the same applicable period used by a taxpayer
for the bona fide residence or the physical presence requirement.
Sec. 1.911-2(a) and (b), Income Tax Regs.
Section 911(d)(3), which defines “tax home” as applied to
the exclusion, incorporates the travel business expense provision
of section 162(a)(2), as follows: “The term ‘tax home’ means,
with respect to any * * * [taxpayer], such * * * [taxpayer’s]
home for purposes of section 162(a)(2) (relating to traveling
expenses while away from home).” Thus, under the foreign earned
income exclusion, the location of a tax home generally is
determined in the same manner as the location of a tax home under
section 162(a)(2).
In section 1.911-2(b), Income Tax Regs., it is explained
that the location of a taxpayer’s regular or principal place of
business, or, if none, of a taxpayer’s abode in a real and
substantial sense, will be regarded as the location of a
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taxpayer’s tax home. Section 1.911-2(b), Income Tax Regs.,
provides as follows:
(b) * * * the term “tax home” has the same meaning
which it has for purposes of section 162(a)(2)
(relating to travel expenses away from home). Thus,
under section 911, * * * [a taxpayer’s] tax home is
considered to be located at his regular or principal
(if more than one regular) place of business or, if the
* * * [taxpayer] has no regular or principal place of
business because of the nature of the business, then at
his regular place of abode in a real and substantial
sense. * * *
If in a year a taxpayer has neither a regular or principal
place of business nor any abode in a real and substantial sense,
a taxpayer may be classified as an itinerant whose tax home is
located wherever the taxpayer is physically located from day to
day. Deamer v. Commissioner, 752 F.2d 337, 339 (8th Cir. 1985),
affg. T.C. Memo. 1984-63; Hicks v. Commissioner, 47 T.C. 71, 73
(1966); Rev. Rul. 73-529, 1973-2 C.B. 37.
During 2001 and until May 5, 2002, petitioners’ business
consisted principally of traveling in international and foreign
waters to foreign countries on the yacht of Cush Automotive.
Because petitioners had neither a regular or principal place of
business, nor a specific abode in a real and substantial sense
during the applicable periods, we conclude that petitioners were
itinerants, that petitioners had a foreign tax home during the
300 plus days they were physically present in a foreign country
during petitioners’ applicable periods for 2001 and for 2002, and
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that petitioners therefore had a foreign tax home for purposes of
the claimed foreign earned income exclusion.4
The last sentence of section 911(d)(3) provides that a
taxpayer who has an abode in the United States will not be
treated as having a tax home in a foreign country. Neither
section 911 nor the regulations thereunder define “abode”.5
Court cases that have done so involve taxpayers who have
alternated long blocks of time working abroad with long blocks of
time at home in the United States where their families lived.
Because the taxpayers had domestic ties (such as family) in the
United States and only transitory ties in the foreign country
where the taxpayers worked, the taxpayers were held to have a
U.S. abode. See Harrington v. Commissioner, 93 T.C. 297, 307-309
(1989); Doyle v. Commissioner, T.C. Memo. 1989-463; Lemay v.
Commissioner, T.C. Memo. 1987-256, affd. 837 F.2d 681 (5th Cir.
1988); Bujol v. Commissioner, T.C. Memo. 1987-230, affd. without
published opinion 842 F.2d 328 (5th Cir. 1988). But cf. Jones v.
4
Respondent herein does not argue that, as itinerants,
petitioners had no foreign tax home for purposes of the sec. 911
foreign earned income exclusion. See, e.g., Henderson v.
Commissioner, T.C. Memo. 1995-559 (holding that, for purposes of
sec. 162(a)(2), an itinerant taxpayer may be treated as having no
tax home and therefore may not be allowed “away from home”
business travel expense deductions), affd. 143 F.3d 497, 499-501
(9th Cir. 1998).
5
Sec. 1.911-2(b), Income Tax Regs., contains the following
statement: “Maintenance of a dwelling in the United States * * *
does not necessarily mean that the * * * [taxpayer’s] abode is in
the United States.”
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Commissioner, 927 F.2d 849, 856-857 (5th Cir. 1991), revg. T.C.
Memo. 1989-616.
Because petitioners’ townhouse was leased to others, not
available to petitioners, and because petitioners had limited
other ties to the United States, petitioners did not have an
abode in the United States during petitioners’ 2001 and 2002
applicable periods.
Physical Presence Requirement
Under the second requirement of section 911(d)(1), because
petitioners acknowledge that they do not qualify for the foreign
earned income exclusion under the bona fide foreign residence
requirement, we address only the alternate physical presence
requirement.
Under section 911(d)(1)(B), a taxpayer who spends at least
330 days during an applicable period in a foreign country or
countries will satisfy the physical presence requirement for the
related tax year. For this purpose, a taxpayer is to add
together all foreign days falling within any one applicable
period. Sec. 1.911-2(d)(1) and (2), Income Tax Regs.
An applicable period consists of any 12 consecutive months.
Sec. 1.911-2(d)(1), Income Tax Regs. In order for the exclusion
to be applicable to reduce gross income in a particular year, the
applicable period must have some overlap with the taxpayer’s
taxable year in question. Sec. 1.911-3(d)(2) and (3), Income Tax
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Regs. For a particular taxable year of a taxpayer, there may be
a number of different applicable periods. See sec. 1.911-
2(a)(2)(ii), (d), Income Tax Regs., and the examples thereunder.
A taxpayer may use whichever applicable period maximizes the
foreign earned income exclusion. See sec. 911(d)(1)(B); sec.
1.911-2(a)(2)(ii), Income Tax Regs.6
Under section 911, a foreign country includes airspace,
lands, and territorial waters under the sovereignty of a country,
territory, or possession other than the United States. Farrell
v. United States, 313 F.3d 1214, 1216 (9th Cir. 2002); Arnett v.
Commissioner, 126 T.C. 89, 93-95 (2006), affd. 473 F.3d 790 (7th
Cir. 2007); sec. 1.911-2(g) and (h), Income Tax Regs.
Because international waters are not under the sovereignty
of any one country, time spent in international waters generally
does not apply toward the 330 foreign day requirement. See
Plaisance v. United States, 433 F. Supp. 936, 939 (E.D. La.
1977).
Although section 911(d)(1)(B) states that an aggregate of
330 full days of physical presence in a foreign country or
countries is required, the regulations thereunder define a “full
6
Respondent’s Audit Technique Guide for Foreign Athletes and
Entertainers (October, 1994) suggests that respondent’s revenue
agents may use a more favorable applicable period than the
taxpayer initially indicated on a filed Form 2555, Foreign Earned
Income. 4 Audit, Internal Revenue Manual (CCH), par. 204,601, at
23,046.
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day” to include partial days of travel in or on international
airspace, land, or waters from one foreign location to another
foreign location. Therefore, a day involving travel in
international waters between foreign locations in increments of
less than 24 hours is treated as a full day in a foreign country.
Sec. 1.911-2(d)(2) and (3), Income Tax Regs.
If the second alternate requirement of section 911(d)(1) is
relied on (330 days of foreign physical presence) and if the
applicable period selected by a taxpayer to satisfy the 330 days
of foreign physical presence does not correspond to the
taxpayer’s taxable year, the taxpayer may only exclude the lesser
of actual foreign income earned during the taxable year or a pro
rata portion of the maximum exclusion amount that corresponds to
the number of days of the applicable period that falls within the
taxpayer’s taxable year. Sec. 1.911-3(d)(2) and (3), Income Tax
Regs.
Because we have found that petitioners were physically
present in foreign countries for 330 days for 2001 (using an
applicable period of January 7, 2001, to January 6, 20027), and
7
For 2001, petitioners have not specifically requested an
applicable period of Jan. 7, 2001, to Jan. 6, 2002. However,
petitioners have requested that the Court determine the
applicable period that will maximize petitioners’ exclusion. We
agree with petitioners that generally we are not precluded from
identifying and utilizing an applicable period that allows a
taxpayer the maximum foreign earned income exclusion under the
physical presence requirement.
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for 333 days for 2002 (using an applicable period of May 16,
2001, to May 15, 2002), petitioners pass the foreign physical
presence requirement for both years.
We explain further two of the disputes the parties have in
calculating petitioners’ foreign physical presence.
Respondent treats each day that involved a partial day of
travel for petitioners in international waters as a nonforeign
day. As explained, however, section 1.911-2(d)(2) and (3),
Income Tax Regs., provides that a partial day of travel in
international waters in traveling from one foreign country to
another foreign country be treated as a full foreign day.
Respondent argues that Myron’s testimony does not establish
petitioners’ presence in Costa Rica from December 1 to
December 19, 2001, and respondent asserts that those 19 days
should not count as foreign days for petitioners.
We find Myron’s testimony to be credible. Furthermore,
Myron’s testimony was corroborated. The yacht was docked in
Costa Rica for the entire month of December 2001, and Myron’s
testimony regarding petitioners’ travel to the United States in
December 2001 was consistent with Myron’s testimony that his
vacation each year in the United States lasted only 2 weeks.
Respondent argues that petitioners’ initial Forms 2555-EZ
indicate that petitioners were located in the United States for
the entire month of December 2001. We disagree. Petitioners’
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Forms 2555-EZ for 2001 were silent as to December 2001, and
petitioners made mistakes designating applicable periods on the
Forms 2555-EZ that they initially filed for both 2001 and 2002.
Also, because of the shift to respondent of the burden of
proof, respondent bears the burden to prove that petitioners were
not in a foreign country for the first 19 days of December 2001.
Respondent argues further that for 2001 there are
insufficient facts in evidence to evaluate the requirements of
the foreign earned income exclusion under any applicable period
other than January 1 to December 31, 2001.
We disagree. Petitioners’ log, Myron’s testimony, and the
Navy review of the log establish petitioners’ presence in foreign
countries for the applicable period we utilize for 2001 -- namely
January 7, 2001, to January 6, 2002, as well as for 2002.
Respondent also makes a procedural argument as to why we
should analyze petitioners’ qualifications for the exclusion only
under the applicable periods petitioners indicated on their
initially filed Forms 2555-EZ. Respondent argues that our
utilization of a different applicable period for 2001 to measure
petitioners’ foreign physical presence constitutes a new issue
not raised by the pleadings.
Although we have adjusted petitioners’ applicable period for
2001, the issue remains what it has always been: Do petitioners
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qualify for the exclusion? Our slight adjustment in the
applicable period for 2001 does not constitute a new issue.
Respondent argues that adjusting the applicable period at
this point in the litigation would be unfair where respondent
prepared for trial based on an applicable period of January 1 to
December 31, 2001.
However, in respondent’s pretrial memorandum and posttrial
briefs, respondent acknowledges: (1) That we might consider
other applicable periods, (2) that an applicable period may be
adjusted before examination, during examination, and during
litigation, and (3) that we may make a finding as to the
appropriate and most favorable applicable period. In
respondent’s pretrial memorandum, respondent states as follows:
“During 2001 and 2002, petitioners were not physically present in
a foreign country for at least 330 full days, nor any other
period of 12 months in a row starting or ending in 2001 and
2002.” (Emphasis added.) Furthermore, respondent has had ample
opportunity to brief the Court and to review the evidence.
On the facts of this case, we do not believe that the
applicable period we use for petitioners for 2001 constitutes
unfair surprise to respondent. See Estate of Keeton v.
Commissioner, T.C. Memo. 2006-263.
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The parties’ stipulation does not require a contrary result.
The parties’ stipulation only encompasses admissibility, not
correctness, of the exhibits admitted into evidence.
Petitioners have established that they qualify for the
exclusion for both 2001 and 2002: (1) Petitioners had a foreign
tax home during the applicable periods, and (2) petitioners were
physically present in foreign countries for at least 330 days of
the applicable periods overlapping 2001 and 2002.
In light of our resolution of the foreign earned income
issue in favor of petitioners, the section 6662 penalties
determined by respondent are moot.
To reflect the foregoing,
Decision will be entered
under Rule 155.8
8
Because the applicable periods utilized in our opinion do
not correspond to petitioners’ taxable years, a pro rata
adjustment to petitioners’ exclusions for foreign earned income
for 2001 and 2002 will need to be made under sec. 1.911-3(d),
Income Tax Regs.