T.C. Memo. 2011-26
UNITED STATES TAX COURT
NATHANIEL J. HOLMES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27240-08. Filed January 31, 2011.
Nathaniel J. Holmes, pro se.
Laura A. Price, for respondent.
MEMORANDUM OPINION
GOEKE, Judge: Respondent determined that income petitioner
received in 2005 from Blackwater Security Consulting (Blackwater)
for dangerous security work while in Iraq was not excludable from
his gross income under section 112.1 This issue and additions to
1
All section references are to the Internal Revenue Code in
(continued...)
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tax under sections 6651(a)(1) and (2) and 6654 for 2005 are
before us. For the reasons stated herein, we hold that
petitioner’s income may not be excluded and that he is liable
only for the section 6654(a) addition to tax.
Background
Some of the facts have been stipulated and are so found.
At the time petitioner filed his petition, he resided in Florida.
Petitioner was engaged in performing dangerous security
services in Iraq during 2005. Petitioner was hired and paid by
Blackwater to perform these security services in Iraq. His work
in Iraq related to military operations. Petitioner received
compensation of $98,400 for those services. He also received
$913 in taxable interest from Navy Federal Credit Union. For
2005 Iraq was identified as a combat zone under Executive Order
12744, 56 Fed. Reg. 2663 (Jan. 23, 1991).
While in Iraq, petitioner was given a memorandum issued by
Robert L. Hunt, the Acting Deputy Director, Compliance Field
Operations, Internal Revenue Service (IRS). This memorandum
discussed the appropriate steps for civilian personnel to take
when engaged in an IRS examination and collection activity
involving a taxpayer deployed to a Qualified Combat Zone.
Petitioner did not remember who gave the memorandum to him.
1
(...continued)
effect for the year in issue.
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Petitioner did not file an income tax return for 2004 or
2005. On June 2, 2008, respondent prepared a substitute for
return for petitioner under section 6020(b) for 2005. At some
point in 2008, petitioner provided respondent with a 2005 Form
1040, U.S. Individual Income Tax Return, dated “28 May 07”.
Petitioner reported zero income and zero tax due on the Form
1040.2 Respondent did not accept the 2005 Form 1040 as a valid
return. On August 25, 2008, respondent mailed petitioner a
notice of deficiency regarding his 2005 income tax liability. On
November 10, 2008, petitioner timely filed a petition with this
Court.
Discussion
I. Section 112
Section 61 provides that gross income includes all income
from whatever source derived, unless the taxpayer can establish
a specific legislative authorization to exclude income from
taxation. Commissioner v. Glenshaw Glass Co., 348 U.S. 426
(1955). Section 112(a)(1) provides: “Gross income does not
include compensation received for active service as a member
below the grade of commissioned officer in the Armed Forces of
the United States for any month during any part of which such
member--(1) served in a combat zone”.
2
Petitioner did not make any estimated tax payments for tax
year 2005 but made estimated tax payments of $55,000 during 2004.
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Section 7701(a)(15) defines “Armed Forces of the United
States” as including:
all regular and reserve components of the uniformed
services which are subject to the jurisdiction of the
Secretary of Defense, the Secretary of the Army, the
Secretary of the Navy, or the Secretary of the Air
Force, and * * * includes the Coast Guard. The members
of such forces include commissioned officers and
personnel below the grade of commissioned officers in
such forces.
In 2005 petitioner did not serve in the Armed Forces of the
United States. He was a private citizen who was hired by and
paid by a private company, Blackwater.
Petitioner argues that because he was performing services
similar to those performed by the U.S. military and because he
performed those services in a “combat zone”, he should be allowed
to exclude from gross income the pay he received from Blackwater
while performing those duties. However, at no time in 2005 was
petitioner actually a member of the Armed Forces of the United
States. Section 1.112-1(a)(4), Income Tax Regs., states:
Only compensation paid by the Armed Forces of the
United States to members of the Armed Forces can be
excluded under section 112, except for compensation
paid by an agency or instrumentality of the United
States or by an international organization to a member
of the Armed Forces whose military active duty status
continues during the member’s assignment to the agency
or instrumentality or organization on official detail.
Compensation paid by other employers (whether private
enterprises or governmental entities) to members of the
Armed Forces cannot be excluded under section 112 even
if the payment is made to supplement the member’s
military compensation or is labeled by the employer as
compensation for active service in the Armed Forces of
the United States. * * *
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Under section 1.112-1(a)(4), Income Tax Regs., petitioner cannot
exclude the compensation he received from Blackwater in 2005 from
gross income because it was not “compensation paid by the Armed
Forces of the United States to members of the Armed Forces”.
The Tax Court has held that employees of private companies
performing services similar to those performed by members of the
Armed Forces of the United States while in combat zones do not
qualify for the exclusion under section 112. See Land v.
Commissioner, 61 T.C. 675 (1974) (a pilot employed by a private
airline flying civilian aircraft under contract with the
Department of Defense in support of the U.S. military in a combat
zone during the Vietnam War was not a member of the Armed Forces
and therefore not entitled to the section 112 exclusion); see
also Hildebran v. Commissioner, T.C. Memo. 2004-42.
In Hildebran, the taxpayer was employed as a merchant marine
by Bay Ship Management, a private company. During part of tax
years 1998 and 1999, the taxpayer was assigned to work aboard a
U.S. naval ship which operated in a combat zone. Id. The
taxpayer was:
subject to Navy physical standards and Navy standards
of appearance, training, and mission completion. * * *
[The taxpayer] was required to, and did, have security
clearances, wear uniforms, receive an anthrax
vaccination, receive training in small arms and
antiterrorism, and carry a Department of Defense
identification card which showed his ship assignment
and specialty.
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In Hildebran, the Commissioner issued a notice of deficiency to
the taxpayer, who petitioned the Court, arguing that the income
he received while working in a combat zone should be excluded
from gross income under section 112.
The Court held in Hildebran that because the taxpayer was
not a member of the Armed Forces of the United States during the
years at issue within the meaning of sections 112 and
7701(a)(15), he was not entitled under section 112 to exclude
from gross income any of the wages that he received while working
for Bay Ship Management aboard the Navy ship. The Court stated
that although the taxpayer met certain Navy standards, “those
facts did not in any way change the status of Mr. Hildebran as a
civilian employee of Bay Ship Management.” The facts in
Hildebran are similar to the facts in this case. Although
petitioner may have performed work similar to that of members of
the Armed Forces of the United States while in a combat zone,
those facts do not change the status of petitioner as a civilian
who was recruited and paid by Blackwater, a private company.
Therefore, like the taxpayer in Hildebran, petitioner is not
entitled under section 112 to exclude from gross income the
compensation he received from a private company, Blackwater,
while working in Iraq.
Petitioner asserts that section 1.112-1(e)(2), Examples (3),
(4), (5), (6), and (7), Income Tax Regs., “clearly illustrate
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that individuals providing military service in a combat zone need
not be members of the armed forces.” However, this is not the
case. Examples (3), (4), (5), (6), and (7) refer to member “B”,
described in Examples (1) and (2) as a member of the Armed
Forces.
Petitioner also asserts that Congress did not intend to
limit the definition of “Armed Forces of the United States” as
defined in section 7701(a)(15) and that this definition may
include individuals who are not members of the Armed Forces and
who perform services similar to those of the United States
military. Congress has considered the issue of whether income
earned by individuals who are not members of the Armed Forces of
the United States and who are working in combat zones should be
excluded from gross income, it has yet to amend section 112 to
extend the exclusion to such taxpayers. H.R. 294, 109th Congress
(2006), proposed to extend the combat zone income tax exclusion
to civilian contract employees serving in combat. Jackson, Cong.
Research Serv., RL 33230, Proposed Federal Income Tax Exclusion
for Civilians Serving in Combat Zones (2006). H.R. 294, was sent
to the House Ways and Means Committee and never came forth.
Similar bills were also introduced in 2001, H.R. 351, 107th Cong.
(2001), and in 2003, H.R. 117, 108th Cong. (2003). Both bills
were also sent to the House Ways and Means Committee and never
came forth.
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II. Additions to Tax
Respondent determined that petitioner is liable for
additions to tax for failure to timely file a return under
section 6651(a)(1), failure to timely pay tax under section
6651(a)(2), and failure to pay estimated income tax under section
6654(a).
Section 6651(a)(1) imposes an addition to tax for failure to
timely file a required Federal income tax return, unless the
taxpayer can establish that the failure is due to reasonable
cause and not due to willful neglect. Section 7491(c) places the
burden of production on the Commissioner to present sufficient
evidence showing that the addition to tax is appropriate. Higbee
v. Commissioner, 116 T.C. 438 (2001). Once the Commissioner
meets this burden, the taxpayer has the burden of proof with
respect to exculpatory factors, such as reasonable cause. Id. at
446.
Petitioner admitted on brief that he did not file a return
for calender year 2005. Petitioner’s only explanation for
failing to file is that in 2005 while in Iraq, he was given a
memorandum that caused him to believe that the income he was
receiving from Blackwater was not taxable. This memorandum was
an internal memorandum written to give the Commissioner’s
employees field guidance for examination and collection activity
involving taxpayers in Iraq. The memorandum, titled “Memorandum
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for Acting Deputy Director, Compliance Field Operations”, was
issued by the Internal Revenue Service Small Business/Self-
Employment Division on June 28, 2004. The memorandum states that
civilian or military personnel who are in direct support of a
combat zone military initiative and physically located in the
combat area are entitled to the exclusion. It also states that
time spent in a combat zone by an individual serving in support
of the Armed Forces will be disregarded with respect to “certain
acts required under the Internal Revenue Code.” It goes on to
state that “This change in procedure will be reflected in the
next revision of the IRM, which is in the process of being
written.”
Petitioner satisfies all the criteria found in the
memorandum. He was serving in Iraq alongside the military,
provided security to Government officials, and aided in giving
air support, medical aid, and emergency response assistance.
Petitioner had no background in tax law and was given this
memorandum written by an IRS employee while serving in Iraq. We
believe that receiving this memorandum while serving in Iraq
could give someone reasonable cause to believe that his payments
from Blackwater were excluded from gross income. Therefore,
petitioner is not liable for the addition to tax under section
6651(a)(1).
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Respondent also determined a section 6651(a)(2) addition to
tax. Section 6651(a)(2) imposes an addition to tax for failure
to pay the amount shown as tax on a return on or before the due
date prescribed unless the taxpayer can establish such failure
was due to reasonable cause and not willful neglect. The amount
of the addition is equal to 0.5 percent of the amount shown as
tax on the tax return but not paid, with an additional 0.5
percent each month or fraction thereof during which the failure
to pay continues (up to a maximum of 25 percent). See Cabirac v.
Commissioner, 120 T.C. 163, 170 n.12 (2003). For the reasons
stated above, we find that petitioner had reasonable cause and is
not liable for the section 6651(a)(2) addition to tax.
Respondent also determined that petitioner is liable for an
addition to tax under section 6654 for failure to pay estimated
tax for 2005. Section 6654(a) imposes an addition to tax for
failure to make timely and sufficient payments for estimated tax.
A taxpayer has an obligation to pay estimated tax for a
particular year only if he has a “required annual payment” for
that year. Sec. 6654(d). A required annual payment is equal to
the lesser of: (1) 90 percent of the tax shown on the taxpayer’s
return due for the year in issue (or, if no return is filed, 90
percent of the tax for such year); or (2) if the taxpayer filed a
return for the immediately preceding taxable year, 100 percent of
the tax shown on that return. Sec. 6654(d)(1)(B). Generally,
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section 6654 provides no exception for reasonable cause. Sec.
1.6654-1(a)(1), Income Tax Regs.; see also Bray v. Commissioner,
T.C. Memo. 2008-113.
Petitioner made no estimated tax payments for 2005, and
therefore such payments were less than 90 percent of the amount
of tax shown on the substitute for return; and petitioner failed
to file a 2004 income tax return. Therefore, petitioner is
liable for the section 6654(a) addition to tax.
To reflect the foregoing,
An appropriate decision will
be entered.