T.C. Memo. 2017-221
UNITED STATES TAX COURT
ROBERT HUDSON AND ELEANOR M. HUDSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 28265-14. Filed November 8, 2017.
Eric W. Johnson, for petitioners.
Christina L. Cook, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PUGH, Judge: In a notice of deficiency dated October 1, 2014, respondent
determined the following deficiencies and penalties:1
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure. Amounts are
(continued...)
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Penalty
[*2] Year Deficiency sec. 6662(a)
2011 $42,557 $8,511
2012 10,657 2,131
Respondent concedes that petitioners are entitled to a home mortgage
interest deduction of $26,464 for 2011, as claimed, and of $11,255 for 2012, as
corrected.2 The remaining issues for decision are: (1) whether petitioners are
entitled to the section 911 foreign earned income exclusion for the 2011 and 2012
taxable years, (2) whether petitioners are liable for self-employment tax pursuant
to section 1401, and (3) whether petitioners are liable for the accuracy-related
penalty under section 6662(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Petitioners resided
in Arizona when they filed their timely petition. Petitioners were married during
the taxable years in issue and filed joint Federal income tax returns.
1
(...continued)
rounded to the nearest dollar.
2
In their pretrial memorandum petitioners admitted erroneously assuming
that they were entitled to home mortgage interest deductions on any two of their
residences on their 2012 tax return. Under sec. 163(h)(4)(A)(i), however, one of
the two residences had to be petitioners’ “principal residence”. Petitioners paid
off the mortgage on their principal residence in 2011.
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[*3] Petitioner Robert Hudson is a retired airline pilot. Upon graduating from
Iowa State University with a degree in distributive studies, Mr. Hudson had
enrolled in a pilot training program offered by the Air Force Reserves (Reserves).
During his career Mr. Hudson served as a pilot for the Reserves for 8 years and
spent 26 years as a commercial airline pilot for Northwest Airlines (Northwest).
Mr. Hudson was employed by both the Reserves and Northwest for several years.
After his retirement in February 2007 Mr. Hudson was able to collect his pension
from Northwest early with no restriction on his ability to work as a pilot for
another airline.
After retiring Mr. Hudson sought employment with foreign airlines because
of their policies of maintaining the seniority of pilots. He decided to seek
employment with Korean Airlines. He was required to submit his application to
the airline through a recruiting agency. Mr. Hudson chose to use the recruiting
agency Global Airline Pilots (GAP) because it was based in the United States and
his pay would be higher. After GAP forwarded his application to Korean Airlines,
Mr. Hudson was invited to interview with Korean Airlines in Seoul, South Korea
(Korea). During his interview process Mr. Hudson was required to pass a
simulator ride, complete a physical examination, and interview with Korean
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[*4] Airlines’ chief pilots and vice president of flight operations. He did not
interview with any representatives from GAP.
Mr. Hudson ultimately was offered, and accepted, a position with Korean
Airlines. On March 19, 2007, he entered into an agreement with GAP (GAP
agreement) that described his employment status as follows: “The Crew Member
is an independent contractor and is not an employee or agent of GAP.” The GAP
agreement further stated that Mr. Hudson’s flight base was in Korea. The contract
had a term of five years. At the time he began working for Korean Airlines, he
expected to work until he reached the mandatory retirement age (then 60), 5-1/2
years in the future. In 2012 he retired before age 60, at the end of his 5-year
contract, because of a failed physical examination.
During his first months as a Korean Airlines pilot Mr. Hudson was required
to complete a training course at the Korean Airlines facility, complete the Korean
Airlines simulator program, and pass a Korean air law exam. He then was issued a
Korean pilot’s license as a 747-400 captain. While flying with Korean Airlines
Mr. Hudson was required to abide by the Korean Airlines policies and procedures
as listed in the Korean Airlines employee manual he received.
During his time with Korean Airlines Mr. Hudson was based in Inchon,
South Korea. He received an E5 visa and was a registered alien in Korea. He
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[*5] lived in a Hyatt Hotel owned by Korean Airlines, and Korean Airlines paid
for his housing at the hotel. He stored large suitcases of his belongings at the
hotel while he was away and would have these belongings brought to his room
upon check-in. The hotel had a designated area for Mr. Hudson to cook his meals,
although he mostly ate out with friends. His activities included riding a bicycle
provided to him by the hotel, using the hotel’s golf course and driving range, and
exercising. Mr. Hudson would travel to a nearby town if he had a long time off.
He learned basic phrases in Korean, such as greetings and terms necessary to order
food in restaurants. He had a Korean bank account and had a Korean cell phone
for a limited time.
Mr. Hudson flew routes to cities throughout Asia, Europe, and the United
States. In addition, under Korean Airlines’ layover policy Mr. Hudson’s layovers
between his working flights outside Korea could last for days at a time. He
received 9 days off per month, which Korean Airlines typically gave in blocks,
and 24 vacation days per year. Sometimes he would be asked to take flights on his
days off, however. Mr. Hudson would request to use his vacation days in the same
period as his days off. For his vacation, he had the option of traveling, at no
expense to him, to any city where Korean Airlines flew direct. He seldom spent
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[*6] his vacation days in Korea. Instead, Mr. Hudson sought to spend all of his
time off (as many as 132 days per year) in the United States during the years in
issue.
Petitioners owned three homes in the United States during the taxable years
in issue in Apple Valley, Minnesota; Surprise, Arizona; and Chicago, Illinois.
Petitioners’ primary residence was in Minnesota. They paid off the mortgage on
their primary residence in 2011. Petitioners had mortgages on the other two
homes for both 2011 and 2012. Petitioner Eleanor Hudson lived in the Minnesota
home during the summer and fall months and spent the colder months in Arizona.
Mrs. Hudson also traveled to the locations where Mr. Hudson spent his layovers.
Korean Airlines did not pay Mr. Hudson directly. Rather, Korean Airlines
transferred his salary to GAP, which in turn withheld Korean taxes and GAP’s
fees and then deposited the remainder into Mr. Hudson’s U.S. bank account. He
also received per diem allowances which were deposited into his Korean bank
account. Mr. Hudson received an annual Korean tax statement listing him as a
“non-resident”. Mr. Hudson did not view himself as a permanent resident of
Korea but as a registered alien paying Korean taxes.
Mr. Hudson sought professional advice regarding his relationship with
Korean Airlines and his compliance with tax laws. He hired an attorney to review
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[*7] the GAP agreement and understood from that attorney that he became an
employee of Korean Airlines when he signed that agreement.
To assist him with his tax obligations, Mr. Hudson initially hired a tax
return preparer, Rachel Overcash, who was recommended to him by GAP as
experienced in preparing returns for American pilots recruited by GAP to fly for
Korean Airlines. He excluded his foreign earned income under section 911 for
2007 on the basis of information provided by Ms. Overcash. He later hired a
certified public accountant (C.P.A.) in Minnesota, Paul Christiansen, to prepare
petitioners’ 2011 and 2012 tax returns. With respect to petitioners’ home
mortgage interest, Mr. Hudson provided Mr. Christiansen with all of the Forms
1098, Mortgage Interest Statement, that they had received for the three homes they
owned during the 2011 and 2012 tax years; and Mr. Hudson answered questions in
a “brochure” provided to him by Mr. Christiansen. Petitioners’ 2011 return
claimed a deduction for home mortgage interest paid on the Minnesota and
Arizona houses. Petitioners’ 2012 return claimed a home mortgage interest
deduction relating to the Arizona and Illinois houses.
Mr. Hudson also sought legal advice regarding his eligibility for the foreign
earned income exclusion. He completed a questionnaire provided by his counsel.
He did not provide the GAP agreement to counsel; nor was he asked to provide it.
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[*8] In a letter dated January 6, 2011, Mr. Hudson’s counsel advised him that he
was eligible for the exclusion.
In the notice of deficiency, respondent disallowed petitioners’ foreign
earned income exclusions for both taxable years because of their failure to
establish either bona fide residence or physical presence in a foreign country for
the relevant period. Respondent also determined self-employment tax for both
taxable years in issue. Additionally, respondent determined that petitioners failed
to report $41 of income from a State tax refund they had received from the State of
Minnesota in 2012. As petitioners neither disputed this adjustment in the petition
or in their pretrial memorandum nor addressed it at trial, this issue is deemed
conceded. See Rules 34(b)(4), 149(b). Finally, respondent determined that
petitioners were liable for a 20% accuracy-related penalty under section 6662(a)
for each year in issue.
OPINION
The taxpayer generally has the burden of proving that the Commissioner’s
determinations in a notice of deficiency are incorrect. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift from the
taxpayer to the Commissioner in certain circumstances under section 7491(a).
Petitioners have not claimed or shown that they meet the requirements of section
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[*9] 7491(a) to shift the burden of proof to respondent as to any relevant factual
issue.
I. Foreign Earned Income Exclusion
We first address respondent’s determination that petitioners did not qualify
for the foreign earned income exclusion for 2011 and 2012 under section 911.
Section 911(a) allows a “qualified individual” to exclude from gross income
“foreign earned income”. Foreign earned income is “the amount received by such
individual from sources within a foreign country or countries which constitute
earned income attributable to services performed by such individual”. Sec.
911(b)(1)(A). A qualified individual is defined as “an individual whose tax home
is in a foreign country and who is” either a bona fide resident or physically present
in the country for a certain time.3 Sec. 911(d)(1).
A. Bona Fide Residence
To qualify for the foreign earned income exclusion as a bona fide resident
of a foreign country, a taxpayer must offer “strong proof” of bona fide residence in
3
Sec. 911(d)(1)(B) defines a qualified individual as “a citizen or resident of
the United States * * * who, during any period of 12 consecutive months, is
present in a foreign country or countries during at least 330 full days in such
period.” Petitioners have not argued or presented evidence showing that Mr.
Hudson was present in Korea for a period sufficient to satisfy the sec.
911(d)(1)(B) test.
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[*10] the foreign country. Schoneberger v. Commissioner, 74 T.C. 1016, 1024
(1980). Courts consider a number of factors when determining whether a taxpayer
was a bona fide resident of a foreign country. Sochurek v. Commissioner, 300
F.2d 34 (7th Cir. 1962), rev’g and remanding 36 T.C. 131 (1961). These factors
include:
(1) intention of the taxpayer;
(2) establishment of his home temporarily in the foreign
country for an indefinite period;
(3) participation in the activities of his chosen community on
social and cultural levels, identification with the daily lives of the
people and, in general, assimilation into the foreign environment;
(4) physical presence in the foreign country consistent with his
employment;
(5) nature, extent and reasons for temporary absences from his
temporary foreign home;
(6) assumption of economic burdens and payment of taxes to
the foreign country;
(7) status of resident contrasted to that of transient or sojourner;
(8) treatment accorded his income status by his employer;
(9) marital status and residence of his family;
(10) nature and duration of his employment; whether his
assignment abroad could be promptly accomplished within a definite
or specified time;
(11) good faith in making his trip abroad; whether for purpose
of tax evasion.
Id. at 38. While all of these factors may not be present in every case, the
applicable factors should be considered and weighed. Id. Below we consider the
pertinent Sochurek factors.
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[*11] Petitioners rely on two cases that applied Sochurek to conclude that pilots
for foreign airlines were eligible for the section 911 exclusion: Jones v.
Commissioner, 927 F.2d 849 (5th Cir. 1991), rev’g T.C. Memo. 1989-616, and
Cobb v. Commissioner, T.C. Memo. 1991-376, 62 T.C.M. (CCH) 408 (1991). We
agree with petitioners that the outcome here will depend on whether there are
meaningful differences between the facts we have found above and those of Cobb
and Jones. We recently performed this very analysis in Acone v. Commissioner,
T.C. Memo. 2017-162, a case that also involved a Korean Airlines pilot.
In Jones v. Commissioner, 927 F.2d at 850, the taxpayer, Mr. Jones, was an
airline pilot who contracted with a domestic corporation that placed him with
Japan Air Lines Co., Ltd. (JAL), a foreign airline. Mr. Jones was based in Tokyo,
Japan, but spent fewer than 165 nights a year in Japan. Id. at 851. During the tax
years in issue Mrs. Jones resided in Anchorage, Alaska, while Mr. Jones was in
Japan. Id. Because Anchorage was JAL’s only U.S. base and a normal stopover,
Mr. Jones was in Anchorage frequently and would stay in petitioners’ townhouse
when there overnight. Id. at 851-852. In Japan Mr. Jones lived in a hotel where
other crew members also lived. Id. at 851. Mr. Jones did not have extensive
contact with Japanese culture but often did socialize with coworkers and
occasionally drove into Tokyo for dinner and entertainment. Id. at 852.
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[*12] Additionally, Mr. Jones would visit a local Japanese doctor for medical
attention. Id.
Mr. Jones would leave his personal belongings in hotel storage while he
was away. Id. at 851. Unlike domestic airlines, JAL did not allow flight crew to
fly for free, so Mr. Jones paid for the trips he took during his time off using
discounted tickets. Id. He had a Japanese driver’s license but did not maintain a
Japanese bank account or Japanese credit cards. Id. Mr. Jones paid Japanese and
U.S. income taxes, and his returns were prepared at his expense. Id. He once
returned a dividend check intended for Alaska residents explaining he was no
longer an Alaska resident. Id.
The U.S. Court of Appeals for the Fifth Circuit applied the Sochurek factors
to conclude that Mr. Jones was a bona fide resident of Japan, reversing the Tax
Court’s holding to the contrary. Jones v. Commissioner, 927 F.2d at 855. The
Court of Appeals concluded that he intended to become a resident of Japan as he
returned a dividend check to Alaska and intended to remain in Japan until his
anticipated retirement (approximately eight years after his transfer to Tokyo). Id.
at 851, 854. As the Court of Appeals recognized, “[a] taxpayer’s intent plays
perhaps the most important part in determining the establishment and maintenance
of a foreign residence.” Id. at 854 (citing Dawson v. Commissioner, 59 T.C. 264,
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[*13] 268 (1972)). The court also rejected our analysis concerning the temporary
nature of Mr. Jones’ housing in a hotel. Id. at 854. As the court stated: “[I]t is not
necessary for a taxpayer to establish a fixed, permanent place of abode in order to
be a ‘resident’ of a foreign country.” Id. (citing Swenson v. Thomas, 164 F.2d
783, 785 (5th Cir. 1947)). Mr. Jones was away from Japan only when work
required or he was on vacation. Id. The court also determined that the fact that
his wife did not join him in Japan should not have been held against him for
purposes of determining his bona fide residence. Id. at 854-855. The court noted
that Mr. Jones was not assimilated into Japanese culture, but it held that the
majority of the Sochurek factors favored bona fide residence. Id. at 855.
In Cobb v. Commissioner, 62 T.C.M. (CCH) at 409, the taxpayer, Mr.
Cobb, was employed by a domestic air service corporation and was assigned to
work for JAL. While initially based in Alaska, Mr. Cobb later was transferred to
the Narita Airport base in Japan. Id. He lived in a hotel owned by JAL during the
tax years at issue, paying a discounted daily room rate during his stays. Id. He left
his bags in hotel storage while he was away. Id. His wife and children lived in
California while he was in Japan. Id. at 410. Mr. Cobb would visit his family
while he had layovers in California. Id. Mr. Cobb was not integrated into
Japanese culture--he did not learn Japanese and did not participate extensively in
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[*14] Japanese social activities. Id. at 409. He did, however, join the swim club
and play golf and tennis while in Japan. Id. Mr. Cobb paid Japanese income tax.
Id. at 410. On these facts, we held that Mr. Cobb was a bona fide resident of
Japan. Id. at 412. On the most significant factor, the taxpayer’s intent, we found
that Mr. Cobb presented documentary evidence that proved his intention was to be
a resident of Japan. Id. Further, in evaluating Mr. Cobb’s visits to the United
States, we recognized that “[w]hile he did sometimes visit with his family when
laid over in Los Angeles, these occasions were indeed visits, limited by
convenience and Mr. Cobb’s flight schedule, and in no way converted the Los
Angeles area into Mr. Cobb’s domicile or place of dwelling.” Id. at 412.
Additionally, we considered Mr. Cobb’s transfer to Japan permanent, whereas we
viewed Mr. Jones’ transfer as temporary because Mr. Jones had been transferred
from Japan twice before. Id.
We revisited our application of the Sochurek factors to pilots for foreign
airlines in Acone v. Commissioner, T.C. Memo. 2017-162. There we concluded
that the pilot, Mr. Acone, did not establish a bona fide residence in Korea even
though we accepted his testimony that he intended to remain in Korea until he
retired. Id. at *16-*17. We found that he was in Korea only when necessary for
work and returned to the United States whenever possible. Id. at *17-*18. Over
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[*15] the course of the two years before the Court, he spent a total of 333 days in
the United States and only 248 days in South Korea. Id. at *17. We found this to
be a critical distinction. Id. at *17-*18. We specifically noted that in Jones the
taxpayer was away only when business required or he was on vacation and he had
returned a dividend check from Alaska; and in Cobb the taxpayer accepted a
permanent transfer to Japan and his occasional visits with family on layovers in
the United States were limited by convenience and his flight schedule. Id. at *21-
*22. “By contrast, Mr. Acone always intended to return to the United States; and
in the meantime, his time in the United States with his family far exceeded * * *
mere ‘visits’ of ‘convenience’”. Id. at *22.
As we did in Acone, we find here that the Sochurek factors weigh against a
finding of bona fide residence in Korea. While Mr. Hudson credibly testified that
he intended to work for Korean Airlines until his retirement, petitioners have not
shown that he intended to be anything more than a transient. Indeed, Mr. Hudson
demonstrated that he always intended to return to the United States.
Further, like the pilot in Acone, Mr. Hudson intended to spend all of his
time off work during the years at issue in the United States. Mr. Hudson sought to
travel to his home in the United States as often as work would allow, in contrast to
the visits of convenience described in Cobb. The record before us does not
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[*16] specify the number of days Mr. Hudson spent on duty in Korea versus off
duty in the United States (unlike the record in Acone), but we are mindful that
petitioners bear the burden of proof, and the record before us shows that Mr.
Hudson had as many as 132 days off per year and intended to spend these days in
the United States. See Vento v. Dir. of V.I. Bureau of Internal Revenue, 715 F.3d
455, 467 (3d Cir. 2013) (“[E]xtensive absences will negate a finding of bona fide
residency, unless those absences are justified by good-faith reasons, such as the
travel requirements of the taxpayer’s profession[.]”). While we recognize the
similarities between Mr. Hudson’s circumstances and those of the taxpayers in
Jones and Cobb, we conclude that Mr. Hudson’s limited contacts with Korean
culture combined with his extended absences preclude a finding that he was a
bona fide resident of Korea.
We find, therefore, that Mr. Hudson was not a bona fide resident of Korea
during the years in issue.
B. Tax Home
As we have determined that Mr. Hudson was not a bona fide resident, we
need not evaluate whether his “tax home” was in Korea. Sec. 911. Accordingly,
we hold that Mr. Hudson was not a “qualified individual” as defined by section
911(d)(1). Petitioners, therefore, are not entitled to exclude Mr. Hudson’s income
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[*17] as a Korean Airlines pilot under the foreign earned income exclusion for the
years in issue.
II. Self-Employment Tax
We next must determine whether Mr. Hudson’s income is subject to self-
employment tax. Section 1401 imposes a percentage tax on self-employment
income. Self-employment income is defined as the “net earnings from self-
employment derived by an individual * * * during any taxable year”. Sec.
1402(b). Net earnings from self-employment are defined as “gross income derived
by an individual from any trade or business carried on by such individual, less the
deductions allowed by this subtitle which are attributable to such trade or
business”. Sec. 1402(a); see sec. 1.1402(a)-1, Income Tax Regs. The self-
employment tax does not apply to compensation paid to an employee, however.
Sec. 1402(c)(2).
Whether an individual is an employee or an independent contractor is a
factual question answered by applying principles of common law. Secs. 1402(d),
3121(d)(2); Simpson v. Commissioner, 64 T.C. 974, 984 (1975). Factors to
consider when determining whether an individual worker is an employee or an
independent contractor include:
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[*18] (1) the degree of control exercised by the principal over the
details of the work;
(2) which party invests in the facilities used in the work;
(3) the opportunity of the individual for profit or loss;
(4) whether or not the principal has the right to discharge the
individual;
(5) whether the work is part of the principal’s regular business;
(6) the permanency of the relationship; and
(7) the relationship the parties believe they are creating.
Weber v. Commissioner, 103 T.C. 378, 387 (1994), aff’d, 60 F.3d 1104 (4th Cir.
1995). All of the facts and circumstances of each case are considered when
making this determination, and no single factor is conclusive. See Simpson v.
Commissioner, 64 T.C. at 985. The degree of control is critical. See Weber v.
Commissioner, 103 T.C. at 387. An employer-employee relationship exists when
the principal controls the methods to be used in doing the work and controls the
details and means by which the desired result is to be accomplished. See Ellison
v. Commissioner, 55 T.C. 142, 152-153 (1970).
We hold that Mr. Hudson’s proper work classification during the years in
issue was that of an employee. Korean Airlines exercised considerable control
over his work. While flying Korean Airlines aircraft, Mr. Hudson was required to
abide by the policies and procedures listed in the employee manual he received
from Korean Airlines. See, e.g., Weber v. Commissioner, 103 T.C. 378 (finding
that as the taxpayer was bound by rules determined by his principal, the principal
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[*19] held sufficient control for the taxpayer to be classified as an employee).
Further, Mr. Hudson’s schedule, including his vacation and the length of his
layovers, was determined by Korean Airlines. See, e.g., Simpson v.
Commissioner, 64 T.C. at 985 (finding that the taxpayer’s freedom to set his own
office hours and take vacations without his principal’s approval weighed in favor
of treatment as an independent contractor).
We also reject respondent’s assertion that the GAP agreement is
determinative of Mr. Hudson’s work status. Blodgett v. Commissioner, T.C.
Memo. 2012-298; Jacobs v. Commissioner, T.C. Memo. 1993-570; sec.
31.3121(d)-1(a)(3), Employment Tax Regs. (“If the relationship of employer and
employee exists, the designation or description of the relationship by the parties as
anything other than that of employer and employee is immaterial. Thus, if such
relationship exists, it is of no consequence that the employee is designated as [an]
* * * independent contractor[.]”).
Accordingly, we hold that Mr. Hudson’s proper work classification was that
of an employee and petitioners are not liable for self-employment tax on the
income Mr. Hudson earned while working as a Korean Airlines pilot.
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[*20] III. Section 6662(a) Penalty
Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty
on any underpayment of Federal income tax attributable to a taxpayer’s negligence
or disregard of rules or regulations or substantial understatement of income tax.
“‘[N]egligence’ includes any failure to make a reasonable attempt to comply with
the provisions of * * * [the Code], and the term ‘disregard’ includes any careless,
reckless, or intentional disregard.” Sec. 6662(c). Negligence is strongly indicated
where “[a] taxpayer fails to make a reasonable attempt to ascertain the correctness
of a deduction, credit or exclusion on a return which would seem to a reasonable
and prudent person to be ‘too good to be true’ under the circumstances”. Sec.
1.6662-3(b)(1)(ii), Income Tax Regs. An understatement of income tax is
substantial if the amount of the understatement exceeds the greater of 10% of the
tax required to be shown for the taxable year or $5,000. Sec. 6662(d)(1)(A).
With respect to an individual taxpayer’s liability for a penalty, section
7491(c) places the burden of production on the Commissioner, requiring the
Commissioner to come forward with sufficient evidence indicating that the
imposition of a penalty is appropriate. Higbee v. Commissioner, 116 T.C. 438,
446 (2001). The taxpayer then bears the burden of proof as to any defense to the
penalty. Id. at 446-447. We anticipate that the Rule 155 computations will
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[*21] confirm a substantial understatement of income tax exists for the taxable
years in issue and, therefore, that respondent has met his burden of production.
Sec. 7491(c).
Taxpayers may absolve themselves of liability for a section 6662(a) penalty
if they can show reasonable cause for the resulting underpayment and that they
acted in good faith. Sec. 6664(c); Higbee v. Commissioner, 116 T.C. at 446-447.
The decision as to whether a taxpayer acted with reasonable cause and in good
faith is made on a case-by-case basis, taking into account all pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most
important factor is the extent of the taxpayer’s efforts to assess the proper tax
liability. Id. Reliance on professional advice may constitute reasonable cause and
good faith if the taxpayer proves, by a preponderance of the evidence, that he
“meets each requirement of the following three-prong test: (1) [t]he advisor was a
competent professional who had sufficient expertise to justify reliance, (2) the
taxpayer provided necessary and accurate information to the adviser, and (3) the
taxpayer actually relied in good faith on the adviser’s judgment.” Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d
Cir. 2002).
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[*22] Petitioners contend that their reliance on professional advice constitutes the
reasonable cause and good faith necessary to absolve them of the section 6662(a)
accuracy-related penalty. Mr. Hudson testified credibly that they provided to their
C.P.A. the information the C.P.A. sought to prepare their returns accurately,
including providing information about their outstanding mortgages. Mr. Hudson
also consulted counsel to determine his eligibility for the foreign earned income
exclusion and provided to counsel the information counsel requested (via a
questionnaire) to make that determination. We hold that petitioners’ reliance on
these professionals was reasonable under these circumstances. Because
petitioners have shown that they acted with reasonable cause and in good faith,
they are not liable for the section 6662(a) penalty.
We have considered all arguments made and facts presented in reaching our
decision, and, to the extent not discussed above, we conclude that they are moot,
irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.