T.C. Memo. 2013-147
UNITED STATES TAX COURT
JAMES F. DALY AND CANDACE H. DALY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23850-10. Filed June 6, 2013.
Eric D. Froisland, for petitioners.
Inga C. Plucinski, for respondent.
MEMORANDUM OPINION
KERRIGAN, Judge: Respondent determined deficiencies and penalties as
follows:
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Penalty
[*2] Year Deficiency sec. 6662(a)
2006 $26,253 $5,251
2007 17,051 3,410
2008 20,958 4,192
After concessions tax year 2006 is not in issue. The only issue remaining
for our consideration is whether petitioner husband was a qualified individual for
purposes of section 911(a) for tax years 2007 and 2008 (years in issue).
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. All monetary amounts have been
rounded to the nearest dollar.
Background
This case was fully stipulated under Rule 122. The stipulated facts are
incorporated in our findings by this reference. Petitioners resided in Utah when
they filed the petition.
Petitioner husband is a U.S. citizen. He began working for L3
Communications (L3) in April 1982 as a full-time employee and remained there
until June 1989. Between June 1986 and October 1987 petitioner husband
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[*3] worked for L3 in Honduras. He was physically present in Honduras during
that time and maintained a residence there.
Petitioner husband returned to work for L3 in November 1994 as a full-time
employee. He remained with L3 until April 1999. During that time petitioner
husband did not work overseas. Petitioner husband returned to L3 in August 2006
as a full-time employee. He was employed by L3 during the years in issue.
During the years in issue L3 maintained its principal place of business in
Salt Lake City, Utah. L3 contracted with the Department of Defense. Part of
petitioner’s work for L3 involved L3’s contract with the Department of Defense.
During the years in issue petitioner husband performed services for L3 in
Afghanistan and Iraq. L3 compensated petitioner husband for those services.
When petitioner husband was working overseas, he was unable to choose where
he would be working or for how long he would be there. He was informed of his
departure date only one month in advance. He was informed of his return date
only two weeks in advance. Petitioner husband, however, was aware in advance
that his assignments in Afghanistan and/or Iraq would last approximately three
months. The Department of the Air Force provided L3 with an official travel
authorization for petitioner husband for travel from August 10, 2007, to August
31, 2008.
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[*4] Petitioner husband was in Afghanistan or Iraq from August 29 through
December 12, 2007, and January 25 to April 28, 2008.1 While petitioner husband
was in Afghanistan, he lived and worked on the Kandahar Air Base. While
petitioner husband was in Iraq, he lived and worked on the Ballard Air Base. The
U.S. Air Force transported petitioner husband to and from Iraq and Afghanistan.
The U.S. military did not permit petitioner husband to leave the military base on
which he was working and living. The U.S. military also did not permit petitioner
husband’s family to live with him on either military base.
While in Iraq and Afghanistan petitioner husband worked 12-hour shifts
seven days a week. L3 deposited petitioner husband’s wages electronically into
his bank account. He had access to these funds while he was in Iraq and
Afghanistan.
During the years in issue petitioner husband worked in Utah. L3 also
required that he travel to California, Nevada, and Germany. While in Utah,
California, and Nevada, petitioner husband worked three days of 12-hour shifts
followed by four days off, then four days of 12-hour shifts followed by three days
off.
1
According to the opening briefs of both petitioners and respondent, the
parties stipulated the incorrect dates and that petitioner husband lived in
Afghanistan and/or Iraq sometime between August 29 and December 12, 2007.
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[*5] During the years in issue petitioner wife was self-employed as a lobbyist.
Her business was in Utah. The parties agree that petitioner wife earned and
received all of the self-employment income generated by her business, as
calculated by the parties in their stipulation of settled issues, for tax years 2006,
2007, and 2008.
Petitioners timely filed a Form 1040, U.S. Individual Income Tax Return,
for tax year 2007. They excluded $24,888 in wages that L3 had paid to petitioner
husband. Petitioners attached a Form 2555-EZ, Foreign Earned Income
Exclusion, to their tax return. On the Form 2555-EZ petitioners listed Utah as
their tax home. Petitioners also attached a letter requesting a waiver of “foreign
earned income tax 330 day requirement” (2007 request for waiver) to their tax
return. Petitioner husband signed the 2007 request for waiver.
In the 2007 request for waiver petitioner husband requested a “prorated
foreign earned income excludable amount of $24,888.00” because he was
“deployed under government orders to a combat zone in Iraq” for 106 days in tax
year 2007 (from August 29 to December 12). Petitioner husband noted that the
foreign earned income exclusion amount for that year was $85,700, or
approximately $235 per day. He concluded that “106 days times $234.79 per day
deployed in the combat zone equates to a prorated foreign earned income
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[*6] excludable amount of $24,888.00.” Petitioner husband wrote: “I was not
armed, equipped, or trained to operate in a combat environment therefore I was not
able to safely stay the required 330 days in Iraq.”
Petitioners filed a Form 1040 for tax year 2008 in June 2009. Petitioners
excluded $22,259 in wages that L3 had paid to petitioner husband. Petitioners
attached a Form 2555-EZ to their tax return and listed Utah as their tax home.
Petitioners also attached a letter requesting a waiver of “foreign earned income tax
330 day requirement” (2008 request for waiver) to their tax return. Petitioner
husband signed the 2008 request for waiver.
In the 2008 request for waiver petitioner requested a “prorated foreign
earned income excludable amount of $22,258.62” because he was “deployed
under Government orders, to a combat zones [sic] in Iraq” for 93 days in tax year
2008 (from January 27 to April 26). Petitioner husband noted that the foreign
earned income exclusion amount for that year was $87,600, or approximately $239
per day. He concluded that “93 days times $239.34 per day equates to a prorated
foreign earned income excludable amount of $22,258.62.” Petitioner husband
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[*7] wrote: “I was not armed, equipped, or trained to operate in a combat
environment therefore I was not able to safely stay the required 330 days in Iraq.”
Respondent disallowed the foreign earned income tax exclusions that
petitioners claimed for the years in issue.
Discussion
Generally, a taxpayer bears the burden of proving the Commissioner’s
determinations in a notice of deficiency are erroneous. Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Pursuant to section 7491(a), the taxpayer
may shift the burden of proof to the Commissioner in certain circumstances.
Petitioners have not claimed or shown that they meet the specifications of section
7491(a) to shift the burden of proof to respondent as to any relevant factual issue.
Section 61(a) provides that gross income means all income from whatever
source derived. Citizens of the United States are generally taxed on income
earned outside of the United States unless a specific exclusion applies. Specking
v. Commissioner, 117 T.C. 95, 101-102 (2001), aff’d sub nom. Haessly v.
Commissioner, 68 Fed. Appx. 44 (9th Cir. 2003), and aff’d sub nom. Umbach v.
Commissioner, 357 F.3d 1108 (10th Cir. 2003). Exclusions from income are
construed narrowly; taxpayers must bring themselves within the clear scope of the
exclusion. Id. at 101.
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[*8] Section 911(a) provides in relevant part that a qualified individual may elect
to exclude his or her foreign earned income from gross income. The exclusion
amount for calendar years 2002 and thereafter is limited to $80,000 per year,
indexed for inflation. Sec. 911(b)(2)(D)(i) and (ii). Section 911(b)(1)(A) defines
the phrase “foreign earned income” as “the amount received by such individual
from sources within a foreign country * * * which constitute earned income
attributable to services performed by such individual”. Section 911(d)(1) defines
the phrase “qualified individual” as follows:
(1) Qualified individual.--The term “qualified individual”
means an individual whose tax home is in a foreign country and who
is--
(A) a citizen of the United States and establishes to the
satisfaction of the Secretary that he has been a bona fide
resident of a foreign country or countries for an uninterrupted
period which includes an entire taxable year, or
(B) a citizen or resident of the United States and 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.
Thus, a taxpayer must both (1) maintain a tax home in a foreign country and (2)
either (a) establish a bona fide residency for an entire taxable year or (b) be
present in a foreign country during at least 330 full days in a 12-month period.
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[*9] An individual who fails to meet the 330-day physical presence test of
section 911(d)(1)(B) shall be treated as a qualified individual if he or she is
eligible for a waiver of period of stay in a foreign country pursuant to section
911(d)(4). Section 911(d)(4) provides in pertinent part:
(4) Waiver of period of stay in foreign country.--
Notwithstanding paragraph (1), an individual who--
(A) is a bona fide resident of, or is present in, a foreign
country for any period,
(B) leaves such foreign country after August 31, 1978--
(i) during any period during which the Secretary
determines, after consultation with the Secretary of State
or his delegate, that individuals were required to leave
such foreign country because of war, civil unrest, or
similar adverse conditions in such foreign country which
precluded the normal conduct of business by such
individuals, and
(ii) before meeting the requirements of such
paragraph (1), and
(C) establishes to the satisfaction of the Secretary that
such individual could reasonably have been expected to have
met such requirements but for the conditions referred to in
clause (i) of subparagraph (B),
shall be treated as a qualified individual with respect to the period
* * * during which he was a bona fide resident of, or was present in,
the foreign country * * *
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[*10] Section 911(d)(3) defines the term “tax home” as the individual’s home for
purposes of section 162(a)(2) (relating to travel expenses while away from home).
Section 162(a)(2) provides for a deduction for ordinary and necessary expenses
paid during the taxable year in carrying on a trade or business, including travel
expenses incurred while away from home in the pursuit of a trade or business. See
also Commissioner v. Flowers, 326 U.S. 465, 470 (1946). For purposes of section
162(a)(2), an individual’s tax home is “the vicinity of the taxpayer’s principal
place of employment and not where his or her personal residence is located.”
Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); see also Rev. Rul. 75-432,
1975-2 C.B. 60. If an individual is engaged in a trade or business at more than
one location during the tax year, the individual’s tax home is located at his or her
regular place of business or, if the individual has more than one regular place of
business, at his or her principal place of business. See sec. 1.911-2(b), Income
Tax Regs. If an individual has no regular or principal place of business because of
the nature of the business, then the individual’s tax home is his or her place of
abode in a real and substantial sense. Id.
An individual, however, shall not be treated as having a tax home in a
foreign country for any period during which his or her abode is within the United
States. Sec. 911(d)(3); see also Harrington v. Commissioner, 93 T.C. 297, 307
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[*11] (1989). Temporary presence of the individual in the United States does not
necessarily mean that the individual’s abode is in the United States. Sec. 1.911-
2(b), Income Tax Regs.
In prior section 911 cases, we have examined and contrasted the taxpayer’s
domestic ties (i.e., his or her familial, economic, and personal ties to the foreign
country in which he or she claims a tax home) in order to determine whether his or
her abode was in the United States during a particular period. Harrington v.
Commissioner, 93 T.C. at 307-308; see also Struck v. Commissioner, T.C. Memo.
2007-42; Moudy v. Commissioner, T.C. Memo. 1989-216; Benham v.
Commissioner, T.C. Memo. 1989-215; Bosarge v. Commissioner, T.C. Memo.
1989-15; Hummer v. Commissioner, T.C. Memo. 1988-528; Lemay v.
Commissioner, T.C. Memo. 1987-256, aff’d, 837 F.2d 681 (5th Cir. 1988); Bujol
v. Commissioner, T.C. Memo. 1987-230, aff’d without published opinion, 842
F.2d 328 (5th Cir. 1988). Even though a taxpayer may have some limited ties to a
foreign country, if the taxpayer’s ties to the United States remain strong, we have
held that his or her abode remained in the United States, especially when his or her
ties to the foreign country were transitory or limited. Harrington v. Commissioner,
93 T.C. at 308.
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[*12] The taxpayer husband in Harrington resided in Texas with his family before
he went to Angola as part of his work for a company. We found that the taxpayer
husband maintained strong ties to the United States while he was in Angola: he
maintained a bank account in Texas and a Texas driver’s license and had two
vehicles registered in Texas. Id. at 309. In contrast, we found that the taxpayer
husband’s ties to Angola were almost nonexistent: he did not own land or
vehicles, he did not travel, he did not bring his family with him (they were
prohibited from accompanying him or staying with him), and he did not maintain a
bank account in Angola. Id. We determined that the taxpayer husband’s ties to
Angola were “severely limited and transitory”, and we held that the taxpayer
husband’s abode for purposes of section 911 remained in the United States. Id.
The same types of factors that supported the holding in Harrington apply
here. Petitioner husband maintained strong ties to his home in Utah. He lived on
U.S. Air Force bases when he was in Iraq and Afghanistan and was not allowed to
leave the bases. His family did not go with him, and he did not travel. He did not
open a bank account in Iraq or Afghanistan. Like the taxpayer husband in
Harrington, petitioner husband had ties to Iraq and Afghanistan that were severely
limited and transitory during the years in issue.
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[*13] Petitioners contend that even if petitioner wife had been allowed to join
petitioner husband in Iraq or Afghanistan, she nevertheless would have been
unable to go because of her separate career. Petitioners also contend that
petitioner husband maintained a residence in Utah because of petitioner wife’s
business. Even if these contentions were true, they would not outweigh petitioner
husband’s limited ties to Iraq and Afghanistan.
We find that petitioner husband’s abode was in the United States during the
years in issue. Therefore, petitioners’ tax home was in the Untied States (and not
in a foreign country) for the purposes of section 911(d)(1) during the years in
issue.
Petitioners contend that petitioner husband’s residence was in Iraq or
Afghanistan or both during the years in issue. They claim that his primary place of
business was in Afghanistan and/or Iraq because he was “ordered to be present in
these countries for an entire 12 months”. Petitioners refer to the travel
authorization that L3 received from the Department of the Air Force, which
authorized petitioner husband to travel from August 2007 to August 2008. Travel
authorization alone is not proof that petitioner husband’s primary place of
business (and therefore tax home) was in a foreign country. Petitioner husband’s
temporary location in Afghanistan and Iraq does not change the fact that
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[*14] petitioners’ tax home was in the United States. Petitioners have failed to
show that petitioner husband established a residence in a real or substantial sense
in Afghanistan and/or Iraq in the years in issue.
Petitioners contend that even if we found that petitioner husband’s primary
place of business was not in Iraq or Afghanistan, his tax home was still located in
those countries “because that is where he resided for most of these tax years”.
There is nothing in the record that shows that petitioner husband resided in
Afghanistan and/or Iraq for most of the years in issue. For tax year 2007
petitioner husband worked in Afghanistan and/or Iraq for no more than 106 days.
For tax year 2008 petitioner husband worked in Iraq and/or Afghanistan for no
more than 93 days. Less than half of his income was derived from services
performed in Afghanistan and/or Iraq.
Petitioner husband’s employer, L3, had its principal place of business in
Salt Lake City, Utah, during the years in issue. Petitioners maintained a residence
in Utah. The parties stipulated that petitioner husband worked in Utah during the
years in issue. When petitioner husband was in the country, he worked either at
his Utah residence or at L3’s Salt Lake City office. Petitioners contend that
petitioner husband worked in California, Nevada, and Germany during the years in
issue; however, petitioners have provided no evidence regarding how many days
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[*15] he worked in those locations. Moreover, the address on petitioners’ tax
returns for the years in issue was in Utah, and petitioners wrote on their Forms
2555-EZ that their tax home was in Utah during those years.
We thus find that petitioners’ tax home was in the United States during the
years in issue. Because we have determined that petitioners’ tax home was in the
United States, we do not need to determine whether petitioner husband was a bona
fide resident of Afghanistan and/or Iraq or met the 330-day physical presence test
pursuant to section 911(d)(1)(A) and (B). See Stright v. Commissioner, T.C.
Memo. 1993-576. We note, however, that petitioners also failed to meet the
specifications in section 911(d)(1)(A) and (B). Petitioners did not argue that
petitioner husband was a bona fide resident in either country, and petitioner
husband was not in Afghanistan and/or Iraq for 330 full days during any 12-month
period in the years in issue. Moreover, petitioner husband’s time in Germany fails
to get him over the 330-day hurdle because petitioners failed to provide any proof
regarding how long he was in Germany.
Petitioners likewise failed to meet the requirements for a waiver of period of
stay in a foreign country, pursuant to section 911(d)(4). The test for the waiver of
period of stay in a foreign country is conjunctive: a taxpayer must meet all three
requirements set forth in section 911(d)(4)(A)-(C).
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[*16] Petitioners failed to meet the requirements under section 911(d)(4)(B)
because they failed to show that the Secretary determined that individuals were
required to leave Afghanistan and/or Iraq because of war, civil unrest, or similar
adverse conditions. The Secretary publishes a list of foreign countries where war,
civil unrest, or similar adverse conditions exist for purposes of section
911(d)(4)(B). Sec. 1.911-2(f), Income Tax Regs. No list was published for 2007.
The list that was published for 2008 does not include Iraq or Afghanistan. See
Rev. Proc. 2009-22, sec. 2.04, 2009-16 I.R.B. 862, 863.
We thus find that petitioner husband was not a qualified individual under
section 911(d)(1) during the years in issue. Accordingly, we hold that petitioners
failed to meet the criteria to exclude foreign earned income pursuant to section
911(a) for the years in issue.
Contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.