T.C. Summary Opinion 2009-115
UNITED STATES TAX COURT
PAUL D. AND ALICIA L. MUSSHAFEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20482-07S. Filed July 23, 2009.
Paul D. and Alicia L. Musshafen, pro sese.
William F. Castor, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Unless otherwise indicated, subsequent
section references are to the Internal Revenue Code in effect for
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the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined deficiencies in petitioners’ Federal
income taxes for 2004 and 2005 of $7,916 and $8,324,
respectively, together with accuracy-related penalties under
section 6662(a) of $1,583.20 and $1,664.80, respectively. After
petitioners’ concession, the issues for decision are: (1)
Whether petitioners are entitled to a foreign earned income
exclusion under section 911(a) for 2004 and 2005; and (2) whether
petitioners are liable for accuracy-related penalties under
section 6662(a) for 2004 and 2005.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
Paul D. Musshafen (petitioner) has worked for Parker
Drilling Management Services, Inc. (PDMS), located in Houston,
Texas, since 1981. PDMS operates a production oilfield in
Kuwait. PDMS has assigned petitioner to work in several
different countries over the years, including Ecuador, Bolivia,
and Kuwait. Petitioner was assigned to work in Kuwait in 2002 as
an onshore rig supervisor at a drilling rig site. Petitioner was
working in Kuwait during the 2004 and 2005 tax years. At the
time of trial he was working at a rig on an oilfield in the
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Kuwaiti desert near Amadhi, Kuwait, that was owned by the Kuwait
Drilling Co.
During the entire time that petitioner has spent in Kuwait
he has lived in employer-furnished housing on the rig site, which
is a 45-minute drive from Kuwait City. In addition to housing,
PDMS provided petitioner with food and medical services.
Generally, other than being driven between the airport and the
rig site, petitioner did not leave the site because of PDMS’
security precautions. However, on occasion, he traveled to
Kuwait City under the recommendation that he stay within the area
secured by the Kuwaiti military. Petitioner worked at the
jobsite on an alternating 35-days-on, 35-days-off schedule.
During petitioner’s 35-day duty periods he worked 12-hour days
and was on call 24 hours per day. Petitioner does not presently
speak Arabic, but he is being taught the language at his jobsite.
Petitioner spent his 35-day-off-duty periods in Chickasha,
Oklahoma. Alicia Musshafen, a homemaker, and their daughter, who
was 16 years old in 2004, reside in Chickasha, Oklahoma, where
petitioners jointly own a house and a motor vehicle and maintain
a bank account. Petitioner’s paychecks were directly deposited
into the bank account in Oklahoma. Petitioner also has an
Oklahoma driver’s license, a U.S. passport, a resident visa
sponsored by PDMS and issued by the Kuwaiti Government, and a
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Kuwaiti identification card. Any taxes or fees petitioner is
required to pay to the Kuwaiti Government are paid by PDMS.
Mrs. Musshafen and petitioner’s daughter have never visited
Kuwait, primarily because: (1) Their daughter attended high
school in Oklahoma; (2) petitioner returned to his hometown
during his 35-day-off-duty periods, which eliminated the need for
his family to visit him in Kuwait; and (3) there were safety and
security reasons that weighed against a visit to Kuwait.
Petitioners have elected the foreign earned income exclusion
since 1992. Ms. Thomas, a certified public accountant (C.P.A.),
has prepared petitioners’ tax returns since 1991. In order to
determine whether petitioners were entitled to the foreign earned
income exclusion, Ms. Thomas performed her own research and
consulted with an expert at the Oklahoma Society of C.P.A.s and
with an attorney. Petitioner and Ms. Thomas together concluded
that petitioners were entitled to the foreign earned income
exclusion on the basis of her research and consultations.
Discussion
I. Foreign Earned Income Exclusion
U.S. citizens are required to include in gross income all
income from whatever sources derived, unless a specific income
exclusion applies. See sec. 61(a); Arnett v. Commissioner, 126
T.C. 89, 91 (2006), affd. 473 F.3d 790 (7th Cir. 2007).
“Exclusions from income are construed narrowly, and taxpayers
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must bring themselves within the clear scope of the exclusion.”
Arnett v. Commissioner, supra at 91-92. There is a specific
income exclusion for a qualified individual whose tax home is in
a foreign country. Sec. 911(a), (d). At the election of a
qualified individual the foreign earned income of such individual
is excluded from gross income and exempt from taxation. Sec.
911(a)(1). A qualified individual is an individual whose tax
home is in a foreign country and who is either: (1) A citizen of
the United States and a bona fide resident of a foreign country
for an uninterrupted period which includes an entire taxable year
(the bona fide residence test) or (2) a citizen or resident of
the United States who, during any period of 12 consecutive
months, is present in a foreign country during at least 330 full
days in such period (the physical presence test). Sec.
911(d)(1). Petitioner bears the burden of proving that he is a
qualified individual entitled to the foreign earned income
exclusion. See Rule 142(a); Nelson v. Commissioner, 30 T.C.
1151, 1154 (1958); Cobb v. Commissioner, T.C. Memo. 1991-376.
The term “tax home” means an individual’s home for purposes
of section 162(a)(2) (relating to travel expenses while away from
home); however, an individual shall not be treated as having a
tax home in a foreign country during any period for which his
abode is within the United States. Sec. 911(d)(3).
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Abode has been variously defined as one’s home,
habitation, residence, domicile or place of dwelling.
Black’s Law Dictionary 7 (5th ed. 1979). While an
exact definition of abode depends upon the context in
which the word is used, it clearly does not mean one’s
principal place of business. Thus abode has a domestic
rather than vocational meaning, and stands in contrast
to tax home as defined for purposes of section
162(a)(2). * * *
Bassett v. Commissioner, T.C. Memo. 1988-218 (quoting Bujol v.
Commissioner, T.C. Memo. 1987-230, affd. without published
opinion 842 F.2d 328 (5th Cir. 1988) (quotation marks omitted).
A taxpayer’s abode is the location where he has strong economic,
family, and personal ties. Bujol v. Commissioner, supra.
Several previous cases have dealt with this precise issue,
including Brobst v. Commissioner, T.C. Memo. 1988-456; Lemay v.
Commissioner, T.C. Memo. 1987-256, affd. 837 F.2d 681 (5th Cir.
1988); and Bujol v. Commissioner, supra. Although Lemay and
Bujol involved taxpayers working on an offshore drilling rig in
the territorial waters of a foreign country and Brobst involved a
taxpayer working on an onshore oil storage facility, the facts of
the three cases are not materially different from those of the
present case. In Brobst, Lemay, and Bujol the taxpayers had
alternating work schedules of 28 days on duty and 28 days off
duty, with off-duty periods spent in the United States. In all
three cases the taxpayers lived in employer-furnished housing,
had little contact with foreign nationals, and maintain a home
and family in the United States. In all three cases the Court
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concluded that the taxpayers were not entitled to the foreign
earned income exclusion because their abode was in the United
States.
Similar to the taxpayers in the cases cited above,
petitioner had a rotating work schedule that placed him in Kuwait
every other 35-day period. He spent his 35-day-off-duty periods
at his residence in Oklahoma. Therefore, during 2004 and 2005 he
would have spent approximately 182.5 days in Kuwait and 182.5
days in Oklahoma. Petitioner’s wife and daughter lived in
Oklahoma; petitioners’ daughter attended high school in Oklahoma;
and petitioners jointly owned a house and motor vehicle and
maintain a bank account in Oklahoma. Petitioner also had an
Oklahoma driver’s license, a U.S. passport, a resident visa
sponsored by PDMS and issued by the Kuwaiti Government, and a
Kuwaiti identification card. Further, petitioner has stipulated
that he was generally confined to the jobsite for security
reasons and, therefore, could have had only very limited
interaction with Kuwaiti nationals.
Petitioner testified that he is contemplating moving his
family to Kuwait after his daughter graduates from high school,
renting an apartment or obtaining housing in an expatriate
community, and retiring there. Petitioner added that Kuwait
would be a nice place to retire because, although the climate is
somewhat inhospitable, the Kuwaitis with whom he has come in
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contact are very friendly. Even if we were to find petitioner’s
comments to be realistic, they are not dispositive in determining
the location of his abode under the statute.
On the basis of the entire record, we find that petitioner’s
economic, family, and personal ties were in Oklahoma during 2004
and 2005. Petitioner’s abode was in Oklahoma; therefore, he
could not have a tax home in a foreign country. See sec.
911(d)(3). Petitioner’s tax home must also have been in
Oklahoma. Having determined that petitioner’s tax home was in
Oklahoma during the 2004 and 2005 tax years, we conclude that
petitioner is not a qualified individual, and we need not inquire
further as to whether petitioner meets the bona fide residence or
physical presence tests. Respondent’s determination is
sustained, and petitioner is not entitled to the foreign earned
income exclusion for 2004 and 2005.
II. Accuracy-Related Penalties
Section 6662(a) and (b)(1) and (2) provides for a penalty
equal to 20 percent of the portion of an underpayment of tax
attributable to negligence or disregard of rules or regulations
or any substantial understatement of income tax. “[T]he term
‘negligence’ includes any failure to make a reasonable attempt to
comply with the provisions” of the Internal Revenue Code “and the
term ‘disregard’ includes any careless, reckless, or intentional
disregard.” Sec. 6662(c). A substantial understatement exists
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“if the amount of the understatement for the taxable year exceeds
the greater of--(i) 10 percent of the tax required to be shown on
the return for the taxable year or (ii) $5,000.” Sec.
6662(d)(1)(A).
However, a taxpayer will not be liable for an accuracy-
related penalty under section 6662(a) if the reasonable cause
exception of section 6664(c) applies. “No penalty shall be
imposed * * * with respect to any portion of an underpayment if
it is shown that there was a reasonable cause for such portion
and that the taxpayer acted in good faith with respect to such
portion.” Sec. 6664(c)(1). “[T]he most important factor is the
extent of the taxpayer’s effort to assess the taxpayer’s proper
tax liability.” Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioners engaged Ms. Thomas, a C.P.A., to prepare their
Federal income tax returns and determine whether they were
eligible for the foreign earned income exclusion. Ms. Thomas
conducted her own research and consulted an expert at the
Oklahoma Society of C.P.A.s and an attorney. Ms. Thomas reached
the reasonable, albeit incorrect, conclusion that petitioner was
entitled to the foreign earned income exclusion because his tax
home was in Kuwait. Tax home and abode are vague legal concepts
that are not clearly defined by statute and therefore require a
great deal of subjective analysis. Given the nature of this area
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of Federal income tax law, it does not necessarily follow that an
incorrect conclusion is also an unreasonable conclusion.
Petitioners, after considering all of the information
available to them and in good faith reliance on Ms. Thomas’
professional opinion, claimed the foreign earned income exclusion
for both years. Taxpayers and tax professionals are often
required to make informed decisions relating to ambiguous areas
of tax law. It follows that taxpayers and tax professionals will
not always make the correct decision.
The record establishes that petitioners acted with
reasonable cause and in good faith. In this case it is
reasonable for the petitioners to rely on the advice given them
by Ms. Thomas. Therefore, we hold that petitioners are not
liable for the penalties pursuant to section 6662(a).
To reflect the foregoing,
Decision will be entered
for respondent as to the
deficiencies and for
petitioners as to the
accuracy-related penalties.
Musshafen v. Comm'r
Court: United States Tax Court
Date filed: 2009-07-23
Citations: 2009 T.C. Summary Opinion 115, 2009 Tax Ct. Summary LEXIS 115
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