TAX COURT OPINION

Case: Timothy E. & Mary L. Breeding
Docket Number: 16448-04
Judge: Kroupa
Opinion Type: memo
Filed: 08/08/2006
Pages: 10

ADM, RECORD3D RVICE C L. STAT. | | . JUDGE . FI'.S T.C. Memo. 2006-159 UNITED STATES TAX COURT KEVIN L. AND VICTORIA L. HARGROVE, ET AL.,¹ Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 16441-04, 16442-04, 16443-04, 16444-04, 16448-0A__ Filed August 8, 2006. Richard Edward Preston and Alvin S. Brown, for petitioners. Paul T. Butler, for respondent. MEMORANDUM OPINION KROUPA, Judge: Respondent determined deficiencies in petitioñers' Federal income taxes for 1999, 2000, 2001, and 2002 ¹This case is consolidated for briefing and opinion with the cases of William C. and Deborah L. Kirkpatrick, Docket No. 16442-04, David J. and Ann M. Nakagawa, Docket No. 16443-04, Robert C. and Yvonne R. Anthony, Docket No. 16444-04, and Timothy E. and Mary L. Breeding, Docket No. 16448-04. SERVED AUG 8 2006 Respondent determined that petitioners Timothy E. and. Mary L. Breeding were liable for a $13,232.deficiency and a $2,232 accuracy-related penalty for 2000. For 2001, respondent determined that petitioners Mr. and Mrs. Breeding were liable for a $13,482 deficiency and a $2,284 accuracy-related penalty. After concessions,4 there are three issues for decision. The first issue is whether petitioners may exclude the costs of lodging provided by their employer from income under section 119. (cid:16)042We hold that they may not. The second issue is whether Mr. and Mrs. Hargrove and Mr. and Mrs. Breeding are entitled to exclude certain allowances under section 912. We hold that they are not. The third issue is whether Mr. and Mrs. Hargrove and Mr. and Mrs. Breeding are liable fo.r accuracy-related penalties under section 6662(a). We hold that they are. Background These cases were submitted fully stipulated pursuant to Rule 122, and the facts are so found. The stipulations of facts and the accompanying exhibits are incorporated by this refe.rence. All petitioners resided outside the United States at the times they filed their petitions. .One or both petitioners in each.case were employees of TRW Overseas Inc. (TRW) during the relevant years. These petitioners worked for TRW in Pine Gap, Australia, at the Joint Defense Space Research Facility/Joint Defense Space Communication Station (the 4Respondent concedes that Mr. and Mrs. Nakagawa are not liable for accuracy-related penalties under sec. 6662(a). -5- to attach copies of the .clpsing agreements to their respective returns. No petitioner attached a copy of his or her closing agreement to the return for any of the relevant years. Mr. and Mrs. Hargrove did not retain the s.ervices of a . preparer to assist them in filing their returns for 2000 and 2001. Mr. and Mrs. Hargrove did not seek advice from any accountant, attorney, or other tax professional with respect to their exclusions of income under sections 912 and 119. Mr. and (cid:16)042Mrs. Hargrove .reported they owed tax of $4,719 for 2000 and $4,123 for 2001.5 Mr. and Mrs. Breeding filed their original returns for 1998 and 1999 without the assistance of a preparer. They then retained Bob Ross, a certified public accountant located in California, on the advice of coworkers at.the defense facility. Mr. Ross filed amended returns for 1998 and 1999 on behalf of Mr. and Mrs. Breeding excluding income under sections 119 and 912. Mr. and Mrs. Breeding's original returns for 2000 and 2001, prepared with the assistance of Mr. Ross, also excluded income under sections 119 and 912. Mr. and Mrs. Breeding reported they owed tax. of $22,235 for 2000 and $23,169 for 2001.6 Respondent disallowed·certain deductions and determined that petitioners:are not entitled to certain exclusions they claimed sThis is the sum stated in the deficiency notice. We note that the parties stipulated that Mr.. and Mrs. Hargrove reported amounts slightly different. 6This is the sum stated in the deficiency notice. We note that the parties stipulated that Mr. and Mrs. Breeding reported amounts slightly different. -7- $36,651 for 2001 and that Mr. and Mrs. Breeding are liable for accuracy-related penalties. Petitioners timely filed petitions. Discussion We are asked to decide whether petitioners may exclude the value of lodging provided by their employer under section 119 and whether certain petitioners are entitled to exclusions from income for certain allowances under section 912. We are also asked to consider whether certain petitioners are liable for accuracy-related penalties. We begin with the burden of proof. I. Burden of Proof In general, the Commissioner's determinations in the deficiency notice are presumed correct,. and the taxpayer bears the burden of proving that the Commissioner's determinations are in error. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift to the Commissioner under certain circumstances, however, if the taxpayer introduces credible evidence and establishes that he or she substantiated items, maintained required records, and fully cooperated with the Commissioner's reasonable requests. Sec. 7491(a) (2) (A) and (:B). Petitioners repeatedly failed to cooperate with respondent to prepare these cases for trial and were admonished by the Court when the case was called -for trial. Petitioners have therefore not met the requiremen,ts of section 7491(a) (2)(B), and the burden of proof remains with them. _9_ Income Tax Regs. .The phrase "on the business premises" has been construéd to mean either (1) living quarters that constitute.an integral part of the business property or (2) premises on which the employer carries on some of its business activities. See Dole v. Commissioner, supra at 707. Living quarters are generally an integral part of business property if they are physically located on the employer's premises. Living quarters are also generally an integral part of business property if the employee does enough work for the employer at the living quarters so that the living quarters are identified with the interests of the business and serve important business functions. See Adams v. United States, 218 Ct. C1. 322, 585 F.2d 1060, 1066-1067 (1978); Johnson v. Commissioner, T.C. Memo. 1983-479. The home of a high-ranking executive has been considered an integral part of the employer's business when the executive held meetings and business social functions in his home, raising the status of his company. Adams v. United States, supra. Similarly, a hotel manager's residence has been considered an integral part of the employer's business when the hotel manager could observe the hotel from his home, worked from home in the evenings, and also occasionally entertained important hotel guests in his home. Lindeman v. Commissioner, 60 T.C. 609 (1973). Conversely, living quarters physically located off the worksite are not integral to the employer's business unless the -11- Petitioners attempt to redefine their worksite to include .the lodging units in Alice Springs by a broad reading of the treaty under which the defense facility was established.9 We find no merit to their argument. In fact, neither the treaty under which the defense facility was authorized nor its amendments and extensions refers to housing units or lodging for employees." There is no mention of contractors' living quarters and nothing in the treaty implies that contractors' living (cid:16)042quarters should be considered part of the defense facility. III. Exclusion of Living Allowances We next address the argument of petitioners Mr. and Mrs. Hargrove and Mr. and Mrs. Breeding that they are entitled to exclude certain living allowances for the relevant years under Agreement Relating to the Establishment of a Joint Defence Exchange of Notes Constituting an Agreement 9The defense facility was authorized under a treaty between the United States and Australia that became effective on Dec. 9, 1966. Space Research Facility, U.S.-Austl., Dec. 9, 1966, 17 U..S.T. 2235 (the Treaty). The Treaty has been amended and extended since 1966. Further Extend in Force the Agreement Relating to the Establishment of a Joint Defence Facility at Pine Gap of 9 December 1966, as Amended, U.S.-Austl., Jun. 4,.1998, 2171 U.N.T.S. 89; Dec. 9, 1966, As Amended and Extended, Relating to the Establishment of a Joint Defence Space Research Facility, U.S.- Austl., Nov. 16, 1988, State Dept. No. 89-2; Agreement Amending and Extending the Agreement of Dec. 9, 1966, U.S.-Austl., Oct. 19, 1977, 29 U.S.T. 2759. Agreement Amending and Extending the Agreement of to "The treaty generally provides for establishing and operating a facility for general defense research in the space field in Australia. Treaty, art. 1. treaty, contractors' derived in Australia for Australian tax purposes as long as it is Id., not exempt art. 9(1). this provision would entitle Australia to tax it instead. from and is subject to tax in the United States. We note that under the to have been If the lodging income were exempt income shall be deemed not from U.S. tax, -13- and 912. We disagree. Article 7 of the treaty defines the term "United States civilian employee" for purposes of the treaty and the related Status of Forces Agreement, not for the Internal Revenue Code. Moreover,."a civilian employee of the United States government employed in Australia in connection with the facility" is not defined in the treaty to. include contractors or their employees. Contractors and their personnel are. specifically referred to as such in several other parts of the treaty, such as in paragraph (1) of article 9. Even if we were to find that petitioners were employees of the U.S. Government, they would still not be entitled to exclude income under section 912 because they have not shown that they meet the other requirements of.section 912·. Petitioners introduced no evidence concerning any allowances they received, nor have they shown that they received a cost of living allowance, foreign area allowance under chapter 9 of title I of the Foreign Service Act of 1980, .section 4 of the Central Intelligence Agency Act of 1949, as amended, or any other allowance described in section 912. See sec. 912. We conclude that Mr. and Mrs. Hargrove and Mr. and Mrs. Breeding are not entitled to exclude any amounts from income under section 912. IV. Accuracy-Related Penalty We next consider whether petitioners Mr. and Mrs. Hargrove and Mr. and Mrs. Breeding are liable for accuracy-related penalties under section 6662(a) for the relevant years. -15- understated their tax by $11,814 for 2000 and $8,497 for 2001. Accordingly, Mr. and Mrs. Hargrove have understated their tax for each relevant year by the greater of 10 percent of the tax required to be shown on the return, or $5,000. Mr. and Mrs. Breeding reported they owed income tax of $22,235 for 2000 and $23,169 for 2001.¹³ Respondent determined that they owed $35,467 for 2000 and $36,651 for 2001. Mr. and Mrs. Breeding understated their tax by $13,232 for 2000 and $13,482 for 2001. Accordingly, Mr. and Mrs. Hargrove have understated their tax for each relevant year by the greater of 10 percent of the tax required to be shown on the return, or $5,000. The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment, however, if it is shown that there was reasonable cause for the taxpayer's position and that the taxpayer acted in good faith with respect to that portion. Sec. 6664(c)(1); sec. 1.6664-4 (b), Income Tax Regs. The determination of whether.a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances, including the taxpayer's efforts to assess his or her proper tax liability and the knowledge and experience of the taxpayer. Sec. 1.6664- 4(b) (1), Income Tax Regs. The taxpayer bears the burden of proof ¹³None of ·petitioners' returns for the relevant years was introduced in evidence. the deficiency notice for the amounts petitioners reported on their returns. amounts we use and the amounts that petitioners stipulated, but this difference is immaterial. We note there is a slight discrepancy between the We have used the amounts reflected in -17- justify reliance or that Mr. and Mrs. Breeding provided the preparer all relevant information. See Neonatology Associates, P.A. v. Commissioner, supra. We therefore do not find that Mr. and Mrs. Breeding have shown that it was reasonable to rely on this tax return preparer. After considering all of the facts and circumstances, we find that Mr. and Mrs. Hargrove and Mr. and Mrs. Breeding have failed to establish that they had reasonable cause and acted in good faith with respect to their respéctive underpayments. Accordingly, we sustain respondent's determination as to Mr. and Mrs. Hargrove and Mr. and Mrs. Breeding for the accuracy-related penalties for the relevant yeafs. We have. considered all remaining.arguments the parties made and, to the extent not addressed, we conclude they are irrelevant, moot, or meritless. To reflect the foregoing and the concessions of the parties, Decisions will be entered for respondent in Docket Nos. 16441-04, 16442-04, 16444-04, and 16448-04. Decision will be entered for respondent in . Docket No. 16443-04 with respect to the deficiencies and for petitioners with respect to the section 6662(a) penalties. TIMOTHY E. & MARY L. BREEDING, Petitioners, v. COMMISSIONER OF INTENAL REVENUE, Respondent. ) . ) ) ) ) ) ) ) Docket No. 16448-04 PETITIONER'S MOTION FOR RECONSIDERATION Counsel for Petitioner: ALVIN S. BROWN Alvin Brown & Associates, LLC Tax Court Bar No. BA0633 9667 Main Street Suite B Fairfax, VA 22031 Telephone: (703) 425-1400 Counsel for Respondent: PAUL T. BUTLER General Attorney (Small Business/ Self-Employed) Tax Court Bar No. BP0403 P.O. Box 44085 Washington, DC 20026 Telephone: (202) 874-1832 Petitioners respectfully move this'Court, pursuant to Rule 161 of the Tax Court Rules, for reconsideration of the opinion and findings of fact of this Court in T.C. Memo. 2006-159, filed August 8, 2006. The bases for this motion are as follows: A. THE COURT'S CONCLUSION THAT PETITIONERS REPEATEDLY FAILED TO COOPERATE WITH RESPONDENT TO PREPARE THE CASES FOR TRIAL AND WERE ADMONISHED BY THE COURT WHEN THE CASE WAS CALLED FOR TRIAL IS ERRONEOUS, THUS NEGATING THE APPLICATION OF SECTION 7491(A)(2)(B). 1. Petitioners suggested consolidation of the cases in order to save the time of all of the parties and the Court and to minimize expenses U.S. TAX COURT DE N IE D SEP 2 1 2006 (Signed) Diane LW 2 JUDGE