TAX COURT OPINION

Case: William D. & Yen-Ling K. Rogers
Docket Number: 3477-07
Judge: Wherry
Opinion Type: memo
Filed: 05/20/2009
Pages: 16

i T . C .' Memo . 2009-11 1 UNITED, STATES TAX COURT WILLIAM D . AND YEN-'LING K .I ROGERS,Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 3477-07 . Ps are husband and wife . In 2002 and 2003 they were U .S . citizens residing in Taiwan R .determined deficiencies in Ps' Federal income tax . for 2002 and 2003 on the basis that Ps had claimed excessiv e exclusions under sec .911, I .R .C ., for income Mrs . Rogers earned while working as a flight attendant . Held : Ps claimed excess liable for deficiencies . William D . and Yen-Ling K . Rogers, pro sese . Emily Giometti , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINIO N WHERRY, Judge : This case is before the Court on a petition for redetermination of deficiencies for petitioners' 2002 and 2003 tax years . The issue for decision is whether petitioners are entitled to exclude under section 9111 all wage income Mrs . Rogers-earned in 2002 and 2003 while working for United Airlines , Inc . '(United), as a flight attendant . 10 FINDINGS OF FAC T During 2002 and 2003 petitioners, who are husband and wife, were U .S . citizens residing in Taiwan . Mrs' Rogers was employed I by United as a flight attendant based at Hong Kong Internationa l Airport . United required Mrs . Rogers to perform preboarding and postarrival services on every flight on which she worked . Mrs . Rogers was required to check in 1 hour and 45 minutes before the departure of a flight . And she was required to perform approximately 30 minutes of postarrival .services . United paid Mrs . Rogers for her actual flight time--from when an airplane pushed back from the terminal until it reached its destination . United did not pay Mrs . Rogers extra amounts for preboarding and postarrival services . ' 'All section references are to the Internal Revenue Code of 1986, as amended and in effect for the tax years at issue . Rule references are to the Tax Court Rules of Practice and Procedure . During 2002 Mrs . Rogers worked on 6 round-trip flights fro m Hong Kong to San Francisco and 1 7 round-trip flights from Hong ; Kong to Chicago . 2 . During 2003 she worked on the followin g flights :. ( 1) 8 round - tripjflights - from Hong Kong to-Sa n Francisco ; (2) 12 round-trip flights from Hong Kong to Chicago; } (3) 6 . flights from Hong Kong to Tokyo to San Francisco and then1~1 back to Hong Kong via Tokyo ; ( 4) flight from Hong Kong to Tokyo l I to Chicago-and then back to Hong Kong via Tokyo ; and (5) 3 flights from Hong Kong to Incheon (Seoul) to Tokyo to Beijin g Tokyo to .Seoul to Hong Kong . I 2Each round-trip flight from Hong Kong to San Francisco required Mrs . Rogers to perform approximately 1,575 minutes of in-flight services, excluding any preboarding .and postarrival services . Each round-tripiflight from Hong Kong to Chicago required her to perform approximately 1',684 minutes of in-flight~ services, excluding any preboarding and postarrival services . k Each of the six flights from Hong Kong to Tokyo to San Francisco and then back to ;Hong Kong via Tokyo required Mrs . 1I Rogers to perform approximately 2,000 minutes of in-flight !"1 services, including time spent during each layover. in Tokyo, but' excluding any other preboarding .and postarrival services . 'Thew " flight from Hong Kong to Tokyo to Chicago and then back to Hong'; Kong' via Tokyo required Mrs; . Roge Is to perform approximatel y 2,257 minutes of in-flight ; services, including .time spent during each layover in Tokyo, but excluding any other preboarding and' postarrival services . Each of the three flights from Hong Kong to Seoul to Tokyo to Beijing to Tokyo to Seoul to Hong Kong required Mrs . Rogers to perform approximately 2,205 minutes of in-flight services, including time spent during each layover in Seoul and Tokyo, : but excluding any other preboarding and postarrival services . . United paid Mrs . Rogers $52,296 .51 in wages in 2002 and 60,651 .,89 in wages in 2003 . To enable its employees to y determine the percentage of, .wages earned for services rendered in . or above a foreign country, United generated and made available on its,,Web site duty time apportionment forms .(DTAs) .9 . '~ Petitioners filed Forms 1040, U .S . Individual Income Tax Return , for 2002 and 2003 claiming that all of-Mrs . ~Rogers's wage income was foreign earned income which, petitioners 6uld exclude' fro m totallincome for Federal income tax purposes . 5 On . November 28, 2006, respondent issued petitioners' :a notice of deficiency for their 2002 and 2003 tax years in whic h respondent determined respective deficiencies of $5,434 an d Petitioners, prepared their own DTA allocating Mrs . Rogers's United income for the round-trip flights from Hong Kong to San Francisco, from Hong Kong .to Chicago, and from Hong Kong to Tyokyo ; That DTA allocates percentages significantly higher than thosei,in,United's DTAs to time spent-over foreign countries--in other words, in a ,manner more favorable to etitioners . .For example, for the round-trip flights from Hong Kong to San Francisco, the four United DTAs in evidencedifor trips between those :'cities allocated 20 .8 percent (as of ',8/27/02") and' 14 .4 percent (as of "1/31/00", "3/4/05", and "3/31/07") to time spent ovi (,,723 minutes .divided by 1539 total . flight minutes) of each of thosei.f.lights to time spent-over foreign . countries . The big difference;, is attributable to a factual disute . as to time spen t flying over international waters versus time spent flying, over foreign countries . er foreign countries . Petitioners' DTA allocates 46 .97,; percent 1; s SPetitioners reported Mrs . Rogers'swage income but,on line 21 of both Forms 1040 petitioners listed the entire amount of. her w'agesj in parentheses and-wrote "2555-EZ" . Attached to those returns were Forms 2555-EZ, Foreign Earned Income Exclusil'on .. . 'G - 5 $8,376 .6 The deficiencies resulted from the disallowance of $20,221 of the claimed exclusion for 2002 and $29,916 of th e claimed exclusion for 2003 .' Respoldent's tax compliance officer ; (TCO), Vivian Kong, computed the deficiency as follows . Usin g the DTA petitioners prepared , which covered only the round-trip flights from Hong Kong to San Francisco and from Hong Kong t o Chicago, TCO Kong calculated the respective percentages of tim e Mrs . Rogers spent performing in-flight services over foreig n territories, U .S . territori e 1 1 trip .' For routes not covered by pletitioners' DTA, TCO Kong I . I; calculated the necessary percentages using United's DTAs, whic h s, andlinternational waters for each i wl I multiplied those percentages by the total amount of Mrs . Rogerss, l wage income from United for, each of. the tax years at issue . I Petitioners filed a timely pet ition with .this Court . . At th e . 1A . time they filed their petiti on, pet itioner s resided in Taiwan trial . was held on March 18 , 2008 , in San Francisco, California .I + L r 6The Form 4089, Notice of Deficiency -Waiver, attached t o the notice of deficiency incorrectly stated that the asserted deficiency was $6,534 for 2002 . 'Respondent acknowledges , that TCO Kong made,a few mistakesp For one thing, she "erroneously did not include time devoted t o pre-flight and post-flight services, such as briefing, boarding, and going through customs .",I-TCO Kong also "mistakenly switchedi ' the trip time and excludable, ;percentage for the Hong Kong - Chicago trip * * * with the trip time and excludable percentagesI for the Hong Kong - San Francisco trip" . 11 6 - . OPINION r I . Income Earned in International Airspace s A . Burden of Proo f The Comm issioner ' s determination of a .taxpayer 's liabilit y for an'income tax deficiency is generally presumed correct, an d the taxpayer'bears the burden of proving that the determination is improper . Rule 142(a) ; Welch v . Helvering, 290 U .S . 111, 115 (1933) . 9 B, . Determination of Taxable Incom e Section 61(a) specifies that "Except as otherwise provided", gross income includes "all income from whatever source 'I derived" . Although most countries employ territorial ta x systems, the United States employs a worldwide tax system--i t taxes its citizens on their income regardless of its geographi c source . See Crow v . Commissioner , 85 T .C . 376, 380 (1985) ("Th e 11 United States was historically, and continues to be, virtually unique in . taxing its citizens, wherever resident, on thei r r worldwide income, solely by reason of their citizenship .") ; see also Specking V . Commissioner , 117 T .C . 95 101-102 (2001), affd . sThe .term "international airspace", as we use it in this opinion, means the airspace above the high seas (international waters) . 9Although sec . 7491(a) may shift the burden of proof to the Commissioner in specified circumstances, petitioners have not established that they have satisfied the p,krerequisites under sec . 7491(a)(1) and (2) for such a shift . . sub nom . Haessly v . Commissioner , 1 68 Fed . Appx . 44 (9th Cir . 2003), affd . sub nom . Umbach v . Commissioner , 357 F .3d 1108 (10t h Cir . 2003 ) . However , as is often the case with'-our tax laws , there are exceptions. Section 911, which applies to Mrs . Rogers is an exception to the U .S . . worldwide tax system . Section 911(a) allows~a "qualified individual" .to exclud e from gross income "foreign ; earned income" .10 A "qualified individual"'is a U .S . citizen whose tax home is in a foreig n country if that individual H is a bona fide resident of a foreig n country for an uninterrupted period that includes an entir e taxable year ." Sec . 911(d)(1) . The statute defines " .foreig n earned income " as "the amount received . by such individual from sources within a foreign country or countries which constitut e earned income attributable to services performed by such individual" . Sec . 911 (b) (1) (A) . In 2002 and 2003 Mrs .'Rogerswas a qualified individual wh o received foreign earned income with respect to which she is .entitled to an exclusion . The question that we are called up I to decide is a matter of degree : How much of Mrs . Rogers' s United wages qualifies as "foreign earned income"? The answe r "In 2002 and 2003 the 'exclusion was limited'to $80,000 . See sec . 911 (b) (2) (D) (i) . "A U .S . citizen or resident can also qualify if that individual is present in a''foreign country or countries for at' least 330 full days during .a 12-month period . Sec . 911(d)(1 ) sec . 1 .911-2(c) and (d), Income Tax Regs . is i turn&!~on how much of Mrs . Rogers's income was earned while she worked,in a foreign country . Section 911 does not define "foreign country" . However, on e of its implementing regulations, section 1 .911-2(h), Income Ta x Regs ., does : (h) Foreign country . The term "foreign country" when used in a geographical sense includes any territory under the sovereignty of a government other than that of the United States . It includes the territorial waters of the foreign country (determined in accordance with the laws of the United States), the -flair space over the foreign country, and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources .1 2 in Clark v . Commissioner , T .C . Memo . 2008-71, we held that international waters are not a "foreign coutry" and that'income earned while traveling in international waters is not "foreig n earned income" excludable from gross income under section 911 . We can divine no difference between international waters and th e airspace above them for purposes of determining whether incom e earned therein is considered foreign source income . International airspace--like international waters--is not unde r 12Sec . 911(d)(9) expressly delegates toil the Secretary of' the Treasury the authority to prescribe regulations "necessary or appropriate to carry out the purposes" of sec . 911 . The Court of Appeals for the Seventh Circuit has upheld the validity of sec . 1 .911-2(h), Income Tax Regs ., concluding that . the definition therein of "foreign country" is "reasonable" and must be deferred .to . affg .= 126 T .C . 89 (2006) . Arnett v . Commissioner, 473 F .3d 790, 797 (7 .th Cir . 2007), 9 the sovereignty of a Government other than the United State s .13 See Gantchar v . United Airlines, Inc . , No . 93 C 1457 (N .D . Il l Mar . 24, 1995) ("Being outside the United States is no t synonymous with being in alforeign state ; international airspac e and international waters are outside the United States withou t being inside a foreign state .") ; see also United States v . Cabaccang, 332 F .3d 622, 62,6 (9th,Cir . 2003) ("Unlike, fo r example, a foreign nation--which is unquestionably a 'place outside' the United States=,-international airspace is neither ,a point of origin nor a destination of a drug . shipment ; it is 11 merely something through which amaircraft must pass on its wa y from one location to another ..") . It follows that internationakl airspace is not a "foreigncountry;" for purposes of section 91°1 . . 13Petitioners argue that "linking foreign earned income to geography fails upon closer scrutiny" because "It would not bed feasible to allocate earnings according to time spent over the~' , United States , a foreign country , land international waters" fo::r According to petitioners, "Tact someone working in outer . sp'ace .. person ' s earnings would all be foreign earned incomeTheir ; Because argument is creative , but .irrelevant and unpersuasive . petitioners ' case does not concern income earned in outer space, their argument is irrelevant . state has sovereignty over outer space , so income earned in outer space would not be considered foreign earned income . on Principles Governing the Activities of States in the }~ E Exploration and Use of Outer Space ., Including the Moon and Otter 10an . 27, 1967 , 18 U .S . T . 2410 ("Outer Celestial Bodies , art . II , space , including the moon and other celestial bodies , is not subject to national appropriation .by claim of sovereignty, by means of use or occupation ,. or by any other means .") . Federal income tax purposes , income earned in outer space would be treated just like income earned in international waters or?in, international airspace . It is , unpersuasive because no See Treaty For - 10 - i As a result, income Mrs . Rogers earned while working i n international airspace is not "foreign earned income" and' .must b e included in petitioners' gross income for 2002 and 2003 . Respondent has been more than fair in affording petitioners the benefits of their self-prepared DTA, which is at odds with those prepared by United and which may inflate the amount of time Mrs . Rogers spent over foreign countries . Because all flights . in 2002 were round-trip flights from Hong Kong1to San Francisco or from Hong Kong to Chicago, we find respondent's adjustments for 2002 to be correct except for a $1 rounding error in respondent's favor on the round-trip flights from Hong Kong to Chicago . We will allow petitioners to exclude $32,077 from their 2002 gross income'(rather than the $32,076 respondent allowed) . Respondent resorted to United's sample DTAs only for 2003 flights on route s not covered by petitioners' DTA . On brief respondent asserts that it would be ii adminis'tratively burdensome for'the Internal Revenue Service to "'calculate „the respective percentage of wages earned over foreign countries for each flight separately" . Nevertheless, on 'repl y "In any event, even if we agreed with petitioners that income :earned in international airspace qualifies for the sec . 911 exclusion, petitioners had no basis for'excluding all of Mrs . Rogers's United . income for 2002 and 2003 . That is because it is clear that Mrs . Rogers earned some portion of her income for those years in the United States . In 2002 all 23 of her roundtrip flights landed in and took off from the United States . And rn 2003' .27 . of her 30 round-trip flights landed in and took of f from the United States . II P - 1 1 brief respondent concedes that nothing prevents an "individual.. from * * * relying on specific flight plans . " At trial Captain Patrick Palazzolo, a United pilot who flties ~ mainly between Hong Kong and San Francisco, testified credibl y that the amount of flight time spent over foreign countrie s II i varies depending on weather patterns and the location of the jetstream . For example, atgreater portion of a Hong Kong to Sa n Francisco flight is more likely to be over land in the winter than it is in the summer . Thus, if petitioners could prove that i Mrs . Rogers flew that routs only in the winter, they would be, entitled to a higher ratio ;of time spent over foreign countries for those flights . They have not done so . For the 2003 routes not covered by their self-prepared DTA, ; petitioners have not provided evidence that would enable a calculation of actual fliglit time ratios sufficient to overcome respondent ' s use of United's DTAs . Without evidence -of when she1 flew (such as flight plans),, even with Captain Palazzolo' s testimony, we cannot assign flight time ratios in excess of'tl-os e taken from United's .DTAs for the routes on which Mrs . Roger s flew .ls 15Captain Palazzolo testified that he does not agree withjl United's DTAs because theyappearto account for flights that are : primarily over water but not for those primarily over land . Even if he is correct, we still have no evidence as to when Mrs . } fi~ Rogers flew, and respondent has already accepted petitioners' }DTA which allocates 46 .97 percent of Mrs . Rogers's round-trip flight' s . .) . (continued . 12 - During 2003 in addition to the round-trip flights from Hong Kong to San Francisco and from Hong Kong to,l+Chicago, Mrs ., Rogers I flew on (1) six flights from Hong Kong to Tokyo to San Francisco and then back to Hong Kong via Tokyo ; (2) one flight from Hong Kong to Tokyo to Chicago and then back to Hong Kong via Tokyo ; and (3) three flights from Hong Kong to Seoul to Tokyo to .Beijing to Tokyo to Seoul to Hong Kong . Captain Palazzolo did not testify specifically regarding the six flights from Hong Kong to Tokyo,, to San Francisco and then back to Hong Kong via Tokyo or the flight from Hong Kong to Tokyo to Chicago and then back t o Hong Kong via Tokyo . He did testify regarding the three flights from Hong Kong to Seoulllto~ .Tokyo to Beijing to'(cid:127) (cid:127)Tokyo to Seoull1to Hong Kong .'16 He indicated that the jetstream and winds played little part in these trips and that the flight time would have been "essentiall y the same in both directions ." He testified that a flight fro m 11"(_ . . continued ) from Hong Kong to San Francisco to time spent over foreign countries . That is significantly higher than the 20 .8 percent and 14 .4 percent allocated in United's DTAsOOto time spent over foreign countries for round-trip flights from Hong Kong to San Francisco . See supra note 4 . i16Although the parties stipulated that the flights were'from Hong Kong to Seoul to Tokyo to Beijing to Tokyo to Seoul to Hong Kong,, it appears from Captain Palazzolo's and Mrs . Rogers' s testimony and United's sample DTAs that thellactual route ;;-might haveibeen from Hong Kong to Tokyo to Seoul to Beijing to Seoul to Tokyo ; to Hong Kong . In other words, it appears that the parties mixed up the order of Tokyo and Seoul on those three flights . t - 1 3 Hong Kong to Tokyo takes about 3 to 3-1/2 hours and that the time : spent over foreign terr itory would be 90 to 95 minutes . t He als o k testified that a flight from Tokyol to Seoul would be almost all ' over foreign territory (except fo a few minutes over the Se a Japan) and that a flight from Seoul to Beijing would be mostl y over foreign territory (except fo r a few minutes over the Yello w Sea) . Respondent has determined that 74 .77 percent of Mrs . Rogers's work on the three flights from Hong Kong to Seoul t Tokyo to Beijing to Tokyo to .Seoul to Hong Kong is allocable t o f k services rendered over foreign territory . Although we are unable ; to reconcile respondent's calculation and United's sample DTAs , the amounts are very close and are not materially inconsisten t with Captain Palazzolo' s testimonyl . 1 7 Given respondent's adoption of petitioners' DTAs wit h respect to the round-trip f:lights from Hong Kong to San Francisco : and from Hong Kong to Chicago, it is possible that petitioners , are entitled to a larger foreign territory exclusion with respect . to the six flights from Hong Kong to Tokyo to San Francisco a then back to Hong Kong via (Tokyo and the one flight from Hon g "United' s sample DTAs }do not jinclude information on 'round . , 1 trip flights from Hong Kong to Seoul', perhaps because United d'id , not fly that route . See supra note 16 . In any event, given th :at,i the exclusion that respondent has hallowed for those three flight's is not materially inconsistent with Captain Palazzolo's I j testimony, our conclusion is the same regardless of whether th e stipulation as to those three flights is accurate or whether th e trial testimony is in fact correct . - 14 - I Kong to Tokyo to Chicago and then back to Hong Kong via Tokyo . However., the .evidence of record is not sufficient or detailed enough to permit such a finding . Critically missing is ! information regarding the time spent over international waters during the flights from either San Francisco or Chicago to Tokyo . Those,flights, unlike the direct U .S . to Hong Kong flights, ar e unlikely to cross any Chinese territory and may cross less or n o Russian territory given Tokyo's location considerably east- northeast of Hong Kong . This may be especially true durin g winter,months, when more of the flights are over land . Therefore, we shall sustain respondent's calculations of 'the . percentages of those flights spent over foreign territory afte r correcting certain mathematical errors ." II "In the Form 886-A, Explanation of Adjustments, attached t o the notice of deficiency, respondent determined the following exclusion amounts for petitioners' 2003 tax year : (1) $9,686 for the round-trip flights from Hong Kong to Chicago ; (2) $9,603 for the round-trip flights from Hong Kong to Sa n' Francisco ; (3 ) $4,549 for the flights from Hong Kong to Tokyo to San Francisco and t'hen'back to Hong Kong via Tokyo ; (4) .$1,456 for the one flight from Hong Kong to Tokyo to Chicago and then back to Hong Kong via Tokyo ; and (5) $5,442 for the three flights from Hong Kong to Seoul to Tokyo to Beijing to Tokyo to Seoul to Hong Kong . Using respondent's numbers, the correct exclusion amounts for those flights are $9,563, $9,798, $4,594, $1,360, and $5,443, respectively . In calculating . the exclusion amounts for the 2003 flights using United's sample DTA's, TCO Kong appears to!ohave used at most two decimal places . The net result is a reduced exclusion which we will not countenance . We will allow petitioners an exclusion of .$30,768 under sec . 911 for their 2003 tax year instead of the $30,736 exclusion respondent allowed . A - 1 5 Finally, we agree with respondent that petitioners ar e required to include required : preflight and postflight service) time when calculating foreign earned income19 and to allocat e income from .sick and vacation leave between foreign earned income ; and income that does not qualify for the section 911 exclusion'-ff in other words, income subject to!Federal income tax . II . Interest Abatemen t When there has been an unreas onable error or delay with' respect to a managerial or'ministe1rial act, the Secretary has discretion to abate interest . . Sec . 6404(e) . We have jurisdiction under section ;6404(h)'~ to determine whether the, Secretary's decision not to abate interest was an abuse of discretion . } Petitioners argue thatithey should not be held liable for, any interest on their Federal income tax underpayments because I .. the Internal Revenue Service "chan{ged its interpretation of thi e law in 2002 but failed to provide clear guidance as [to] the exact methodology that must!be used in the allocation of wage s ,: 19Although as a technical matter Mrs . Rogers was paid on he ; basis of her actual flight time, she did not perform pre- and l 1 post-flight services for her own(cid:127)benefit--she did so for Unite~d's benefit and at United's direction . Those services must therefore be accounted for in determining petitioners' exclusion amounts)' for 2002 and 2003 . See Tenn . Coal), Iron & R .R . Co . v . Muscodak Local No . 123 , 321 U .S . 590, 598 (1944) (concluding in a Fair f' Labor Standards Act case that the words "work" and "employment" mean "physical or mental exertion ,(whether burdensome or not) t { controlled or required by the employer and pursued necessarily!° and primarily for the benefit of the employer and his business ;') . - 16 - for flight crews" . Respondent counters that we lack jurisdictio n over petitioners' interest abatement request because responden t has not made a final determination not to abate interes t In January 2008 petitioners filed,a Form 843, Claim fo r Refund and Request for Abatement, despite the fact that respondent had advised them to wait until interest had bee n assessed or their abatement request would be rejected as premature . We lack jurisdiction to consider petitioners' interest abatement request for the same reason that responden t advised them not to file such a request-=abatement of interest is premature because interest has not been assessed and because respondent has not made a final determination not to abate interest . See Muir v . Commissioner , T .C . Memo . 2000-304 ("Consideration of petitioner's request for abatement of interest is premature, however, as there has been neither an assessment-o f interest nor a final determination by respondent not to abate the interest ."), affd . 11 Fed . Appx . 701 (8th Cir . 2001) . The Court has considered all of petitioners' contentions, arguments, requests, and statements . To the extent not discussed herein, we conclude that they are meritless ., moot, or irrelevant . ITo reflect the foregoing, Decision will be entered under Rule 155 .