TAX COURT OPINION

Case: John H. Thompson & Melanie Salyers Thompson
Docket Number: 4628-15
Judge: Kerrigan
Opinion Type: bench
Filed: 02/08/2016
Pages: 10

15 UNITED STATES TAX COURT WASHINGTON, DC 20217 JOHN H. THOMPSON & MELANIE SALYERS THOMPSON, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) Docket No. ) ) ) ) 4628-15. ORD E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Kathleen Kerrigan at San Diego, California on January 13, 2016, containing her oral findings of fact and opinion rendered at the conclusion of the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. February 8, 2016 SERVED Feb 10 2016 Capital Reporting Company 3 Bench Opinion by Judge Kathleen Kerrigan January 13, 2016 John H. Thompson and Melanie Salyers Thompson v. Commissioner Docket No. 4628-15 The Court has decided to render in this case the following as its oral Findings of Fact and Opinion, which shall not be relied upon as precedent in any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issiue, and all Rule references are to S k.Y_ the Tax Court Rules of Practice and Procedure. By notice of deficiency dated November 20, 2014, the Internal Revenue Service (IRS) determined a deficiency in the Federal income tax of.petitioners for tax years 2011, 2012, and 2013. The issue for consideration is whether petitioners are entitled to exclude income pursuant to section 911 for the tax years at issue. The mortgage insurance premiums issue for tax year 2011 is computational only. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 Trial of this case was conducted on January 11, 201 , in San Diego, California. The petitioners represented themselves, and Kathleen A. Tagni represented respondent. The parties' Stipulation of Facts was admitted in evidence along with the attached exhibits. We find the following facts: FINDINGS OF FACT Petitioners resided in California when the petition was filed. During 2011, 2012, and 2013, petitioner husband was an employee of Battlespace Flight Services (BFS). As an employee of BFS, petitioner husband worked overseas pursuant to a United States Department of State Letter of Authorization. BFS contracted with the United States government to provide support for the United States' efforts in Iraq and Afghanistan. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Petitioner did not serve as active duty military 20 21 22 23 24 25 during the years at issue. During 2011 petitioner husband was in Iraq for 71 days and Talil for 132 days. During 2012 petitioner husband was in Afghanistan for two different time periods for a total of 176 days. During 2013 petitioner husband was in Afghanistan for 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 91 days. Per the recommendation of BFS, petitioners' tax returns were prepared by Harvey Cage. Petitioners' tax returns for the years at issue claimed a foreign income exclusion for income earned by petitioner husband while an employee of BFS. Petitioners timely filed their 2011 tax return, excluding the income earned outside the United States. On February 27, 2012, the IRS sent petitioners a letter reducing their refund for tax year 2011 related to a deduction for personal property tax. Respondent concedes this change was a processing error. Petitioners tax return for 2011 was opened for examination in May 2013. In July 2014, respondent examined petitioners 2012 and 2013 income tax returns. On November 20, 2014, respondent sent petitioners a notice of deficiency disallowing petitioners' exclusion of foreign earned income. OPINION 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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 section 7491(a), the taxpayer may shift the burden of proof to the Commissioner in certain circumstances. 3 Petitioners have neither claimed nor shown that they 4 meet the specifications of section 7491(a) to shift 5 6 7 the burden of proof to respondent as to any relevant factual issue. Section 61(a) provides that gross income means 8 all income from whatever source derived. United 9 States citizens are generally taxed on income earned 10 11 12 13 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),,aggL 14 aff'd sub nom. Umbach v. Commissioner, 357 F.3d 1108 15 16 (10th Cir. 2003). Exclusions from income are construed narrowly; taxpayers must bring themselves 17 within the clear scope of the exclusion. Id. at 101. 18 19 20 21 22 23 Section 911(a) provides in relevant part that a qualified individual may elect to exclude his or her foreign earned income from gross income. 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 24 within a foreign country * * * which constitute 25 earned income attributable to services performed by 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company 7 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. 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company 8 Nevertheless, 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 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company which precluded the normal conduct of business by such individuals, and 9 (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 * * *. The IRS issues annual revenue procedures listing countries eligible for a section 911 waiver. The revenue procedures for 2011, 2012, and 2013 did not include countries where petitioner husband worked. See Rev. Proc. 2012-21, 2012-11 C.B. 484; Rev. Proc. 2013-23, 2013-17 C.B. 978; and Rev. Proc. 2014-25, 2014-15 C.B. 927. Petitioner does not dispute that Iraq and Afghanistan were not eligible for the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 waiver. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Since petitioner husband did not work in any countries on the Secretary's list of eligible waiver countries for the tax years at issue, petitioners are not entitled to a foreign income exclusion for 2011, 2012, and 2013. See sec. 911(d)(4). Petitioner husband contends that he would not have taken the exclusion for 2012 and 2013 if he had known that it would be disallowed for 2011. Respondent has three years to assess a tax from the time a tax return is filed. See sec. 6501(a). Respondent complied with the statute of limitations. Petitioner husband was a credible witness and we do not doubt that he would not have claimed an exclusion in 2012 and 2013 if he had not received a refund in 2011. A taxpayer's tax liability, however, is based on the merits and not on any matters occurring before the notice of deficiency was sent. 19 Greenberg' s Express, Inc. v. Commissioner, 62 T. C. 20 21 22 23 24 25 324, 327-328 (1974). The acceptance or acquiescence in returns filed by a taxpayer in a previous year creates no estoppel against the Commissioner, nor does the overlooking of an error in a return upon audit create any such estoppel. See Dixon v. United States, 381 U.S. 68, 72-73 (1965). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 So that the liability can be recalculated, decision will be entered under Rule 155. This concludes the Court's oral Findings of Fact and 4 Opinion in this case. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 9:06 a.m., the above- entitled matter was concluded.) 866.488.DEPO www.Capita1ReportingCompany.com