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2/28/2017 Alfred S. Co, TC Memo 201619, Code Sec(s). 911 6662 7491, 02/8/2016 Checkpoint Contents Federal Library Federal Source Materials Federal Tax Decisions Tax Court Memorandum Decisions Tax Court & Board of Tax Appeals Memorandum Decisions (Prior Years) 2016 TC Memo 201639 TC Memo 20161 Alfred S. Co, TC Memo 201619, Code Sec(s). 911 6662 7491, 02/8/2016 Tax Court & Board of Tax Appeals Memorandum Decisions Alfred S. Co v. Commissioner, TC Memo 201619 , Code Sec(s) 911. ALFRED S. CO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Case Information: [pg. 103] Code Sec(s): 911 Docket: Dkt. No. 2594913. Date Issued: 02/8/2016. Judge: Opinion by Vasquez, J. Tax Year(s): Years 2009, 2010, 2011. Disposition: Decision for Taxpayer in part and for Commissioner in part. HEADNOTE 1. Foreign earned income exclusiongovt. employee or independent contractorproof. Mechanical engineer wasn't entitled to foreign earned income exclusion for income earned performing contract work for U.S. State Dept., Office of Overseas Buildings Operations (OBO) in Pakistan, India, and other foreign locales: taxpayer was clearly govt. agency employee vs. independent contractor where OBO dictated his duties, scope of his work, and his work schedule and contract terms, and supervised his performance. Also, he was paid fixed annual salary in accord with Foreign Service Scale, worked exclusively for OBO for multiple years, and performed type of work that was within OBO's regular scope of business and OBO had right to and did in fact terminate his contract. Reference(s): 9115.10(5) Code Sec. 911 2. Accuracyrelated substantial understatement penaltiesburden of proof and productionreasonable cause good faith. Accuracyrelated substantial understatement penalties weren't upheld against mechanical engineer for years for which he improperly claimed foreign earned income exclusion of income earned performing contract work for U.S. file:///C:/Users/lauren/Downloads/Alfred_S__Co__TC_Memo_2016_19__Code_Sec_s___911__6662__7491__02_8_2016%20(1).htm 1/9 2/28/2017 Alfred S. Co, TC Memo 201619, Code Sec(s). 911 6662 7491, 02/8/2016 State Dept., Office of Overseas Building Operations (OBO) in Pakistan, India, and other foreign locales: although IRS met its burden of production on penalties' applicability with proof of taxpayer's deficiencies, he showed reasonable cause and good faith for his belief that he was entitled to exclusion as independent contractor rather than employee of OBO. Considering that taxpayer had no accounting, finance, or tax background and that applying operative employee test posed high level of difficulty, it was reasonable for him to believe as he did. Plus, he credibly testified that he relied on IRS auditor's prior year determinations that he was entitled to exclusion when preparing subject years' returns. Reference(s): 66,625.01(3) 74,915.03(10) Code Sec. 6662Code Sec. 7491 Syllabus Official Tax Court Syllabus Counsel Jairo G. Cano, Frank Agostino, and Jeffrey M. Dirmann, for petitioner. Marissa J. Savit and Linda Azmon, for respondent. Vasquez, Judge MEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies of $19,071, $21,783, and $25,473 in petitioner's Federal income tax and accuracy 1 related penalties under section 6662(a) of $3,814.20, $4,356.60, and $5,094.60 for 2009, [*2] 2010, and 2011 (years 2 at issue), respectively. The issues for decision are: (1) whether petitioner's income from the U.S. Department of State, Office of Overseas Buildings Operations (OBO), qualifies for the whether petitioner is liable for the section 911 foreign earned income exclusion and (2) section 6662(a) accuracyrelated penalties. FINDINGS OF FACT 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. At the time his petition was filed, petitioner was a U.S. citizen residing in Monsey, New York. Petitioner is a mechanical engineer who graduated from the University of Santo Tomas in the Philippines. From 2007 3 through 2012 he rendered engineering services exclusively to OBO under two personal service contracts (PSCs) for [*3] various projects in Pakistan, India, Indonesia, United Arab Emirates, and Iraq. OBO and petitioner executed the first 4 personal service contract (PSC 1) in August 2007. PSC 1 remained in effect until August 2012, at which time OBO and petitioner executed [pg. 105] a second PSC (PSC 2). The PSCs defined, among other things, petitioner's duties, the scope of petitioner's work, and the process by which petitioner would be evaluated. Petitioner was bound by, and could not negotiate, the terms of the PSCs. During the years at issue petitioner worked under the direct supervision of an OBO project director. Petitioner inspected the quality of the installation of building construction mechanics, including the air conditioning, water system, plumbing, wastewater treatment, and generator installation. He also determined whether the building mechanics were in accordance with the U.S. Government's specifications. In order to sign off on a finished project, petitioner had to obtain final approval from his project manager. file:///C:/Users/lauren/Downloads/Alfred_S__Co__TC_Memo_2016_19__Code_Sec_s___911__6662__7491__02_8_2016%20(1).htm 2/9 2/28/2017 Alfred S. Co, TC Memo 201619, Code Sec(s). 911 6662 7491, 02/8/2016 Petitioner was not permitted to delegate his duties to others, hire any assistants, or work for any other person or entity. He did not own a business and [*4] did not offer his services to the general public. OBO determined the countries to which petitioner would be sent to work as well as when he would be sent there. 5 Petitioner received an annual salary for his engineering services. He made no monetary investment in the buildings that he inspected and was not paid per project or per building that he inspected. His salary did not change regardless of how well, or how poorly, he or OBO performed. He was required to prepare daily progress reports and monthly reports summarizing his accomplishments. He received evaluations from his supervisors. OBO had the authority to discipline petitioner. Petitioner was obligated to work a 40hour workweek. He was supervised by an OBO employee who determined the number of days and hours that he was required to work. He was required to work additional hours if directed by OBO to do so. For instance, while he was stationed in Iraq, OBO required petitioner to work 55 hours per week. Petitioner was also required to submit biweekly timesheets to OBO, which had to be approved by an OBO supervisor. His biweekly payment was made only upon the certification of his biweekly timesheet. [*5] Petitioner was entitled to overtime pay, danger pay allowance, awards, and Sunday premium payments. He was also entitled to annual leave, sick leave, vacation leave, and compensatory time but was required to obtain approval before 6 taking leave or compensatory time. Furthermore, OBO provided training to petitioner and paid for two of petitioner's trips to visit his family in the United States. Moreover, petitioner was reimbursed for travel and health insurance coverage expenses during the years at issue and, in 2011, was given the opportunity to invest his pretax dollars in a section 401(k) plan. During the years at issue OBO was responsible for providing petitioner with office space, a desk, office equipment, and standard office supplies and utilities that would ordinarily be used by similar Government employees. OBO was also responsible for giving petitioner access to Governmentfurnished equipment such as word processors, computers, typewriters, calculators, and copying machines, including necessary supplies. Petitioner resided in U.S. Government furnished quarters during the years at issue. He provided his own air conditioning temperature gauge and the \"welding sizes of a weld\" for his work. He kept the equipment after the termination of his employment with OBO. [*6] OBO had the power to terminate the PSCs for cause and for convenience at any time upon 30 days' written notice. Petitioner also had the power to terminate the PSCs upon 30 days' written notice. OBO terminated PSC 1 for convenience in August 2012 and PSC 2 in December 2012. 7 OBO issued petitioner Forms W2, Wage and Tax Statement, for the years at issue. OBO withheld Federal income tax and FICA taxes and remitted them to the [pg. 106] Internal Revenue Service (IRS). Petitioner attached to his returns for the years at issue Forms 2555, Foreign Earned Income, electing the foreign earned income exclusion for each year. 8 On July 31, 2013, the IRS sent petitioner a notice of deficiency for the years at issue disallowing the foreign earned income exclusion and determining accuracyrelated penalties under section 6662(a). Petitioner disputed the IRS deficiency determinations by timely filing a petition for redetermination. [*7] OPINION I. Burden of Proof As a general rule, a notice of deficiency is entitled to a presumption of correctness, and the taxpayer bears the burden of proving the Commissioner's deficiency determination incorrect. Rule 142(a) Welch v. Helvering, 290 U.S. 111, 115 AFTR 1456] (1933) Bronstein v. Commissioner, 138 T.C. 382, 384 (2012). However, under [12 section 7491(a), if the file:///C:/Users/lauren/Downloads/Alfred_S__Co__TC_Memo_2016_19__Code_Sec_s___911__6662__7491__02_8_2016%20(1).htm 3/9 2/28/2017 Alfred S. Co, TC Memo 201619, Code Sec(s). 911 6662 7491, 02/8/2016 taxpayer produces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's liability for tax and meets other requirements, the burden of proof rests on the Commissioner as to that factual issue. See Higbee v. Commissioner, 116 T.C. 438, 440441 (2001). Our conclusion here is based on the preponderance of the evidence, and thus the allocation of the burden of proof is immaterial. See Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005). II. Foreign Earned Income Exclusion A. Introduction We must decide whether petitioner's income from OBO qualifies for the section 911 foreign earned income exclusion. Section 61(a) specifies that \"[e]xcept as otherwise provided\Student: Lauren Zinn 1. Case: Co, T.C. Memo 2016-19 2. Facts: The PSCs defined, among other things, petitioner's duties, the scope of petitioner's work, and the process by which petitioner would be evaluated. Petitioner was not permitted to delegate his duties to others, hire any assistants, or work for any other person or entity. He did not own a business and did not offer his services to the general public. OBO determined the countries to which petitioner would be sent to work as well as when he would be sent there. Petitioner received an annual salary for his engineering services. Petitioner was entitled to overtime pay, danger pay allowance, awards, and Sunday premium payments. He was also entitled to annual leave, sick leave, vacation leave, and compensatory time but was required to obtain approval before taking leave or compensatory time. Furthermore, OBO provided training to petitioner and paid for two of petitioner's trips to visit his family in the United States. Moreover, petitioner was reimbursed for travel and health insurance coverage expenses during the years at issue and, in 2011, was given the opportunity to invest his pretax dollars in a section 401(k) plan. 3. Issue: Was the petitioner's income from the U.S. Department of State, Office of Overseas Buildings Operations (OBO) qualify for the section 911 foreign earned income exclusion? Was the petitioner liable for the section 6662(a) accuracy-related penalties? 4. Holding: The petitioner was an employee of OBO during the years at issue and accordingly, we find that he is not entitled to the exclusion of income under section 911(a). 5. Rationale (1) Instructions on Case Summaries You are required to complete two case summaries. The citations of these cases are listed in the syllabus. General guidelines you have to follow are: The summary must be prepared in a format, containing maximum length of 1 page, Times New Roman, font 12, single-spaced, 1-inch margin on each side. The summary shall include five sections: (1) case citation, (2) facts, (3) issue(s), (4) holding(s), and (5) rationale. You may follow the format in either samples. Specific guidelines on each section: 1. Case citation: Simple cite the cases similar to what given in the syllabus. 2. Facts: Provide enough information to understand the case. This section should not exceed 30 percent of your report. 3. Issue(s): a. Focus on the substance issues only; do not discuss the procedural issues or penalty issues. b. State the issue(s) in a question format. 4. Holding(s) a. The number of holdings should match the number of issues. b. Simple state the judicial conclusion on the issues. Do not discuss the underlying reasons here. 5. Rationale a. This is the most important section in this report. b. Focus on judge's opinions, instead of yours or the IRS's. c. Be specific to the reasons which may intertwine the tax law and facts together. Common mistakes The report was more than \"ONE\" page. Included a link for the case citation. 1 The fact section was too lengthy. Did not provide enough facts for understanding the scenarios. Issues were not stated in a question format. Did not identify the correct issues. Did not identify all of the issues. The number of holdings did not match the number of issues. Explained the reasons in the holding section. Included assumptions in the holding section. Did not identify the correct holdings. Lack of details on the rationale section. Did not identify all of the reasons upholding the judicial decision. Did not identify the correct reasons upholding the judicial decision. 2 Student Firstname Lastname 1. Case: Porter, TC Memo 2015-141. 2. Facts: The divorce decree specified that petitioner's ex-wife was entitled to claim the oldest and youngest children as dependents for Federal income tax purposes, while petitioner was entitled to claim the middle child as a dependent. The decree was signed by the Judge but not the petitioner and his ex-wife. His ex-wife was the custodial parent. Later, with amendment, the taxpayer claimed the middle child as a dependent, a head of household filing status, and a child credit. However, his exwife already claimed the middle child as a dependent. 3. Issue: Could the taxpayer claim the middle child as a dependent, a head of household filing status, and a child credit? 4. Holding: The taxpayer cannot claim a dependency exemption, a head of household filing status, and a child credit. 5. Rationale (1) In general, Section 152(e)(1) awards the dependency exemption to the custodial parent. An exception to this general occurs when the custodial parent signs a \"written declaration\" releasing her claim and the noncustodial parent attaches such written declaration to his tax return. (2) The written declaration by the custodial parent must be made on Form 8332 or in a signed document substantially similar to Form 8332. A court order or decree executed before July 3, 2008, can serve as a written declaration for purposes of section 152(e)(2)(A). The Tax Court has consistently upheld the requirement, explicit on the face of the statute, that the custodial parent must sign the written declaration. (3) Although the court order was signed by the judge, the taxpayer's ex-wife did not sign the divorce decree. However, a State court order that is not signed by the custodial parent does not satisfy the express statutory requirements of section 152(e)(2)(A). (4) The taxpayer did not provide other document showing a signed declaration from his ex-wife. As a result, the taxpayer cannot claim the middle child as a dependent. (5) Three children lived with his ex-wife for more than 6 months so he could not claim a head of household filing status. (6) To receive a child credit, the taxpayer must have a \"qualifying child.\" Unfortunately, he did not in this case