T.C. Summary Opinion 2005-44

T.C. Summary Opinion 2005-44

UNITED STATES TAX COURT

CRYSTAL K. ABEYTA AND RON L. ABEYTA, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 19868-03S.

Filed April 18, 2005.

Crystal K. Abeyta and Ron L. Abeyta, pro sese.

Randall L. Preheim, for respondent.

ARMEN, Special Trial Judge:

This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1

1

The decision to

Unless otherwise indicated, all subsequent section

references are to the Internal Revenue Code in effect for 2000,

the taxable year in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure. All monetary amounts are

rounded to the nearest dollar.

- 2 be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

Respondent determined a deficiency in petitioners’ Federal

income tax for the taxable year 2000 of $6,826 and an accuracyrelated penalty under section 6662(a) of $1,365.

After petitioners’ concession,2 the issues for decision are:

(1)

Whether petitioners are entitled under section 119 to

exclude from gross income the value of lodging furnished to

petitioner Ron L. Abeyta (Mr. Abeyta).

We hold that they are

not.

(2)

Whether petitioners are liable for self-employment tax

on the value of lodging furnished to Mr. Abeyta.

We hold that

they are not.

(3)

Whether petitioners are liable under section 6662(a)

for an accuracy-related penalty.

We hold that they are not.

An adjustment to the amount of petitioners’ itemized

deductions is purely a computational matter, the resolution of

which is dependent on our disposition of the disputed issues.

Background

Some of the facts have been stipulated, and they are so

found.

We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

2

Petitioners concede that they are not entitled to claim a

cost-of-living allowance exclusion under sec. 912.

- 3 At the time that the petition was filed, petitioners resided

in Colorado Springs, Colorado.

In October 1997, Mr. Abeyta began working as a software

engineer for TRW Systems Overseas Inc. (TRW), a company based in

Redondo Beach, California.

At all relevant times, TRW was an

institutional contractor with Department of Defense agencies,

where TRW assigned its personnel to work at these agencies on

specific projects.

In early March 1998, Mr. Abeyta accepted a position with TRW

to work at the Joint Defense Space Research Facility/Joint

Defense Space Communications Station (JDSRF/JDSCS) located at the

United States-Australian Joint Defence Facility at Pine Gap Air

Force Base in Australia (base). On March 28, 1998, petitioners

and their three children relocated to Australia where they lived

for approximately 4-1/2 years.

As a condition of Mr. Abeyta’s employment, petitioners were

required to sign a closing agreement wherein they agreed to waive

their right to elect a foreign income exclusion under section

911(a). The closing agreement stated, in part, as follows:

WHEREAS, said taxpayer has not made any election

under Code section 911(a) with respect to income

derived from services performed by said taxpayer for

the employer at the JDSRF/JDSCS in Australia for the

taxable year(s) ending 31 December 1998, 31 December

1999, 31 December 2000, hereinafter referred to as the

taxable period(s); and

WHEREAS, prior to the execution of this closing

agreement, the said taxpayer voluntarily agrees to

- 4 waive his or her right to any election under Code

section 911(a) for the income specified herein for the

taxable period(s) * * *

*

*

*

*

*

*

*

NOW IT IS HEREBY DETERMINED AND AGREED for Federal

income tax purposes that:

(a)(1) the said taxpayer shall not at any time

during or after his or her presence in Australia make

any election under Code section 911(a) with respect to

income paid or provided to said taxpayer as

consideration for services performed for the employer

at the JDSRF/JDSCS in Australia; and

(2) the said taxpayer irrevocably waives and

foregoes any right that he or she may have to make any

election under Code section 911(a) with respect to

income paid or provided to said taxpayer as

consideration for services performed for the employer

at the JDSRF/JDSCS in Australia; * * *

*

*

*

*

*

*

*

(2) the said taxpayer agrees to attach a copy of

this closing agreement to his or her United States

Income Tax Return.

As another condition of his employment, TRW required Mr.

Abeyta to accept assigned housing as was required by the

Department of the Air Force for personnel working at the base.

The only housing available was in Alice Springs, Australia.

Alice Springs is located in the middle of the Northern Territory

of Australia and is surrounded by three deserts.

At that time,

the town had a population of approximately 24,000 people.

Aside

from a prison located 15 miles from the base, Alice Springs,

which is approximately 22 miles from the base, is the closest

residential area.

Similar to other towns near a military

- 5 installation, the residents of Alice Springs include personnel

who work at the base as well as people who are unaffiliated with

the base.

The assigned housing units were located in six different

sections throughout the town and consisted of condominiums

(generally for people with no family members) and single family

homes (generally for people with family members), which were not

available for private ownership.

These housing units were

furnished only to personnel working at the base.

The housing

sections were not in a separately gated community, and were

located adjacent to homes that were available to the general

public.

With respect to these housing units, Boeing Corp.

provided the maintenance,3 local Alice Springs companies provided

other services such as trash collection, sewage, and utilities,

and the local Alice Springs police provided law enforcement

services.

For the taxable year 2000, petitioners resided in a single

family, ranch-style home approximately 25 feet wide by 35 feet

long with a metal fence surrounding the property; it had a yard

and a 6-foot-high carport.

Petitioners’ home was located on a

public street that ran through the neighborhood.

Their home was

located in a suburban residential community with between 16 and

3

base.

Boeing Corp. was also the maintenance contractor for the

- 6 20 houses.

All of petitioners’ neighbors worked at the base.

The closest gas station was 1 mile away, and the closest grocery

store was farther away in town.

Petitioners did not pay any rent or utility expenses with

respect to the lodging.4

Generally, Mr. Abeyta would commute by

public bus from Alice Springs to the base.

On occasion, he would

commute by his own privately owned automobile to the base or to

offsite locations for meetings.

For the taxable year 2000, the Department of the Air Force

issued to Mr. Abeyta a Form 1099-MISC, Miscellaneous Income,

reporting $7,506 as the value of lodging furnished to Mr. Abeyta.

Petitioners timely filed a 2000 Federal income tax return,

which their certified public accountant of 19 years prepared.5

In preparing this return, petitioners submitted the raw data to

their accountant; petitioners met with their accountant to “go

through the details and figure out what we’re going to put down

on our taxes”; and petitioners paid their accountant to research

and advise them concerning excluding the value of lodging

4

We note that utilities furnished by the employer to make

a lodging habitable constitute lodging for purposes of sec. 119.

Turner v. Commissioner, 68 T.C. 48, 50 (1977); accord Rev. Rul.

68-579, 1968-2 C.B. 61. Respondent, however, did not raise the

issue whether the value of utilities furnished to Mr. Abeyta

should be included in petitioners’ gross income. Therefore, we

need not address the matter.

5

In 1998, petitioners provided their accountant with a

copy of the closing agreement.

- 7 furnished to Mr. Abeyta and the section 912 exclusion.

Attached

to their 2000 return was a Form 2555, Foreign Earned Income,

reporting as follows:

Cost of living and overseas differential

Less amount excludable under sec. 119

Foreign earned income2

1

$23,213

7,506

15,707

1

It is unclear how petitioners computed this figure.

Petitioners purportedly claimed an exclusion for cost-of-living

allowances under sec. 912.

2

Respondent determined that petitioners were not entitled to

claim these exclusions and that petitioners are liable for selfemployment tax on the value of lodging.

Respondent further

determined that petitioners are liable for the accuracy-related

penalty under section 6662(a) for an underpayment of tax.

Petitioners timely filed with the Court a petition

disputing the determined deficiency as well as the accuracyrelated penalty.

Discussion

Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.

290 U.S. 111, 115 (1933).

Rule 142(a); Welch v. Helvering,

The burden of proof may shift to the

Commissioner under section 7491(a) in certain circumstances.

With respect to the substantive issues, section 7491(a) is not

applicable because we decide these issues without regard to the

burden of proof.

With respect to a taxpayer’s liability for any

- 8 penalty, section 7491(c) places on the Commissioner the burden of

production.

A.

Section 119 Exclusion

Unless otherwise specifically excluded, gross income

includes all income from whatever source derived, including

compensation for services.

Sec. 61(a)(1).

Compensation for

services includes income realized in any form including money,

property, or services.

Sec. 1.61-2(d)(3), Income Tax Regs.

Section 119(a), however, excludes from gross income the value of

lodging furnished to an employee, his spouse, and his dependents

by his employer only if three conditions are met:

(1) The

employee is required to accept such lodging as a condition of

employment; (2) the lodging is furnished for the convenience of

the employer; and (3) the lodging is on the business premises of

the employer.

See sec. 1.119-1(b), Income Tax Regs.

The value

of the lodging will be included in gross income if the employee

fails to meet any of these three conditions.

Dole v.

Commissioner, 43 T.C. 697 (1965), affd. per curiam 351 F.2d 308

(1st Cir. 1965).

The parties do not dispute that petitioners meet the first

two tests under section 119(a).

At issue is whether the lodging

was on the business premises of the employer.

Section 1.119-1(c)(1), Income Tax Regs., defines business

premises of the employer as the place of employment of the

- 9 employer.

The Court has construed the phrase “on the business

premises” to mean either:

(1) Living quarters that constitute an

integral part of the business property, or (2) premises on which

the company carries on some of its business activities.

See Dole

v. Commissioner, supra at 707 (holding that employees living in

company-owned housing 1 mile away from where they worked did not

constitute living on the business premises of their employer).

In addition, section 119(c) provides that:

an individual who is furnished lodging in a camp

located in a foreign country by or on behalf of his

employer, such camp shall be considered to be part of

the business premises of the employer.

Section 119(c)(2) further provides that a camp constitutes

lodging which is:

(A) provided by or on behalf of the employer for the

convenience of the employer because the place at which

such individual renders services is in a remote area

where satisfactory housing is not available on the open

market,

(B) located, as near as practicable, in the vicinity of

the place at which such individual renders services,

and

(C) furnished in a common area (or enclave) which is

not available to the public and which normally

accommodates 10 or more employees.

Petitioners contend that their lodging was on the business

premises of Mr. Abeyta’s employer because their lodging

constituted a “camp” within the meaning of section 119(c).

Petitioners argue that their residence was in a remote location

completely for the benefit and convenience of the employer and

- 10 that there were no adequate facilities at the base.

Respondent,

on the contrary, contends that the lodging does not satisfy the

three requirements under section 119(c)(2) to constitute a camp.

For the reasons stated below, we agree with respondent to the

extent that the requirements of section 119(c)(2)(C) have not

been satisfied.

On the basis of the record in its entirety, the lodging

satisfies only the first two requirements under section

119(c)(2).

With respect to section 119(c)(2)(A), we conclude

that the lodging was provided on behalf of TRW.

Respondent

argues that because the Form 1099-MISC indicated that the

Department of the Air Force provided the housing, the lodging was

not provided by the employer.

We disagree.

Section 119(c)(2)(A)

specifically provides that a camp constitutes lodging that is

“provided by or on behalf of the employer for the convenience of

the employer”.

Although it appears that the Department of the

Air Force owned the housing units, such housing was provided only

to employees working at the base, which presumably includes

Australian military personnel, U.S. military personnel, and

employees of the institutional contractors working at the base.

With respect to section 119(c)(2)(B), we conclude that the

lodging was located, as near as practicable, to the base.

Aside

- 11 from the prison, Alice Springs was the closest residential

community to the base.

With respect to section 119(c)(2)(C), however, we conclude

that the lodging was not furnished in a common area (or enclave)

which is not available to the public and which normally

accommodates 10 or more employees.

Indeed, petitioners’ lodging

was not available to the public as evidenced by the fact that

their specific lodging was restricted to personnel who work at

the base.

The lodging, however, was furnished in a common area

with respect to the fact that the base lodging was located within

the same community as housing available to the general public.

The housing units were interspersed throughout Alice Springs and

not separated into gated communities.

Section 1.119-1(d)(5),

Income Tax Regs., provides that a cluster of housing units does

not satisfy section 119(c)(2)(C) if it is adjacent to or

surrounded by substantially similar housing available to the

general public.

Indeed, a public road accessible to the general

public ran through petitioners’ neighborhood.

Moreover, we are

constrained to find that living in a residential suburb does not

fit the common parlance of a “camp”.

These factors are

sufficient to convince us that the lodging was not a camp for

purposes of section 119(c).

Therefore, petitioners’ lodging does

not constitute a camp within the meaning of section 119(c)(2)(C).

Accordingly, we sustain respondent’s determination on this issue.

- 12 B.

Self-Employment Tax

Section 1401 imposes a tax on self-employment income,

defined generally as “the net earnings from self-employment

derived by an individual” for old-age, survivors, and disability

insurance.

Sec. 1402(b).

The net earnings are defined generally

as “the gross income derived by an individual from any trade or

business carried on by such individual, less the deductions

allowed by this subtitle which are attributable to such trade or

business”.

Sec. 1402(a).

Respondent contends that petitioners are liable for selfemployment taxes for the income reported on Form 1099-MISC, which

represented the value of lodging provided by the Department of

the Air Force.

Respondent argues that the income constitutes

nonemployee compensation to Mr. Abeyta because he was not an

employee of the Department of the Air Force.

Respondent reasons

that had TRW paid for the lodging, the amount would have been

characterized as wages, which would have been subject to Federal

Insurance Contributions Act (FICA) and Medicare taxes, but

because it was paid by the Department of the Air Force, it

constitutes nonemployee compensation income reportable on

Schedule C, Profit or Loss From Business, which would be subject

to the self-employment tax.

We disagree.

- 13 The record is clear, and respondent does not dispute, that

Mr. Abeyta was an employee of TRW during the taxable year 2000.6

As stated earlier, all personnel working at the base were

required to accept lodging in Alice Springs, and that evidently

included employees of contractors working at the base.

Although

it is not entirely clear from the record the manner in which TRW

accounted to the Department of the Air Force for housing provided

to TRW employees, it is plausible to infer that TRW arranged for

petitioners’ lodging as part of TRW’s status as a contractor at

the base.7

As a condition of his employment to work at the

JDSRF/JDSCS, Mr. Abeyta was required to accept the lodging

provided by TRW in Alice Springs.

The nature of TRW’s status as

a contractor at the base as well as the conditions prerequisite

to Mr. Abeyta’s employment at the base do not rise to the level

6

The essence of respondent’s argument is that the value of

the lodging escaped the FICA and Medicare taxes. Respondent’s

argument appears premised on a finding that Mr. Abeyta was

somehow an independent contractor such that the lodging would be

subject to the self-employment tax. See Jackson v. Commissioner,

108 T.C. 130, 133-134 (1997) (earnings derived from work as an

independent contractor are self-employment income subject to the

self-employment tax). The evidence, however, is to the contrary.

See secs. 3101, 3121(d)(2); see also Profl. & Executive Leasing,

Inc. v. Commissioner, 89 T.C. 225, 232 (1987) (listing seven

factors considered in determining whether an individual is an

employee or an independent contractor), affd. 862 F.2d 751 (9th

Cir. 1988).

7

With respect to the lodging, the statutory notice of

deficiency states that Mr. Abeyta “is an employee of a defense

contractor in Alice Springs, Australia, and is furnished housing

by the US Air Force as part of the contract that the US

Government has with the contractor.”

- 14 that Mr. Abeyta was self-employed by the Department of the Air

Force for purposes of the self-employment tax.

Therefore, we

conclude that petitioners are not liable for the self-employment

tax on the value of lodging provided to Mr. Abeyta.

Accordingly,

we hold for petitioners on this issue.

C.

Accuracy-Related Penalty

The last issue for decision is whether petitioners are

liable for an accuracy-related penalty pursuant to section

6662(a) for the year in issue.

Section 6662(a) imposes a penalty equal to 20 percent of any

underpayment of tax that is attributable to either (1) negligence

or disregard of rules or regulations or (2) a substantial

understatement of income tax.

See sec. 6662(a), (b)(1) and (2).

The term “negligence” includes any failure to make a

reasonable attempt to comply with the Internal Revenue Code.

Sec. 6662(c).

“Negligence” also includes any failure by the

taxpayer to keep adequate books and records or to substantiate

items properly.

Sec. 1.6662-3(b)(1), Income Tax Regs.

The term

“disregard” includes any careless, reckless, or intentional

disregard.

Id.; sec. 1.6662-3(b)(2), Income Tax Regs.

An understatement of income tax is “substantial” if it

exceeds the greater of 10 percent of the tax required to be shown

on the return, or $5,000.

Sec. 6662(d)(1)(A).

As relevant

herein, an “understatement” is defined as the excess of the tax

- 15 required to be shown on the return over the tax actually shown on

the return.

Sec. 6662(d)(2)(A).

Whether the accuracy-related penalty is applied because of

negligence or disregard of rules or regulations or a substantial

understatement of tax, the accuracy-related penalty does not

apply to any portion of the underpayment 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.; see United

States v. Boyle, 469 U.S. 241, 242 (1985).

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.

Tax Regs.

Sec. 1.6664-4(b)(1), Income

Relevant factors include the taxpayer’s effort to

assess the taxpayer’s proper tax liability for such year,

including the taxpayer’s reasonable and good faith reliance on

the advice of a professional such as an accountant.

Id.

To show

good faith reliance on the accountant who prepared the taxpayer’s

return, the taxpayer must demonstrate that (1) he or she provided

the correct information to the accountant, and (2) the item

incorrectly claimed, omitted, or reported in the return was a

result of the accountant’s error.

Westbrook v. Commissioner, 68

F.3d 868, 881 (5th Cir. 1995), affg. T.C. Memo. 1993-634; Weiss

v. Commissioner, 94 T.C. 473, 487 (1990).

- 16 Section 7491(c) places on the Commissioner the burden of

production with respect to a taxpayer’s liability for any

penalty.

“The Commissioner’s burden of production under section

7491(c) is to produce evidence that it is appropriate to impose

the relevant penalty”.

Swain v. Commissioner, 118 T.C. 358, 363

(2002); see also Higbee v. Commissioner, 116 T.C. 438, 446

(2001).

The Commissioner, however, does not have the burden to

introduce evidence regarding reasonable cause or substantial

authority.

Higbee v. Commissioner, supra at 446-447.

The

taxpayer, however, still has the burden of proving that the

Commissioner’s determination of the accuracy-related penalty is

erroneous.

Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933);

Higbee v. Commissioner, supra at 446-448.

Respondent satisfied his burden of production under section

7491(a)(1) because the record shows that petitioners

substantially understated their income tax for 2000.

See sec.

6662(d)(1)(A)(ii); Higbee v. Commissioner, supra at 442.

Accordingly, petitioners bear the burden of proving that the

accuracy-related penalty should not be imposed with respect to

any portion of the understatement for which they acted with

reasonable cause and in good faith.

v. Commissioner, supra at 446.

See sec. 6664(c)(1); Higbee

The mere fact that we held

against petitioners with respect to the section 119 exclusion

- 17 does not, in and of itself, require holding for respondent on the

accuracy-related penalty.

See Hitchins v. Commissioner, 103 T.C.

711, 719 (1994).

Respondent contends that petitioners were negligent on the

following grounds:

(1) Petitioners were not entitled to claim

the foreign earned income exclusion under the signed closing

agreement; (2) in the alternative, petitioners were not entitled

to claim the section 912 exclusion because the Form 2555 made no

reference to that section;8 and (3) petitioners were not entitled

to exclude from gross income the value of lodging under section

119.

Petitioners do not dispute that they signed the closing

agreement and that they agreed not to claim an exclusion under

section 911.

Petitioners contend that they did not claim an

exclusion under section 911, but that they claimed an exclusion

under section 912, which was not prohibited in the closing

agreement.

Moreover, petitioners contend that they claimed

exclusions under sections 119 and 912 only after their accountant

researched these issues.

Having observed petitioners’ appearance and demeanor at

trial, we found them to be honest, sincere, and credible

witnesses.

8

Sec. 912 provides that civilian officers and employees of

the U.S. Government stationed outside the continental U.S. may

exclude from gross income the cost-of-living allowances received.

- 18 Petitioners’ accountant had been preparing their returns for

approximately 19 years including preparing the return at issue.

When petitioners signed the closing agreement in 1998, they

provided a copy to their accountant.

A review of petitioners’

2000 return reveals that petitioners submitted to their

accountant all the information necessary for their accountant to

provide tax advice and prepare the return.

In particular,

petitioners sought advice from their accountant whether they were

entitled to any exclusions.

Unsure as to their entitlement,

petitioners paid their accountant to research these specific

issues.

After such research, petitioners’ accountant concluded

that they were so entitled and prepared the returns excluding

income under sections 119 and 912 from petitioners’ gross income.

Therefore, we find that petitioners reasonably and in good faith

relied on the advice of their accountant.

Accordingly, we hold

that petitioners were not negligent in relying on their

accountant and thus are not liable for the accuracy-related

penalty under section 6662(a).

Conclusion

We have considered all of the other arguments made by the

parties, and, to the extent that we have not specifically

addressed them, we conclude that they are without merit.

- 19 Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect our disposition of the disputed issues, as well

as petitioners’ concession,

Decision will be entered

under Rule 155.