United States Tax Court

United States Tax Court

T.C. Memo. 2023-131

NICOLE DIANE HENAIRE,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 1305-21.

Filed October 30, 2023.

—————

During 2017 and 2018, P was employed at the Joint

Defense Facility Pine Gap (JDFPG) in Australia. When P

filed her Petition, she resided in Arizona. Before she began

her employment at JDFPG, P signed a closing agreement

in which she waived her right to make an election under

I.R.C. § 911(a) for 2016, 2017, or 2018. DP signed the

closing agreement on R’s behalf on May 12, 2017. The third

of ten recitals in the closing agreement describes provisions

in agreements entered into between the United States and

Australia concerning the taxation of JDFPG employees.

When P worked at JDFPG, she resided at housing provided

by the Secretary of the Air Force. Among other things, the

notice

of

deficiency

determined

substantial

understatement penalties for P’s 2017 and 2018 taxable

years. The immediate supervisor of the revenue agent

assigned to P’s case approved those penalties in writing

before the issuance to P of a “30-day letter” advising her of

the determination of those penalties.

Held: On May 12, 2017, DP had authority to sign

closing agreements in which individuals employed at

JDFPG waive their right to make elections under I.R.C.

§ 911(a). Smith v. Commissioner, 159 T.C. 33 (2022),

followed.

Served 10/30/23

2

[*2]

Held, further, R did not commit malfeasance in the

execution of P’s closing agreement by disclosing

confidential taxpayer information in violation of I.R.C.

§ 6103. Any disclosure resulting from the submission of

the closing agreement to the Internal Revenue Service

(IRS) was attributable to P herself. Any violation of I.R.C.

§ 6103 that may have occurred when the IRS returned the

fully executed agreement to P’s employer is not grounds

under I.R.C. § 7121(b) to set the agreement aside because,

at that point, the agreement had already become “final and

conclusive.”

Held, further, the third recital to the closing

agreement accurately describes the provisions it purports

to describe and does not include misrepresentations of

material fact that would justify setting the closing

agreement aside.

Held, further, P was not entitled to exclude from her

gross income under I.R.C. § 911(a)(1) any of the wages she

received for her work at JDFPG during 2017 or 2018. In a

valid closing agreement, she waived her right to make an

election under I.R.C. § 911(a)(1). Moreover, because she

has not established that her abode was outside the United

States, she has not established that she was a “qualified

individual,” within the meaning of I.R.C. § 911(d)(1),

during 2017 or 2018. See Rule 142(a)(1).

Held, further, P is not entitled to exclude from her

gross income under I.R.C. § 119(a) the value of the housing

she was provided in Australia. She has not established

that her employer provided her lodging for its own

convenience, that she was required to accept those lodgings

as a condition of her employment, or that the lodgings were

on the employer’s premises. See Rule 142(a)(1).

Held, further, because (1) P has not established that

she is a qualified individual eligible to elect the I.R.C

§ 911(a)(2) exclusion, (2) she waived her right to make an

election under that section, and (3) the value of the housing

she received does not exceed the threshold provided in

I.R.C. § 911(c)(1), she is not entitled to exclude any portion

3

[*3]

of that value from her gross income under I.R.C.

§ 911(a)(2).

Held, further, P is liable for substantial

understatement penalties under I.R.C. § 6662(a) and (b)(2).

R met his burden under I.R.C. § 7491(c) of establishing that

P had a substantial understatement of income tax for each

of 2017 and 2018.

R has also established timely

supervisory approval of the penalties under I.R.C.

§ 6751(b)(1). P has not identified any communication,

before the 30-day letter, of the initial determination to

assess those penalties.

—————

Nicole Diane Henaire, pro se.

Alicia E. Elliott, Rachael J. Zepeda, and Doreen M. Susi, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: In a notice of deficiency dated December 10,

2020, respondent advised petitioner that he had determined deficiencies

in her federal income tax for the taxable years ended December 31, 2017

and 2018, and had also determined accuracy-related penalties under

section 6662(a) 1 for the same years. Petitioner filed a timely Petition for

redetermination. We must decide (1) whether petitioner is entitled to

exclude from her gross income, under section 911(a)(1), $102,100 of the

wages she received for services performed in 2017 for Northrop

Grumman Corp. International (Northrop Grumman) at the Joint

Defense Facility Pine Gap (JDFPG) in Australia, and $103,900 of the

wages she received for services performed in 2018 at JDFPG,

(2) whether petitioner is entitled to exclude, under either section 119(a)

or 911(a)(2), any of the value of housing she was provided near JDFPG,

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect for the years in issue, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for those years, and

Rule references are to the Tax Court Rules of Practice and Procedure in effect at the

relevant times.

4

[*4] and (3) whether petitioner is liable for the accuracy-related

penalties determined in the notice of deficiency.

FINDINGS OF FACT

Petitioner resided in Gilbert, Arizona, when she filed her Petition

in this case. During 2017 and 2018, however, she was employed by

Northrop Grumman at JDFPG. She moved to Australia on January 4,

2017, and began work at Northrop Grumman two days later. Petitioner

remained in Australia through the rest of 2017 except for a visit to the

United States from April 17 to April 30. Petitioner again visited the

United States from March 12 to March 28, 2018, and from October 18 to

October 28 of that year.

Before she began her employment with Northrop Grumman,

petitioner signed a closing agreement in which she waived her right to

make an election under section 911(a) for the taxable years ended

December 31, 2016, 2017, and 2018. 2 After petitioner signed the closing

agreement, an official at Northrop Grumman mailed it to the Internal

Revenue Service (IRS). Petitioner’s closing agreement was signed on

the Commissioner’s behalf on May 12, 2017, by Deborah Palacheck, then

the Director, Treaty Administration of the IRS.

Section (a)(1) of the closing agreement provides that petitioner

“shall not at any time during or after . . . her presence in Australia make

any election under code section 911(a) with respect to income paid or

provided to [her] as consideration for services performed for the

employer at the JDFPG in Australia.” Section (a)(2) of the agreement

provides that petitioner “irrevocably waives and foregoes any right that

. . . she may have to make any election under Code section 911(a) with

respect to income paid or provided to [her] as consideration for services

performed for the employer at the JDFPG in Australia.”

Before its operative provisions, the closing agreement includes

ten recitals. The first recital refers to petitioner’s status as a U.S. citizen

and her employment at JDFPG. The second recital refers to the

2 Section 911(a) provides:

At the election of a qualified individual (made separately with respect

to paragraphs (1) and (2)), there shall be excluded from the gross

income of such individual, and exempt from taxation under this

subtitle, for any taxable year—

(1) the foreign earned income of such individual, and

(2) the housing cost amount of such individual.

5

[*5] taxation, under Australian law, of “any wages, allowances, benefits

and other emoluments paid or provided to [petitioner] as consideration

for services performed for the employer in Australia,” which the

agreement labels “income.” The third recital reads as follows:

WHEREAS Article 9 and Article X of the

Agreements between the Government of the United States

of America and the Government of the Commonwealth of

Australia relating to the establishment of a Joint Defense

Space Research Facility and a Joint Defense Space

Communications Station, effective December 9, 1966, and

November 10, 1969, respectively, provide that such income

shall be deemed not to have been derived in Australia,

provided it is not exempt and is brought to tax, under the

taxation laws of the United States.

In November 2018, petitioner signed three addenda to her closing

agreement in which she consented to the disclosure of specified return

information related to the matters addressed in the agreement.

In addition to her closing agreement, petitioner also entered into

an International Assignment Agreement with Northrop Grumman

concerning her employment. Among other things, that agreement

addresses petitioner’s housing during her employment. It states: “You

will be provided with Government furnished housing in accordance with

Site policy. The Site Housing Board assigns housing to all personnel,

with the individual having no choice in the assignment and selection of

the house.” The agreement also states: “If you elect not to live in the

Government furnished housing, you are entitled to a housing allowance

of $11,000 per year.” During her time in Australia, petitioner lived in

Alice Springs, a town about 10 miles away from JDFPG. Her housing

was provided at no cost to her.

Petitioner did some work for Northop Grumman at her home in

Alice Springs. Northrop Gruman gave her a key fob that allowed her to

access its computers from home. According to petitioner’s testimony at

trial, she did “all of [her] training work” at home.

Petitioner filed her original 2017 return on or before April 15,

2018, in a manner consistent with the closing agreement she signed. On

line 7 of her return, she reported wages of $121,865. The parties

stipulated that that amount “consists of $107,981 in wages for services

[petitioner] performed for Northrop Grumman at JDFPG and $13,884

6

[*6] from the Secretary of the Air Force.” A Form 1099–MISC,

Miscellaneous Income, from the Secretary of the Air Force describes the

latter amount as “nonemployee compensation.” A letter explaining the

Form 1099–MISC states that the reported amount was the value of

government-owned housing provided to petitioner. Petitioner’s 2017

return as originally filed showed a tax of $25,519.

In October 2018, petitioner filed an amended return for 2017 in

which she reported wages of $107,981 and other income of −$102,100.

An accompanying statement describes the other income amount as an

exclusion from Form 2555, Foreign Earned Income. 3 Petitioner’s 2017

amended return includes a Schedule C, Profit or Loss From Business,

for a purported business of petitioner’s as a contractor. The Schedule C

shows gross receipts or sales of $13,884, the value of the governmentprovided housing petitioner received. The schedule shows an expense

in the same amount on line 14, captioned “Employee benefit programs.”

Thus, the Schedule C shows net profit or loss of zero. Although

petitioner filed a Schedule C with her 2017 return, she conceded at trial

that she was not self-employed either during 2017 or 2018. After

petitioner filed her amended return for 2017, she received a refund of

$25,170.

Petitioner filed her 2018 return on or before April 15, 2019,

reporting a foreign earned income exclusion of $103,900. 4 Petitioner

received a Form 1099–MISC from the Secretary of the Air Force for 2018

reporting nonemployee compensation of $9,665.67. Petitioner did not

report that amount as income on her 2018 return. That return showed

tax of $195.

According to Form 4549–A, Report of Income Tax Examination

Changes, included with the notice of deficiency, respondent made three

adjustments to petitioner’s taxable income in computing her 2017

deficiency. First, he disallowed the $13,884 employee benefit deduction

petitioner reported on Schedule C. Second, he increased petitioner’s

income by $102,100, the amount petitioner effectively excluded by

reporting a negative amount of other income to offset the wage income

3 A qualified individual’s excludable foreign earned income cannot exceed the

“exclusion amount,” § 911(b)(2)(A), which is $80,000 adjusted for inflation for years

after 2005, § 911(b)(2)(D)(i) and (ii). For 2017, the exclusion amount was $102,100.

Rev. Proc. 2016-55, § 3.34, 2016-45 I.R.B. 707, 714.

4 The reported exclusion equaled the exclusion amount under section

911(b)(2)(D)(i) for 2018. See Rev. Proc. 2018-18, § 3.34, 2018-10 I.R.B. 392, 397.

7

[*7] she reported. And third, respondent allowed petitioner a deduction

under section 164(f) of $517, an amount equal to half of the $1,033 selfemployment tax he determined. On the basis of those adjustments,

respondent determined that petitioner’s total corrected tax liability for

2017 was $26,407.

The Form 4549–A also shows three adjustments to petitioner’s

taxable income for 2018. First, respondent increased petitioner’s

taxable income by the $103,900 she excluded under section 911(a)(1).

Second, he increased her taxable income by the $9,665 reported on the

Form 1099–MISC issued to petitioner by the Secretary of the Air Force.

And third, respondent allowed petitioner a deduction of $683 under

section 164(f), an amount equal to one-half of the $1,366 selfemployment tax he determined. On the basis of those adjustments,

respondent determined that petitioner’s total corrected tax liability for

2018 was $22,943.

The parties stipulated that Revenue Agent Kimberly Parks

“made the initial determination to assert the substantial

understatement penalty under section 6662(b)(2) and 6662(d) against

petitioner for the taxable years 2017 and 2018.” They also stipulated

that “[o]n June 2, 2020, Doris DeLellis personally approved, in writing,

the proposed substantial understatement penalty for the taxable years

2017 and 2018.” They stipulated that, on the date Ms. DeLellis

approved the penalties, she was “Agent Parks’s immediate supervisor.”

And they stipulated that, “[o]n June 3, 2020, Agent Parks mailed a

Letter 950, commonly referred to as a ‘30-day letter,’ to petitioner for the

taxable years 2017 and 2018, which had enclosed an examination report

that included the proposed substantial understatement penalty.”

OPINION

I.

Exclusion of Petitioner’s JDFPG Wages Under Section 911(a)(1)

Section 911(a)(1) allows a “qualified individual” (as defined in

section 911(d)(1)) to elect to exclude from her gross income her “foreign

earned income.” Under section 911(b)(2)(A), a qualified individual’s

foreign earned income cannot exceed the “exclusion amount.” Petitioner

claims that she is entitled to exclude from her gross income, under

section 911(a)(1), that portion of the wages she received from Northrop

Grumman in each of the years in issue that did not exceed the exclusion

amount for the year. To prevail in that claim, petitioner must establish,

first, that the closing agreement in which she waived her right to make

8

[*8] an election under section 911(a)(1) was invalid and, second, that she

was a qualified individual for each of the years in issue. For the reasons

explained below, we conclude that petitioner has not established either

of the predicates necessary for the section 911(a)(1) exclusion to have

been available to her. See Rule 142(a) (providing as a general rule that

the taxpayer bears the burden of proof).

A.

Validity of Petitioner’s Closing Agreement

Under section 7121(b)(1), once a closing agreement is approved by

the Secretary or her delegate5 the agreement is “final and conclusive . . .

except upon a showing of fraud or malfeasance, or misrepresentation of

a material fact.” Petitioner contends that her closing agreement was not

valid and enforceable. She offers three arguments in support of that

position. First, she asserts that Ms. Palacheck lacked the authority to

have signed the agreement on respondent’s behalf. Second, she claims

that the IRS committed malfeasance by disclosing confidential taxpayer

information in violation of section 6103(a). And third, she complains of

a misrepresentation in one of the recitals in her closing agreement.

1.

Ms. Palacheck’s Authority to Sign Petitioner’s

Closing Agreement

In Smith v. Commissioner, 159 T.C. 33 (2022), we upheld the

validity of a closing agreement in which another employee of a U.S.

defense contractor working at JDFPG waived his right to elect either of

the exclusions provided in section 911(a). Ms. Palacheck signed the

closing agreement at issue in Smith on the same day that she signed

petitioner’s closing agreement. Like petitioner, the taxpayer in Smith

argued, among other things, that Ms. Palacheck lacked the authority to

sign his closing agreement.

We disagreed, concluding that

“Ms. Palacheck . . . acted within her delegated authority when she

signed [the taxpayer’s] Closing Agreement.” Smith, 159 T.C. at 53. If

Ms. Palacheck had the authority to sign the closing agreement at issue

in Smith, she also had the authority to sign on the same day an

agreement with petitioner providing the same terms. In short, Smith is

5 Section 7701(a)(11)(B) defines “Secretary” to mean “the Secretary of the

Treasury or his [or her] delegate.” The term “delegate,” “when used with reference to

the Secretary of the Treasury, means any officer, employee, or agency of the Treasury

Department duly authorized by the Secretary of the Treasury directly, or indirectly by

one or more redelegations of authority, to perform the function mentioned or described

in the context.” § 7701(a)(12)(A)(i).

9

[*9] controlling authority on the issue of Ms. Palacheck’s authority to

sign petitioner’s closing agreement.

Because we had not yet issued our opinion in Smith when

petitioner filed her Seriatim Opening Brief on July 11, 2022, petitioner

did not address (and could not have addressed) that opinion in her brief.

But the arguments she makes on brief give us no reason to question our

conclusion in Smith. To the extent that we did not explicitly consider in

Smith the precise arguments petitioner makes here, our analysis in that

case nonetheless forecloses petitioner’s arguments.

We concluded in Smith that Delegation Order 4-12 (Rev. 3),

Internal Revenue Manual (IRM) 1.2.43.12(14) and (15) (Sept. 7, 2016),

gave Ms. Palacheck the authority to have signed the closing agreement

in issue. Paragraph (14) of the delegation order describes the delegated

authority as follows:

To act as “competent authority” or “taxation authority”

under the tax treaties, tax information exchange

agreements, and FATCA intergovernmental agreements of

the United States and tax coordination agreements and tax

implementation agreements with the territories of the

United States with respect to specific applications of such

treaties and agreements, including signing mutual and

other agreements on behalf of the Commissioner, LB&I,

except as otherwise specifically delegated in this delegation

order.

Paragraph (15) delegates that authority to the Director, Advance Pricing

and Mutual Agreement and the Director, Treaty Administration, “for

cases and issues under their jurisdiction.”

Petitioner characterizes the delegated authority as “narrowly

tailored” in that it allows the delegates to address specific applications

of five types of agreements: tax treaties, tax information exchange

agreements, FATCA intergovernmental agreements, tax coordination

agreements, and tax implementation agreements.

As petitioner

acknowledges, “the United States and Australia have entered into an

income tax treaty.” See Convention for the Avoidance of Double

Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on

Income, Austl.-U.S., Aug. 6, 1982, 35 U.S.T. 1999 (1982 Treaty). The

two countries also entered into two agreements that specifically address

the taxation of employees at JDFPG: one in 1966 and the other in

10

[*10] 1969. 6 Petitioner argues that Delegation Order 4-12 (Rev. 3) did

not authorize Ms. Palacheck to sign her closing agreement because that

agreement “stems from the Pine Gap Agreement.”

While we recognized in Smith that “the Pine Gap Agreements and

Australian law” were relevant in “[d]etermining the appropriate result

for a taxpayer in Mr. Smith’s position,” we also viewed the 1982 Treaty

as relevant. Smith, 159 T.C. at 53. We therefore “conclude[d] that

(1) Ms. Palacheck signed [the taxpayer’s] Closing Agreement while

acting as the competent authority under the 1982 Treaty with respect

to a specific application of that treaty and (2) that action is within the

scope of authority delegated to her as Director, Treaty Administration.”

Id. at 55.

Smith thus disposes of petitioner’s argument that

Ms. Palacheck lacked authority to sign the closing agreement in issue

because it stemmed from the Pine Gap Agreements and not the 1982

Treaty.

Next, petitioner suggests that her closing agreement was not a

“mutual agreement.” According to petitioner, “mutual agreements [are]

agreements entered into between two sovereign states.” If petitioner

were correct, it would follow that a closing agreement between the IRS

and a taxpayer would not be a “mutual agreement.” But Ms. Palacheck’s

authority under Delegation Order 4-12 was not limited to signing

“mutual agreements” that involve specific applications of a treaty.

Instead, she had authority to sign “mutual or other agreements.”

Petitioner offers no argument why her closing agreement was not an

agreement other than a mutual agreement that involved “a specific

application of the 1982 Treaty.” 7

Finally, petitioner views Delegation Order 8-3, IRM 1.2.47.4

(Aug. 18, 1997), as a more specific authority than Delegation Order 4-12

regarding the delegation of authority to sign closing agreements.

Therefore, she reasons, Delegation Order 8-3, which did not grant

authority to sign closing agreements to the Director, Treaty

6 Agreement Relating to the Establishment of a Joint Defence Space Research

Facility, Austl.-U.S., Dec. 9, 1966, 17 U.S.T. 2235 (Pine Gap I); Agreement Relating to

the Establishment of a Joint Defense Space Communications Station in Australia,

Austl.-U.S., Nov. 10, 1969, 20 U.S.T. 3097 (Pine Gap II).

7 In Smith, 159 T.C. at 55–56 (quoting Fort Howard Corp. & Subs. v.

Commissioner, 103 T.C. 351 (1994), supplemented by 107 T.C. 187 (1996)), we read the

term “other” in its “ordinary, everyday sense” and concluded that the reference in

Delegation Order 4-12 (Rev. 3) to “other agreements” “refer[s] to agreements different

from mutual agreements.”

11

[*11] Administration, should take precedence over Delegation Order

4-12. In Smith, 159 T.C. at 57, we explicitly rejected the argument that

“delegations of authority to enter into closing agreements are contained

exclusively within Delegation Order 8-3.” “[M]utual delegations of

authority,” we wrote, “are not only permissible, but occur regularly.” Id.

at 58.

In short, Smith governs the determination of whether

Ms. Palacheck had authority to sign petitioner’s closing agreement and

compels the conclusion that she did. Petitioner’s arguments give us no

grounds to reconsider our conclusion in Smith that, on May 12, 2017,

Ms. Palacheck, as Director, Treaty Administration, had authority to

sign closing agreements in which a U.S. taxpayer employed at JDFPG

waived his or her right to elect the section 911(a) exclusion.

2.

Respondent’s Alleged Malfeasance

Petitioner argues that “[t]he IRS committed malfeasance when

they [sic] procured the Closing Agreement through a third party,

Petitioner’s employer, and thereby disclosed confidential information.”

Those alleged disclosures, petitioner contends, violated section 6103,

which requires that “[r]eturns and return information” be kept

confidential. 8

How and when did disclosures occur in violation of section 6103?

Petitioner provides three examples: First, she says, “the IRS committed

the textbook definition of malfeasance, when IRS disclosed to

Petitioner’s employer that the IRS was requesting a Closing Agreement

from Petitioner.” Second, “[t]he IRS further violated IRC § 6103(a) when

the IRS obtained the Closing Agreement through Petitioner’s employer.”

“And finally,” petitioner alleges, “the IRS violated IRC § 6103(a) when

IRS then used Petitioner’s employer as an agent to return the executed

Closing Agreement back to Petitioner.”

The record does not support petitioner’s claims that the IRS

requested a closing agreement from her, disclosed that request to

Northrop Grumman, and, in so doing, disclosed to Northrop Grumman

information protected by section 6103(a). Petitioner proposes no

findings of fact to that effect and her brief fails to cite any evidence in

the record to support her claims.

8 “[A] taxpayer’s identity” is “return information.” § 6103(b)(2)(A). So is “any

agreement under section 7121.” § 6103(b)(2)(D).

12

[*12] Our opinion in Smith requires rejection of petitioner’s second and

third arguments regarding section 6103(a). In Smith, as in petitioner’s

case, the taxpayer’s employer provided the closing agreement in issue to

the IRS after it had been signed by the taxpayer. We accepted in Smith

that that action might have resulted in the disclosure of protected

information—for example, the taxpayer’s name, address, and Social

Security number. Any such disclosure, however, “was attributable to

Mr. Smith and not to the IRS.” Smith, 159 T.C. at 67. Consequently,

the actions in question did not violate section 6103:

We fail to see how an action taken by Mr. Smith

himself, in the absence of any affirmative action

whatsoever by the IRS, could violate section 6103. The IRS

did not disclose anything when Mr. Smith submitted the

half-signed agreement; it merely received the document

from Raytheon [Mr. Smith’s employer], which had received

it from Mr. Smith. We therefore conclude that the IRS’s

receipt of the half-signed 2016–18 Closing Agreement from

Raytheon did not violate section 6103 and does not

constitute malfeasance.

Smith, 159 T.C. at 67–68 (footnote omitted).

The taxpayer in Smith also argued “that malfeasance occurred

when the IRS sent the fully executed 2016–18 Closing Agreement back

to Raytheon.” Id. at 68. “[T]he execution of the agreement itself,” we

wrote, “preempted” that argument. Id. “Mr. Smith cannot be said to

have been induced into executing the 2016–18 Closing Agreement,” we

reasoned, “by an action taken after the agreement had become ‘final and

conclusive’ under section 7121.”

Id. (emphasis added).

“Any

malfeasance occurring after the validity (and finality) of a closing

agreement is established,” we concluded, “is no ground to set it aside.”

Id.

Petitioner devotes considerable attention to three Consent to

Disclosure forms that she signed, by which, she alleges, “the IRS

attempted to remedy their [sic] illegal acts.” Petitioner acknowledges,

however, that she did not sign the Consent to Disclosure forms until

“nearly two years after” the alleged violations of section 6103.

Therefore, whether the Consent to Disclosure Forms were invalid, as

petitioner claims, has no bearing on the enforceability of her closing

agreement. Petitioner suggests that what she describes as “[t]he IRS’s

poor attempt to obtain authorization after the violation occurs further

13

[*13] shows the IRS’s malfeasance.” Petitioner seems to view the

request for the consents as admissions of malfeasance. Even if we were

to accept them as such, the malfeasance would not be grounds for setting

petitioner’s closing agreement aside because the only possible violation

of section 6103 occurred after the agreement became final and

conclusive with Ms. Palacheck’s signature.

Petitioner claims that “[n]o weight should be given to any

potential argument that any IRC § 6013 [sic] post-signature violation

does not invalidate an executed Closing Agreement.” Petitioner made

that claim in the brief she submitted before the issuance of our opinion

in Smith. The argument she seeks to dismiss is not “potential.” As

Smith confirms, it is the law.

3.

Misrepresentation

Next, petitioner claims that her closing agreement “must be

annulled, set aside, or disregarded based on [a] material

misrepresentation.” In support of her claim, petitioner quotes the

agreement’s third recital (which she refers to as its “second preamble”),

regarding specified provisions of Pine Gap I and Pine Gap II.

Immediately after quoting the closing agreement’s third recital,

petitioner argues: “Portraying on the face of the Closing Agreement that

the execution of the Closing Agreement and foregoing a domestic U.S.

tax right is required to avoid Australian taxation is a material

misrepresentation of U.S. law with the intent to induce Petitioner to

sign the Closing Agreement.” The third recital, however, says nothing

about the need to waive a “domestic U.S. tax right” in order “to avoid

Australian taxation.” The recital, again, reads as follows:

WHEREAS Article 9 and Article X of the agreements

between the Government of the United States of America

and the Government of the Commonwealth of Australia

relating to the establishment of a Joint Defense Space

Research Facility and a Joint Defense Communications

Station, effective December 9, 1966, and November 10,

1969, respectively, provide that such income shall be

deemed not to have been derived in Australia, provided it

is not exempt, and is brought to tax, under the taxation

laws of the United States.

The recital accurately describes the cited provisions of the Pine Gap

Agreements. Article 9(1) of Pine Gap I, 17 U.S.T. 2238, provides:

14

[*14] Income derived wholly and exclusively from performance

in Australia of any contract with the United States

Government in connection with the facility by any person

or company (other than a company incorporated in

Australia) being a contractor, sub-contractor, or one of

their personnel, who is in or is carrying on business in

Australia solely for the purpose of such performance, shall

be deemed not to have been derived in Australia, provided

that it is not exempt, and is brought to tax, under the

taxation laws of the United States.

Pine Gap II contains a substantially identical provision. See Pine Gap

II, art. X(1), 20 U.S.T. at 3100.

Petitioner argues that “Article 9 of the Pine Gap Agreement

[apparently a reference to Pine Gap I] infringes on Congressional

powers.” “The Pine Gap Agreement,” she contends, “cannot alter or

override U.S. statutory law and deprive U.S. citizens of the rights

awarded to them by the Congressional enacted [sic] IRC § 911.”

Article 9 of Pine Gap I has no apparent effect on U.S. tax law. It

provides only that if, under U.S. law, income is not exempt but instead

subject to U.S. tax, it will be deemed not to have been derived in

Australia. The U.S. tax treatment of the income is the same as it would

have been in the absence of Article 9. Article 9 does not alter the U.S.

tax treatment. It leaves entirely to “Congressional[ly] enacted” U.S. law

the issue of whether the income in question is subject to tax in the

United States.

Petitioner has not advanced a valid argument for setting her

closing agreement aside on the grounds of misrepresentation. A

misrepresentation justifies invalidating a closing agreement only if the

misrepresentation is “of a material fact.” § 7121(b). The recital (or

preamble) of which petitioner complains purports to make a factual

statement: It describes what the Pine Gap Agreements provide. But

petitioner points to no respect in which that description is inaccurate:

The Pine Gap Agreements say what the recital says they say.

Petitioner’s complaint seems to be that the waiver of her right to

elect either or both of the section 911(a) exclusions was unnecessary for

her Pine Gap wages to be treated as “not exempt” and “brought to tax”

in the United States. She suggests that income excluded from a

taxpayer’s gross income under section 911(a) is not exempt from U.S.

15

[*15] tax because that income enters into the calculation of the

taxpayer’s U.S. tax liability and may (by moving her into a higher tax

bracket) increase the tax she is required to pay on income not excluded

under section 911(a). See § 911(f). Petitioner may or may not be correct

about when Australian law considers income exempt from tax in another

country. But that is a question of law—not one of fact. Even if an IRS

official had told petitioner, before she signed the closing agreement, that

she had to agree to waive her right to make an election under section

911(a) to avoid Australian tax on her wages, and even if that statement

did not accurately reflect the relevant Australian law, petitioner still

would not have grounds under section 7121(b) to set aside the closing

agreement. Again, a misrepresentation justifies invalidating a closing

agreement only if the misrepresentation misstates a material fact.

Misrepresentations of law do not provide grounds under section 7121(b)

to set a closing agreement aside. Smith, 159 T.C. at 71.

B.

Petitioner’s Status as a Qualified Individual Within the

Meaning of Section 911(d)(1)

Regardless of the validity of petitioner’s closing agreement, she

was not entitled to exclude from her gross income under section

911(a)(1) any of the wages she received from Northrop Grumman for her

work at JDFPG during 2017 or 2018 because she has not established

that she was, during those years, a “qualified individual,” within the

meaning of section 911(d)(1).

Section 911(d)(1) provides:

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.

Respondent accepts that petitioner satisfied the physical

presence test of section 911(d)(1)(B). He argues, however, that

16

[*16] “petitioner has not established that her ‘tax home’ was in

Australia.” We agree.

An individual’s tax home is his or her “home for purposes of

section 162(a)(2) (relating to traveling expenses while away from

home).” § 911(d)(3). Therefore, an individual’s tax home “is generally

‘the vicinity of the taxpayer’s principal place of employment and not

where his or her personal residence is located.’” Wentworth v.

Commissioner, T.C. Memo. 2018-194, at *17 (quoting Mitchell v.

Commissioner, 74 T.C. 578, 581 (1980)). But “[a]n individual shall not

be treated as having a tax home in a foreign country for any period for

which his abode is within the United States.” § 911(d)(3).

Petitioner argues that, because her “principal place of

employment was in Alice Springs, Australia . . . her tax home was

Australia for 2017 and 2018.” We agree that, if Australia had been

petitioner’s principal place of business, it would have been her “home for

purposes of section 162(a).” Even so, if she nonetheless maintained her

“abode . . . within the United States,” Australia could not have been her

tax home. Petitioner has not addressed the location of her abode.

While section 162(a) focuses on the taxpayer’s principal place of

employment, the concept of “abode” looks to a taxpayer’s “familial,

economic, and personal ties.” Wentworth, T.C. Memo. 2018-194, at *18.

“Thus, ‘abode’ has a domestic rather than vocational meaning . . . .” Id.

(quoting Bujol v. Commissioner, T.C. Memo. 1987-230, Tax Ct. Memo

LEXIS 234, at *8–9, aff’d, 842 F.2d 328 (5th Cir. 1988)). The

considerations relevant to determining a taxpayer’s abode “include

property ownership, community involvement, banking activity,

recreational activities, the amount of time the taxpayer spent in each

location, and the residence of the taxpayer’s family.” Id. at *19.

Under section 911(d)(3), therefore, the foreign country that is a

taxpayer’s principal place of employment does not qualify as the

taxpayer’s tax home if the taxpayer maintains sufficiently strong

familial, economic, or personal ties to the United States. Haskins v.

Commissioner, T.C. Memo. 2019-87, aff’d per curiam, 820 F. App’x 994

(11th Cir. 2020), exemplifies such a case. The wife of the couple involved

in Haskins had served in the U.S. Army in Afghanistan. After she

retired from the Army, she returned to Afghanistan and worked on

military bases there as an employee of Science Applications

International Corp. The Commissioner conceded (as he does in the case

before us) that the taxpayer met the 330-day physical presence test

17

[*17] provided in section 911(d)(1)(B). It was also “uncontested that [the

taxpayer’s] principal place of employment during the relevant periods

was in Afghanistan.” Haskins, T.C. Memo. 2019-87, at *17. Therefore,

the taxpayer’s eligibility for the foreign earned income exclusion turned

on whether “her abode was in the United States.” Id.

We concluded that it was. The taxpayer’s husband and two

children lived in the United States. So did her mother. “When her

mother was diagnosed with cancer, [the taxpayer] returned to the

United States.” Id. at *18. While the taxpayer worked in Afghanistan,

she “did not have strong nonwork ties” there. Id. “[S]he worked and

lived on forward operating bases,” which she could not leave because of

security threats. Id. On the basis of those facts, we concluded that the

taxpayer’s “abode was in the United States during the relevant period.”

Id. at *19.

As noted, we agree with respondent that “[p]etitioner has not met

[her] burden” of proving “that her tax home was in Australia.” None of

petitioner’s proposed findings of fact is explicitly directed to the question

of her abode, which is perhaps not surprising given that she makes no

argument that her abode was not in the United States. And we find

insufficient evidence in the record to support a conclusion that

petitioner’s abode was elsewhere.

Petitioner did make multiple visits to the United States, but we

are unable to assess their relevance without knowing more about her

trips than the record discloses. In particular, we do not know the

purpose of petitioner’s visits or whom she stayed with while in the

United States. Those visits tend to indicate, though, that she retained

at least some ties to the United States while she worked in Australia.

The record also fails to disclose whether petitioner maintained a

driver’s license or bank accounts in the United States during the years

in issue or whether she owned property here during that time. Did she

maintain community ties in the United States through involvement, for

example, in civic or religious organizations? Again, the record does not

provide answers.

Given the paucity of the record, we conclude that petitioner has

not met her burden under Rule 142(a) of establishing that her abode

during the years in issue was not in the United States. Consequently,

she has not established that, during those years, her tax home was in

Australia and that she was a qualified individual within the meaning of

18

[*18] section 911(d)(1) entitled, if her closing agreement was invalid, to

elect to exclude her foreign earned income from her gross income under

section 911(a)(1).

C.

Conclusion

Petitioner was not entitled to exclude from her gross income

under section 911(a)(1) any portion of the wages she received from

Northrop Grumman for her work at JDFPG during the years in issue

unless she made a valid election under that section. She signed a closing

agreement waiving her right to make such an election for either of the

two years in issue. Although she challenges the validity of that

agreement on multiple grounds, we have rejected her challenges and

concluded that her closing agreement was valid and enforceable.

Moreover, we have also concluded that petitioner has not established

that she was a qualified individual within the meaning of section

911(d)(1) and thus would have been entitled, but for the closing

agreement, to have elected the section 911(a)(1) exclusion. We therefore

conclude that petitioner was not entitled under section 911(a)(1) to

exclude from her gross income that portion of the wages she received

from Northrop Grumman for her work at JDFPG for each year that did

not exceed the exclusion amount for the year. Petitioner offers no other

grounds to exclude from her gross income any portion of her wages. We

thus conclude that the wages petitioner received from Northrop

Grumman for each of the years in issue are includible in her gross

income for the year.

II.

Petitioner’s Government-Provided Housing

Petitioner was inconsistent in her treatment of the value of the

housing she received from the U.S. Air Force. On her amended 2017

return, she reported as income the value of the housing she received

during that year but also claimed an offsetting deduction. Her 2018

return, by contrast, does not report the value of her governmentprovided housing.

On brief, petitioner first claims that she “can deduct the housing

value under IRC § 911, even though the U.S. Government directly paid

the amount,” or, “[a]lternatively, [she] can deduct the amount under IRC

§ 119.”

19

[*19] A.

Section 119

Section 119 provides for an exclusion—not a deduction. In

particular, section 119(a) allows an employee to exclude from gross

income the value of any lodging furnished to her by or on behalf of her

employer, for the employer’s convenience, if “the employee is required to

accept such lodging on the business premises of [her] employer as a

condition of [her] employment.”

Even assuming that the Secretary of the Air Force provided

housing to petitioner on Northrop Grumman’s behalf, to qualify for the

section 119 exclusion petitioner has to establish that the housing was

provided on Northrop Grumman’s premises and that she was required

to accept the housing as a condition of her employment. Petitioner

acknowledges that “one sentence” in the International Assignment

Agreement governing her employment with Northrop Grumman

“indicates that [she] need not accept” the offer of government-provided

housing. She emphasizes, however, that “individuals do not have a

choice in picking their homes.” That an employee could not choose a

particular house were she to accept government-provided housing does

not establish that she was required to accept government-provided

housing in the first place.

That petitioner “was not expressly required to accept the

[government-provided] accommodations . . . is not determinative.” See

McDonald v. Commissioner, 66 T.C. 223, 231 (1976). Instead, our

caselaw “focus[es] on whether, as a practical matter ‘the employee’s

occupancy of the lodging furnished by his employer is necessary . . . for

the employee to perform properly the duties he is employed to perform.”

Id. (quoting Heyward v. Commissioner, 36 T.C. 739, 744 (1961), aff’d,

301 F.2d 307 (4th Cir. 1962)).

Northrop Grumman’s offer of a housing allowance, in lieu of

government-provided housing, demonstrates that petitioner’s residing

in government-provided housing was not necessary for her to perform

the duties of her job. JDFPG may be, as petitioner describes it, in “an

extremely remote area.” But the facility is about 10 miles from Alice

Springs, the town in which petitioner was provided with housing.

Perhaps it would have been difficult for petitioner to secure alternative

housing in Alice Springs or elsewhere. But if she had been able to find

alternative housing, Northrop Grumman’s offer of an allowance to help

pay for that housing indicates that it would not have objected to her

living elsewhere than the government housing she was provided. Her

20

[*20] residing in government-provided housing thus was unnecessary

for her to perform her duties. Instead, the offer of that housing was

apparently made for her convenience rather than Northrop Grumman’s.

Moreover, petitioner would be eligible for the section 119(a)

exclusion only if the lodging she was provided was on Northrop

Grumman’s “premises.” Petitioner’s testimony establishes that the

home in which she lived in Alice Springs was not at JDFPG; it was

instead about 10 miles away.

Petitioner argues that she “was required to complete work from

home and was on call 24/7.” Her suggestion seems to be that, because

she occasionally worked from home, her home was part of Northrop

Grumman’s “business premises.”

Treasury Regulation § 1.119-1(c)(1) provides: “[T]he term

‘business premises of the employer’ generally means the place of

employment of the employee.” But this Court (perhaps focusing on the

qualifying adverb) has recognized that an employer’s “business premises

are not defined solely in terms of the employee’s place of employment.”

McDonald, 66 T.C. at 230. Instead, the employer’s business premises

“may include housing where the employee performs a significant portion

of his duties.” Id.

On at least three occasions, we have addressed the availability of

the section 119 exclusion to JDFPG employees.

See Smith v.

Commissioner, T.C. Memo. 2023-6; Middleton v. Commissioner, T.C.

Memo. 2008-150; Hargrove v. Commissioner, T.C. Memo. 2006-159, 2006

WL 2280631. In each case, we concluded that the employee had not

established that the employer-provided lodging was part of the

employer’s business premises.

Petitioner argues that her case is distinguishable from Hargrove

and Middleton in that, unlike the taxpayers in those cases, she

performed some work-related activities at home. 9 Like the taxpayer in

Smith, petitioner has not established how much work she did at home.

Therefore, she has not established that any differences between her case

and Middleton or Hargrove require a different result. The record does

not establish the portion of petitioner’s duties she fulfilled at home.

Therefore, petitioner has not established that she performed a

9 Petitioner did not address Smith, T.C. Memo. 2023-6, because we issued our

opinion in that case only after she filed her Seriatim Opening Brief.

21

[*21] “significant portion” of her employment duties at her residence so

that her residence was an “integral part” of Northrop Grumman’s

business property.

McDonald, 66 T.C. at 230; Hargrove v.

Commissioner, 2006 WL 2280631, at *4.

In sum, petitioner has not established that she met any of the

three conditions necessary for the value of her government-provided

housing to be excluded from her gross income under section 119. She

has not established that Northrop Grumman provided her lodgings for

its own convenience, that she was required to accept those lodgings as a

condition for her employment, or that the lodgings were on Northrop

Grumman’s premises.

B.

Section 911(a)(2)

What we have already said establishes that petitioner is not

entitled to exclude from her gross income under section 911(a)(2) any

portion of the value of the housing she was provided. First, like the

foreign earned income exclusion of section 911(a)(1), the exclusion for

housing costs provided in section 911(a)(2) is available only to qualified

individuals who elect the exclusion. As explained above, petitioner has

not established that her abode was not within the United States during

the years in issue. Consequently, she has not established that her tax

home was in a foreign country or that she was a qualified individual,

within the meaning of section 911(d)(1), during the years in issue.

Second, petitioner signed a closing agreement in which she

waived her right to elect either exclusion for the taxable years in issue.

We have concluded that the official who signed petitioner’s closing

agreement on behalf of the IRS had the authority to do so and that the

agreement cannot be set aside under any of the grounds cognizable by

section 7121(b).

But there is yet a third reason why petitioner cannot exclude

under section 911(a)(2) any of the value of the housing she was provided

in Alice Springs while working at JDFPG. Section 911(a)(2) allows a

qualified individual to elect to exclude the individual’s “housing cost

amount.” Section 911(c)(1) defines housing cost amount as the excess of

an individual’s housing expenses 10 over a prescribed threshold. The

10 An individual’s housing expenses include amounts “paid or incurred during

the taxable year by or on behalf of [the] individual.” § 911(c)(3)(A). Therefore, if

Northrop Grumman paid the U.S. Air Force for the value of the housing provided to

22

[*22] threshold generally equals 16% of the limit on the foreign earned

income exclusion. The threshold is prorated, however, if the taxable

year includes periods during which the qualified individual was not a

bona fide resident of a foreign country or did not meet the 330-day test

provided in section 911(d)(2)(B). Petitioner claims, and respondent

accepts, that she satisfied the 330-day test from her entry into Australia

through the end of 2018. Therefore, the appliable thresholds for

determining petitioner’s housing cost amounts are $16,157 for 2017

($102,100 × 0.16 × 361/365) and $16,624 for 2018 ($103,900 × 0.16). 11

For each year, the applicable threshold exceeds the value of the housing

petitioner received ($13,884 for 2017 and $9,667.67 for 2018). 12

Therefore, even if petitioner were a qualified individual who validly

elected the section 911(a)(2) exclusion with her 2017 amended return,

her excludable housing cost amount for each year would be zero.

III.

Penalties

Section 6662(a) provides for an accuracy-related penalty of 20%

of the portion of a taxpayer’s “underpayment” that is attributable to one

of eight grounds listed in section 6662(b). The potential grounds for an

accuracy-related penalty include “[n]egligence or disregard of rules or

regulations” and “[a]ny substantial understatement of income tax.” As

noted at the outset, the notice of deficiency determined accuracy-related

penalties for each of the years in issue but did not identify the basis for

the penalty. In his answering brief, however, respondent clarifies that

he “determined that petitioner is liable for substantial understatement

penalties for the tax years at issue pursuant to sections 6662(a) and (d).”

Very generally, a taxpayer has an “understatement of income tax”

for a taxable year if the tax required to be shown on the taxpayer’s

return exceeds the tax actually shown on the return.

See

petitioner, that amount could be includible in petitioner’s housing expenses for the

purpose of determining her housing cost amount.

11 Respondent would reduce the applicable thresholds for periods during which

petitioner was outside Australia. His calculations, however, are contrary to the

applicable regulations. If a qualified individual meets the 330-day test during a 12month period, all days within that period are “qualifying days,” whether or not the

individual was present in the foreign country. See Treas. Reg. § 1.911-4(f) (example

4). Even under respondent’s calculations, however, the applicable threshold for each

year would exceed the value of petitioner’s government-provided housing.

12 Petitioner does not claim any housing expenses other than the value of the

housing she was provided.

23

[*23] § 6662(d)(2). 13 A taxpayer’s understatement is “substantial” (and

thus potentially subject to penalty) if the understatement exceeds the

greater of $5,000 or 10% of the tax required to be shown on the

taxpayer’s return. § 6662(d)(1)(A). A taxpayer’s understatement may

be reduced, however, to the extent it is attributable to one or more

positions that, although ultimately determined to be incorrect, were

nonetheless supported by substantial authority. § 6662(d)(2)(B). A

taxpayer may also be excused from the substantial understatement

penalty (or other accuracy-related penalties) to the extent that the

taxpayer had reasonable cause for her underpayment of tax and acted

in good faith. § 6664(c)(1). (The definition of “underpayment” is

generally the same as the definition of “understatement” in that each

compares the tax imposed to the tax shown on the taxpayer’s return.

See § 6664(a) (defining “underpayment”).)

Although taxpayers generally have the burden of proof under

Rule 142(a), the Commissioner bears the burden of production “with

respect to the liability of any individual for any penalty, addition to tax,

or additional amount.” § 7491(c).

Respondent argues that, because petitioner did not address on

brief her liability for accuracy-related penalties, we should treat her as

having conceded her liability for those penalties. The authority

respondent cites, however, does not support his argument.

We have held that a taxpayer’s failure in her petition to assign

error to the Commissioner’s penalty determinations relieves the

Commissioner of his burden of production under section 7491(c). E.g.,

Funk v. Commissioner, 123 T.C. 213, 218 (2004).

In her Petition, petitioner did not specifically assign error to

respondent’s determination of penalties. She used a standard form

petition that provides space for a taxpayer to “[e]xplain why you

disagree with the IRS determination in this case.” Petitioner responded

as follows:

I believe the U.S. Treaty with Australia was overlooked or

not included in the review of my original tax filings or the

audit. I was conducting official Government work while in

Australia as I have in other countries was denied the

13 In computing a taxpayer’s understatement, the tax shown on the return is

“reduced by any rebate (within the meaning of section 6211(b)(2)).” § 6662(d)(2)(A)(ii).

24

[*24] physical presence consideration. But if I am denied that

again I would like to look at the excessive time it took for

an audit to be conducted that added additional penalties

and interest. The IRS Agent, Mrs. Parks told me that she

was out sick for months at a time, but my audit was never

transferred to another agent who might be able to work it

with her being out of the office.

In short, the only errors petitioner assigned were respondent’s

alleged failure to give due regard to the 1982 Treaty and the length of

time taken to audit her returns. Petitioner seems to have abandoned

any claim for relief under the 1982 Treaty. And her complaint about the

length of the audit does not provide her legal grounds for relief. The

period of limitation on assessment provides taxpayers’ only basis for

relief when an audit is unduly prolonged. See § 6501(a) (providing as a

general rule that tax must be assessed within three years of the filing of

the relevant return). Petitioner does not allege that the period of

limitation on assessment expired before respondent issued the notice of

deficiency. Nor does she have any apparent basis for such an allegation:

The date of the notice of deficiency, December 10, 2020, is less than three

years after the earliest date on which petitioner could have filed any of

her returns for the years in issue.

Although petitioner’s Petition did not specifically assign error to

the adjustments in the notice of deficiency or respondent’s

determination of penalties, the issues of the inclusion in petitioner’s

gross income of the wages she received from Northrop Grumman and

the value of her government-provided housing, as well as her liability

for accuracy-related penalties, were all tried by the consent of the

parties.

Respondent identified all three issues in his pretrial

memorandum. And the parties presented evidence relevant to all three

issues.

The facts in Funk are thus distinguishable from those of

petitioner’s case. While petitioner did not specifically assign error to

respondent’s penalty determinations, the issue of her liability for the

penalties was tried by the consent of the parties. Therefore, we treat

petitioner as having assigned error to those determinations. Rule

41(b)(1) provides:

When issues not raised by the pleadings are tried by

express or implied consent of the parties, they shall be

treated in all respects as if they had been raised in the

25

[*25] pleadings. The Court, upon motion of any party at any

time, may allow such amendment of the pleadings as may

be necessary to cause them to conform to the evidence and

to raise these issues, but failure to amend does not affect

the result of the trial of these issues.[14]

If a taxpayer assigns error to the Commissioner’s determinations

but makes no argument on brief addressing her liability for penalties, is

the Commissioner relieved of his burden of production under section

7491(c)? In other words, does the taxpayer’s failure to address penalties

on brief have the same effect as an initial failure to have assigned error

to the Commissioner’s penalty determinations?

Rule 151(e)(5) requires a party’s brief to set forth the party’s

“argument,” including a discussion of “the points of law involved and any

disputed questions of fact.” When a party fails to comply with Rule

151(e)(5) by ignoring an issue on brief, the party can be treated as having

conceded the issue. See, e.g., Gregory v. Commissioner, T.C. Memo.

2018-192, at *10–11; Remuzzi v. Commissioner, T.C. Memo. 1988-8,

aff’d, 867 F.2d 609 (4th Cir. 1989).

Respondent relies on Hockaden & Associates, Inc. v.

Commissioner, 84 T.C. 13, 16 n.3 (1985), aff’d, 800 F.2d 70 (6th Cir.

1986), in which a taxpayer challenged the constitutionality of the excise

tax imposed by section 4975. In a footnote, the Court dismissed that

argument and the taxpayer’s allegation of a Fifth Amendment violation.

Because the taxpayer had “not raise[d] this issue in its briefs, . . . we

conclude[d] that it ha[d] abandoned the argument for lack of merit.”

Hockaden, 84 T.C. at 16 n.3.

Remuzzi, Hockaden & Associates, and Gregory did not address

penalties for which the Commissioner bore the burden of production

under section 7491(c). (Indeed, the first two cases were decided before

Congress enacted section 7491(c).)

Under the circumstances, however, we need not decide whether a

taxpayer’s failure to address penalties on brief relieves the

Commissioner of his burden of production under section 7491(c). Even

if petitioner’s failure to address on brief her liability for the penalties

respondent determined did not relieve him of his burden of production

14 Rule 41(b)(1) was amended, without substantive effect, as of March 20, 2023.

26

[*26] under section 7491(c), respondent has met his burden in the case

before us.

To meet his burden, the Commissioner has to “come forward with

sufficient evidence indicating that it is appropriate to impose the

relevant penalty.” Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

When the relevant penalty is the substantial understatement penalty

provided in section 6662(a) and (b)(2), the Commissioner first has to

show that the taxpayer had substantial understatements for the years

in question.

Petitioner’s 2017 return should have showed a tax of slightly more

than $25,374 (the $26,407 total corrected tax liability shown on the

Form 4549–A included with the notice of deficiency less the $1,033 selfemployment tax respondent determined). 15 Because petitioner received

a refund of $25,170 on the ground that the tax imposed for 2017 was less

than the $25,519 of tax shown on her return for the year as originally

filed, her refund was a “rebate,” within the meaning of sections

6211(b)(2) and 6662(d)(2)(A). See Treas. Reg. §§ 1.6662-4(b)(5), 1.66642(e). The refund reduced to $349 ($25,519 − $25,170) the amount

described in section 6662(d)(2)(A)(ii) (that is, the amount compared to

the tax required to be shown on the taxpayer’s return in computing the

taxpayer’s understatement). Petitioner thus has an understatement for

2017 of slightly more than $25,025 ($25,374 − $349). Because that

amount is larger than $5,000 (which, in turn, is more than 10% of the

tax required to have been shown on petitioner’s return), her 2017

understatement is a substantial understatement.

Petitioner’s 2018 return should have shown tax of slightly more

than $21,577 (the $22,943 total corrected tax liability shown on Form

4549–A less the $1,366 self-employment tax respondent determined).

Because petitioner’s return for that year showed tax of only $195, she

had an understatement for the year of slightly more than $21,382

($21,577 − $195). Petitioner’s 2018 understatement thus exceeds $5,000

(which, in turn, is more than 10% of the tax required to have been shown

on her return). Consequently, petitioner’s understatement for 2018 was

15 The $25,374 figure given in the text slightly understates petitioner’s tax for

2017 because it takes into account the $517 deduction respondent allowed under

section 164(f) for one-half of the self-employment tax he determined. Respondent

concedes that petitioner was not subject to that tax. Consequently, she is not entitled

to any deduction under section 164(f).

27

[*27] also a “substantial understatement,” within the meaning of

section 6662(d)(1)(A).

The Commissioner’s burden of production under section 7491(c)

requires him to establish compliance with the supervisory approval

requirements of section 6751(b)(1). Graev v. Commissioner, 149 T.C.

485, 493 (2017), supplementing and overruling in part 147 T.C. 460

(2016); Carter v. Commissioner, T.C. Memo. 2020-21, at *27, rev’d and

remanded per curiam, No. 20-12200, 2022 WL 4232170 (11th Cir.

Sept. 14, 2022). Section 6751(b)(1) provides: “No penalty under this title

shall be assessed unless the initial determination of such assessment is

personally approved (in writing) by the immediate supervisor of the

individual making such determination or such higher level official as the

Secretary may designate.”

Although section 6751(b)(1) does not explicitly require that “the

written approval of the ‘initial determination of . . . assessment’ occur at

any particular time before the ‘assessment’ is made,” Graev, 147 T.C. at

477, we have interpreted the provision to require approval before the

first communication to the taxpayer that demonstrates that an initial

determination has been made, Carter, T.C. Memo. 2020-21, at *27.

Section 7491(c) assigns to the Commissioner only the burden of

production in regard to penalties. It does not impose on him the entire

burden of proof. In general, the burden of proof is on the taxpayer. Rule

142(a). Although section 7491(a) shifts the burden of proof to the

Commissioner in specified circumstances, petitioner makes no

argument that those conditions were met in the present case.

In Frost v. Commissioner, 154 T.C. 23, 35 (2020), we held that

“the Commissioner’s introduction of evidence of written approval of a

penalty before a formal communication of the penalty to the taxpayer is

sufficient to carry his initial burden of production under section 7491(c)

to show that he complied with the procedural requirements of section

6751(b)(1).” If the Commissioner makes that showing, the burden would

then shift to the taxpayer “to offer evidence suggesting that the approval

of the . . . penalty was untimely—e.g., that there was a formal

communication of the penalty before the proffered approval.” Id. If the

taxpayer introduces evidence to that effect, we would then “weigh the

evidence before us to decide whether the Commissioner satisfied the

requirements of section 6751(b)(1).” Id.

28

[*28] If the Commissioner bore the entire burden of proof, and not just

the burden of production, it would be the Commissioner’s responsibility

to establish that no sufficiently formal communication of the penalty

occurred before the supervisor granted approval.

In Chai v.

Commissioner, 851 F.3d 190 (2d Cir. 2017), aff’g in part, rev’g in part

T.C. Memo. 2015-42, the Court of Appeals for the Second Circuit did not

clearly differentiate between the burden of production and the larger

burden of proof. As we observed in Graev, 149 T.C. at 493 n.14, some of

the Second Circuit’s statements in Chai could be read to have “suggested

that the Commissioner . . . bears the burden of proof, in addition to the

burden of production, with respect to sec. 6751(b) issues.” The court

purported to “hold that compliance with § 6751(b)(1) is part of the

Commissioner’s burden of production and proof.” Chai v. Commissioner,

851 F.3d at 221. While it noted that section 7491(c) assigns the

Commissioner the burden or production, however, the court cited no

authority that would impose on the Commissioner the entire burden of

proof. In Graev, 149 T.C. at 493 n.14, we expressed “doubt” as to

“whether Chai meant to impose upon the Commissioner the burden of

proof or just—as provided in sec. 7491(c)—the burden of production.”

And in Frost, we implicitly concluded that the Commissioner bears only

the burden of production. In that case, the Commissioner submitted a

signed Civil Penalty Approval Form for one of the years in issue with an

electronic signature dated more than a year before the date of the notice

of deficiency. We acknowledged that the Commissioner had not shown

“that there were no formal communication(s) to [the taxpayer] about the

penalty before the penalty was approved.” Frost, 154 T.C. at 35.

Nonetheless, we concluded that the Civil Penalty Approval Form met

the Commissioner’s burden of production for the year to which it related.

Thus, we implicitly determined that the taxpayer, not the

Commissioner, bore the responsibility for establishing a formal

communication of the penalty earlier than the notice of deficiency (and

earlier than the date of the supervisor’s electronic signature on the Civil

Penalty Approval Form). In other words, our conclusion that approval

was timely necessarily rested on the premise that the Commissioner

bears only the burden of production assigned to him by section 7491(c),

while the overall burden of proof remains with the taxpayer under Rule

142(a) (unless the conditions of section 7491(a) are satisfied).

On the basis of the parties’ stipulations concerning penalty

approval in the present case, respondent argues that Agent Parks

“properly obtained written supervisory approval of the proposed

substantial understatement penalties for [petitioner’s] 2017 and 2018

taxable years.” We agree. The stipulations establish that Ms. DeLellis

29

[*29] approved the penalties before Agent Parks sent petitioner the

30-day letter, which, under our caselaw, demonstrates that an initial

determination of penalties has been made. See Clay v. Commissioner,

152 T.C. 223, 249 (2019), aff’d, 990 F.3d 1296 (11th Cir. 2021). Although

the stipulations do not rule out the possibility of an earlier

communication of an initial determination of penalties, 16 petitioner

presented no evidence that any such communication occurred. Indeed,

petitioner makes no argument at all in regard to the penalties

respondent determined. Therefore, the stipulations are sufficient to

meet respondent’s burden of production under section 7491(c) and

petitioner has not met her burden of proving that Ms. DeLellis’s

approval was untimely. 17

When the Commissioner meets his burden of production under

section 7491(c) of “com[ing] forward with sufficient evidence indicating

that it is appropriate to impose the relevant penalty,” it becomes

incumbent on the taxpayer to raise defenses such as reasonable cause

or substantial authority. Higbee, 116 T.C. at 446. Petitioner, however,

raised no such defenses. Again, she did not address penalties at all in

her brief. We therefore conclude that petitioner is liable for a

substantial understatement penalty for each of the years in issue in an

amount to be determined by the parties, taking into account

16 In addition, the stipulations do not conform precisely with the text of section

6751(b)(1). That Agent Parks made the initial determination to assert the penalties

does not establish that she also made the determination to assess them. Strictly

speaking, therefore, the stipulations fall short of establishing that Ms. DeLellis was

the appropriate person to grant supervisory approval. Under the circumstances,

however, we are willing to infer that Agent Parks’s determination encompassed both

the assertion and assessment of the penalties in issue. We view it as unlikely that,

while Agent Parks determined to assert the penalties, another official whose

involvement in the case is not disclosed by the record made a separate determination

to assess the penalties.

17 Because Ms. DeLellis’s approval was timely under this Court’s more

stringent test, it is of no moment that the U.S. Court of Appeals for the Ninth Circuit

(the likely appellate venue given petitioner’s residence in Arizona when she filed her

Petition, see § 7482(b)(1)) would employ a more lenient test. See Laidlaw’s Harley

Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022), rev’g and

remanding 154 T.C. 68 (2020); Kraske v. Commissioner, No. 27574-15, 161 T.C.

(Oct. 26, 2023); Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985

(10th Cir. 1971).

30

[*30] respondent’s concession of the self-employment tax he determined

in the notice of deficiency.

Decision will be entered under Rule 155.