Nicole Diane Henaire ( 2023 )

United States Tax Court
T.C. Memo. 2023-131NICOLE 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 government-
provided 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 self-
employment 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 self-
employment 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 government-
provided 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 12-
month 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 self-
employment 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), 1.6664-
2(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.