Martti v. United States

• Decision Date: 05 May 2015
• Docket Number: No. 13-118T,13-118T
• Parties: JOHN M. MARTTI, Plaintiff, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

JOHN M. MARTTI, Plaintiff, v. UNITED STATES, Defendant.

No. 13-118T

United States Court of Federal Claims

May 5, 2015

Federal Tax; Motion to Dismiss; Lack of Subject Matter Jurisdiction; Claim for Refund; Waiver; Foreign Earned Income Exclusion.

Molly L. Stanga, Mayhall Law Firm, APLC, Covington, Louisiana, for plaintiff.

S. Starling Marshall, Trial Attorney, Tax Division, United States Department of Justice, Washington, D.C., for defendant. With her were G. Robson Stewart, Assistant Chief, Court of Federal Claims Section, David I. Pincus, Chief, Court of Federal Claims Section, and Caroline D. Ciraolo, Acting Assistant Attorney General, Tax Division.

OPINION

HORN, J.

FINDINGS OF FACT

Plaintiff John M. Martti filed a complaint in the United States Court of Federal Claims, which alleges that the Internal Revenue Service (IRS) owes him refunds of tax, penalties, and interest totaling $15,740.61 for the 2005 tax year, and $27,788.60 for the 2006 tax year. Plaintiff argues that he is owed these amounts because the IRS improperly concluded that he did not qualify for the foreign earned income exclusion under 26 U.S.C. § 911(a) (2012). Plaintiff filed his complaint on February 14, 2013. The parties subsequently indicated that after the exchanges of information and negotiation between the parties, they believe that $22,844.56 of plaintiff's 2006 deficiency can be resolved through settlement.

Plaintiff is a United States citizen who worked as a sea vessel captain in Nigeria's territorial waters. He, therefore, claimed Nigeria as his principal place of business and histax home for the 2005 and 2006 tax years. Alternatively, plaintiff asserts in his complaint that his tax home for 2005 and 2006 was Costa Rica, because plaintiff claims he has resided in Costa Rica since 2005, that he spent at least 330 days in 2015 outside of the United States in foreign countries, including Costa Rica and Nigeria, and that he "was a bona fide resident of Costa Rica during the 2006 tax year." Plaintiff states that his job as a sea vessel captain provided his only source of income, and that he only was licensed to navigate Nigerian territorial waters, not international waters. Plaintiff argues that given his foreign residency and the foreign source of his income, he is eligible for the foreign earned income exclusion set out in 26 U.S.C. § 911(a) for both the 2005 and 2006 tax years.

Plaintiff filed his Form 1040 U.S. Individual Income Tax Return for the 2005 tax year on April 27, 2006, claiming that all of his earned income was excluded from taxation under the foreign earned income exclusion. Plaintiff's employer, Galliano Marine Services International, had withheld $10,722.00 of plaintiff's earnings in 2005 as income tax the employer paid to the IRS in plaintiff's name. See 26 U.S.C. § 6513(b)(1) (2012). On May 22, 2006, the IRS refunded the $10,722.00 withheld salary to plaintiff.

Plaintiff filed his Form 1040 U.S. Individual Income Tax Return for the 2006 tax year on May 3, 2007. Plaintiff's employer had withheld $21,810.00 of plaintiff's wages as income tax the employer paid to the IRS in plaintiff's name. See 26 U.S.C. § 6513(b)(1). Plaintiff claimed that $82,400.00 of his earned income, the maximum allowed under the foreign earned income exclusion, should have been excluded in calculating his tax liability, and identified $19,264.00 of the $21,810.00 withheld by his employer as an overpayment of tax to be refunded to plaintiff.¹ On May 28, 2007, the IRS refunded $19,264.00 to plaintiff.

On November 15, 2007, Michael Pryzbyl, in his capacity as a tax compliance officer for the IRS, sent plaintiff a letter informing him that the IRS had audited plaintiff for the 2005 and 2006 tax years and assessed additional tax liability. The IRS concluded that plaintiff did not meet the requirements for the foreign earned income exclusion because income earned while working in international waters does not qualify as income earned in a foreign country, but rather, "is U.S. source income." The IRS found, therefore, that a deficiency existed in the amount of $10,071.00 for the 2005 tax year, and $17,411.00 for the 2006 tax year, and that these underpayments warranted additional tax, interest, and penalties. With his November 15, 2007 letter, Mr. Pryzbyl included two copies of the IRS examination report, which contained proposed changes to plaintiff's tax liability for 2005 and 2006. He requested that plaintiff review the IRS examination report and then inform the IRS whether or not he agreed with the proposed changes to his federal income tax liability for the 2005 and 2006 tax years. The letter indicated that plaintiff should respond no later than December 15, 2007, otherwise, the IRS would issue a notice of deficiency.In a second letter to plaintiff, dated January 9, 2008, Mr. Pryzbyl, this time identified as a group manager, indicated that plaintiff had not replied to the November 15, 2007 letter, and January 24, 2008 would be the last day for plaintiff to respond prior to the IRS issuing a notice of deficiency.

According to Mr. Pryzbyl's "Examining Officer's Activity Record," he closed the case on January 31, 2008 after receiving no response from the taxpayer. Mr. Pryzbyl's activity record shows he subsequently received a phone call from plaintiff, on February 11, 2008,² in which the taxpayer "STATED HE WORKED IN NIGERIA ENTIRE YEAR." (capitalization in original). Mr. Pryzbyl granted plaintiff a requested extension to respond to the IRS' proposed changes, and requested a letter from plaintiff's employer stating that he worked in Nigeria for the entire year. The activity record indicates that, once again, no response was received from plaintiff,³ and, on April 3, 2008, after the March 15, 2008 extension deadline had passed, the case, once again, was closed by the IRS.

The IRS issued a notice of deficiency on August 1, 2008 in the amount of $10,071.00 for the 2005 tax year and $17,411.00 for the 2006 tax year. The IRS also assessed a twenty percent penalty, amounting to $2,014.20 for the 2005 tax year and $3,482.20 for the 2006 tax year. See 26 U.S.C. § 6662(a) (2012). The notice of deficiency stated that interest on the deficiencies would continue to accrue from the due date of the tax returns until they were paid. The notice informed plaintiff that if he wished to contest the determination before paying the tax, he could file a petition in the United States Tax Court within 150 days of the date listed on the notice. The notice also instructed plaintiff that he could contact Davina Manuel, an IRS tax compliance officer, if he had any questions.

According to plaintiff, following the issuance of the statutory notice of deficiency on August 1, 2008, plaintiff's accountant, Mr. Brohl, contacted Ms. Manuel to discuss what plaintiff describes as his "response to the January 9, 2008 letter" sent to plaintiff by the IRS.⁴ On September 11, 2008, Ms. Manuel's office appears to have faxed a Form 4564 Information Document Request regarding both tax years to plaintiff's accountant for completion,⁵ along with a Form 9209 Bona Fide Residence/Physical Presence Questionnaire, a Form 9211 Foreign Earned Income Exclusion Questionnaire, and a Form 9212 Income Questionnaire. Plaintiff claims he completed and returned the forms to the IRS on October 8, 2008.

On June 26, 2009, the IRS sent plaintiff a letter to an address in Cost Rica regarding the 2005 and 2006 tax audits. This letter indicated that the IRS was not altering the tax increase proposed in the August 1, 2008 statutory notice of deficiency.⁶ The letter stated:

We have carefully considered the information you recently provided us about your federal tax liability for the year(s) shown above [2005 and 2006] . . . . We did not make any changes to the tax increase we previously proposed in the statutory notice of deficiency issued on the date shown above. The information you provided did not justify a change . . . .

The letter indicated that if plaintiff agreed with the findings, he should sign and return an agreement form, and if plaintiff did not agree with the lRS' conclusion, he could file apetition in the United States Tax Court within 150 days of the date of the notice of deficiency.

Plaintiff states that Mr. Brohl attempted to call Ms. Manuel three times in the subsequent weeks, but that her voicemail box was full each time. After repeated unsuccessful attempts to reach Ms. Manuel, plaintiff claims that on August 5, 2009, his accountant spoke with Jeannie Thomas, Ms. Manuel's manager at the IRS. Plaintiff states in his response brief that during Mr. Brohl's call with Ms. Thomas, Mr. Brohl:

learned of the various reasons that Mr. Przybyl and the IRS did not consider the plaintiff to be a bona fide resident of a foreign country, and, therefore, had denied the plaintiff's use of the foreign earned income tax exclusion, which resulted in the issuance of the June 26, 2009, [sic] letter.

On August 10, 2009, Mr. Brohl sent a letter to the IRS on plaintiff's behalf requesting "audit reconsideration" for the 2005 and 2006 audits, based on "additional information not submitted with the original return or requested by previous IRS inquiries." The letter claimed that plaintiff had responded timely to all IRS inquiries and that the IRS had disallowed plaintiff's foreign income exclusion based on an understanding that plaintiff performed his duties in international waters. Plaintiff's representative explained in the letter that plaintiff did not work in international waters. Rather, he worked in Nigerian national waters on an oilfield rig supply ship, ferrying equipment and passengers from a Nigerian port to drill sites located in Nigerian national waters. Plaintiff's accountant also reiterated that plaintiff moved to Costa Rica in 2005, and he applied for permanent residency that year. Moreover, plaintiff informed the IRS that, as of February 2005, his address was a Costa Rica location, and he declared his intention...