Rogers v. Comm'r

• Decision Date: 17 April 2015
• Docket Number: No. 13–1241.,13–1241.
• Citation: 783 F.3d 320
• Parties: William D. ROGERS and Yen–Ling K. Rogers, Appellants v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

783 F.3d 320

William D. ROGERS and Yen–Ling K. Rogers, Appellants

v.COMMISSIONER OF INTERNAL REVENUE SERVICE, Appellee.

No. 13–1241.

United States Court of Appeals, District of Columbia Circuit.

April 17, 2015.

Yen–Ling K. Rogers, Pro se, argued the cause for appellants. With her on the briefs was William D. Rogers, Pro se.

Damon W. Taaffe, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief was Richard Farber, Attorney. Bethany B. Hauser, Attorney, entered an appearance.

Before: BROWN, Circuit Judge, MILLETT, Circuit Judge, and EDWARDS, Senior Circuit Judge.

Opinion

EDWARDS, Senior Circuit Judge:

This case involves an appeal by Yen–Ling Rogers (“Rogers”) and her husband William Rogers (together, “Appellants”) challenging a decision of the Tax Court denying their request to redetermine their tax liability for 2007 and imposing a 20% penalty for negligently failing to follow the tax rules.

The United States income tax system reaches all U.S. citizens' income no matter where in the world it is earned, “unless it is expressly excepted by another provision in the Tax Code.” See Comm'r v. Schleier, 515 U.S. 323, 328, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995) ; see also 26 U.S.C. § 61(a) (defining “gross income” as “all income from whatever source derived,” except as otherwise provided). There are many exceptions under the Tax Code, however. Relevant to this case, qualified Americans who live abroad can exclude from their taxable income “foreign earned income,” which is defined as earned income “from sources within a foreign country or countries.” 26 U.S.C. § 911(a)(1), (b)(1)(A). Internal Revenue Service (“IRS”) regulations provide that income is only “from sources within a foreign country” if it is “attributable to services performed by an individual in a foreign country or countries. ” 26 C.F.R. § 1.911–3(a) (emphasis added). As a result, according to the IRS, qualified Americans who live abroad cannot use Section 911 to exclude any income from work performed in or over the United States or international waters. Only income for work performed in or over foreign countries can be counted as foreign earned income.

In 2007, Rogers, who is a U.S. citizen, lived in Hong Kong and worked as an international flight attendant for United Airlines (“United”). She flew and worked in and over foreign countries and also in and over the United States and over international waters. Nonetheless, she and her husband filed a tax return reporting all of her flight attendant earnings as “foreign earned income.” The Commissioner of the IRS, however, determined that Appellants owed a tax deficiency of $3,428.30 on the portion of Rogers's earnings attributable to her work outside foreign countries, as well as a 20% penalty.

Appellants petitioned the Tax Court to redetermine their income tax liability, arguing that the language of Section 911 authorized them to exclude all of Rogers's flight attendant earnings as “foreign earned income,” and that they should not be charged the negligence penalty. The Tax Court disagreed. Citing the language of Section 911, its prior holdings, and IRS regulations, the court found that Appellants could only exclude the portion of Rogers's earnings that were related to her time spent working in or over foreign countries. Rogers v. Comm'r, 105 T.C.M. (CCH) 1478, 1479–80 (2013). The Tax Court also upheld the negligence penalty. Id. at 1480. Rogers and her husband then filed a timely appeal with this court.

Appellants argue that the Tax Court incorrectly applied Section 911. They contend that the language of Section 911 authorizes them to exclude all of Rogers's flight attendant income as “foreign earned income” because it was received “from sources within a foreign country or countries”—namely, Rogers's Hong Kong-based job. See 26 U.S.C. § 911. They also challenge the imposition of the negligence penalty, and ask this court to award costs and fees.

We agree with the Tax Court that the language of Section 911 and the IRS's regulations support the Commissioner's determination against Appellants. Rogers has failed to show that the Tax Court erred, or that the IRS's regulations interpreting Section 911 are unreasonable. We remand only for the Tax Court to address a factual issue that was raised and clarified at oral argument before this court.

I. Background

In 2007, Rogers worked for United as an international flight attendant based in Hong Kong. According to the parties' stipulations below, she flew a total of 74 flights between destinations in Asia and the United States. She performed both in-flight duties and some pre-departure and post-arrival work, and was generally paid according to her flight time. She received vacation time and benefits as part of her employment, and could receive “guarantee pay” for work she would have performed on flights that were canceled. The parties agreed at oral argument that, during the time when Rogers received guarantee pay, she was required to remain in Hong Kong, awaiting reassignment to another flight.

United paid Rogers $41,762.10 in wages during 2007, and provided her with an apportionment of her estimated duty time between minutes spent in or over foreign countries, in or over the United States, and over international waters. Appellants jointly filed their 2007 taxes, excluding all of Rogers's flight attendant earnings as “foreign earned income” under Section 911. Rogers, 105 T.C.M. (CCH) at 1478–79.

On December 30, 2010, the Commissioner sent Rogers and her husband a deficiency notice for the 2007 tax year, stating that they could not exclude the portion of Rogers's income earned while she was working in or over the United States and over international waters. That portion of her wages was not “foreign earned income” because it was not “attributable to services performed by an individual in a foreign country or countries. ” 26 C.F.R. § 1.911–3(a) (emphasis added). Based on United's duty time apportionment, the IRS concluded that Rogers and her husband owed $3,428.30 in taxes on the erroneously excluded wages. The IRS also assessed Rogers and her husband a $685.66 “accuracy-related penalty” under a provision of the tax code that allows the Commissioner to impose a penalty equal to 20% of the underpayment if a taxpayer withholds taxes due to “[n]egligence or disregard of rules or regulations.” 26 U.S.C. § 6662.

Appellants petitioned the Tax Court for a redetermination of their tax liability. The parties stipulated before the Tax Court to duty time apportionments far more favorable to Rogers than United's estimates; they also stipulated that Rogers was a “qualified individual” eligible for the foreign earned income exclusion. In their arguments to the Tax Court, Appellants claimed that they were entitled to exclude all of Rogers's flight attendant income as “foreign earned income”; that the value of Rogers's vacation pay, sick pay, guarantee pay, and training pay should be considered earned in Hong Kong and thus allocated to foreign earned income; and that they should not have been charged a penalty.

The Tax Court rejected all of Appellants' legal arguments. Citing its prior cases, the court ruled that Rogers could only exclude earnings for services actually performed in or over foreign countries, and that Appellants must pay taxes on the portion of Rogers's earnings attributable to time when she worked over international waters and in or over the United States. Rogers, 105 T.C.M. (CCH) at 1479 (citing LeTourneau v. Comm'r, 103 T.C.M. (CCH) 1229 (2012) ; Rogers v. Comm'r, 97 T.C.M. (CCH) 1573 (2009) ). The court also concluded that most of Rogers's other benefits and pay, such as vacation and sick days, arose from Rogers's general work and should therefore be allocated according to Rogers's flight time. Id. at 1479–80. As to the accuracy-related penalty, the court found that Appellants had failed to carry their burden of showing that they acted with reasonable cause and in good faith in excluding all of the flight attendant earnings. The Tax Court noted that the IRS had issued deficiency notices to Appellants for the exact same behavior in prior tax years. Id. at 1480. Using the new, stipulated apportionment, the court reduced the tax deficiency to $1,635.30, and adjusted the accuracy-related penalty downward to $327.06.

Rogers and her husband appealed to this court. Their chief argument is that the Tax Court erred in applying Section 911 and the IRS regulations. In particular, they contend that the language of Section 911 entitles them to exclude all of Rogers's flight attendant income as “foreign earned income” because it is “from sources within a foreign country.” See 26 U.S.C. § 911(b)(1)(A). Appellants also challenge the accuracy-related negligence penalty, and ask the court to award them costs and fees.

II. Analysis

Appellants' primary argument is that the Tax Court erred in requiring them to apportion Rogers's flight attendant earnings because, in their view, Section 911 allows them to exclude all of her earnings from taxable income. We review the Tax Court's legal conclusions de novo. See Byers v. Comm'r, 740 F.3d 668, 675 (D.C.Cir.2014).

Appellants note that Section 911 defines “foreign earned income” as earned income “from sources within a foreign country or countries.” 26 U.S.C. § 911 (emphasis added). Focusing on the “from sources” language, they reason that, under the statute, the location where personal services are performed is irrelevant to the tax status of the earnings arising from those services. Instead, they argue, all that matters is the location of the source of the income. As a result, Appellants contend that all income related to Rogers's United Airlines job placement in Hong Kong—the ostensible foreign “source” of her earnings—should be excluded. To bolster their legal argument, Appellants cite a number of cases that they claim show a practice by the IRS and the Tax Court of allowing pilots and other persons living abroad to...