Nathaniel J. Holmes, Petitioner

T.C. Memo. 2011-26 UNITED STATES TAX COURT NATHANIEL J. HOLMES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 27240-08.

Filed January 31, 2011.

Nathaniel J. Holmes, pro se.

Ijaura'A. Priõe, for i-espondent

MEMORANDUM OPINION

GOEKE, Judge: Respondent determined that income petitioner received in 2005 from Blackwater Security Consulting (Blackwater) for dangerous security work while in Iraq was not excludable from his gross income under section 112.1 This issue and additions to All section references are to the Internal Revenue Code in (continued.:.)

SERVED JAN 3 1 ŽÓR tax under sections 6651(a) (1) and (2) and 6654 for 2005 are before us.

For the reasons stated herein, we hold that petitioner' s income may not be excluded and that he is liable only fþr the section 6654 (a) addition to tax.

Background Sbme of the facts have ,been stipulated and are so found.

At the time petitioner filed his petition, he resided in Florida.

P titioner was engaged in performing dangerous security services in Iraq during 2005. Petitioner was hired and paid by Blackwater to perform these security services in Iraq. His work in Ira related to military operations.

Pe itioner received compensation of $98,400 for those services.

He also received $913 in taxable interest from Navy Federal Credit, Union.

For 2005 I aq was identified as a combat zone under Executive Order 12744, 56 Fed. Reg. 2663 (Jan. 23, 19.91) .

While in Iraq, petitioner was given a memorandum issued by Robert L. Hunt, the Acting Deputy Director, Compliance Field Operat ons, Internal Revenug Service (IRS) .

This memorandum.

discus ed the appropriate steps for civilian personnel to take when engaged in an IRS examination and collection activity involving a taxpayer deploy d to a Qualified Combat- Zone Petiti ner did not remember who gave the memorandum to him.

. continued) effect for the year in issue.

.

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Petitioner did not file aan incóme tax'return for 2004 or 2005.

On June 2, 2008, respondent prepared a substitute for < return for petitioner under section 6020 (b) for 2005. At some point in 2008, a petitioner provided respondent with a 2005. Form 1040, U.S.

Individual:Income Tax Return, dated "28 May 07".

Petitioner -reported zero income and zero tax due on the Form 1040.2 Respondent did not accept the 2005 Form 1040 as a valid return.

On August 25, 2008, respondent mailed petitioner a notice of deficiency regarding his 2005 income tax liability.

On November 10, 2008, petitioner timely filed a petition with this Cour t .

I. Section 112 Discussion Section 61 provides that gross income includes all income from whatever source derived, unless the taxpayer can establish a specific legislative authorization to exclude income from taxation. Commissioner v. Glenshaw Glass Co. , 348 U.S. 426 (1955) . Section 112 (a) (1) provides:

"Gross income does not include compeñsation receïved for' active service as a member below the grade of commissioned officer in the Armed Forces of the United States for any month during any part of which such member - - (1)- served in a combat zone" .

2Petitioner did not make any estimated tax payments for tax year 2005 but made estimated tax payments of' $55,000 during 2004.

Section 7701(a) (15) defines. "Armed Forces of the United 4 - States!' as including:

a 1 regular and reserve components of syrvices which are subject Secretary of Defense, Secretary of Fþrce, and * of such forces include commissioned officers and pþesonnel below the grade of commissioned officers in , sùch forces.

the Navy, for the Secretary of *s *s includes the Coast Guard.

to the jurisdiction of the -Secretary of the Armyg the the uniformed the Air the The members , In 2003 petitioner did not serve in the Armed Forces of the United States .

He was a private citizen who was hired by and paid by a private company, Blackwater.

P titioner argues that because he was performing services simila to those performed by the U.S. military and becaus he perforned those services in a "combat zone", he should be allowed to exclude from gross income the pay he received from Blackwater while performing those duties. However, at no time in 2005 was, petiti ner actually a member of the Armed Forces of the United States. Section 1.112-1(a) (4), Income Tax Regs., states:

Only compensation paid by the Armed Forces of the * United States to members of the United the Armed-Forces-whose military active duty status the Ahmed Forces can, be e cluded under section 112, except for compensation paid by an agency or' instrumentality of States or by an international organization to a member of continues during the member' s assignment to the agency or instrumentality or organization on official detai-l. Compensation paid by ot her employers (whether private enterprises or governmèntal entities) ,to members of Écmed Forces cannot be excluded under section 112 even if the payment n ilitary compensation or is labeled by the employer as c mpensation for active service in the Armed Forces of the IJnited St ates .

is made to supplement the member' s * * * the Under section 1.112-1(a) (4) Income 'Íai Regs.⁴, petitnioner cannot exclude the compensation he received ffom Blackwater iñ°2005 from gross income because it was not "compensation paid by the Armed Forces of the United States to membeis of 'the Armed Forces" The Tax Court-has held that émployees of þrivate companies performing services similar to those performed by members öf the Armed Forces of the United States while in combat zones do not qualify for the exclusion under seätion 112.

See Land v.

Cdmmissioner,-~61 T.C.3675 (1974) (a ýilót employed by a private airline flÿingEcivilian aircraft uhder contract with the Department of Defense in support of the U.S. military 'in a combat zone -during the Viêtnam War was not-a'member of the Armed Forces and therefore not entitled to the secüion 112 exclusion); see' also Hildebran v Commissioner, T.C. Memo. 2004-42.

In Isildebran, the taxpayer was employed as a merchant marine by Bay Ship Management, a private company. During part of tax years-1998 and- 1999 the taxpayer was assigned to work aboard a U.S. naval ship which operated in a combat zone.

Id.

The taxpayer was' training, and mission completion.

to Navy physical standards and Navy standards áubject of appearance, ['Ì'he taxpayer]ewas reqüired to, and did, have security a clearances, wear uniforms, vaccination, antiterrorism, and carry a Department of Defense identification card which showed his ship assignment and specialty.

receive training in small akms and receive an anthrax * * * -l.

In Hildebran, the Commissiorier issued a notice of deficiency to the ta payer, who petitioned -the Court, arguing that the income he received while working. in a combat zone should be, excluded 4|..

from g oss income under sect ion 112.

The Court held in Hildebran .that because the taxpayer was not a útember of the Armed Forces of the United States during the years at issue within the meaning of sections 112 and 7701(a) (15) , he was not ent-i tled underg section -112 to exclude, from gross income any of the wages that he received-while working for Ba Ship Management abo rd the Navy ship.

The Court stated that although the taxpayer n et certain Navy standards, "those facts did not in any way change the status of Mr.. Hildebran as a civilián employee of Bay Ship Management."

,The facts in Hildebi-an are.similar to the facts in this case, , Although |- petiti ner may have performed work similar A.o ,that of members of the Arned Forces of the United States while in a combat zone, those facts do not. change tl e status of petitioner as ancivilian who wah recruited and paid by Blackwater, a private company.

Therefbre, like the taxpayer in Hildebran, petitioner is not entitl d under section 112 t o exclude from gross income ·the compenpatipn he received frôm a private company, Blackwater, while working in Iraq.

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Petitioner asserts tha section 1. 112-1 (e) (2) ,3 Examples (_3_) , (4 ) , ( ) , (6_) , and (7) , Income Tax Regs , , "clearly illustrate that individuals providing military service in a combat zone need not be memberssof the armed forces." However, athis is not the case . »Examples (3) , (4) , (5) , : (6) , and (7) refer to member "B"a, described in Examples (1) and (2) as a nember of the Armed Forces:

Petitioner also asserts that Congress did not intend to limit the definition of "Armed Forces of the United States" as defined in section 7701(a) (15) and that this definition.may include individuals who are not members ofsthe Armed Forces and who perform services similar to those of the United-States military. Congress has considered the issue of whether income earned by -individuals who are .not members of the Armed Forces of the - United States and -who are úrorking in combat zones should be excluded from gross inòome, it has yet to âmend section 112 to extend the exclusion to such taxpayers H.R 294, 109th Congress (2006) , proposed to extend the combat zone income tax exclusion to civilian-contract employees serving in'combat.

Jackson, Cong.

Research Serv , RL 33230, Proposed, Federal Income Tax⁹ Exclusion for Civilians Serving in Combát Zones (2006) .

H R'.5 294 was sent to the House Ways and Means Committee and never came forth.

. Similar bills wekel also introducede in 2001, H.R. 351, 10'7th Cong.

(2001) , andrin 2003, H R. 11.7, 108th Cong.

(2003) . Both bills were also sent, to the House Ways and Means Committee and never came forth.

a II.' Additions to Tax s R spondent -determined that petitioner is liable for additions to-tax for failure to tïmely file a return under section 6651(a) (1) , failure /to timely pay tax under, section 6651(a) (2) , and failure to pay estimated income tax under section Section 6651(a) (1) imposes an addition to -tax for-failure to timely file a required Federal income tax return, unless the taxpayer can -establish that the failure is due to -reasonable a cause-and not due to'willfu] neglect. Section 7491(c) places the burdentof productionson the Commissioner to present sufficient, evidenge showing that the addition to tax is appropriate . Higbee v. Cominissioner, 116 T.C. 438 -(2001-).. Once the Commissioner , meets this burden, the taxpayer has the burden»of proof with respecp to -exculpatory factòrs, such as reasonable cause.

Id. at 446.

Petitioner admitted on:brief thats he did not:file a return for calender year 2005. Petitioner's only explanation for failing to file is that in 2005 while in Iraq, he was given a memorandum that he , caused him to ,believe that the income he was receiving from Blackwater was not taxable.

This memorandum was an internal memorandum writtien to give the Commissioner' s emplo ees field guidance for examination and collection activity involving taxpayers in Iraq.

The memorandum, titled "Memorandum for Acting Deputy Director, Compliance Field Operations", was issued by the -Internal Revenue Service Small Business/Self - Employment Divisions on June 28, 22004.

The memorandum states that civilian or military personnel who are in direct - suyport 'of a combat zone military initiative and physically located .in the o combat area are entitled to the exclusion.

It also *atates that time spent in a combat zone by an individuala serving in support of the Armed Forces will be disregarded with respect to "certain acts required under the Internal Revenue Code."

It goes on to state that "This change in píocedure will be reflected" in the next revision -of the IRMI, which is in the process of being written."

Petitioner satisfies all the criteria found-in then - memorandum.

He was serving in Iraq alongside "the military, provided security to'Government officials, and aided in giving air support, medical aid, and emergen'cy response assistance.

Petitioner had no baákground in tax law and was given this memorandum writtentby an IRS employee while serving in Iraq.

We believe that receiving this memorandum while-serving in Iraq could- give someone reasonable cause to believe: that his payments from Blackwater were excluded from gross income. Therefore, petitioner is not liable for the addition to tax under section 6651(a).(1) 10 - Respondent also determ ned at section 6651(a) (2) addition to tax. Nection 6651(a) (2) im oses an, addition to tax-for failure to paygthe amount shown as tax on a return one or before the ^due date pÊescribed unless the taxpayer can establish such failure was due -to reasonabl-e cause and not willful. neglect.

The amount of ·the addition is equal-to 0.5 percent of the amount shown as tax on the tax return but not paid, with anyadditional 0.5 percen each month or fraction ·thereof during ,which the failure to payi continues (up to a maximum of 25 percent) .

See Cabirac v.

Commiskioner, 120 T.C. 163, ¾170 n.¹² (2003) .

, For the reasons stated above, we find that.-petitioner had reas'onable-cause and is not liable for the section 6651(a). (2) addition to tax.

Respondent also determined-thatepetitioner is liable for an addition to - tax under sectión 6654 - for f ailure to pay estimated income for 2005.

- Section 6654 (a) .imposes an addition to tax for failure to make timely and sufficient payments for estimated tax.

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A taxpayer has an obligation to pay estimated tax for a particular year only if he has a "required annual payment" for that ear .

Sec . 6654 (d) .

- A required annual - payment , is equal to the lesser of :

(1) 9.0 percent of the tax, shown on .the taxpayer' s returr due for the year sin issue (or, i.

if anorreturn is filed, , 90 percer t of the tax for asuchgyear) ; or (2) if the taxpayer filed a returrÈ for the immediately preceding taxable year, 100 percent of the tix shown on that return.

Sec. 6654 (d) (1) (B) . Generally, section 6654 provides no exception for reasonable cause.

Sec.

1. 6654 -1 (a) (1) , Income Tax Regs . ; see also Brav v. Commissioner, T.C. Memo. 2008-113.

Petitioner made no estimated tax payments for 2005, and therefore such payments were less than 90 percent of the amount of tax shown on the substitute for return; and petitioner failed to file a 2004 income tax return. Therefore, petitioner is liable for the section 6654 (a) addition to tax.

To reflect the foregoing, An appropriate decision will be entered.