Decisions will be entered under
GUY,
Respondent issued a joint notice of deficiency to Larry Lee Lock II and Kristi Leigh Lock determining income tax deficiencies of $19,439 and $22,643 for the taxable years 2010 and 2011, respectively. Respondent issued a separate notice of deficiency to Mr. Lock determining an income tax deficiency of $28,169 for the taxable year 2012. Petitioners invoked the Court's jurisdiction by filing timely petitions for redetermination with the Court. At the time the petitions were filed, petitioners resided in Florida.
After the petition was filed in the case at docket No. 24629-14S, Ms. Lock submitted to respondent a Form 8857, Request for Innocent Spouse Relief, for the taxable years 2010 and 2011. Respondent reviewed Ms. Lock's claim and determined2017 Tax Ct. Summary LEXIS 11">*12 that she is entitled to spousal relief for the taxable years 2010 and 2011 under the provisions of
The issues for decision are whether: (1) Mr. Lock is a "qualified individual" who is entitled to exclude a portion of the wages that he earned overseas during the taxable years 2010, 2011, and 2012 (years in issue) under the foreign earned income exclusion provisions of
Some of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulation of facts, and the accompanying exhibits are incorporated herein by this reference.
Petitioners married in August 2002, and they have a son born in 2003. They divorced in October 2012.
Mr. Lock earned a bachelor's degree from Western Kentucky University in 1995. As discussed in detail below, Mr. Lock spent a number of years working as a law enforcement2017 Tax Ct. Summary LEXIS 11">*13 officer, followed by an extended period of employment working overseas as a personal security specialist for Triple Canopy, Inc. (TCI).
Ms. Lock completed high school, and since 2005 she has been employed as a clerical assistant. She was the primary caregiver for the couple's son while Mr. Lock worked overseas.
From 1995 until 2005 Mr. Lock was employed as a deputy sheriff in Florida, including service as a sniper on the special weapons and tactics team. From 2008 through at least July 2011 he continued to qualify as a reserve deputy sheriff, and he served in that capacity on occasion when he was not working for TCI.
TCI is a private security company and Government contractor with headquarters in Virginia. In late December 2005 TCI hired Mr. Lock as a personal security specialist to provide protection for U.S. Department of State (State Department) personnel and other high-ranking U.S. Government officials primarily in Baghdad, Iraq, and other locations within that country. In August 2009 TCI promoted Mr. Lock to unit support coordinator--a supervisory position.
During most of 2010 and 2011 and for six months2017 Tax Ct. Summary LEXIS 11">*14 in 2012 Mr. Lock lived and worked primarily in the International Zone (IZ) (formerly known as the Green Zone) and neighboring areas in Baghdad. The IZ was a large area in central Baghdad, with secured points of entry, that housed the U.S. Embassy and civilian and military personnel. The IZ was controlled by the Iraqi military and police, and Mr. Lock reported that the area was frequently the target of mortar and rocket attacks.
Among other conditions of his employment, TCI required Mr. Lock to maintain a valid U.S. tourist passport, a valid U.S. driver's license, and a bank account to facilitate electronic deposits of his paychecks. The Iraqi Ministry of Interior issued a series of entry and exit visas to Mr. Lock that allowed him to travel to and from Iraq for periods that normally lasted no more than 12 months. Mr. Lock's wife and son were not permitted to accompany him to Iraq.
Mr. Lock was not permitted to bring weapons into or out of Iraq. The U.S. Government provided Mr. Lock with all of the firearms that he used in Iraq, including handguns, shotguns, and rifles. Mr. Lock was required to maintain proficiency in the use2017 Tax Ct. Summary LEXIS 11">*15 of those weapons, and he had access to a shooting range near his living quarters in the IZ for that purpose.
Mr. Lock purchased his own gun holsters and body armor for use in Iraq. In 2010 he purchased a laptop, a digital camera, and a portable GPS device, and in 2011 he purchased a tactical watch--items that he purportedly needed to properly perform advance site surveys and related missions for TCI. Mr. Lock acknowledged that he also used some of the tactical equipment in new businesses (described below) that he organized in the United States in 2011 and 2012.
In 2011 and 2012 Mr. Lock purchased several firearms which he stored at his home in Florida. In August 2011 he purchased a rifle that was identical to one that he used in Iraq. In April 2012 he purchased a Kimber handgun imprinted with the State Department "High Threat Protection Service" logo, and in December 2012 he purchased two Sig Sauer tactical handguns.
Other than a temporary assignment in Israel in 2010, Mr. Lock's principal place of business in 2010, 2011, and most of 2012 was Iraq.
In 2010 Mr. Lock worked for TCI in Israel for 111 days and in Iraq for 163 days. In 2011 and 2012 Mr. Lock worked2017 Tax Ct. Summary LEXIS 11">*16 for TCI in Iraq for 278 and 178 days, respectively. Mr. Lock was outside the United States for 334 days during the 12-month period beginning June 27, 2011, and ending June 26, 2012.
During the years in issue Mr. Lock traveled between Florida and Iraq via commercial airlines. TCI reimbursed Mr. Lock for his transportation expenses to and from Iraq.
The State Department issued letters of authorization to Mr. Lock dated December 3, 2009, and June 22, 2010, indicating that while he was performing contract services in Israel and Iraq he was entitled to Government-furnished services including mail delivery, meals, primary care, transportation, authorized weapons, and military banking. TCI provided Mr. Lock with a per diem allowance that covered his expenses for meals and housing while he was working in Israel in 2010.
TCI provided Mr. Lock with modest living quarters in the IZ. Specifically, Mr. Lock lived in a shipping container that had been modified to create two 15-by 15-foot rooms or apartments separated by a single entrance and a shared bathroom. Mr. Lock's room included a small refrigerator, a microwave oven, a television, a small2017 Tax Ct. Summary LEXIS 11">*17 desk, and a bed. TCI did not charge Mr. Lock for rent or for utilities. Mr. Lock prepared some of his meals in his microwave oven, or he dined in restaurants in the U.S. Embassy or nearby in the IZ.
Mr. Lock enjoyed a support system in Iraq with his "brothers in arms". He primarily associated with fellow Americans working for TCI, but he also befriended others including U.S. Embassy personnel and some Iraqi police and military officers who served as interpreters and assisted TCI personnel as they passed through Iraqi security checkpoints. Mr. Lock spoke little Arabic, but he had picked up enough of the language over the years to "get out of a few situations."
Mr. Lock paid for Internet service, including voice over Internet phone service, in his living quarters in Iraq. He also purchased a cellular phone and paid for cellular phone service in Iraq, communications services that he used for both personal and business purposes.
Mr. Lock received preliminary notifications about TCI missions or work assignments via email on his personal computer. To obtain a "mission packet" which would provide details about the assignment, however, he was required to proceed2017 Tax Ct. Summary LEXIS 11">*18 to the U.S. Embassy and log in to a secure email system. Depending on the complexity of the operation, TCI missions lasted from 1 to 18 hours, and a mission involving a congressional delegation might require security services for two or three days.
As a supervisor, Mr. Lock performed his duties from an office/command center, or, in the event of a high-priority mission, he would serve as a team leader in the field. He normally worked six days per week, with Fridays off.
Depending on his particular assignment, Mr. Lock was required to wear a blazer, a dress shirt and pants, and a tie, or khaki pants and a polo shirt. He was not required to wear a uniform or clothing bearing TCI's logo.
TCI electronically deposited Mr. Lock's paycheck into a joint checking account that he maintained with Ms. Lock at a bank in Florida. TCI routinely withheld Federal income tax and employment taxes from his salary. Mr. Lock was not subject to any Iraqi tax, duty, or fee.
While in Iraq Mr. Lock conducted banking transactions online, used a credit card, and obtained cash (in U.S. dollars) by cashing a check or using an automated teller machine inside the U.S. Embassy. Mr. Lock explained that most of2017 Tax Ct. Summary LEXIS 11">*19 the shops and businesses in the IZ preferred to transact business in U.S. dollars.
Mr. Lock felt the stress that came with working in Iraq, and he looked forward to trips to the United States for rest and vacation. He scheduled his vacation time about four or five months in advance and would take as much leave as TCI would allow--usually 3 to 5 weeks of leave at a time or a total of about 10 weeks yearly.
Mr. Lock suffered a knee injury while working in Iraq, and he returned to the United States for surgery on June 27, 2012. Although he was originally scheduled to return to Iraq after the surgery, his surgeon ultimately recommended restrictions on his activities that precluded his returning to work for TCI. Consequently, Mr. Lock did not return to Iraq, and his employment with TCI ended in October 2012.
Mr. Lock maintains that he incurred a number of employee business expenses during the years in issue, that TCI did not have a written employee reimbursement policy, and that TCI did not reimburse him for any of the expenses in question.
At trial Mr. Lock presented schedules and bank records in an effort to substantiate employee2017 Tax Ct. Summary LEXIS 11">*20 business expenses reported on the Schedules A accompanying his tax returns for the years in issue. The schedules and bank records also related to additional expenses that he had failed to disclose to respondent's counsel before trial. Under the circumstances, the Court admitted the documents into evidence only insofar as they pertain to the expenses listed on the Schedules A.
While Mr. Lock was overseas, Ms. Lock and his son continued to reside in the couple's marital home Florida. Petitioners claimed Florida homestead exemptions on this residence for the years in issue.
Mr. Lock spent most of his TCI vacation time with his family and friends in Florida, and he made an annual trip to Kentucky to spend time with his mother, grandmother, and siblings.
Throughout the years in issue Mr. Lock was registered to vote in Florida, and he maintained a Florida driver's license. He also owned two trucks, a boat and a trailer, and multiple firearms (described above) that he stored at his residence in Florida.
In 2003 petitioners joined Mr. Lock's father in purchasing a residence in Florida. The following year,2017 Tax Ct. Summary LEXIS 11">*21 Mr. Lock's father transferred his interest in the property to petitioners by quitclaim deed. Although petitioners initially resided at this property, they subsequently converted it to a rental property and hired a realty company to manage it. Petitioners continued to own this property throughout the years in issue.
In 2004 Mr. Lock and a friend, Duane Johnson, organized Signal-15 Properties, LLC (Signal-15), as a Florida limited liability company and acquired a rental property in Florida. During the years in issue Mr. Lock owned this property and filed annual reports for Signal-15 with the State of Florida identifying himself as the firm's registered agent and a managing member.
In 2005 Mr. Lock and Mr. Johnson acquired another rental property in Florida by way of a warranty deed. Mr. Lock jointly owned this property throughout the years in issue.
Mr. Lock devoted about 200 hours during each of the years in issue to managing his rental properties in Florida.
In 2011 Mr. Lock and a partner, Chris Gately, organized three Florida limited liability companies, Off the X, OTX Solutions, and Off the X Fitness, intending to operate a firearms training business and to acquire2017 Tax Ct. Summary LEXIS 11">*22 and operate a franchise specializing in physical fitness training known as Workout Anytime. Mr. Lock maintained several bank accounts for these companies in Florida. In 2012 Mr. Lock filed annual reports with the State of Florida for the companies listed above, identifying himself as the registered agent and as a managing member of each firm.
During 2010, 2011, and early 2012 petitioners maintained at least three joint bank accounts in Florida. Mr. Lock's paychecks from TCI were deposited in one of these joint accounts (Mr. Lock's account), and he used the funds in this account to pay most of the family's household bills, including the mortgage on petitioners' residence. Ms. Lock's paychecks were deposited in a second account (Ms. Lock's account) which she used for day-to-day personal and miscellaneous household expenses. Petitioners also maintained a money market account that Mr. Lock controlled.
Ms. Lock moved out of the marital home sometime in mid to late 2012. In October 2012 petitioners' marriage was dissolved.
Petitioners' tax returns for the years in issue were prepared by an accountant, Jerry2017 Tax Ct. Summary LEXIS 11">*23 F. Sowell, Jr. Ms. Lock had collected the couple's tax records for 2010 and 2011 and forwarded them to Mr. Sowell. When those tax returns were complete, Ms. Lock (with Mr. Lock's consent) signed them and filed them with the Internal Revenue Service.
Petitioners filed a joint Federal income tax return for 2010, reporting wages of $142,020 on line 7 (comprising $117,963 earned by Mr. Lock and $24,057 earned by Ms. Lock). Petitioners attached a Form 2555, Foreign Earned Income, to the tax return, claimed that Mr. Lock was eligible for a foreign earned income exclusion of $91,500, and subtracted that amount from total income on line 21. Petitioners also attached a Schedule A to the tax return and claimed in relevant part a deduction of $1,969 (after the application of the 2% limitation prescribed in
Petitioners claimed a refund on an overpayment of $23,270 (the full amount of Federal2017 Tax Ct. Summary LEXIS 11">*24 income tax withheld from their wages), and that amount was deposited to Mr. Lock's account by electronic transfer on April 27, 2011. Over the next few weeks Mr. Lock transferred about $17,000 from his account to the money market account and another account that is not clearly identified in the record.
Petitioners filed a joint Federal income tax return for 2011, reporting wages of $186,129 on line 7 (comprising $162,195 earned by Mr. Lock and $23,934 earned by Ms. Lock). Petitioners attached a Form 2555 to the tax return, claimed that Mr. Lock was eligible for a foreign earned income exclusion of $92,900, and subtracted that amount from total income on line 21. Petitioners also attached a Schedule A to their tax return and claimed in relevant part a deduction of $1,611 (after the application of the 2% limitation prescribed in
Petitioners claimed a refund on an overpayment of $25,896, and that amount was deposited to Mr. Lock's account by electronic2017 Tax Ct. Summary LEXIS 11">*25 transfer on April 18, 2012. That same day Mr. Lock transferred $25,000 to the money market account.
Mr. Lock filed a Federal income tax return for 2012, reporting wages of $156,891 on line 7. He attached a Form 2555 to his tax return claiming a foreign earned income exclusion of $95,100, and that amount was subtracted from total income on line 21. He also attached a Schedule A to his tax return and claimed in relevant part a deduction of $3,832 (after the application of the 2% limitation prescribed in
Unless a specific income exclusion applies, a taxpayer is required to include in gross income all income from whatever sources derived. See
(3) Tax home.--The term "tax home" means, with respect to any individual, such individual's home for purposes of
The Court has explained in prior cases involving the foreign earned income exclusion that the term "abode" has a domestic connotation that stands in contrast to the taxpayer's principal place of business.
Mr. Lock had strong family and personal ties in the United States throughout the period in question. Ms. Lock and the couple's son resided in the marital home in Florida, and he took them on vacations when he was not working overseas. Although the Locks' marriage apparently was failing, Mr. Lock stayed in contact with Ms. Lock from Iraq, and he relied on her to send him items that he requested. Likewise, Mr. Lock's mother, grandmother, and siblings resided in Kentucky where he visited them at least once a year. Mr. Lock also maintained a Florida driver's license, and he owned two trucks, a boat and a trailer, and numerous firearms that he kept at his home in Florida.
Mr. Lock had numerous economic ties to the United States. He maintained his status as a reserve deputy sheriff in Florida, owned and helped to manage three rental properties there, and organized and served as the resident agent for three startup businesses. He managed his financial affairs2017 Tax Ct. Summary LEXIS 11">*29 through numerous personal and business bank accounts in Florida.
In contrast, Mr. Lock's primary, if not sole, tie to Iraq was his work for TCI. Although he spent a considerable amount of time in Iraq, and we have no doubt that he developed strong bonds with his coworkers and acquaintances there, Mr. Lock clearly looked forward to leaving Iraq whenever he could to spend time with his family and friends in the United States. Mr. Lock was permitted to enter Iraq only on visas of fairly limited duration, and he did not pursue any business opportunities, open a banking account, or purchase any property there. The austerity of his living quarters in Iraq is strong evidence that his presence in Iraq was transitory and temporary.
Consistent with the foregoing, we conclude that Mr. Lock's abode was within the United States during the years in issue and therefore we sustain respondent's determination that he was not eligible for the foreign earned income exclusion under
As a general rule, the Commissioner's determination of a taxpayer's liability in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that2017 Tax Ct. Summary LEXIS 11">*30 the determination is incorrect.
A taxpayer must substantiate claimed deductions by keeping and producing adequate records that enable the Commissioner to determine the taxpayer's correct tax liability.
Under
The term "trade or business" includes performing services as an employee.
A deduction normally is not available for personal, living, or family expenses.
We conclude that Mr. Lock is not entitled to the deductions in question, in whole or in part, on alternative grounds. First, he failed to show that he was not eligible to be reimbursed by TCI for the expenses in question. Second, most of the expenses either were personal or were not adequately substantiated.
Although Mr. Lock testified that TCI did not have a written employee reimbursement policy, the record is replete with letters and instructions from TCI which show that the firm was quite adept at managing transportation, housing, communications, and many other matters for employees that it dispatched on overseas missions. Against this record, we find it highly unlikely that TCI did not have a written employee reimbursement policy, and we decline to accept Mr. Lock's uncorroborated2017 Tax Ct. Summary LEXIS 11">*32 testimony on this point.9 On this ground alone, we sustain respondent's determination disallowing the deductions that Mr. Lock claimed for unreimbursed business expenses.
The question of reimbursement aside, many of the expenses in dispute were clearly personal or were not properly substantiated. Items that fall into this category include expenses for postage and supplies, work clothing, professional dues, the GRE, and weapons and electronics.
Mr. Lock claimed deductions for supplies and the cost of shipping those supplies to Iraq. There is no evidence in the record, however, identifying the particular supplies or their cost; and Mr. Lock could recall only that the supplies were food items and gear. Without more we can only conclude that these expenses were personal.
Mr. Lock claimed deductions for the cost of clothing that he wore while working for TCI. The cost of clothes that are "required or essential in an employment, and which are not suitable for general or personal wear and [are] not so worn" is a deductible expense.
Mr. Lock paid an annual membership fee of $180 to the American Forces Benefit Association (AFBA) during the years in issue. Mr. Lock confirmed that TCI did not require membership in AFBA as a condition of his employment. That fact, combined with his description of AFBA member services, indicates that Mr. Lock's membership fees represent a personal expense.
Mr. Lock purportedly paid $133 to take the GRE in 2010 so that he might be eligible to apply for higher level TCI supervisory positions. The regulations under
Mr. Lock purchased weapons (which he kept in Florida), and electronic equipment and tactical gear which he claims to have used in Iraq to perform work for TCI. He acknowledged at trial that most of these items were also used in his startup businesses in Florida. We are not convinced that TCI would not have provided these items to Mr. Lock if they were truly necessary to the successful completion of TCI missions. Moreover, it appears many of these expenses are properly attributable to Mr. Lock's startup businesses.
In sum, respondent's determination disallowing the deductions Mr. Lock claimed for unreimbursed employee business expenses for the years in issue is sustained.
Generally, married taxpayers may elect to file a joint Federal income tax return.
The Court applies a de novo scope and standard of review in deciding whether a taxpayer is entitled to relief under
Under
(2) Actual knowledge--(i) In general.--If, under (A) Omitted income.--In the case of omitted income, knowledge of the item includes knowledge of the receipt of the income. * * * (B) Deduction or credit.--(1) Erroneous deductions in general.--In the case of an erroneous deduction or credit, knowledge of the item means knowledge of the facts that made the item not allowable as a deduction or credit.
Consistent with the foregoing, we evaluate whether Ms. Lock had actual knowledge of the facts that led to the disallowance of the deductions that Mr. Lock claimed for employee business expenses.
The proper treatment under
The preponderance of the evidence shows that Ms. Lock did not have actual knowledge of the factual circumstances underlying the disallowance of the deductions that Mr. Lock claimed for unreimbursed employee expenses or the exclusions that he claimed for foreign earned income for 2010 and 2011. Ms. Lock has a high school education, and there is no indication that she is sophisticated in tax matters. Although she signed the tax returns in question for herself and Mr. Lock, the tax return preparer, Mr. Sowell, did not review the returns with her. There is likewise no evidence that Mr. Lock discussed with Ms. Lock the facts underlying the items in dispute or that she intentionally avoided learning about them. In the light of all the circumstances, we conclude that2017 Tax Ct. Summary LEXIS 11">*39 Ms. Lock qualifies for spousal relief under
We turn to the proper allocation of the tax deficiencies under
To reflect the foregoing,
1. These cases were consolidated for purposes of trial, briefing, and opinion. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the taxable years 2010, 2011, and 2012, and all Rule references are to the Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the nearest dollar.↩
2. Respondent concedes that petitioners are entitled to deductions of $200, $230, and $440 for tax return preparation expenses for the taxable years 2010, 2011, and 2012, respectively, subject to the limitation prescribed in
3. Other adjustments are computational and depend solely on the Court's disposition of the issues for decision.↩
4. Although most countries employ territorial tax systems, the United States employs a worldwide tax system--it taxes its citizens on their income regardless of its geographic source.
5. The amount of foreign earned income that may be excluded from gross income is subject to an annual adjustment for inflation and totaled $91,500 for 2010, $92,900 for 2011, and $95,100 for 2012.
6.
7. Under the circumstances, we need not decide whether Mr. Lock satisfied the bona fide residence test or the physical presence test of
8. Petitioners do not contend that the burden of proof should be shifted to respondent pursuant to
9. A declaration or an affidavit from TCI corroborating Mr. Lock's testimony would have provided the Court with objective evidence on this point.↩
10. An election under
11. In addition, the requesting spouse's proportionate share of the deficiency shall be increased by the value of any disqualified asset transferred to her by the nonrequesting spouse.
