                         T.C. Memo. 2007-42


                      UNITED STATES TAX COURT



      MYRON R. STRUCK AND THELMA C. STRUCK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7900-05.                 Filed February 22, 2007.




     David S. Greenberg, for petitioners.

     Joseph P. Wilson, for respondent.


              MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   Respondent determined deficiencies in and

penalties on petitioners’ Federal income taxes as follows:

       Year          Deficiency           Sec. 6662 Penalty
       2001           $27,555                   $5,511
       2002             6,790                    1,358
                                - 2 -
     After concessions by the parties, the primary issue for

decision is whether petitioners qualify for the foreign earned

income exclusion of section 911 (hereinafter sometimes

“exclusion”) under the two conjunctive requirements thereof.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 2001 and 2002, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.


                          FINDINGS OF FACT

     This case was tried on April 27, 2006, in San Diego,

California.   Some of the facts have been stipulated and are so

found.

     At the time the petition was filed, Myron and Thelma Struck

resided in San Diego, California.

     For approximately 27 years, from 1975 through early May

2002, Myron was employed full time as a yacht captain for owners

of private yachts.    Thelma also was employed on the yachts as a

chef and stewardess.

     Beginning in 1991 through May of 2002, Myron and Thelma were

employed on a yacht that was owned by Cush Automotive, a

California company, and that was operated primarily in foreign

territorial waters.    Each year, Cush Automotive paid Myron and

Thelma a salary, their living expenses while on the yacht, and

their vacation travel expenses back to the United States.
                              - 3 -
     When underway, every 4 hours Myron would note in a log the

yacht’s longitude and latitude coordinates.

     Except for approximately 2 weeks when on vacation in the

United States, and even when docked in foreign ports, Myron and

Thelma lived on the yacht.

     Based on testimony and exhibits in evidence, including a

review of the log coordinates that was performed by personnel of

the U.S. Navy for purposes of this case, the charts below set

forth (for Myron and Thelma’s taxable years 2001 and 2002) our

findings as to the number of days during the applicable 12-month

periods on which Myron and Thelma were not physically present in

foreign territorial waters and the number of days they were

physically present in foreign territorial waters.1

     As indicated in the charts, the two 12-month applicable

periods we utilize to establish petitioners’ 330 or more days of

foreign physical presence requisite to qualify Myron and Thelma

for the foreign earned income exclusion for 2001 and 2002 overlap

each other and do not correspond to calendar years.




     1
      We refer to each period of 12 consecutive months used in
the calculation of a taxpayer’s foreign earned income exclusion
as an “applicable period”.
                           - 4 -
                        For 2001
Applicable Period of January 7, 2001, to January 6, 2002
                                     Number of Days
         Dates            Nonforeign Days    Foreign Days
    1/7/01 -   1/13/01              7
   1/14/01 -   1/26/01                            13
   1/27/01 -     2/2/01             7
    2/3/01 -     2/7/01                               5
    2/8/01 -     2/9/01             2
   2/10/01 -   8/20/01                           192
   8/21/01 -   8/23/01              3
   8/24/01 - 12/19/01                            118
  12/20/01 -     1/4/02            16
    1/5/02 -     1/6/02                               2
                  Total            35            330



                        For 2002
   Applicable Period of May 16, 2001, to May 15, 2002
                                     Number of Days
         Dates            Nonforeign Days    Foreign Days
   5/16/01 -   8/20/01                            97
   8/21/01 -   8/23/01              3
   8/24/01 - 12/19/01                            118
  12/20/01 -     1/4/02            16
    1/5/02 -   3/31/02                            86
    4/1/02 -     4/3/02             3
    4/4/02 -     5/5/02                           32
    5/6/02 -   5/15/02             10
                  Total            32            333
                               - 5 -
     On December 20, 2001, Myron and Thelma left the yacht in

Costa Rica and flew to the United States for their annual 2-week

vacation.   On January 4, 2002, Myron and Thelma returned to the

yacht in Costa Rica.

     On May 6, 2002, Myron and Thelma docked the yacht in the

harbor in San Diego, California, and retired from working on

yachts.

     From 1986 through 2002, Myron and Thelma owned unimproved

real property in Julian, California, and occasionally they camped

on this unimproved real property.   During 2001 and 2002, Myron

and Thelma were listed on the San Diego, California, county tax

rolls as absentee owners of this unimproved real property.

     From 1993 through 2002, Myron and Thelma also owned a

townhouse in Coronado, California (townhouse), and they

apparently claimed a California property tax homeowners’

exemption relating to the townhouse.2   During all of 2001 and the

first half of 2002, Myron and Thelma rented out the townhouse to

tenants, and the townhouse was managed by real estate

professionals.   Because it was rented out, Myron and Thelma did

not stay in their townhouse while vacationing in California in

2001 and the first half of 2002.




     2
      Cal. Const. art. 13, sec. 3(k), exempts $7,000 of a home’s
taxable value from California property tax assessment when the
home constitutes the owner’s principal residence and is occupied
by the owner.
                               - 6 -
     During 2001 and the first half of 2002, in California Myron

and Thelma also maintained bank accounts, registered and garaged

two vehicles at a relative’s property, and maintained their

driver’s licenses.

     Myron and Thelma’s combined salaries from their employment

on the yacht totaled $82,768 for 2001 and $71,063 for 2002.

     On petitioners’ 2001 joint Federal income tax return,

petitioners reported their total $82,768 in salaries, and they

claimed the foreign earned income exclusion with regard to that

total amount.   With the filing of their 2001 joint Federal income

tax return, petitioners included a Form 2555-EZ, Foreign Earned

Income Exclusion, relating to each petitioner.   On these Forms

2555-EZ, petitioners entered the address of a relative in

California in the blanks for “foreign address” and indicated an

applicable period of January 1 to November 30, 2001.

     On petitioners’ 2002 joint Federal income tax return,

petitioners reported their total $71,063 in salaries, and they

claimed the foreign earned income exclusion with regard to

$55,120 thereof (based on the number of days in petitioners’ 2002

applicable period that fell within petitioners’ 2002 taxable

year).

     With the filing of their 2002 joint Federal income tax

return, petitioners included a Form 2555-EZ relating to each

petitioner.   On these Forms 2555-EZ, petitioners entered the
                              - 7 -
address of a relative in California in the blanks for “foreign

address” and indicated an applicable period of January 1 to

May 15, 2002.3

     During respondent’s audit, petitioners filed with respondent

amended Forms 2555-EZ for 2001 and 2002 indicating a Costa Rica

foreign address for both years and new applicable periods of

November 30, 2000, to November 30, 2001, and May 16, 2001, to

May 15, 2002, respectively, and petitioners cooperated with all

of respondent’s documented requests for information and otherwise

cooperated with respondent.

     Respondent’s revenue agent concluded that petitioners did

not have a foreign tax home for 2001 and 2002, and the revenue

agent disallowed the total foreign earned income exclusions

petitioners claimed for each year.

     In their briefs, for purposes of calculating their foreign

earned income exclusions for 2001 and 2002, petitioners request

revised applicable periods for 2001 and 2002 respectively of

January 1 to December 31, 2001, and May 6, 2001, to May 5, 2002.

Alternatively, for each year, petitioners request that we apply

whatever applicable periods would maximize petitioners’ foreign

earned income exclusions.




     3
      The record does not explain why petitioners indicated on
their filed Forms 2555-EZ, Foreign Earned Income Exclusion, for
2001 and 2002, respectively, applicable periods of only 11 months
and 4-1/2 months.
                               - 8 -
     In his briefs, respondent states that the only applicable

periods we should consider for petitioners for 2001 and 2002 are

January 1 to December 31, 2001, and May 16, 2001, to May 15, 2002.


                               OPINION

     Taxpayers generally have the burden of proof.   Rule 142(a).

However, because petitioners submitted credible evidence,

maintained records, and cooperated with respondent, the burden of

proof regarding petitioners’ physical presence during 2001 and

2002 is on respondent.   Sec. 7491(a)(1), (2)(A) and (B).

     Generally, section 911 provides to U.S. taxpayers a limited

elective exclusion from gross income for income earned overseas.

     To qualify for this foreign earned income exclusion for a

particular year, a taxpayer:   (1) Must have a foreign tax home,

sec. 911(d)(1), and (2) must either be a bona fide resident of a

foreign country for the taxpayer’s full taxable year (bona fide

residence requirement) or be physically present in a foreign

country or countries for at least 330 days during any consecutive

12 months which overlap the taxpayer’s taxable year (physical

presence requirement), sec. 911(d)(1)(A) and (B).

     A qualified taxpayer may only exclude the lesser of actual

foreign earned income or the maximum amount set by statute.    Sec.

911(b)(2)(A).   Married taxpayers may each use their exclusions

separately on separate returns or combine their exclusions on a

joint return, sec. 1.911-5(a)(2), Income Tax Regs., and without
                                - 9 -
regard to community property laws, sec. 1.911-5(b), Income Tax

Regs.

     For 2001 and 2002, the maximum exclusions for a married

couple filing a joint Federal income tax return totaled $156,000

and $160,000, respectively.    Sec. 911(b)(2)(D).


Foreign Tax Home Requirement

     The foreign tax home requirement of section 911(d)(1) is to

be evaluated during the same applicable period used by a taxpayer

for the bona fide residence or the physical presence requirement.

Sec. 1.911-2(a) and (b), Income Tax Regs.

     Section 911(d)(3), which defines “tax home” as applied to

the exclusion, incorporates the travel business expense provision

of section 162(a)(2), as follows:    “The term ‘tax home’ means,

with respect to any * * * [taxpayer], such * * * [taxpayer’s]

home for purposes of section 162(a)(2) (relating to traveling

expenses while away from home).”    Thus, under the foreign earned

income exclusion, the location of a tax home generally is

determined in the same manner as the location of a tax home under

section 162(a)(2).

     In section 1.911-2(b), Income Tax Regs., it is explained

that the location of a taxpayer’s regular or principal place of

business, or, if none, of a taxpayer’s abode in a real and

substantial sense, will be regarded as the location of a
                               - 10 -
taxpayer’s tax home.    Section 1.911-2(b), Income Tax Regs.,

provides as follows:


            (b) * * * the term “tax home” has the same meaning
       which it has for purposes of section 162(a)(2)
       (relating to travel expenses away from home). Thus,
       under section 911, * * * [a taxpayer’s] tax home is
       considered to be located at his regular or principal
       (if more than one regular) place of business or, if the
       * * * [taxpayer] has no regular or principal place of
       business because of the nature of the business, then at
       his regular place of abode in a real and substantial
       sense. * * *


       If in a year a taxpayer has neither a regular or principal

place of business nor any abode in a real and substantial sense,

a taxpayer may be classified as an itinerant whose tax home is

located wherever the taxpayer is physically located from day to

day.    Deamer v. Commissioner, 752 F.2d 337, 339 (8th Cir. 1985),

affg. T.C. Memo. 1984-63; Hicks v. Commissioner, 47 T.C. 71, 73

(1966); Rev. Rul. 73-529, 1973-2 C.B. 37.

       During 2001 and until May 5, 2002, petitioners’ business

consisted principally of traveling in international and foreign

waters to foreign countries on the yacht of Cush Automotive.

Because petitioners had neither a regular or principal place of

business, nor a specific abode in a real and substantial sense

during the applicable periods, we conclude that petitioners were

itinerants, that petitioners had a foreign tax home during the

300 plus days they were physically present in a foreign country

during petitioners’ applicable periods for 2001 and for 2002, and
                              - 11 -
that petitioners therefore had a foreign tax home for purposes of

the claimed foreign earned income exclusion.4

     The last sentence of section 911(d)(3) provides that a

taxpayer who has an abode in the United States will not be

treated as having a tax home in a foreign country.   Neither

section 911 nor the regulations thereunder define “abode”.5

Court cases that have done so involve taxpayers who have

alternated long blocks of time working abroad with long blocks of

time at home in the United States where their families lived.

Because the taxpayers had domestic ties (such as family) in the

United States and only transitory ties in the foreign country

where the taxpayers worked, the taxpayers were held to have a

U.S. abode.   See Harrington v. Commissioner, 93 T.C. 297, 307-309

(1989); Doyle v. Commissioner, T.C. Memo. 1989-463; Lemay v.

Commissioner, T.C. Memo. 1987-256, affd. 837 F.2d 681 (5th Cir.

1988); Bujol v. Commissioner, T.C. Memo. 1987-230, affd. without

published opinion 842 F.2d 328 (5th Cir. 1988).   But cf. Jones v.



     4
      Respondent herein does not argue that, as itinerants,
petitioners had no foreign tax home for purposes of the sec. 911
foreign earned income exclusion. See, e.g., Henderson v.
Commissioner, T.C. Memo. 1995-559 (holding that, for purposes of
sec. 162(a)(2), an itinerant taxpayer may be treated as having no
tax home and therefore may not be allowed “away from home”
business travel expense deductions), affd. 143 F.3d 497, 499-501
(9th Cir. 1998).
     5
      Sec. 1.911-2(b), Income Tax Regs., contains the following
statement: “Maintenance of a dwelling in the United States * * *
does not necessarily mean that the * * * [taxpayer’s] abode is in
the United States.”
                                - 12 -
Commissioner, 927 F.2d 849, 856-857 (5th Cir. 1991), revg. T.C.

Memo. 1989-616.

     Because petitioners’ townhouse was leased to others, not

available to petitioners, and because petitioners had limited

other ties to the United States, petitioners did not have an

abode in the United States during petitioners’ 2001 and 2002

applicable periods.


Physical Presence Requirement

     Under the second requirement of section 911(d)(1), because

petitioners acknowledge that they do not qualify for the foreign

earned income exclusion under the bona fide foreign residence

requirement, we address only the alternate physical presence

requirement.

     Under section 911(d)(1)(B), a taxpayer who spends at least

330 days during an applicable period in a foreign country or

countries will satisfy the physical presence requirement for the

related tax year.   For this purpose, a taxpayer is to add

together all foreign days falling within any one applicable

period.   Sec. 1.911-2(d)(1) and (2), Income Tax Regs.

     An applicable period consists of any 12 consecutive months.

Sec. 1.911-2(d)(1), Income Tax Regs.     In order for the exclusion

to be applicable to reduce gross income in a particular year, the

applicable period must have some overlap with the taxpayer’s

taxable year in question.   Sec. 1.911-3(d)(2) and (3), Income Tax
                               - 13 -
Regs.    For a particular taxable year of a taxpayer, there may be

a number of different applicable periods.   See sec. 1.911-

2(a)(2)(ii), (d), Income Tax Regs., and the examples thereunder.

     A taxpayer may use whichever applicable period maximizes the

foreign earned income exclusion.   See sec. 911(d)(1)(B); sec.

1.911-2(a)(2)(ii), Income Tax Regs.6

     Under section 911, a foreign country includes airspace,

lands, and territorial waters under the sovereignty of a country,

territory, or possession other than the United States.    Farrell

v. United States, 313 F.3d 1214, 1216 (9th Cir. 2002); Arnett v.

Commissioner, 126 T.C. 89, 93-95 (2006), affd. 473 F.3d 790 (7th

Cir. 2007); sec. 1.911-2(g) and (h), Income Tax Regs.

     Because international waters are not under the sovereignty

of any one country, time spent in international waters generally

does not apply toward the 330 foreign day requirement.   See

Plaisance v. United States, 433 F. Supp. 936, 939 (E.D. La.

1977).

     Although section 911(d)(1)(B) states that an aggregate of

330 full days of physical presence in a foreign country or

countries is required, the regulations thereunder define a “full



     6
      Respondent’s Audit Technique Guide for Foreign Athletes and
Entertainers (October, 1994) suggests that respondent’s revenue
agents may use a more favorable applicable period than the
taxpayer initially indicated on a filed Form 2555, Foreign Earned
Income. 4 Audit, Internal Revenue Manual (CCH), par. 204,601, at
23,046.
                              - 14 -
day” to include partial days of travel in or on international

airspace, land, or waters from one foreign location to another

foreign location.   Therefore, a day involving travel in

international waters between foreign locations in increments of

less than 24 hours is treated as a full day in a foreign country.

Sec. 1.911-2(d)(2) and (3), Income Tax Regs.

     If the second alternate requirement of section 911(d)(1) is

relied on (330 days of foreign physical presence) and if the

applicable period selected by a taxpayer to satisfy the 330 days

of foreign physical presence does not correspond to the

taxpayer’s taxable year, the taxpayer may only exclude the lesser

of actual foreign income earned during the taxable year or a pro

rata portion of the maximum exclusion amount that corresponds to

the number of days of the applicable period that falls within the

taxpayer’s taxable year.   Sec. 1.911-3(d)(2) and (3), Income Tax

Regs.

     Because we have found that petitioners were physically

present in foreign countries for 330 days for 2001 (using an

applicable period of January 7, 2001, to January 6, 20027), and



     7
      For 2001, petitioners have not specifically requested an
applicable period of Jan. 7, 2001, to Jan. 6, 2002. However,
petitioners have requested that the Court determine the
applicable period that will maximize petitioners’ exclusion. We
agree with petitioners that generally we are not precluded from
identifying and utilizing an applicable period that allows a
taxpayer the maximum foreign earned income exclusion under the
physical presence requirement.
                               - 15 -
for 333 days for 2002 (using an applicable period of May 16,

2001, to May 15, 2002), petitioners pass the foreign physical

presence requirement for both years.

       We explain further two of the disputes the parties have in

calculating petitioners’ foreign physical presence.

       Respondent treats each day that involved a partial day of

travel for petitioners in international waters as a nonforeign

day.    As explained, however, section 1.911-2(d)(2) and (3),

Income Tax Regs., provides that a partial day of travel in

international waters in traveling from one foreign country to

another foreign country be treated as a full foreign day.

       Respondent argues that Myron’s testimony does not establish

petitioners’ presence in Costa Rica from December 1 to

December 19, 2001, and respondent asserts that those 19 days

should not count as foreign days for petitioners.

       We find Myron’s testimony to be credible.       Furthermore,

Myron’s testimony was corroborated.     The yacht was docked in

Costa Rica for the entire month of December 2001, and Myron’s

testimony regarding petitioners’ travel to the United States in

December 2001 was consistent with Myron’s testimony that his

vacation each year in the United States lasted only 2 weeks.

       Respondent argues that petitioners’ initial Forms 2555-EZ

indicate that petitioners were located in the United States for

the entire month of December 2001.      We disagree.    Petitioners’
                               - 16 -
Forms 2555-EZ for 2001 were silent as to December 2001, and

petitioners made mistakes designating applicable periods on the

Forms 2555-EZ that they initially filed for both 2001 and 2002.

     Also, because of the shift to respondent of the burden of

proof, respondent bears the burden to prove that petitioners were

not in a foreign country for the first 19 days of December 2001.

     Respondent argues further that for 2001 there are

insufficient facts in evidence to evaluate the requirements of

the foreign earned income exclusion under any applicable period

other than January 1 to December 31, 2001.

     We disagree.   Petitioners’ log, Myron’s testimony, and the

Navy review of the log establish petitioners’ presence in foreign

countries for the applicable period we utilize for 2001 -- namely

January 7, 2001, to January 6, 2002, as well as for 2002.

     Respondent also makes a procedural argument as to why we

should analyze petitioners’ qualifications for the exclusion only

under the applicable periods petitioners indicated on their

initially filed Forms 2555-EZ.   Respondent argues that our

utilization of a different applicable period for 2001 to measure

petitioners’ foreign physical presence constitutes a new issue

not raised by the pleadings.

     Although we have adjusted petitioners’ applicable period for

2001, the issue remains what it has always been:   Do petitioners
                               - 17 -
qualify for the exclusion?   Our slight adjustment in the

applicable period for 2001 does not constitute a new issue.

     Respondent argues that adjusting the applicable period at

this point in the litigation would be unfair where respondent

prepared for trial based on an applicable period of January 1 to

December 31, 2001.

      However, in respondent’s pretrial memorandum and posttrial

briefs, respondent acknowledges:   (1) That we might consider

other applicable periods, (2) that an applicable period may be

adjusted before examination, during examination, and during

litigation, and (3) that we may make a finding as to the

appropriate and most favorable applicable period.    In

respondent’s pretrial memorandum, respondent states as follows:

“During 2001 and 2002, petitioners were not physically present in

a foreign country for at least 330 full days, nor any other

period of 12 months in a row starting or ending in 2001 and

2002.”   (Emphasis added.)   Furthermore, respondent has had ample

opportunity to brief the Court and to review the evidence.

     On the facts of this case, we do not believe that the

applicable period we use for petitioners for 2001 constitutes

unfair surprise to respondent.   See Estate of Keeton v.

Commissioner, T.C. Memo. 2006-263.
                             - 18 -
     The parties’ stipulation does not require a contrary result.

The parties’ stipulation only encompasses admissibility, not

correctness, of the exhibits admitted into evidence.

     Petitioners have established that they qualify for the

exclusion for both 2001 and 2002:    (1) Petitioners had a foreign

tax home during the applicable periods, and (2) petitioners were

physically present in foreign countries for at least 330 days of

the applicable periods overlapping 2001 and 2002.

     In light of our resolution of the foreign earned income

issue in favor of petitioners, the section 6662 penalties

determined by respondent are moot.

     To reflect the foregoing,


                                       Decision will be entered

                                 under Rule 155.8




     8
      Because the applicable periods utilized in our opinion do
not correspond to petitioners’ taxable years, a pro rata
adjustment to petitioners’ exclusions for foreign earned income
for 2001 and 2002 will need to be made under sec. 1.911-3(d),
Income Tax Regs.
