                       T.C. Memo. 2015-169



                  UNITED STATES TAX COURT



            NANCY MCDONALD, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 21543-13.                        Filed August 25, 2015.



       P, a U.S. citizen, worked abroad in 2009 and failed to file a
Federal income tax return for 2009. R prepared and filed a substitute
for return (“SFR”) for P’s 2009 year in January 2012, and in April
2012 R issued to P a statutory notice of deficiency (“NOD”). In May
2012 P filed a Form 1040, “U.S. Individual Income Tax Return”, for
2009 and reported $101,244 of income but excluded $23,032,
claiming a foreign earned income exclusion (“FEIE”). With her
return, P sent R a payment of the resulting balance due, and R
processed the return and payment and closed the NOD.

       R subsequently audited P’s return for 2009 and issued to P a
second NOD which disallowed P’s claimed FEIE because she did not
make a valid election under 26 C.F.R. sec. 1.911-7(a)(2), Income Tax
Regs. R filed a motion for partial summary judgment, and P filed an
opposition and a cross-motion for partial summary judgment arguing
that the regulation is invalid.
                                        -2-

      [*2] Held: The Secretary of the Treasury had authority to
      promulgate the regulation under the specific authority granted to him
      under I.R.C. sec. 911 as well as under his general authority to
      promulgate regulations under I.R.C. sec. 7805(d). The regulation is a
      valid implementation of the statute. See Faltesek v. Commissioner,
      92 T.C. 1204 (1989).


      Steven L. Gremminger, for petitioner.

      Han Huang, for respondent.



                           MEMORANDUM OPINION


      GUSTAFSON, Judge: The Internal Revenue Service (“IRS”) determined a

deficiency of $6,454 in the 2009 income tax of petitioner Nancy McDonald, as

well as additions to tax under section 6651(a)(1) and (2)1 and an accuracy-related

penalty under section 6662(a). Ms. McDonald timely filed a petition for

redetermination of the tax, additions to tax, and penalties determined by the IRS in

its statutory notice of deficiency (“NOD”). Her petition alleges an address in

Washington, D.C. The case is before the Court on a motion for partial summary




      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (26 U.S.C.; “Code”), and all Rule references are to the Tax Court
Rules of Practice and Procedure. All amounts are rounded to the nearest dollar.
                                        -3-

[*3] judgment filed by respondent, the Commissioner of the IRS, and an

opposition and cross-motion for partial summary judgment filed by

Ms. McDonald.

      The sole issue for decision is whether Ms. McDonald is entitled to the

foreign earned income exclusion (“FEIE”) under section 911 for tax year 2009.

The Commissioner argues that Ms. McDonald is not entitled to the FEIE because

she failed to make a timely election in accordance with the provisions of 26 C.F.R.

section 1.911-7(a)(2), Income Tax Regs., to exclude her foreign earned income.

Ms. McDonald argues that she is entitled to the FEIE because the regulation upon

which the Commissioner’s contention is based is inconsistent with section 911 and

is therefore invalid. Thus, we must decide whether 26 C.F.R. section 1.911-

7(a)(2), which establishes periods for making the FEIE election, is valid. We will

grant the Commissioner’s motion for partial summary judgment and deny

Ms. McDonald’s motion for partial summary judgment.2

                                   Background

      The facts set forth below are based on the pleadings and other pertinent

materials in the record. Rule 121(b).

      2
       We leave for later proceedings the remaining issues in this case, i.e., the
additions to tax under section 6651(a)(1) and (2) and the accuracy-related penalty
under section 6662(a).
                                         -4-

[*4] Ms. McDonald, a U.S. citizen, left the United States in October 2009 to

work overseas. Her Form 1040, “U.S. Individual Income Tax Return”, for that

year was due on April 15, 2010. Ms. McDonald did not request an extension of

time to file her 2009 return and did not timely file it. The IRS evidently received,

from Ms. McDonald’s employer, information about her wages; and in January

2012 the IRS prepared and filed for Ms. McDonald a substitute for return (“SFR”)

for 2009, pursuant to section 6020(b). On April 9, 2012, the IRS issued to

Ms. McDonald an NOD for 2009 based on the SFR. The NOD determined a

deficiency of $19,449 in tax and additions to tax under sections 6651(a)(1) and (2)

and 6654. Ms. McDonald did not file a petition in the Tax Court challenging that

NOD.

       Rather, on May 18, 2012, Ms. McDonald filed her Form 1040 for 2009.

The Form 1040 reported income of $101,244, but Ms. McDonald attached thereto

a Form 2555, “Foreign Earned Income”, and claimed thereon an FEIE and

excluded $23,032 from her total income. With her return Ms. McDonald sent the

IRS a payment of $3,018, the balance due reported on her return. The IRS

processed Ms. McDonald’s return and payment and closed the first NOD in July

2012. On August 13, 2012, the IRS assessed the tax liability reported on

Ms. McDonald’s Form 1040 for 2009.
                                         -5-

[*5] Subsequently, the IRS selected Ms. McDonald’s 2009 return for audit. As a

result of the audit, on June 20, 2013, the IRS issued Ms. McDonald a second

NOD, upon which this case is based. (Because Ms. McDonald had not filed suit

after the first NOD, section 6212(c)(1) did not bar the issuance of the second

NOD.) The second NOD disallowed Ms. McDonald’s claimed FEIE because she:

(i) did not make a valid election and file Form 2555 with a timely filed return; (ii)

did not elect to exclude the foreign income on a previous return; and (iii) did not

otherwise comply with the procedural rules to make a valid election to exclude the

foreign income under 26 C.F.R. section 1.911-7(a)(2).

                                     Discussion

I.    Summary judgment standard

      Where the material facts are not in dispute, a party may move for summary

judgment to expedite the litigation and avoid an unnecessary trial. Fla. Peach

Corp. v. Commissioner, 90 T.C. 678, 681 (1988). A motion for partial summary

judgment may be granted where there is no genuine dispute as to any material fact,

and a decision may be rendered as a matter of law. Rule 121(a) and (b); see

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965

(7th Cir. 1994). A partial summary adjudication is appropriate if some but not all

issues in the case are disposed of summarily. See Rule 121(b); Turner Broad.
                                         -6-

[*6] Sys., Inc. v. Commissioner, 111 T.C. 315, 323-324 (1998). The party moving

for summary judgment bears the burden of showing that there is no genuine

dispute as to any material fact, and factual inferences will be drawn in the manner

most favorable to the party opposing summary judgment. Dahlstrom v.

Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner, 79 T.C. 340,

344 (1982). Both parties have moved for partial summary judgment; and since we

will grant the Commissioner’s motion for partial summary judgment, we draw all

inferences in favor of Ms. McDonald as non-movant. See infra note 3.

II.   Electing the foreign earned income exclusion

      A.     Statutory requirements for the FEIE

      The sole issue to be decided is whether Ms. McDonald is entitled to the

FEIE. Section 911(a) provides that a qualified individual may elect to exclude

from gross income the foreign earned income of such individual. To qualify for

the FEIE, the taxpayer must satisfy a three-part test: (1) the taxpayer must be a

U.S. citizen who is a bona fide resident of a foreign country for an entire taxable

year or physically present in a foreign country during at least 330 days out of a

12-month period, sec. 911(d)(1); (2) the taxpayer must have earned income from

personal services rendered in a foreign country, sec. 911(d)(2); and (3) the

taxpayer’s tax home for the period must be outside of the United States, sec.
                                         -7-

[*7] 911(d)(3).3 Although a taxpayer may satisfy these three requirements, the

opening words of section 911(a)--“At the election of a qualified individual”--make

clear that the taxpayer must also affirmatively elect to exclude the foreign earned

income from his or her gross income.

      B.     The timing requirement of the regulation

      Section 911(a) is silent on the timing of a valid election. However, section

911(d)(9) gives the Secretary specific authority to promulgate regulations on the

making of an election by mandating that “[t]he Secretary shall prescribe such

regulations as may be necessary or appropriate to carry out the purposes of this

section”; and section 7805(d) provides that “any election under this title shall be

made at such time and in such manner as the Secretary shall prescribe.”

(Emphasis added.) Pursuant to this authority, the Secretary promulgated 26 C.F.R.

      3
        In the Commissioner’s response to Ms. McDonald’s motion for partial
summary judgment, the Commissioner asserts that there are genuine disputes of
material fact concerning whether Ms. McDonald satisfied this three-part test.
Specifically, the Commissioner asserts that there is a material question of fact
whether Ms. McDonald was a “qualified individual” because (he asserts) one
cannot conclude from her documents that she was a bona fide resident of a foreign
country for an uninterrupted period that includes the entire taxable year or that she
was in a foreign country for at least 330 days out of a 12-month period. The
Commissioner also asserts that Ms. McDonald has failed to show that her tax
home was in a foreign country. We need not resolve these factual disputes
because we decide the Commissioner’s partial summary judgment motion on the
legal issue of whether 26 C.F.R. sec. 1.911-7(a)(2)(i) is valid and Ms. McDonald’s
election was untimely thereunder.
                                         -8-

[*8] section 1.911-7(a)(2)(i), which establishes the timing requirements under

which a valid election can be made. The regulation provides four alternative

timing methods by which a taxpayer may validly make the election:

      (i) In general.--In order to make a valid election under this paragraph
      (a), the election must be made:

            (A) With an income tax return that is timely filed (including
      any extensions of time to file),

             (B) With a later return filed within the period prescribed in
      section 6511(a) amending the foregoing timely filed income tax
      return,

             (C) With an original income tax return that is filed within one
      year after the due date of the return (determined without regard to any
      extension of time to file); this one year period does not constitute an
      extension of time for any purpose--it is merely a period during which
      a valid election may be made on a late return, or

             (D) With an income tax return filed after the period described
      in paragraphs (a)(2)(i)(A), (B), or (C) of this section provided--

            (1) The taxpayer owes no federal income tax after taking into
      account the exclusion and files Form 1040 with Form 2555 or a
      comparable form attached either before or after the Internal Revenue
      Service discovers that the taxpayer failed to elect the exclusion; or

            (2) The taxpayer owes federal income tax after taking into
      account the exclusion and files Form 1040 with Form 2555 or a
      comparable form attached before the Internal Revenue Service
      discovers that the taxpayer failed to elect the exclusion.

            (3) A taxpayer filing an income tax return pursuant to
      paragraph (a)(2)(i)(D)(1) or (2) of this section must type or legibly
                                         -9-

      [*9] print the following statement at the top of the first page of the
      Form 1040: “Filed Pursuant to Section 1.911-7(a)(2)(i)(D).”

26 C.F.R. sec. 1.911-7(a)(2)(i).

      C.     Deference to agency regulations

      To address Ms. McDonald’s claim, we must determine whether the timing

requirement included in 26 C.F.R. section 1.911-7(a)(2) is valid. In reviewing the

validity of regulations, we defer to the agency in accordance with Chevron,

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). See Mayo

Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 55 (2011);

Altera Corp. v. Commissioner, 145 T.C. __, __ (slip op. at 38-39) (July 27, 2015).

In Mayo Found. the Supreme Court clarified that the standard by which the

validity of regulations will be measured--with regard to “general authority”

regulations as well as “specific grant of authority” regulations--is the two-step

standard of Chevron. Mayo Found., 562 U.S. at 56-57 (quoting Rowan Cos. v.

United States, 452 U.S. 247, 253 (1981)). As the Supreme Court stated in Mayo

Found., the principles underlying Chevron “apply with full force in the tax

context.” Id. at 55.

      Determining whether a regulation merits deference under Chevron involves

a two-step process: We first determine whether Congress has directly spoken to
                                         -10-

[*10] the precise question at issue. Chevron, 467 U.S. at 842. If the answer is

yes, we must give effect to congressional intent. Id. at 842-843. In order to

determine whether Congress has directly spoken, we “employ[] traditional tools of

statutory construction”. United States v. Home Concrete & Supply, LLC, 566

U.S. __, __, 132 S. Ct. 1836, 1844 (2012) (quoting Chevron, 467 U.S. at 843 n.9).

If, employing those tools, we determine that Congress has not directly spoken to

the precise question at issue, we proceed to the second Chevron step and

determine whether the agency’s chosen interpretation is a “reasonable

interpretation” of the enacted statutory text. Chevron, 467 U.S. at 843-844.4 If it

is a reasonable interpretation, the regulation will stand. It will be ruled invalid

only if it is found to be “‘arbitrary or capricious in substance, or manifestly

contrary to the statute.’” Mayo Found., 562 U.S. at 53 (quoting Household Credit

Servs., Inc. v. Pfennig, 541 U.S. 232, 242 (2004)).




      4
       As we have recently explained: “Chevron step 2 incorporates the reasoned
decisionmaking standard of [Motor Vehicle Mfrs. Ass’n of the U.S. v.] State Farm
[Mut. Auto Ins. Co., 463 U.S. 29 (1983)]. See Judulang [v. Holder, 565 U.S. ___,
___, 132 S. Ct. 476 (2011)], 565 U.S. at ___ n.7, 132 S. Ct. at 483 (stating that,
under either standard, the ‘analysis would be the same, because under Chevron
step two, we ask whether an agency interpretation is “arbitrary or capricious in
substance”’ (fn. ref. omitted) (quoting Mayo Found., 562 U.S. at 53))”. Altera
Corp. v. Commissioner, 145 T.C. __, __ (slip op. at 47-48) (July 27, 2015).
                                         -11-

[*11] III.   Ms. McDonald’s contentions

      Ms. McDonald preliminarily contends that she satisfied the timing

requirement of the regulation and that her failure to add, to the top of the first page

of her return, the statement required by 26 C.F.R. section 1.911-7(a)(2)(i)(D)(3)

does not negate her compliance. Alternatively, Ms. McDonald challenges the

validity of the regulation on two bases: she argues that the regulation is an invalid

interpretation of the statute because the statute creates the only legal standard that

she needs to satisfy and the additional timing requirement that the regulation

imposes is absent from the statute. Next, she argues that the 12-month deadline in

26 C.F.R. section 1.911-7(a)(2)(i)(C) is arbitrary and “is neither necessary or

appropriate to carry out the purposes of Section 911.” The gravamen of

Ms. McDonald’s challenge is that the regulation is invalid.

IV.   Analysis

      A.     Compliance with 26 C.F.R. section 1.911-7(a)(2)(i)(D)(3)

      Ms. McDonald argues that had she simply included, on the top of the first

page of her return, the statement required by subdivision (i)(D)(3) of the

regulation, i.e., “Filed Pursuant to Section 1.911-7(a)(2)(i)(D)”, then she would

have made a valid election under subdivision (i)(D) and would not owe the tax

determined in the NOD. She seems to argue that the omission of this statement
                                        -12-

[*12] should be excused because her return preparer did not advise her to include

it. However, this argument ignores the other requirements of subdivision (i)(D)(1)

and (2), one of which must be complied with before subdivision (i)(D)(3) can

apply.

         Subdivision (i)(D)(1) was unavailable to Ms. McDonald because she was a

not a taxpayer who “owes no federal income tax”, as subdivision (i)(D)(1)

requires; rather, she did owe Federal income tax after taking the exclusion into

account. Similarly, Ms. McDonald could not have made a valid election under

subdivision (i)(D)(2), because it requires that the taxpayer “file[ ] Form 1040 with

Form 2555 * * * before the Internal Revenue Service discovers that the taxpayer

failed to elect the exclusion.” Instead, the IRS discovered that she had failed to

make a valid election before she filed her Form 1040 for 2009. Specifically, the

IRS discovered that she had failed altogether to file any return--and thus

discovered that she had failed to file Form 2555--no later than the date on which it

issued the SFR in January 2012, i.e., months before Ms. McDonald filed her first

Form 1040 for 2009 in May 2012.

         Subdivision (i)(D)(3) does not provide a separate mechanism for making an

FEIE election but rather is an additional requirement for a taxpayer who otherwise

meets the requirements of subdivision (i)(D)(1) or (2). Ms. McDonald did not
                                         -13-

[*13] qualify under subdivision (i)(D)(1) or (2), and she failed to comply with

subdivision (i)(D)(3).

      B.      The addition of a deadline (Chevron step 1)

      Ms. McDonald’s principal contention, however, is that the deadline in the

regulation is not valid. To evaluate this contention, we address Chevron’s first

step by observing that a simple reading of the statutory text shows that, in

section 911, Congress did not directly address the timing question at issue. The

statute provides that, in order to obtain the FEIE, the taxpayer must elect it; but the

statute does not impose any time limit within which the taxpayer must do so.

Thus, because Congress did not directly address the timing issue, we must proceed

to Chevron’s second step to determine whether the Secretary’s interpretation is

reasonable.

      It appears that Ms. McDonald disagrees and would, in effect, halt the

analysis at step 1. Her argument questions whether, in section 911, the “silence”

about any deadline really creates a gap that can be legitimately filled by

regulation. Ms. McDonald seems to suggest that the statute, by including no

deadline, reflects a congressional intention that there be no deadline.

      It is true that section 911(d)(9) makes no mention of the timing of an

election but rather provides: “The Secretary shall prescribe such regulations as
                                             -14-

[*14] may be necessary or appropriate to carry out the purposes of this section,

including regulations providing rules” not concerning the timing of an election.

However, section 911(d)(9) is a specific instance of a principle enacted in

section 7805(d), which provides more generally:

             SEC. 7805(d). Manner of Making Elections Prescribed by
      Secretary.--Except to the extent otherwise provided by this title, any
      election under this title shall be made at such time and in such manner
      as the Secretary shall prescribe. [Emphasis added.]

Section 911(d)(9) does not provide otherwise5 and did not deprive the Secretary of

the authority (indeed, the responsibility) of providing the time of making an FEIE

election. Therefore, the general rule of section 7805(d) stands: “[A]ny election

under this title shall be made at such time * * * as the Secretary shall prescribe.”

(Emphasis added.)

      Since we thus conclude that the statute does authorize the Secretary to

impose a deadline, we proceed, under the second step of the Chevron paradigm, to

examine the reasonableness of the multiple deadlines that the Secretary did

establish in the regulation at issue here.


      5
       On the contrary, as we have previously explained in regard to the
section 911 election, various details in section 911 show a definite congressional
understanding that “[p]rovisions establishing rules for the timing and making the
section 911(e) election were thus of a high order of importance” for such an
election. See Faltesek v. Commissioner, 92 T.C. 1204, 1210 (1989).
                                        -15-

[*15] C.     The reasonableness of the regulation’s deadlines (Chevron step 2)

      Ms. McDonald contends that the regulation’s specific rules for electing the

FEIE are unreasonable and therefore invalid. This Court has previously addressed

and rejected the same challenge to this regulation. In Faltesek v. Commissioner,

92 T.C. 1204 (1989), the Court held that the alternative periods set forth in 26

C.F.R. section 1.911-7(a)(2)(i)(A)-(C)6 were not arbitrary or unreasonable and

were within the specific authority granted to the Secretary under section 9117 as

well as the Secretary’s general authority to promulgate regulations under section

7805. See Faltesek v. Commissioner, 92 T.C. at 1212-1213. We opined that the

timing requirements in the regulation were “generous” because they provided

multiple alternative methods for making the election. Id. at 1211.




      6
       The Faltesek case addressed an earlier version of 26 C.F.R. section 1.911-
7(a)(2)(i) that included only subdivision (i)(A) through (C). The regulation was
subsequently amended to include subdivision (i)(D). Nonetheless, we find the
rationale and holding of Faltesek equally applicable here, because the amended
regulation with new subdivision (i)(D) is even more permissive than the former
version. The amended regulation provides a taxpayer with an additional method
for making the election if the taxpayer does not otherwise meet the requirements
of subdivision (i)(A) through (C). Thus, if the pre-amendment version of the
regulation was reasonable, as we held in Faltesek, then the more permissive
amended version must also be reasonable.
      7
       During the years at issue in Faltesek, the predecessor to current section
911(d)(9) was found in section 911(d)(8).
                                         -16-

[*16] In holding that the regulation was not arbitrary or unreasonable, the Court

found it significant that the Secretary responded favorably to public comment and

criticism that the originally proposed periods were too narrow and did not account

for the difficulties of communicating with overseas taxpayers. Id. The Treasury

Department adopted final regulations that had more liberal periods than those

originally proposed. Id. “Far from being arbitrary, these regulations reflect

sensitivity on the part of the Treasury to the problem presented, and they can

hardly be fairly characterized as unreasonable.” Id. at 1212. Thus, these

regulations are certainly not “arbitrary or capricious in substance”. Mayo Found.,

562 U.S. at 53 (quoting United States v. Mead Corp., 533 U.S. 218, 227 (2001)).

      Ms. McDonald attempts to distinguish Faltesek on its facts, but the factual

distinctions she attempts to draw between the Faltesek case and her own are

immaterial. The Faltesek decision was based upon a legal challenge to the validity

of the regulation, and its holding and rationale apply with full force here.

Additionally, the regulation’s subsequent amendment adding subdivision (i)(D)

further supports the rationale and holding in Faltesek. The addition of subdivision

(i)(D) gave taxpayers seeking to make the election a fourth alternative (and even

less restrictive) period in which to do so. The inclusion of subdivision (i)(D) only

bolsters our conclusion that the regulation is reasonable.
                                        -17-

[*17] We hold, as we did in Faltesek, that the Secretary’s interpretation and

implementation of the statute is valid, because it reasonably implements

Congress’s specific grant of authority in section 911(d)(9) to prescribe regulations

that are necessary and appropriate to carry out the purposes of the statute, and

Congress’s general grant of authority under section 7805(d) to prescribe rules for

the time and manner of making elections under the Code. The regulation provides

taxpayers with four alternative methods by which they can timely elect the FEIE.

The fact that the Secretary could have chosen longer periods within which to

permit the election is of no consequence, because the alternative methods with

four varying periods are reasonable.

      We will therefore grant the Commissioner’s motion for partial summary

judgment.

      To reflect the foregoing,


                                               An appropriate order will be issued.
