                         T.C. Memo. 2006-51



                       UNITED STATES TAX COURT



           L. BEN SMITH & CAROL SMITH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5708-03.            Filed March 23, 2006.



     Steven T. Barta, for petitioners.

     Jonathan J. Ono, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, and accuracy-related penalties under section

6662(a)1 on, petitioners’ Federal income tax (tax):


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years at
issue. All Rule references are to the Tax Court Rules of Prac-
                                                   (continued...)
                                 - 2 -

                                         Accuracy-Related Penalty
         Year      Deficiency               Under Sec. 6662(a)
         1999        $16,935                     $3,387.00
         2001         17,586                      3,517.20

     The only issue remaining for decision is whether petitioners

are liable for 2001 for the accuracy-related penalty under

section 6662(a).   We hold that they are.

                         FINDINGS OF FACT

     All of the facts in this case, which the parties submitted

under Rule 122, have been stipulated by the parties and are so

found.

     Petitioners resided in Hermiston, Oregon, at the time they

filed the petition in this case.

     Starting around June 1998, L. Ben Smith (Mr. Smith) began

working for Raytheon Demilitarization Company (Raytheon) on

Johnston Island.   Around April 1998, shortly before Mr. Smith’s

employment with Raytheon began, Mr. Smith attended an orientation

session presented by Raytheon (Raytheon’s orientation session).

During Raytheon’s orientation session, Raytheon orally informed

Mr. Smith that Johnston Island was not tax exempt and that he was

to be liable for tax on the compensation that he earned while

working on Johnston Island.     Around June 1, 1998, after

Raytheon’s orientation session, Raytheon issued a so-called



     1
      (...continued)
tice and Procedure.
                                       - 3 -

assignment letter to Mr. Smith (Raytheon’s June 1, 1998 assign-

ment letter), the receipt of which Mr. Smith acknowledged by

signing that letter.        Raytheon’s June 1, 1998 assignment letter,

inter alia, described certain benefits that Raytheon was to

provide to Mr. Smith as a result of Mr. Smith’s working on

Johnston Island.       That letter stated, inter alia:              “Johnston

Island is not tax exempt; therefore, standard tax obligations

apply.”    Raytheon included with Raytheon’s June 1, 1998 assign-

ment letter certain documents (Raytheon’s enclosure to Raytheon’s

June 1, 1998 assignment letter) that set forth certain terms and

conditions of Mr. Smith’s employment with Raytheon.                   Among the

documents in Raytheon’s enclosure to Raytheon’s June 1, 1998

assignment letter was a document entitled “TAX TREATMENT OF

JOHNSTON ISLAND ASSIGNMENT EXPENSES” (Raytheon’s description of

the tax treatment of Johnston Island assignment expenses), which

provided:

                                                          Employee W-2 and Tax
  Assignment Expense            Tax Classification        Withholding Treatment

  1. Travel, in-transit         Relocation expense        Subject to W-2
                                                          reporting-Not subject
                                                          to withholding if
                                                          deductible

  2. Remote site differential   Compensation              Taxable

  3. Subsistence and quarters   Business travel expense   Taxable

  4. Off-island rotation        Personal travel           Taxable

  5. Emergency leave            Compensation              Taxable

  NOTE:   You should also consult your personal tax advisor for application to your
            particular tax considerations.

     Throughout 1999 and 2001, Mr. Smith continued to work for
                                - 4 -

Raytheon on Johnston Island.2   During 1999 and 2001, Mr. Smith

received wages from Raytheon totaling $92,276 and $99,980,

respectively.

     Around December 12, 2000, Raytheon issued another letter to

Mr. Smith (Raytheon’s December 12, 2000 letter) that included

revisions to certain terms and conditions of his employment on

Johnston Island.   Raytheon’s December 12, 2000 letter stated,

inter alia:   “Johnston Island is not tax exempt; therefore,

standard tax obligations apply.”   Raytheon included with

Raytheon’s December 12, 2000 letter certain documents, including

a document that was identical to Raytheon’s description of the

tax treatment of Johnston Island assignment expenses.

     On March 9, 2000, the Internal Revenue Service (IRS) issued

a news release entitled “Johnston Inland [sic] Individuals May

Not Claim Income Exclusion” (IRS March 9, 2000 news release).

That news release stated in pertinent part:

     The Internal Revenue Service reminds individuals in an
     unincorporated U.S. territory, such as Johnston Island,
     that they may not claim the exclusion for personal
     service income earned in a U.S. possession under sec-
     tion 931. They also cannot exclude this income as
     “foreign earned income” under the exclusion provision
     in section 911.

     At one time Johnston Island was listed as a U.S. pos-
     session for purposes of the possessions exclusion under


     2
      Throughout 1999 and 2001, Mr. Smith worked on Johnston
Island for Washington Group International, formerly Raytheon.
For convenience, we shall hereinafter refer only to Raytheon, and
not to Washington Group International.
                                 - 5 -

     the 1954 Code; however, the law was changed under
     amendments enacted by the Tax Reform Act of 1986.
     Johnston Island is not a “specified possession” for
     purposes of new section 931, so income earned on the
     Island is not subject to exclusion.

     The IRS published Publication 570, Tax Guide for Individuals

with Income From U.S. Possessions, for use in the preparation of

individual tax returns for the taxable year 2001 (IRS Publication

570 for 2001).     IRS Publication 570 for 2001 stated in pertinent

part:

     For 2001, the possession exclusion applies only to
     individuals who are bona fide residents of American
     Samoa. * * *

          Individuals in the following U.S. possessions or
     territories are not eligible for the possession exclu-
     sion discussed here.

         *        *       *       *       *       *       *

             • Johnston Island

     Sometime prior to November 13, 2001, an individual named

Brian Jordan (Mr. Jordan)3 sent a letter to President George W.

Bush (Mr. Jordan’s letter to President Bush).    That letter stated

in pertinent part:

     Subject: CFR 26, Vol 10, Part 1, (secs 1.908 to
     1.1000), Revised as of 1 April 1997


     Dear Sir:

     I would like to know if the above mentioned subject is
     still current for Johnston Atoll (Island) because I


     3
      The record does not disclose who Mr. Jordan is or his
relationship, if any, to petitioners.
                                - 6 -

     have been unable to obtain an answer from the I.R.S.

     On November 13, 2001, in response to Mr. Jordan’s letter to

President Bush, the IRS Center in Philadelphia, Pennsylvania,

sent a letter to Mr. Jordan (IRS November 13, 2001 letter to Mr.

Jordan) that was signed by David L. Medeck, who was identified in

that letter as “Field Director, Accounts Management”.   The IRS

November 13, 2001 letter to Mr. Jordan stated in pertinent part:

     I am responding to your letter to President George W.
     Bush. You asked about the Code of Federal Regulations
     (CFR) as it pertains to Johnston Island.

          *       *         *    *      *        *       *

     I am enclosing 26 CFR 1.931-1. These regulations are
     current as of October 24, 2001.

Attached to the IRS November 13, 2001 letter to Mr. Jordan was a

copy of section 1.931-1, Income Tax Regs., which the Department

of the Treasury (Treasury) promulgated under section 931 prior to

its amendment by section 1272(a) of the Tax Reform Act of 1986

(TRA 1986), Pub. L. 99-514, 100 Stat. 2593.4   (We shall refer to

section 931 prior to its amendment by the TRA 1986 as old section

931.)

     On March 2, 2000, and March 6, 2002, respectively, peti-

tioner signed Form 1040, U.S. Individual Income Tax Return, for

each of their taxable years 1999 (1999 joint return) and 2001




     4
        See infra note 8.
                                - 7 -

(2001 joint return).5   Thereafter, they filed their 1999 joint

return and their 2001 joint return.6    In the 1999 joint return,

petitioners reported wage income of $92,276 and claimed an

exclusion from gross income of $79,781 ($79,781 exclusion of 1999

wages).   In the 2001 joint return, petitioners reported wage

income of $99,980 and claimed an exclusion from gross income of

$99,980 ($99,980 exclusion of 2001 wages).    On page 1, line 21 of

the 2001 joint return, petitioners included the following nota-

tion with respect to the $99,980 exclusion of 2001 wages:    “CODE

SEC 931 DEDUCT-SEE ATTACHED”.   Petitioners attached to the 2001

joint return a document entitled “Federal Supplemental Informa-

tion” (petitioners’ attachment to their 2001 joint return).     That

document stated:   “TAXPAYER WORKED ON JOHNSTON ISLAND ATOLL

DURING TAX YEAR AND SUBSEQUENT TO TITLE 26, VOL. 10, PART 1

(SECTIONS 1.908 TO 1.1000), 26CFR 1.931-1 (REVISION 4-1-97),

TAXPAYER IS ENTITLED TO EXCLUDE EARNINGS FROM REPORTABLE INCOME.”

(Reproduced literally.)

     Respondent issued to petitioners a notice of deficiency

(notice) with respect to their taxable years 1999 and 2001.     In

that notice, respondent determined, inter alia, to disallow


     5
      On Feb. 26, 2000, and Feb. 27, 2002, respectively, Leland
Rubesh signed the 1999 joint return and the 2001 joint return as
return preparer.
     6
      The record does not disclose the respective dates on which
petitioners filed their 1999 joint return and their 2001 joint
return.
                               - 8 -

petitioners’ $79,781 exclusion of 1999 wages and petitioners’

$99,980 exclusion of 2001 wages.   Respondent further determined

in the notice that petitioners are liable for 1999 and 2001 for

the accuracy-related penalty under section 6662(a) because of:

(1) Negligence or disregard of rules or regulations under section

6662(b)(1) or (2) a substantial understatement of tax in peti-

tioners’ 2001 joint return under section 6662(b)(2).

                              OPINION

     We must determine whether petitioners are liable for 2001

for the accuracy-related penalty under section 6662(a) because of

negligence under section 6662(b)(1) or a substantial understate-

ment of tax under section 6662(b)(2).7

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment to which section 6662 applies.

Section 6662 applies to the portion of any underpayment which is

attributable to, inter alia, negligence, sec. 6662(b)(1), or a

substantial understatement of tax, sec. 6662(b)(2).

     The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code.

See sec. 6662(c).   Negligence has also been defined as a failure

to do what a reasonable person would do under the circumstances.

See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),



     7
      Respondent concedes that petitioners are not liable for
1999 for the accuracy-related penalty under sec. 6662(a).
                               - 9 -

affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.

686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).   A return

position that has a reasonable basis within the meaning of

section 1.6662-3(b)(3), Income Tax Regs., is not attributable to

negligence.   Sec. 1.6662-3(b)(1), Income Tax Regs.   The meaning

of the term “reasonable basis” is set forth in section 1.6662-

3(b)(3), Income Tax Regs., as follows:

     Reasonable basis is a relatively high standard of tax
     reporting, that is, significantly higher than not
     frivolous or not patently improper. The reasonable
     basis standard is not satisfied by a return position
     that is merely arguable or that is merely a colorable
     claim. If a return position is reasonably based on one
     or more of the authorities set forth in §1.6662-
     4(d)(3)(iii) (taking into account the relevance and
     persuasiveness of the authorities, and subsequent
     developments), the return position will generally
     satisfy the reasonable basis standard even though it
     may not satisfy the substantial authority standard as
     defined in §1.6662-4(d)(2). (See §1.6662-4(d)(3)(ii)
     for rules with respect to relevance, persuasiveness,
     subsequent developments, and use of a well-reasoned
     construction of an applicable statutory provision for
     purposes of the substantial understatement penalty.)
     In addition, the reasonable cause and good faith excep-
     tion in §1.6664-4 may provide relief from the penalty
     for negligence or disregard of rules or regulations,
     even if a return position does not satisfy the reason-
     able basis standard.

A return position that does not have a reasonable basis is

attributable to negligence.   Van Camp & Bennion v. United States,

251 F.3d 862, 866 (9th Cir. 2001).

     For purposes of section 6662(b)(2), there is a substantial

understatement of tax for any taxable year if the amount of the

understatement for the taxable year exceeds the greater of 10
                              - 10 -

percent of the tax required to be shown in the return for the

taxable year or $5,000.   Sec. 6662(d)(1)(A).   An understatement

is equal to the excess of the amount of tax required to be shown

in the tax return over the amount of tax shown in such return.

See sec. 6662(d)(2)(A).   The amount of the understatement is to

be reduced by that portion of the understatement which is attrib-

utable to (1) “the tax treatment of any item by the taxpayer if

there is or was substantial authority for such treatment” (sub-

stantial authority), sec. 6662(d)(2)(B)(i), or (2) any item if

(a) “the relevant facts affecting the item’s tax treatment are

adequately disclosed in the return or in a statement attached to

the return” (adequate disclosure), sec. 6662(d)(2)(B)(ii)(I), and

(b) “there is a reasonable basis for the tax treatment of such

item by the taxpayer” (reasonable basis), sec.

6662(d)(2)(B)(ii)(II).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.   Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such
                               - 11 -

as an accountant.   Sec. 1.6664-4(b)(1), Income Tax Regs.

     Before turning to petitioners’ position under section 6662,

we shall address section 7491(c).    Although respondent must have

commenced respondent’s examination of petitioners’ return for the

year at issue after July 22, 1998, the parties do not address

section 7491(c).    Respondent has the burden of production under

that section with respect to the accuracy-related penalty under

section 6662(a).    To meet that burden, respondent must come

forward with sufficient evidence showing that it is appropriate

to impose the accuracy-related penalty.    Higbee v. Commissioner,

116 T.C. 438, 446 (2001).    Although respondent bears the burden

of production with respect to the accuracy-related penalty that

respondent determined for petitioners’ taxable year 2001, respon-

dent “need not introduce evidence regarding reasonable cause,

substantial authority, or similar provisions. * * * the taxpayer

bears the burden of proof with regard to those issues.”     Id.

     Old section 931 permitted citizens of the United States to

exclude income derived from sources within possessions of the

United States, except Puerto Rico, the U.S. Virgin Islands, and

Guam, if certain conditions were satisfied.    Although old section

931 did not define the term “possession of the United States”,

section 1.931-1, Income Tax Regs., promulgated under old section

931 provided that the term “possession of the United States”
                              - 12 -

included Johnston Island.8

     Section 1272(a) of the TRA 1986 amended old section 931 to

exclude from income, in the case of an individual who is a bona

fide resident of a specified possession during the entire taxable

year, gross income derived from sources within any such specified

possession.   Section 931, as amended by section 1272(a) of the

TRA 1986, defines the term “specified possession” to mean only

Guam, American Samoa, and the Northern Mariana Islands.   Sec.

931(c).

     Around 6½ months before petitioners signed their 2001 joint

return,9 we issued our Opinion in Specking v. Commissioner, 117

     8
      Sec. 1.931-1, Income Tax Regs., promulgated under sec. 931
prior to its amendment by the TRA 1986 provided in pertinent
part:

          § 1.931-1. Citizens of the United States and
     domestic corporations deriving income from sources
     within a possession of the United States.

          (a) Definitions. (1) As used in section 931 and
     this section, the term “possession of the United
     States” includes American Samoa, Guam, Johnston Island,
     Midway Islands, the Panama Canal Zone, Puerto Rico, and
     Wake Island. * * *

     On Apr. 6, 2005, the Treasury Department promulgated T.D.
9194, 2005-20 I.R.B. 1016, which revised sec. 1.931-1, Income Tax
Regs., promulgated under old section 931. Subsequent to that
revision, sec. 1.931-1, Income Tax Regs., provides in pertinent
part: “§ 1.931-1. Exclusion of certain income from sources
within Guam, American Samoa, or the Northern Mariana Islands.--
[Reserved].”
     9
      Although the record establishes the date on which petition-
ers signed their 2001 joint return, the record does not disclose
                                                   (continued...)
                               - 13 -

T.C. 95 (2001), affd. sub nom. Haessly v. Commissioner, 68 Fed.

Appx. 44 (9th Cir. 2003), affd. sub nom. Umbach v. Commissioner,

357 F.3d 1108 (10th Cir. 2003).    In Specking, we held, inter

alia:    (1) Johnston Island does not constitute a specified

possession for purposes of section 931 as amended by the TRA

1986; and (2) the amendment of old section 931 by the TRA 1986

became effective as to taxpayers who earned compensation while

working on Johnston Island for taxable years that began after

December 31, 1986.    Id. at 108-109.   In so holding, we rejected

as misplaced the reliance by the taxpayers in Specking on section

1.931-1, Income Tax Regs., promulgated under old section 931.

Id. at 110.   We stated:

     The regulatory language on which petitioners rely
     defines the term “possession” for purposes of old
     section 931. As we have concluded above, that provi-
     sion no longer applies to petitioners. Consequently,
     the regulatory provision also has no application to
     them and is obsolete as to petitioners.

Id. at 110-111.

     Petitioners nonetheless claimed the $99,980 exclusion of

2001 wages in their 2001 joint return.    According to petitioners’

attachment to their 2001 joint return, they did so in reliance on

section 1.931-1, Income Tax Regs., that the Treasury promulgated

under old section 931 and that we found in Specking was obsolete

with respect to taxpayers who earned compensation while working


     9
      (...continued)
the date on which petitioners filed that return.
                                - 14 -

on Johnston Island for taxable years that began after December

31, 1986.   On the record before us, we find that respondent has

satisfied respondent’s burden of production under section 7491(c)

with respect to the accuracy-related penalty under section

6662(a) and (b)(1) that respondent determined for 2001.

     We turn now to petitioners’ position that they are not

liable for 2001 for the accuracy-related penalty under section

6662(a).    According to petitioners, they are not liable for that

penalty because (1) there was substantial authority for claiming

the $99,980 exclusion of 2001 wages in their 2001 joint return,

(2) there was adequate disclosure of the relevant facts affecting

such tax treatment of those wages, and (3) there was a reasonable

basis for such tax treatment.

     We shall address only whether petitioners had a reasonable

basis in claiming the $99,980 exclusion of 2001 wages in their

2001 joint return.   If the record were to establish that peti-

tioners did not have a reasonable basis in claiming that exclu-

sion, such return position of petitioners would be attributable

to negligence.10   Van Camp & Bennion v. United States, 251 F.3d

at 866.

     In support of petitioners’ position that they had a reason-



     10
       A fortiori, a return position that did not have a reason-
able basis is not a position for which there was substantial
authority under sec. 6662(d)(2)(B)(i) and the regulations there-
under.
                             - 15 -

able basis in claiming the $99,980 exclusion of 2001 wages in

their 2001 joint return, petitioners advance three arguments as

follows:

     It is * * * petitioners’ position that there was a
     reasonable basis for questioning the effective date of
     the proposed amendments to I.R.C. sec. 931 [old section
     931] contained in the Tax Reform Act [TRA 1986]. It
     has never been established that the so called “specific
     possessions” have ever entered into the required agree-
     ments regarding tax administration, which the Tax
     Reform Act included as a condition precedent to the
     effective date of the proposed amendments. This was the
     basis upon which the Court’s decision in Specking et
     al, supra [Specking v. Commissioner, 117 T.C. 95
     (2001), affd. sub nom. Haessly v. Commissioner, 68 Fed.
     Appx. 44 (9th Cir. 2003), affd. sub nom. Umbach v.
     Commissioner, 357 F.3d 1108 (10th Cir. 2003)] was
     appealed to the 9th and 10th Circuit Courts of Appeal,
     the decisions affirming to Tax Courts opinion not being
     issued until 2003. Based upon the respondent’s contin-
     ued publication of Treas. Reg. 1.931-1, Mr. Medeck’s
     response [IRS November 13, 2001 letter to Mr. Jordan]
     to the Presidential inquiry, and the question posed in
     the appeal of the Specking et al, supra opinion,[11]
     there was a reasonable basis for the petitioners treat-
     ment of L. Ben Smith’s Johnston Island income on the
     return filed for the year 2001, sufficient to relieve
     them from liability for the I.R.C. sec. 6662(a) addi-
     tions to the tax. [Reproduced literally.]

     We consider first petitioners’ arguments that they had a

reasonable basis in claiming the $99,980 exclusion of 2001 wages

in their 2001 joint return because:   (1) The amendment by the TRA


     11
      On Mar. 6, 2002, when petitioners signed their 2001 joint
return, no notice of appeal had been filed with respect to
Specking v. Commissioner, 117 T.C. 95 (2001), affd. sub nom.
Haessley v. Commissioner, 68 Fed. Appx. 44 (9th Cir. 2003), affd.
sub nom. Umbach v. Commissioner, 57 F.3d 1108 (10th Cir. 2003).
It was not until May 9, 2002, that the taxpayers involved filed
respective notices of appeal to the U.S. Courts of Appeals for
the Ninth Circuit and the Tenth Circuit.
                                 - 16 -

1986 of old section 931 was not effective for their taxable year

2001 since certain implementing agreements were not entered into

between the United States and the specified possessions identi-

fied in section 931 after that amendment; and (2) after the

amendment by the TRA 1986 of old section 931 the Treasury did not

amend or withdraw section 1.931-1, Income Tax Regs., promulgated

under old section 931, and therefore petitioners were entitled to

rely on that regulation.      Around 6½ months before petitioners

signed their 2001 joint return,12 we rejected both of those

arguments in Specking v. Commissioner, 117 T.C. 95 (2001).          As

discussed above, in Specking, we held that the amendment of old

section 931 by the TRA 1986 became effective as to taxpayers who

earned compensation while working on Johnston Island for taxable

years that began after December 31, 1986.         Id. at 109-110.   In so

holding, we rejected the argument advanced by the taxpayers in

Specking and petitioners here that the existence of certain

implementing agreements between the United States and the speci-

fied possessions identified in section 931 after its amendment by

the TRA 1986 was a condition precedent to the effective date of

such amendment of old section 931.        Id.   As also discussed above,

in Specking, we further rejected the argument of the taxpayers

there and petitioners here that section 1.931-1, Income Tax

Regs., promulgated under old section 931 continued to apply after


     12
          See supra note 6.
                                - 17 -

the TRA 1986 amended old section 931 because the Treasury did not

amend or withdraw that regulation.       Id. at 110-111.   In Specking,

we held that old section 931 no longer applied to the taxpayers

there, id., and that “Consequently, the regulatory provision also

has no application to them and is obsolete as to petitioners [in

Specking]”, id. at 111.     In so holding, we stated:

             We do not agree with petitioners that respondent’s
        failure to amend section 1.931-1, Income Tax Regs.,
        supports petitioners’ position. As the Supreme Court
        recently observed regarding another unamended regula-
        tion provision: “The Treasury’s relaxed approach to
        amending its regulations to track Code changes is well
        documented. * * * The absence of any amendment * * * is
        more likely a reflection of the Treasury’s inattention
        than any affirmative intention on its part to say
        anything at all.” United Dominion Indus., Inc. v.
        United States, 532 U.S. * * * [822, 836-837 (2001)].

Id.13


        13
      Even before we issued our Opinion in Specking v. Commis-
sioner, 117 T.C. 95 (2001), affd. sub nom. Haessly v. Commis-
sioner, 68 Fed. Appx. 44 (9th Cir. 2003), affd. sub nom. Umbach
v. Commissioner, 57 F.3d 1108 (10th Cir. 2003), the United States
District Court for the District of Hawaii (U.S. District Court)
held that taxpayers who earned compensation during 1994, 1995,
and 1996 while working on Johnston Island must include such
compensation in gross income for those years. Farrell v. United
States, 87 AFTR 2d 2001-1159, 2001-1 USTC par. 50,279 (D. Haw.
2001), affd. 313 F.3d 1214 (9th Cir. 2002). In so holding, the
U.S. District Court rejected the arguments of the taxpayers in
Farrell and petitioners here (1) that the amendment by the TRA
1986 of old section 931 was not effective because certain imple-
menting agreements were not entered into between the United
States and the specified possessions identified in sec. 931 after
that amendment and (2) that the taxpayers were entitled to rely
on sec. 1.931-1 Income Tax Regs., promulgated under old section
931 because that regulation was not amended or withdrawn by the
Treasury after the TRA 1986 amended old section 931. In reject-
ing the argument of the taxpayers in Farrell with respect to the
                                                   (continued...)
                             - 18 -

     We conclude that petitioners’ arguments relating to (1) the

effective date of the amendment by the TRA 1986 of old section

931 and (2) the failure by the Treasury to amend or withdraw

section 1.931-1, Income Tax Regs., did not provide petitioners

with a reasonable basis in claiming the $99,980 exclusion of 2001



     13
      (...continued)
effective date of the amendment by TRA 1986 of old section 931,
the U.S. District Court stated:

     the outdated Section 931 was no longer in the Internal
     Revenue Code in the 1994 to 1996 period. Had Congress
     intended that the outdated Section 931 have continuing
     effect, it would have stated so in the amended Section
     931.

Farrell v. United States, 87 AFTR 2d 2001-1159, at 2001-1161 n.5,
2001-1 USTC par. 50,279, at 87,552 n.5.

In rejecting the argument of the taxpayers in Farrell that sec.
1.931-1, Income Tax Regs., promulgated under old section 931
allowed them to exclude the income earned while working on
Johnston Island, the U.S. District Court stated:

           Although Section 931 was amended, Regulation
     1.931-1 was not amended to reflect the changes made to
     Section 931. See 10 United States Tax Reporter 9312
     (2000) (explanation of IRC section 931) (“Caution: The
     Treasury has not yet amended Reg section 1.931-1 to
     reflect changes made by P.L. 99-514”). To read Regula-
     tion 1.931-1 as including Johnston Island as a “speci-
     fied possession” for purposes of 26 U.S.C. section 931
     [(]1986) would be contrary to the plain intent of
     Congress, which is to allow income to be excluded from
     gross income for only Guam, American Samoa, and the
     Northern Mariana Islands. Accordingly, this court does
     not give any deference to the Treasury’s outdated
     interpretation of “possession” in Regulation 1.931-1.
     * * *

Farrell v. United States, 87 AFTR 2d 2001-1159, at 2001-1160 to
2001-1161, 2001-1 USTC par. 50,279, at 87,552.
                              - 19 -

wages in their 2001 joint return.

     We consider now petitioners’ third argument in support of

their position that they had a reasonable basis in claiming the

$99,980 exclusion of 2001 wages in their 2001 joint return.    As

we understand that argument, petitioners maintain that in claim-

ing that exclusion they relied on the IRS November 13, 2001

letter to Mr. Jordan14 that the IRS sent in response to Mr.

Jordan’s letter to President Bush.15   On the record before us, we

reject any such argument.   The record does not establish that

petitioners were even aware of the IRS November 13, 2001 letter

to Mr. Jordan when they signed their 2001 joint return.

     In relying on old section 931 and section 1.931-1, Income

Tax Regs., promulgated under old section 931 in claiming the

$99,980 exclusion of 2001 wages in their 2001 joint return,

petitioners not only ignored Specking v. Commissioner, 117 T.C.

95 (2001), and Farrell v. United States, 87 AFTR 2d 2001-1159,



     14
      As stated supra note 3, the record does not disclose who
Mr. Jordan is or his relationship, if any, to petitioners.
     15
      The IRS November 13, 2001 letter to Mr. Jordan stated in
pertinent part:

     I am responding to your letter to President George W.
     Bush. You asked about the Code of Federal Regulations
     (CFR) as it pertains to Johnston Island.

          *     *       *        *       *       *        *

     I am enclosing 26 CFR 1.931-1. These regulations are
     current as of October 24, 2001.
                               - 20 -

2001-1 USTC par. 50,279 (D. Haw. 2001), affd. 313 F.3d 1214 (9th

Cir. 2002), they also disregarded admonitions from Mr. Smith’s

employer and from the IRS that compensation earned while working

on Johnston Island is taxable and may not be excluded from

income.   In this regard, before petitioners signed their 2001

joint return, (1) Mr. Smith received multiple warnings from his

employer, one a little less than 15 months before petitioners

signed that return, that Johnston Island was not tax exempt and

that “therefore, standard tax obligations apply” and that certain

so-called assignment expenses were to be treated as compensation

that is taxable; (2) the IRS March 9, 2000 news release was

issued that, inter alia, stated:   “Johnston Island is not a

‘specified possession’ for purposes of new section 931, so income

earned on the Island is not subject to exclusion”; and (3) IRS

Publication 570 for 2001 was issued that provided, inter alia,

that taxpayers who earned compensation while working on Johnston

Island “are not eligible for the possession exclusion discussed

here [in this publication]”.   Under the circumstances extant when

petitioners signed their 2001 joint return, petitioners, at a

minimum, should have consulted a professional about whether to

claim the $99,980 exclusion of 2001 wages in that return and

relied on such professional’s advice.   See Zmuda v. Commissioner,

731 F.2d 1417, 1422-1423 (9th Cir. 1984), affg. 79 T.C. 714

(1982).   Petitioners do not contend that they did so and do not
                              - 21 -

claim that they are not liable for 2001 for the accuracy-related

penalty under section 6662(a) because they relied on the advice

of a professional.

     On the record before us, we find that petitioners did not

have a reasonable basis in claiming the $99,980 exclusion of 2001

wages in their 2001 joint return.     On that record, we further

find that petitioners’ return position in claiming the $99,980

exclusion of 2001 wages was attributable to negligence.     See Van

Camp & Bennion v. United States, 251 F.3d at 866.

     On the record before us, we further find that petitioners

have failed to carry their burden of establishing that there was

reasonable cause for, and that they acted in good faith with

respect to, any portion of the underpayment for petitioners’

taxable year 2001.   See sec. 6664(c)(1); sec. 1.6664-4(b)(1),

Income Tax Regs.   On that record, we find that petitioners have

failed to carry their burden of showing any circumstances that

would enable us to find that they had reasonable cause for, and

acted in good faith in, claiming the $99,980 exclusion of 2001

wages in their 2001 joint return.16



     16
      For example, petitioners have failed to show that, after
we issued Specking v. Commissioner, 117 T.C. 95 (2001), they
consulted a professional who advised them to claim the $99,980
exclusion of 2001 wages in their 2001 joint return. Indeed,
petitioners have failed to show that, after we issued Specking,
they even made any efforts to consult a professional about
whether to make such a claim. See Zmuda v. Commissioner, 731
F.2d 1417, 1422-1423 (9th Cir. 1984), affg. 79 T.C. 714 (1982).
                              - 22 -

     Based upon our examination of the entire record before us,

we find that petitioners have failed to carry their burden of

establishing that they are not liable for 2001 for the accuracy-

related penalty under section 6662(a) and (b)(1).17

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.18

     To reflect the foregoing and the concessions of the parties,



                                   Decision will be entered for

                              respondent with respect to the

                              deficiency for 1999 and the

                              deficiency and the accuracy-related

                              penalty under section 6662(a) for

                              2001 and for petitioners with

                              respect to the accuracy-related

                              penalty under section 6662(a) for

                              1999.


     17
      In light of our finding that petitioners are liable for
2001 for the accuracy-related penalty because of negligence under
sec. 6662(b)(1), we shall not address respondent’s argument that
petitioners are liable for that year for that penalty because of
a substantial understatement of tax under sec. 6662(b)(2).
     18
      We note that Taibo v. Commissioner, T.C. Memo. 2004-196,
is materially distinguishable from the instant case. In Taibo,
the taxpayer, unlike petitioners in the instant case, filed his
return for the year in question (i.e., 2000) prior to the issu-
ance of Specking v. Commissioner, supra.
