 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued October 17, 2014               Decided April 17, 2015

                        No. 13-1241

      WILLIAM D. ROGERS AND YEN-LING K. ROGERS,
                     APPELLANTS

                             v.

      COMMISSIONER OF INTERNAL REVENUE SERVICE,
                      APPELLEE


              On Appeal from the Order and
          Decision of the United States Tax Court


    Yen-Ling K. Rogers, Pro se, argued the cause for
appellants. With her on the briefs was William D. Rogers, Pro
se.

    Damon W. Taaffe, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief was
Richard Farber, Attorney. Bethany B. Hauser, Attorney,
entered an appearance.

    Before: BROWN, Circuit Judge, MILLETT, Circuit Judge,
and EDWARDS, Senior Circuit Judge.

   Opinion for the Court filed by Senior Circuit Judge
EDWARDS.
                               2
     EDWARDS, Senior Circuit Judge: This case involves an
appeal by Yen-Ling Rogers (“Rogers”) and her husband
William Rogers (together, “Appellants”) challenging a
decision of the Tax Court denying their request to redetermine
their tax liability for 2007 and imposing a 20% penalty for
negligently failing to follow the tax rules.

     The United States income tax system reaches all U.S.
citizens’ income no matter where in the world it is earned,
“unless it is expressly excepted by another provision in the
Tax Code.” See Comm’r v. Schleier, 515 U.S. 323, 328
(1995); see also 26 U.S.C. § 61(a) (defining “gross income”
as “all income from whatever source derived,” except as
otherwise provided). There are many exceptions under the
Tax Code, however. Relevant to this case, qualified
Americans who live abroad can exclude from their taxable
income “foreign earned income,” which is defined as earned
income “from sources within a foreign country or countries.”
26 U.S.C. § 911(a)(1), (b)(1)(A). Internal Revenue Service
(“IRS”) regulations provide that income is only “from sources
within a foreign country” if it is “attributable to services
performed by an individual in a foreign country or countries.”
26 C.F.R. § 1.911-3(a) (emphasis added). As a result,
according to the IRS, qualified Americans who live abroad
cannot use Section 911 to exclude any income from work
performed in or over the United States or international waters.
Only income for work performed in or over foreign countries
can be counted as foreign earned income.

     In 2007, Rogers, who is a U.S. citizen, lived in Hong
Kong and worked as an international flight attendant for
United Airlines (“United”). She flew and worked in and over
foreign countries and also in and over the United States and
over international waters. Nonetheless, she and her husband
filed a tax return reporting all of her flight attendant earnings
                              3
as “foreign earned income.” The Commissioner of the IRS,
however, determined that Appellants owed a tax deficiency of
$3,428.30 on the portion of Rogers’s earnings attributable to
her work outside foreign countries, as well as a 20% penalty.

     Appellants petitioned the Tax Court to redetermine their
income tax liability, arguing that the language of Section 911
authorized them to exclude all of Rogers’s flight attendant
earnings as “foreign earned income,” and that they should not
be charged the negligence penalty. The Tax Court disagreed.
Citing the language of Section 911, its prior holdings, and IRS
regulations, the court found that Appellants could only
exclude the portion of Rogers’s earnings that were related to
her time spent working in or over foreign countries. Rogers v.
Comm’r, 105 T.C.M. (CCH) 1478, 1479–80 (2013). The Tax
Court also upheld the negligence penalty. Id. at 1480. Rogers
and her husband then filed a timely appeal with this court.

    Appellants argue that the Tax Court incorrectly applied
Section 911. They contend that the language of Section 911
authorizes them to exclude all of Rogers’s flight attendant
income as “foreign earned income” because it was received
“from sources within a foreign country or countries” –
namely, Rogers’s Hong Kong-based job. See 26 U.S.C. § 911.
They also challenge the imposition of the negligence penalty,
and ask this court to award costs and fees.

     We agree with the Tax Court that the language of Section
911 and the IRS’s regulations support the Commissioner’s
determination against Appellants. Rogers has failed to show
that the Tax Court erred, or that the IRS’s regulations
interpreting Section 911 are unreasonable. We remand only
for the Tax Court to address a factual issue that was raised
and clarified at oral argument before this court.
                              4
                     I.   BACKGROUND

     In 2007, Rogers worked for United as an international
flight attendant based in Hong Kong. According to the
parties’ stipulations below, she flew a total of 74 flights
between destinations in Asia and the United States. She
performed both in-flight duties and some pre-departure and
post-arrival work, and was generally paid according to her
flight time. She received vacation time and benefits as part of
her employment, and could receive “guarantee pay” for work
she would have performed on flights that were canceled. The
parties agreed at oral argument that, during the time when
Rogers received guarantee pay, she was required to remain in
Hong Kong, awaiting reassignment to another flight.

    United paid Rogers $41,762.10 in wages during 2007,
and provided her with an apportionment of her estimated duty
time between minutes spent in or over foreign countries, in or
over the United States, and over international waters.
Appellants jointly filed their 2007 taxes, excluding all of
Rogers’s flight attendant earnings as “foreign earned income”
under Section 911. Rogers, 105 T.C.M. (CCH) at 1478–79.

     On December 30, 2010, the Commissioner sent Rogers
and her husband a deficiency notice for the 2007 tax year,
stating that they could not exclude the portion of Rogers’s
income earned while she was working in or over the United
States and over international waters. That portion of her
wages was not “foreign earned income” because it was not
“attributable to services performed by an individual in a
foreign country or countries.” 26 C.F.R. § 1.911-3(a)
(emphasis added). Based on United’s duty time
apportionment, the IRS concluded that Rogers and her
husband owed $3,428.30 in taxes on the erroneously excluded
wages. The IRS also assessed Rogers and her husband a
                               5
$685.66 “accuracy-related penalty” under a provision of the
tax code that allows the Commissioner to impose a penalty
equal to 20% of the underpayment if a taxpayer withholds
taxes due to “[n]egligence or disregard of rules or
regulations.” 26 U.S.C. § 6662.

     Appellants petitioned the Tax Court for a redetermination
of their tax liability. The parties stipulated before the Tax
Court to duty time apportionments far more favorable to
Rogers than United’s estimates; they also stipulated that
Rogers was a “qualified individual” eligible for the foreign
earned income exclusion. In their arguments to the Tax Court,
Appellants claimed that they were entitled to exclude all of
Rogers’s flight attendant income as “foreign earned income”;
that the value of Rogers’s vacation pay, sick pay, guarantee
pay, and training pay should be considered earned in Hong
Kong and thus allocated to foreign earned income; and that
they should not have been charged a penalty.

     The Tax Court rejected all of Appellants’ legal
arguments. Citing its prior cases, the court ruled that Rogers
could only exclude earnings for services actually performed in
or over foreign countries, and that Appellants must pay taxes
on the portion of Rogers’s earnings attributable to time when
she worked over international waters and in or over the
United States. Rogers, 105 T.C.M. (CCH) at 1479 (citing
LeTourneau v. Comm’r, 103 T.C.M. (CCH) 1229 (2012);
Rogers v. Comm’r, 97 T.C.M. (CCH) 1573 (2009)). The court
also concluded that most of Rogers’s other benefits and pay,
such as vacation and sick days, arose from Rogers’s general
work and should therefore be allocated according to Rogers’s
flight time. Id. at 1479–80. As to the accuracy-related penalty,
the court found that Appellants had failed to carry their
burden of showing that they acted with reasonable cause and
in good faith in excluding all of the flight attendant earnings.
                               6
The Tax Court noted that the IRS had issued deficiency
notices to Appellants for the exact same behavior in prior tax
years. Id. at 1480. Using the new, stipulated apportionment,
the court reduced the tax deficiency to $1,635.30, and
adjusted the accuracy-related penalty downward to $327.06.

     Rogers and her husband appealed to this court. Their
chief argument is that the Tax Court erred in applying Section
911 and the IRS regulations. In particular, they contend that
the language of Section 911 entitles them to exclude all of
Rogers’s flight attendant income as “foreign earned income”
because it is “from sources within a foreign country.” See 26
U.S.C. § 911(b)(1)(A). Appellants also challenge the
accuracy-related negligence penalty, and ask the court to
award them costs and fees.

                        II. ANALYSIS

    Appellants’ primary argument is that the Tax Court erred
in requiring them to apportion Rogers’s flight attendant
earnings because, in their view, Section 911 allows them to
exclude all of her earnings from taxable income. We review
the Tax Court’s legal conclusions de novo. See Byers v.
Comm’r, 740 F.3d 668, 675 (D.C. Cir. 2014).

     Appellants note that Section 911 defines “foreign earned
income” as earned income “from sources within a foreign
country or countries.” 26 U.S.C. § 911 (emphasis added).
Focusing on the “from sources” language, they reason that,
under the statute, the location where personal services are
performed is irrelevant to the tax status of the earnings arising
from those services. Instead, they argue, all that matters is the
location of the source of the income. As a result, Appellants
contend that all income related to Rogers’s United Airlines
job placement in Hong Kong – the ostensible foreign “source”
                              7
of her earnings – should be excluded. To bolster their legal
argument, Appellants cite a number of cases that they claim
show a practice by the IRS and the Tax Court of allowing
pilots and other persons living abroad to exclude all of their
income from taxation, rather than apportion it. Based on their
reading of the statute and case law, they argue that the Tax
Court incorrectly forced them to apportion Rogers’s income.

     We have little trouble dismissing Appellants’ argument
that the Tax Court erred in applying the law, because
Appellants’ presentation of both the law and prior cases is
unconvincing. First, Appellants paint an incomplete portrait
of the law. They focus on the language of the statute and fail
to take account of the controlling IRS regulation. The
regulation is telling. It states:

  Earned income is from sources within a foreign country if
  it is attributable to services performed by an individual in
  a foreign country or countries. The place of receipt of
  earned income is immaterial in determining whether earned
  income is attributable to services performed in a foreign
  country or countries.

26 C.F.R. § 1.911-3(a) (emphasis added). While this
regulation does not speak directly to the treatment of income
earned over international waters, a separate regulation defines
the term “foreign country” to mean “any territory under the
sovereignty of a government other than that of the United
States,” including, among other things, “the territorial waters
of the foreign country” and “the air space over the foreign
country.” 26 C.F.R. § 1.911-2(h). The regulation thus makes
explicit that income earned over waters not subject to any
foreign country’s jurisdiction would not be income earned “in
a foreign country or countries” for purposes of Section 1.911-
                                8
3(a). In sum, it is clear that Appellants’ position in this case is
completely at odds with IRS’s regulations.

     An agency’s regulation implementing its authorizing
statute “is binding in the courts unless procedurally defective,
arbitrary or capricious in substance, or manifestly contrary to
the statute.” Household Credit Servs. v. Pfennig, 541 U.S.
232, 242 (2004) (quoting United States v. Mead Corp., 533
U.S. 218, 227 (2001)) (internal quotation marks omitted).
This principle “appl[ies] with full force in the tax context.”
Mayo Found. for Med. Educ. and Research v. United States,
562 U.S. 44, 55 (2011). “Filling gaps in the Internal Revenue
Code plainly requires the Treasury Department to make
interpretive choices for statutory implementation at least as
complex as the ones other agencies must make in
administering their statutes.” Id. at 56.

     The IRS’s regulatory limitation of income “from sources
within a foreign country” to income attributable to services
performed in a foreign country accords with the language of
Section 911, particularly in light of the “default rule of
statutory interpretation that exclusions from income must be
narrowly construed.” Schleier, 515 U.S. at 328 (internal
quotation marks omitted). Furthermore, the regulation
harmonizes with related sections of the Internal Revenue
Code, in which the phrase “income from sources within”
generally limits personal services income to income earned
from services “performed in” a given jurisdiction. See 26
U.S.C. § 861(a)(3) (defining income from personal services as
being “from sources within the United States” if those “labor
or personal services [are] performed in the United States”); id.
§ 862(a)(3) (defining income from personal services as being
“from sources without the United States” if those “labor or
personal services [are] performed without the United States”).
The IRS’s regulation and its application here simply mirror
                               9
the use of similar “source” language in related sections of the
Code, where “the source of income is the place where the
services are performed.” Tipton & Kalmbach, Inc. v. United
States, 480 F.2d 1118, 1120 (10th Cir. 1973).

     It is particularly noteworthy that Appellants do not
contest the validity of § 1.911-3(a). And we have no basis to
find that the regulation is “procedurally defective, arbitrary or
capricious in substance, or manifestly contrary to the statute.”
Therefore, we are bound to give deference to the IRS’s
interpretation of the statute. Pfennig, 541 U.S. at 242; see Tax
Analysts v. IRS, 350 F.3d 100, 102–03 (D.C. Cir. 2003)
(applying Chevron deference to IRS tax regulations).

     In light of the controlling regulation and Appellants’
stipulation below that Rogers earned a significant portion of
her wages for services performed in or over the United States
and over international waters, the Tax Court did not err in
requiring Appellants to pay taxes on that portion of Rogers’s
wages. Appellants have put forward no colorable argument
for why those earnings should be considered “attributable to
services performed . . . in a foreign country or countries.” 26
C.F.R. § 1.911-3(a). Nor could they in the face of the IRS’s
regulation.

     This conclusion does not conflict with precedent.
Appellants claim to have unearthed a host of cases showing a
longstanding practice by the IRS and the Tax Court of
allowing the categorical exclusion of earnings from foreign-
based jobs. Appellants’ Br. 8. However, none of the cases
cited by Appellants is controlling or on point. Most of the
cases involve wholly unrelated issues, such as whether
taxpayers qualify as bona fide residents of foreign countries
for purposes of Section 911. See, e.g., Jones v. Comm’r, 927
F.2d 849 (5th Cir. 1991). Contrary to Appellants’
                               10
characterization, these cases generally say nothing about how
much of their income the taxpayers earned in the United
States or over international waters, what portion of it they
sought to exclude, or whether they could do so categorically.
By contrast, in another cited case, the parties in fact stipulated
that, if the airline pilot taxpayer were found eligible for the
Section 911 exclusion, he would allocate his income
according to his geographic flight time percentages. See
Schoneberger v. Comm’r, 74 T.C. 1016, 1017 n.2 (1980).

     We have found only one, non-binding case, uncited by
Appellants, in which an international airline employee
excluded the entirety of his salary under Section 911. But in
that case, the Tax Court specifically noted that “no issue
[was] raised with respect” to whether the salary constitutes
foreign earned income. Cobb v. Comm’r, 62 T.C.M. (CCH)
408, 411 n.5 (1991). In contrast, the Tax Court has decided
several recent cases specifically dealing with the question
raised in this case and consistently limiting the Section 911
exclusion to income actually earned in or over foreign
countries. See LeTourneau, 103 T.C.M. (CCH) 1229
(requiring apportionment of income by a flight attendant);
Rogers, 97 T.C.M. (CCH) 1573 (same, in a case involving the
instant Appellants). Appellants have shown no error in the
Tax Court’s application of Section 911 or the relevant IRS
regulation.

                             ****

    Although we reject Appellants’ argument regarding the
scope of Section 911, we will remand the case to the Tax
Court on one factual issue that was raised and clarified at oral
argument before this court.
                               11
     As part of Rogers’s employment, she was eligible to
receive “guarantee pay” when a flight she was scheduled to
work was canceled. In 2007, Rogers received guarantee pay
for one canceled flight. As the parties explained at argument,
Rogers was expected to remain in Hong Kong during this
period, available in the event that United chose to assign her
to a new flight. Government counsel conceded at oral
argument that he could think of no reason why any portion of
this payment to Rogers – for time spent on assignment in and
with orders to stay in a foreign country – would be included
as taxable income. In other words, Government counsel
acknowledged that the entire amount is excludable pursuant to
Section 911. We agree.

     Given the vagaries of guarantee pay and the different
ways in which it may be earned under different employment
contracts, we take no position on whether every form of
guarantee pay should be excludable under Section 911.
However, we agree with the Commissioner and Appellants
that in this case there is no reason to apportion the guarantee
pay earned by Rogers in Hong Kong. The Tax Court’s
opinion is unclear about the treatment of this payment, which
amounted to $1,041.82. For this reason, we remand the case
for the Tax Court to ensure that the entirety of this payment
has been properly excluded from Appellants’ taxable income.

     We reject the remainder of Appellants’ objections to the
Tax Court’s apportionment calculations. They have failed to
identify a basis for setting aside the stipulations to which they
agreed below or any clear error in the Tax Court’s factual
determinations regarding how other forms of non-flight
compensation (for example, vacation or sick pay) should be
apportioned. Finally, Appellants’ objection notwithstanding,
apportioning the time Rogers worked on the basis of minutes
rather than days is expressly contemplated by IRS regulation
                              12
in a related context. See 26 C.F.R. § 1.861-4(b)(2)(ii)(E)
(noting that, in calculating the amount of compensation
received for labor or personal services performed within the
United States on a time basis, “[a] unit of time less than a day
may be appropriate”).

                            ****

     Appellants’ claims regarding the accuracy-related penalty
and the award of costs and fees lack merit. Because “[t]he Tax
Court’s assessment of an accuracy-related penalty is a factual
determination,” it is reviewed for clear error. Calloway v.
Comm’r, 691 F.3d 1315, 1334 (11th Cir. 2012). Appellants
have not demonstrated any error in the Tax Court’s
conclusion that they failed to meet their burden of showing
reasonable cause and good faith in excluding their income
earned in and over the United States and over international
waters. As the Tax Court noted, Appellants had been issued a
deficiency notice for the same behavior in prior tax years, and
were on notice that they were not complying with the
applicable IRS regulations. See Rogers, 97 T.C.M. (CCH)
1573.

     Finally, Appellants are not entitled to costs and fees
under 26 U.S.C. § 7430. That section provides that Appellants
are only entitled to costs and fees if (1) they prevail in this
appeal and (2) the Government cannot establish that its
position was “substantially justified.” Id. § 7430(c)(4)(A),
(B). Appellants have failed to prevail on almost all of their
claims, and the Government has easily shown that the
Commissioner’s position was “substantially justified.”
Therefore, Appellants’ claim for fees and costs is denied.
                           13
                    III. CONCLUSION

     For these reasons, we affirm the judgment of the Tax
Court, with only one caveat. We remand the case to ensure
the proper allocation of Rogers’s guarantee pay.

                                              So ordered.
