                  T.C. Memo. 2009-111



                UNITED STATES TAX COURT



   WILLIAM D. AND YEN-LING K. ROGERS, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3477-07.               Filed May 20, 2009.



     Ps are husband and wife. In 2002 and 2003 they
were U.S. citizens residing in Taiwan. R determined
deficiencies in Ps’ Federal income tax for 2002 and
2003 on the basis that Ps had claimed excessive
exclusions under sec. 911, I.R.C., for income Mrs.
Rogers earned while working as a flight attendant.

     Held: Ps claimed excessive exclusions and are
liable for deficiencies.



William D. and Yen-Ling K. Rogers, pro sese.

Emily Giometti, for respondent.
                                 - 2 -

              MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     This case is before the Court on a petition

for redetermination of deficiencies for petitioners’ 2002 and

2003 tax years.   The issue for decision is whether petitioners

are entitled to exclude under section 9111 all wage income Mrs.

Rogers earned in 2002 and 2003 while working for United Airlines,

Inc. (United), as a flight attendant.



                           FINDINGS OF FACT

     During 2002 and 2003 petitioners, who are husband and wife,

were U.S. citizens residing in Taiwan.    Mrs. Rogers was employed

by United as a flight attendant based at Hong Kong International

Airport.   United required Mrs. Rogers to perform preboarding and

postarrival services on every flight on which she worked.    Mrs.

Rogers was required to check in 1 hour and 45 minutes before the

departure of a flight.    And she was required to perform

approximately 30 minutes of postarrival services.    United paid

Mrs. Rogers for her actual flight time--from when an airplane

pushed back from the terminal until it reached its destination.

United did not pay Mrs. Rogers extra amounts for preboarding and

postarrival services.



     1
      All section references are to the Internal Revenue Code of
1986, as amended and in effect for the tax years at issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

     During 2002 Mrs. Rogers worked on 6 round-trip flights from

Hong Kong to San Francisco and 17 round-trip flights from Hong

Kong to Chicago.2   During 2003 she worked on the following

flights:   (1) 8 round-trip flights from Hong Kong to San

Francisco; (2) 12 round-trip flights from Hong Kong to Chicago;

(3) 6 flights from Hong Kong to Tokyo to San Francisco and then

back to Hong Kong via Tokyo; (4) 1 flight from Hong Kong to Tokyo

to Chicago and then back to Hong Kong via Tokyo; and (5) 3

flights from Hong Kong to Incheon (Seoul) to Tokyo to Beijing to

Tokyo to Seoul to Hong Kong.3




     2
      Each round-trip flight from Hong Kong to San Francisco
required Mrs. Rogers to perform approximately 1,575 minutes of
in-flight services, excluding any preboarding and postarrival
services. Each round-trip flight from Hong Kong to Chicago
required her to perform approximately 1,684 minutes of in-flight
services, excluding any preboarding and postarrival services.
     3
      Each of the six flights from Hong Kong to Tokyo to San
Francisco and then back to Hong Kong via Tokyo required Mrs.
Rogers to perform approximately 2,000 minutes of in-flight
services, including time spent during each layover in Tokyo, but
excluding any other preboarding and postarrival services. The
flight from Hong Kong to Tokyo to Chicago and then back to Hong
Kong via Tokyo required Mrs. Rogers to perform approximately
2,257 minutes of in-flight services, including time spent during
each layover in Tokyo, but excluding any other preboarding and
postarrival services. Each of the three flights from Hong Kong
to Seoul to Tokyo to Beijing to Tokyo to Seoul to Hong Kong
required Mrs. Rogers to perform approximately 2,205 minutes of
in-flight services, including time spent during each layover in
Seoul and Tokyo, but excluding any other preboarding and
postarrival services.
                                 - 4 -

     United paid Mrs. Rogers $52,296.51 in wages in 2002 and

$60,651.89 in wages in 2003.    To enable its employees to

determine the percentage of wages earned for services rendered in

or above a foreign country, United generated and made available

on its Web site duty time apportionment forms (DTAs).4

Petitioners filed Forms 1040, U.S. Individual Income Tax Return,

for 2002 and 2003 claiming that all of Mrs. Rogers’s wage income

was foreign earned income which petitioners could exclude from

total income for Federal income tax purposes.5

         On November 28, 2006, respondent issued petitioners a

notice of deficiency for their 2002 and 2003 tax years in which

respondent determined respective deficiencies of $5,434 and


     4
      Petitioners prepared their own DTA allocating Mrs. Rogers’s
United income for the round-trip flights from Hong Kong to San
Francisco, from Hong Kong to Chicago, and from Hong Kong to
Tokyo. That DTA allocates percentages significantly higher than
those in United’s DTAs to time spent over foreign countries--in
other words, in a manner more favorable to petitioners. For
example, for the round-trip flights from Hong Kong to San
Francisco, the four United DTAs in evidence for trips between
those cities allocated 20.8 percent (as of “8/27/02”) and 14.4
percent (as of “1/31/00”, “3/4/05”, and “3/31/07”) to time spent
over foreign countries. Petitioners’ DTA allocates 46.97 percent
(723 minutes divided by 1539 total flight minutes) of each of
those flights to time spent over foreign countries. The big
difference is attributable to a factual dispute as to time spent
flying over international waters versus time spent flying over
foreign countries.
     5
      Petitioners reported Mrs. Rogers’s wage income but, on line
21 of both Forms 1040 petitioners listed the entire amount of her
wages in parentheses and wrote “2555-EZ”. Attached to those
returns were Forms 2555-EZ, Foreign Earned Income Exclusion.
                               - 5 -

$8,376.6   The deficiencies resulted from the disallowance of

$20,221 of the claimed exclusion for 2002 and $29,916 of the

claimed exclusion for 2003.   Respondent’s tax compliance officer

(TCO), Vivian Kong, computed the deficiency as follows.   Using

the DTA petitioners prepared, which covered only the round-trip

flights from Hong Kong to San Francisco and from Hong Kong to

Chicago, TCO Kong calculated the respective percentages of time

Mrs. Rogers spent performing in-flight services over foreign

territories, U.S. territories, and international waters for each

trip.7   For routes not covered by petitioners’ DTA, TCO Kong

calculated the necessary percentages using United’s DTAs, which

were generally less favorable to petitioners.   Then, TCO Kong

multiplied those percentages by the total amount of Mrs. Rogers’s

wage income from United for each of the tax years at issue.

     Petitioners filed a timely petition with this Court.   At the

time they filed their petition, petitioners resided in Taiwan.    A

trial was held on March 18, 2008, in San Francisco, California.



     6
      The Form 4089, Notice of Deficiency - Waiver, attached to
the notice of deficiency incorrectly stated that the asserted
deficiency was $6,534 for 2002.
     7
      Respondent acknowledges that TCO Kong made a few mistakes.
For one thing, she “erroneously did not include time devoted to
pre-flight and post-flight services, such as briefing, boarding,
and going through customs.” TCO Kong also “mistakenly switched
the trip time and excludable percentage for the Hong Kong -
Chicago trip * * * with the trip time and excludable percentage
for the Hong Kong - San Francisco trip”.
                                - 6 -

                               OPINION

I.   Income Earned in International Airspace8

     A. Burden of Proof

     The Commissioner’s determination of a taxpayer’s liability

for an income tax deficiency is generally presumed correct, and

the taxpayer bears the burden of proving that the determination

is improper.   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).9

     B. Determination of Taxable Income

     Section 61(a) specifies that “Except as otherwise provided”,

gross income includes “all income from whatever source

derived”.   Although most countries employ territorial tax

systems, the United States employs a worldwide tax system--it

taxes its citizens on their income regardless of its geographic

source.    See Crow v. Commissioner, 85 T.C. 376, 380 (1985) (“The

United States was historically, and continues to be, virtually

unique in taxing its citizens, wherever resident, on their

worldwide income, solely by reason of their citizenship.”); see

also Specking v. Commissioner, 117 T.C. 95, 101-102 (2001), affd.


     8
      The term “international airspace”, as we use it in this
opinion, means the airspace above the high seas (international
waters).
     9
      Although sec. 7491(a) may shift the burden of proof to the
Commissioner in specified circumstances, petitioners have not
established that they have satisfied the prerequisites under sec.
7491(a)(1) and (2) for such a shift.
                                - 7 -

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).    However, as is often the case with our tax laws,

there are exceptions.    Section 911, which applies to Mrs. Rogers,

is an exception to the U.S. worldwide tax system.

     Section 911(a) allows a “qualified individual” to exclude

from gross income “foreign earned income”.10    A “qualified

individual” is a U.S. citizen whose tax home is in a foreign

country if that individual is a bona fide resident of a foreign

country for an uninterrupted period that includes an entire

taxable year.11   Sec. 911(d)(1).   The statute defines “foreign

earned income” as “the amount received by such individual from

sources within a foreign country or countries which constitute

earned income attributable to services performed by such

individual”.   Sec. 911(b)(1)(A).

     In 2002 and 2003 Mrs. Rogers was a qualified individual who

received foreign earned income with respect to which she is

entitled to an exclusion.   The question that we are called upon

to decide is a matter of degree:    How much of Mrs. Rogers’s

United wages qualifies as “foreign earned income”?    The answer


     10
      In 2002 and 2003 the exclusion was limited to $80,000.
See sec. 911(b)(2)(D)(i).
     11
      A U.S. citizen or resident can also qualify if that
individual is present in a foreign country or countries for at
least 330 full days during a 12-month period. Sec. 911(d)(1);
sec. 1.911-2(c) and (d), Income Tax Regs.
                               - 8 -

turns on how much of Mrs. Rogers’s income was earned while she

worked in a foreign country.

     Section 911 does not define “foreign country”.   However, one

of its implementing regulations, section 1.911-2(h), Income Tax

Regs., does:

          (h) Foreign country. The term “foreign country”
     when used in a geographical sense includes any
     territory under the sovereignty of a government other
     than that of the United States. It includes the
     territorial waters of the foreign country (determined
     in accordance with the laws of the United States), the
     air space over the foreign country, and the seabed and
     subsoil of those submarine areas which are adjacent to
     the territorial waters of the foreign country and over
     which the foreign country has exclusive rights, in
     accordance with international law, with respect to the
     exploration and exploitation of natural resources.12

     In Clark v. Commissioner, T.C. Memo. 2008-71, we held that

international waters are not a “foreign country” and that income

earned while traveling in international waters is not “foreign

earned income” excludable from gross income under section 911.

We can divine no difference between international waters and the

airspace above them for purposes of determining whether income

earned therein is considered foreign source income.

International airspace--like international waters--is not under


     12
      Sec. 911(d)(9) expressly delegates to the Secretary of the
Treasury the authority to prescribe regulations “necessary or
appropriate to carry out the purposes” of sec. 911. The Court of
Appeals for the Seventh Circuit has upheld the validity of sec.
1.911-2(h), Income Tax Regs., concluding that the definition
therein of “foreign country” is “reasonable” and must be deferred
to. Arnett v. Commissioner, 473 F.3d 790, 797 (7th Cir. 2007),
affg. 126 T.C. 89 (2006).
                              - 9 -

the sovereignty of a Government other than the United States.13

See Gantchar v. United Airlines, Inc., No. 93 C 1457 (N.D. Ill.

Mar. 24, 1995) (“Being outside the United States is not

synonymous with being in a foreign state; international airspace

and international waters are outside the United States without

being inside a foreign state.”); see also United States v.

Cabaccang, 332 F.3d 622, 626 (9th Cir. 2003) (“Unlike, for

example, a foreign nation--which is unquestionably a ‘place

outside’ the United States--international airspace is neither a

point of origin nor a destination of a drug shipment; it is

merely something through which an aircraft must pass on its way

from one location to another.”).   It follows that international

airspace is not a “foreign country” for purposes of section 911.



     13
      Petitioners argue that “linking foreign earned income to
geography fails upon closer scrutiny” because “It would not be
feasible to allocate earnings according to time spent over the
United States, a foreign country, and international waters” for
someone working in outer space. According to petitioners, “That
person’s earnings would all be foreign earned income”. Their
argument is creative, but irrelevant and unpersuasive. Because
petitioners’ case does not concern income earned in outer space,
their argument is irrelevant. It is unpersuasive because no
state has sovereignty over outer space, so income earned in outer
space would not be considered foreign earned income. See Treaty
on Principles Governing the Activities of States in the
Exploration and Use of Outer Space, Including the Moon and Other
Celestial Bodies, art. II, Jan. 27, 1967, 18 U.S.T. 2410 (“Outer
space, including the moon and other celestial bodies, is not
subject to national appropriation by claim of sovereignty, by
means of use or occupation, or by any other means.”). For
Federal income tax purposes, income earned in outer space would
be treated just like income earned in international waters or in
international airspace.
                             - 10 -

As a result, income Mrs. Rogers earned while working in

international airspace is not “foreign earned income” and must be

included in petitioners’ gross income for 2002 and 2003.14

     Respondent has been more than fair in affording petitioners

the benefits of their self-prepared DTA, which is at odds with

those prepared by United and which may inflate the amount of time

Mrs. Rogers spent over foreign countries.   Because all flights in

2002 were round-trip flights from Hong Kong to San Francisco or

from Hong Kong to Chicago, we find respondent’s adjustments for

2002 to be correct except for a $1 rounding error in respondent’s

favor on the round-trip flights from Hong Kong to Chicago.   We

will allow petitioners to exclude $32,077 from their 2002 gross

income (rather than the $32,076 respondent allowed). Respondent

resorted to United’s sample DTAs only for 2003 flights on routes

not covered by petitioners’ DTA.

     On brief respondent asserts that it would be

administratively burdensome for the Internal Revenue Service to

“calculate the respective percentage of wages earned over foreign

countries for each flight separately”.   Nevertheless, on reply


     14
      In any event, even if we agreed with petitioners that
income earned in international airspace qualifies for the sec.
911 exclusion, petitioners had no basis for excluding all of Mrs.
Rogers’s United income for 2002 and 2003. That is because it is
clear that Mrs. Rogers earned some portion of her income for
those years in the United States. In 2002 all 23 of her round-
trip flights landed in and took off from the United States. And
in 2003 27 of her 30 round-trip flights landed in and took off
from the United States.
                              - 11 -

brief respondent concedes that nothing prevents an “individual

from * * * relying on specific flight plans.”

     At trial Captain Patrick Palazzolo, a United pilot who flies

mainly between Hong Kong and San Francisco, testified credibly

that the amount of flight time spent over foreign countries

varies depending on weather patterns and the location of the

jetstream.   For example, a greater portion of a Hong Kong to San

Francisco flight is more likely to be over land in the winter

than it is in the summer.   Thus, if petitioners could prove that

Mrs. Rogers flew that route only in the winter, they would be

entitled to a higher ratio of time spent over foreign countries

for those flights.   They have not done so.

     For the 2003 routes not covered by their self-prepared DTA,

petitioners have not provided evidence that would enable a

calculation of actual flight time ratios sufficient to overcome

respondent’s use of United’s DTAs.     Without evidence of when she

flew (such as flight plans), even with Captain Palazzolo’s

testimony, we cannot assign flight time ratios in excess of those

taken from United’s DTAs for the routes on which Mrs. Rogers

flew.15


     15
      Captain Palazzolo testified that he does not agree with
United’s DTAs because they appear to account for flights that are
primarily over water but not for those primarily over land. Even
if he is correct, we still have no evidence as to when Mrs.
Rogers flew, and respondent has already accepted petitioners’ DTA
which allocates 46.97 percent of Mrs. Rogers’s round-trip flights
                                                   (continued...)
                                - 12 -

     During 2003 in addition to the round-trip flights from Hong

Kong to San Francisco and from Hong Kong to Chicago, Mrs. Rogers

flew on (1) six flights from Hong Kong to Tokyo to San Francisco

and then back to Hong Kong via Tokyo; (2) one flight from Hong

Kong to Tokyo to Chicago and then back to Hong Kong via Tokyo;

and (3) three flights from Hong Kong to Seoul to Tokyo to Beijing

to Tokyo to Seoul to Hong Kong.    Captain Palazzolo did not

testify specifically regarding the six flights from Hong Kong to

Tokyo to San Francisco and then back to Hong Kong via Tokyo or

the flight from Hong Kong to Tokyo to Chicago and then back to

Hong Kong via Tokyo.

     He did testify regarding the three flights from Hong Kong to

Seoul to Tokyo to Beijing to Tokyo to Seoul to Hong Kong.16    He

indicated that the jetstream and winds played little part in

these trips and that the flight time would have been “essentially

the same in both directions.”    He testified that a flight from



     15
      (...continued)
from Hong Kong to San Francisco to time spent over foreign
countries. That is significantly higher than the 20.8 percent
and 14.4 percent allocated in United’s DTAs to time spent over
foreign countries for round-trip flights from Hong Kong to San
Francisco. See supra note 4.
     16
      Although the parties stipulated that the flights were from
Hong Kong to Seoul to Tokyo to Beijing to Tokyo to Seoul to Hong
Kong, it appears from Captain Palazzolo’s and Mrs. Rogers’s
testimony and United’s sample DTAs that the actual route might
have been from Hong Kong to Tokyo to Seoul to Beijing to Seoul to
Tokyo to Hong Kong. In other words, it appears that the parties
mixed up the order of Tokyo and Seoul on those three flights.
                                - 13 -

Hong Kong to Tokyo takes about 3 to 3-1/2 hours and that the time

spent over foreign territory would be 90 to 95 minutes.     He also

testified that a flight from Tokyo to Seoul would be almost all

over foreign territory (except for a few minutes over the Sea of

Japan) and that a flight from Seoul to Beijing would be mostly

over foreign territory (except for a few minutes over the Yellow

Sea).     Respondent has determined that 74.77 percent of Mrs.

Rogers’s work on the three flights from Hong Kong to Seoul to

Tokyo to Beijing to Tokyo to Seoul to Hong Kong is allocable to

services rendered over foreign territory.     Although we are unable

to reconcile respondent’s calculation and United’s sample DTAs,

the amounts are very close and are not materially inconsistent

with Captain Palazzolo’s testimony.17

     Given respondent’s adoption of petitioners’ DTAs with

respect to the round-trip flights from Hong Kong to San Francisco

and from Hong Kong to Chicago, it is possible that petitioners

are entitled to a larger foreign territory exclusion with respect

to the six flights from Hong Kong to Tokyo to San Francisco and

then back to Hong Kong via Tokyo and the one flight from Hong



     17
      United’s sample DTAs do not include information on round-
trip flights from Hong Kong to Seoul, perhaps because United did
not fly that route. See supra note 16. In any event, given that
the exclusion that respondent has allowed for those three flights
is not materially inconsistent with Captain Palazzolo’s
testimony, our conclusion is the same regardless of whether the
stipulation as to those three flights is accurate or whether the
trial testimony is in fact correct.
                              - 14 -

Kong to Tokyo to Chicago and then back to Hong Kong via Tokyo.

However, the evidence of record is not sufficient or detailed

enough to permit such a finding.   Critically missing is

information regarding the time spent over international waters

during the flights from either San Francisco or Chicago to Tokyo.

Those flights, unlike the direct U.S. to Hong Kong flights, are

unlikely to cross any Chinese territory and may cross less or no

Russian territory given Tokyo’s location considerably east-

northeast of Hong Kong.   This may be especially true during

winter months, when more of the flights are over land.

Therefore, we shall sustain respondent’s calculations of the

percentages of those flights spent over foreign territory after

correcting certain mathematical errors.18




     18
      In the Form 886-A, Explanation of Adjustments, attached to
the notice of deficiency, respondent determined the following
exclusion amounts for petitioners’ 2003 tax year: (1) $9,686 for
the round-trip flights from Hong Kong to Chicago; (2) $9,603 for
the round-trip flights from Hong Kong to San Francisco; (3)
$4,549 for the flights from Hong Kong to Tokyo to San Francisco
and then back to Hong Kong via Tokyo; (4) $1,456 for the one
flight from Hong Kong to Tokyo to Chicago and then back to Hong
Kong via Tokyo; and (5) $5,442 for the three flights from Hong
Kong to Seoul to Tokyo to Beijing to Tokyo to Seoul to Hong Kong.
Using respondent’s numbers, the correct exclusion amounts for
those flights are $9,563, $9,798, $4,594, $1,360, and $5,443,
respectively. In calculating the exclusion amounts for the 2003
flights using United’s sample DTA’s, TCO Kong appears to have
used at most two decimal places. The net result is a reduced
exclusion which we will not countenance. We will allow
petitioners an exclusion of $30,768 under sec. 911 for their 2003
tax year instead of the $30,736 exclusion respondent allowed.
                                - 15 -

      Finally, we agree with respondent that petitioners are

required to include required preflight and postflight service

time when calculating foreign earned income19 and to allocate

income from sick and vacation leave between foreign earned income

and income that does not qualify for the section 911 exclusion--

in other words, income subject to Federal income tax.

II.   Interest Abatement

      When there has been an unreasonable error or delay with

respect to a managerial or ministerial act, the Secretary has

discretion to abate interest.    Sec. 6404(e).   We have

jurisdiction under section 6404(h) to determine whether the

Secretary’s decision not to abate interest was an abuse of

discretion.

      Petitioners argue that they should not be held liable for

any interest on their Federal income tax underpayments because

the Internal Revenue Service “changed its interpretation of the

law in 2002 but failed to provide clear guidance as [to] the

exact methodology that must be used in the allocation of wages


      19
      Although as a technical matter Mrs. Rogers was paid on the
basis of her actual flight time, she did not perform pre- and
post-flight services for her own benefit--she did so for United’s
benefit and at United’s direction. Those services must therefore
be accounted for in determining petitioners’ exclusion amounts
for 2002 and 2003. See Tenn. Coal, Iron & R.R. Co. v. Muscoda
Local No. 123, 321 U.S. 590, 598 (1944) (concluding in a Fair
Labor Standards Act case that the words “work” and “employment”
mean “physical or mental exertion (whether burdensome or not)
controlled or required by the employer and pursued necessarily
and primarily for the benefit of the employer and his business”).
                               - 16 -

for flight crews”.   Respondent counters that we lack jurisdiction

over petitioners’ interest abatement request because respondent

has not made a final determination not to abate interest.

     In January 2008 petitioners filed a Form 843, Claim for

Refund and Request for Abatement, despite the fact that

respondent had advised them to wait until interest had been

assessed or their abatement request would be rejected as

premature.   We lack jurisdiction to consider petitioners’

interest abatement request for the same reason that respondent

advised them not to file such a request--abatement of interest is

premature because interest has not been assessed and because

respondent has not made a final determination not to abate

interest.    See Muir v. Commissioner, T.C. Memo. 2000-304

(“Consideration of petitioner's request for abatement of interest

is premature, however, as there has been neither an assessment of

interest nor a final determination by respondent not to abate the

interest.”), affd. 11 Fed. Appx. 701 (8th Cir. 2001).

     The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.    To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
