                               T.C. Memo. 2017-221



                         UNITED STATES TAX COURT



          ROBERT HUDSON AND ELEANOR M. HUDSON, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28265-14.                          Filed November 8, 2017.



      Eric W. Johnson, for petitioners.

      Christina L. Cook, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


      PUGH, Judge: In a notice of deficiency dated October 1, 2014, respondent

determined the following deficiencies and penalties:1


      1
        Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure. Amounts are
                                                                        (continued...)
                                         -2-

                                                                   Penalty
 [*2]        Year                    Deficiency                  sec. 6662(a)
            2011                       $42,557                      $8,511
            2012                        10,657                       2,131

        Respondent concedes that petitioners are entitled to a home mortgage

interest deduction of $26,464 for 2011, as claimed, and of $11,255 for 2012, as

corrected.2 The remaining issues for decision are: (1) whether petitioners are

entitled to the section 911 foreign earned income exclusion for the 2011 and 2012

taxable years, (2) whether petitioners are liable for self-employment tax pursuant

to section 1401, and (3) whether petitioners are liable for the accuracy-related

penalty under section 6662(a).

                                 FINDINGS OF FACT

        Some of the facts have been stipulated and are so found. Petitioners resided

in Arizona when they filed their timely petition. Petitioners were married during

the taxable years in issue and filed joint Federal income tax returns.


        1
      (...continued)
rounded to the nearest dollar.
        2
        In their pretrial memorandum petitioners admitted erroneously assuming
that they were entitled to home mortgage interest deductions on any two of their
residences on their 2012 tax return. Under sec. 163(h)(4)(A)(i), however, one of
the two residences had to be petitioners’ “principal residence”. Petitioners paid
off the mortgage on their principal residence in 2011.
                                        -3-

[*3] Petitioner Robert Hudson is a retired airline pilot. Upon graduating from

Iowa State University with a degree in distributive studies, Mr. Hudson had

enrolled in a pilot training program offered by the Air Force Reserves (Reserves).

During his career Mr. Hudson served as a pilot for the Reserves for 8 years and

spent 26 years as a commercial airline pilot for Northwest Airlines (Northwest).

Mr. Hudson was employed by both the Reserves and Northwest for several years.

After his retirement in February 2007 Mr. Hudson was able to collect his pension

from Northwest early with no restriction on his ability to work as a pilot for

another airline.

      After retiring Mr. Hudson sought employment with foreign airlines because

of their policies of maintaining the seniority of pilots. He decided to seek

employment with Korean Airlines. He was required to submit his application to

the airline through a recruiting agency. Mr. Hudson chose to use the recruiting

agency Global Airline Pilots (GAP) because it was based in the United States and

his pay would be higher. After GAP forwarded his application to Korean Airlines,

Mr. Hudson was invited to interview with Korean Airlines in Seoul, South Korea

(Korea). During his interview process Mr. Hudson was required to pass a

simulator ride, complete a physical examination, and interview with Korean
                                        -4-

[*4] Airlines’ chief pilots and vice president of flight operations. He did not

interview with any representatives from GAP.

      Mr. Hudson ultimately was offered, and accepted, a position with Korean

Airlines. On March 19, 2007, he entered into an agreement with GAP (GAP

agreement) that described his employment status as follows: “The Crew Member

is an independent contractor and is not an employee or agent of GAP.” The GAP

agreement further stated that Mr. Hudson’s flight base was in Korea. The contract

had a term of five years. At the time he began working for Korean Airlines, he

expected to work until he reached the mandatory retirement age (then 60), 5-1/2

years in the future. In 2012 he retired before age 60, at the end of his 5-year

contract, because of a failed physical examination.

      During his first months as a Korean Airlines pilot Mr. Hudson was required

to complete a training course at the Korean Airlines facility, complete the Korean

Airlines simulator program, and pass a Korean air law exam. He then was issued a

Korean pilot’s license as a 747-400 captain. While flying with Korean Airlines

Mr. Hudson was required to abide by the Korean Airlines policies and procedures

as listed in the Korean Airlines employee manual he received.

      During his time with Korean Airlines Mr. Hudson was based in Inchon,

South Korea. He received an E5 visa and was a registered alien in Korea. He
                                        -5-

[*5] lived in a Hyatt Hotel owned by Korean Airlines, and Korean Airlines paid

for his housing at the hotel. He stored large suitcases of his belongings at the

hotel while he was away and would have these belongings brought to his room

upon check-in. The hotel had a designated area for Mr. Hudson to cook his meals,

although he mostly ate out with friends. His activities included riding a bicycle

provided to him by the hotel, using the hotel’s golf course and driving range, and

exercising. Mr. Hudson would travel to a nearby town if he had a long time off.

He learned basic phrases in Korean, such as greetings and terms necessary to order

food in restaurants. He had a Korean bank account and had a Korean cell phone

for a limited time.

      Mr. Hudson flew routes to cities throughout Asia, Europe, and the United

States. In addition, under Korean Airlines’ layover policy Mr. Hudson’s layovers

between his working flights outside Korea could last for days at a time. He

received 9 days off per month, which Korean Airlines typically gave in blocks,

and 24 vacation days per year. Sometimes he would be asked to take flights on his

days off, however. Mr. Hudson would request to use his vacation days in the same

period as his days off. For his vacation, he had the option of traveling, at no

expense to him, to any city where Korean Airlines flew direct. He seldom spent
                                         -6-

[*6] his vacation days in Korea. Instead, Mr. Hudson sought to spend all of his

time off (as many as 132 days per year) in the United States during the years in

issue.

         Petitioners owned three homes in the United States during the taxable years

in issue in Apple Valley, Minnesota; Surprise, Arizona; and Chicago, Illinois.

Petitioners’ primary residence was in Minnesota. They paid off the mortgage on

their primary residence in 2011. Petitioners had mortgages on the other two

homes for both 2011 and 2012. Petitioner Eleanor Hudson lived in the Minnesota

home during the summer and fall months and spent the colder months in Arizona.

Mrs. Hudson also traveled to the locations where Mr. Hudson spent his layovers.

         Korean Airlines did not pay Mr. Hudson directly. Rather, Korean Airlines

transferred his salary to GAP, which in turn withheld Korean taxes and GAP’s

fees and then deposited the remainder into Mr. Hudson’s U.S. bank account. He

also received per diem allowances which were deposited into his Korean bank

account. Mr. Hudson received an annual Korean tax statement listing him as a

“non-resident”. Mr. Hudson did not view himself as a permanent resident of

Korea but as a registered alien paying Korean taxes.

         Mr. Hudson sought professional advice regarding his relationship with

Korean Airlines and his compliance with tax laws. He hired an attorney to review
                                        -7-

[*7] the GAP agreement and understood from that attorney that he became an

employee of Korean Airlines when he signed that agreement.

      To assist him with his tax obligations, Mr. Hudson initially hired a tax

return preparer, Rachel Overcash, who was recommended to him by GAP as

experienced in preparing returns for American pilots recruited by GAP to fly for

Korean Airlines. He excluded his foreign earned income under section 911 for

2007 on the basis of information provided by Ms. Overcash. He later hired a

certified public accountant (C.P.A.) in Minnesota, Paul Christiansen, to prepare

petitioners’ 2011 and 2012 tax returns. With respect to petitioners’ home

mortgage interest, Mr. Hudson provided Mr. Christiansen with all of the Forms

1098, Mortgage Interest Statement, that they had received for the three homes they

owned during the 2011 and 2012 tax years; and Mr. Hudson answered questions in

a “brochure” provided to him by Mr. Christiansen. Petitioners’ 2011 return

claimed a deduction for home mortgage interest paid on the Minnesota and

Arizona houses. Petitioners’ 2012 return claimed a home mortgage interest

deduction relating to the Arizona and Illinois houses.

      Mr. Hudson also sought legal advice regarding his eligibility for the foreign

earned income exclusion. He completed a questionnaire provided by his counsel.

He did not provide the GAP agreement to counsel; nor was he asked to provide it.
                                        -8-

[*8] In a letter dated January 6, 2011, Mr. Hudson’s counsel advised him that he

was eligible for the exclusion.

      In the notice of deficiency, respondent disallowed petitioners’ foreign

earned income exclusions for both taxable years because of their failure to

establish either bona fide residence or physical presence in a foreign country for

the relevant period. Respondent also determined self-employment tax for both

taxable years in issue. Additionally, respondent determined that petitioners failed

to report $41 of income from a State tax refund they had received from the State of

Minnesota in 2012. As petitioners neither disputed this adjustment in the petition

or in their pretrial memorandum nor addressed it at trial, this issue is deemed

conceded. See Rules 34(b)(4), 149(b). Finally, respondent determined that

petitioners were liable for a 20% accuracy-related penalty under section 6662(a)

for each year in issue.

                                     OPINION

      The taxpayer generally has the burden of proving that the Commissioner’s

determinations in a notice of deficiency are incorrect. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift from the

taxpayer to the Commissioner in certain circumstances under section 7491(a).

Petitioners have not claimed or shown that they meet the requirements of section
                                          -9-

[*9] 7491(a) to shift the burden of proof to respondent as to any relevant factual

issue.

I. Foreign Earned Income Exclusion

         We first address respondent’s determination that petitioners did not qualify

for the foreign earned income exclusion for 2011 and 2012 under section 911.

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

“foreign earned income”. Foreign earned income is “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). A qualified individual is defined as “an individual whose tax home

is in a foreign country and who is” either a bona fide resident or physically present

in the country for a certain time.3 Sec. 911(d)(1).

         A. Bona Fide Residence

         To qualify for the foreign earned income exclusion as a bona fide resident

of a foreign country, a taxpayer must offer “strong proof” of bona fide residence in


         3
        Sec. 911(d)(1)(B) defines a qualified individual as “a citizen or resident of
the United States * * * who, during any period of 12 consecutive months, is
present in a foreign country or countries during at least 330 full days in such
period.” Petitioners have not argued or presented evidence showing that Mr.
Hudson was present in Korea for a period sufficient to satisfy the sec.
911(d)(1)(B) test.
                                        - 10 -

[*10] the foreign country. Schoneberger v. Commissioner, 74 T.C. 1016, 1024

(1980). Courts consider a number of factors when determining whether a taxpayer

was a bona fide resident of a foreign country. Sochurek v. Commissioner, 300

F.2d 34 (7th Cir. 1962), rev’g and remanding 36 T.C. 131 (1961). These factors

include:

             (1) intention of the taxpayer;
             (2) establishment of his home temporarily in the foreign
      country for an indefinite period;
             (3) participation in the activities of his chosen community on
      social and cultural levels, identification with the daily lives of the
      people and, in general, assimilation into the foreign environment;
             (4) physical presence in the foreign country consistent with his
      employment;
             (5) nature, extent and reasons for temporary absences from his
      temporary foreign home;
             (6) assumption of economic burdens and payment of taxes to
      the foreign country;
             (7) status of resident contrasted to that of transient or sojourner;
             (8) treatment accorded his income status by his employer;
             (9) marital status and residence of his family;
             (10) nature and duration of his employment; whether his
      assignment abroad could be promptly accomplished within a definite
      or specified time;
             (11) good faith in making his trip abroad; whether for purpose
      of tax evasion.

Id. at 38. While all of these factors may not be present in every case, the

applicable factors should be considered and weighed. Id. Below we consider the

pertinent Sochurek factors.
                                       - 11 -

[*11] Petitioners rely on two cases that applied Sochurek to conclude that pilots

for foreign airlines were eligible for the section 911 exclusion: Jones v.

Commissioner, 927 F.2d 849 (5th Cir. 1991), rev’g T.C. Memo. 1989-616, and

Cobb v. Commissioner, T.C. Memo. 1991-376, 62 T.C.M. (CCH) 408 (1991). We

agree with petitioners that the outcome here will depend on whether there are

meaningful differences between the facts we have found above and those of Cobb

and Jones. We recently performed this very analysis in Acone v. Commissioner,

T.C. Memo. 2017-162, a case that also involved a Korean Airlines pilot.

      In Jones v. Commissioner, 927 F.2d at 850, the taxpayer, Mr. Jones, was an

airline pilot who contracted with a domestic corporation that placed him with

Japan Air Lines Co., Ltd. (JAL), a foreign airline. Mr. Jones was based in Tokyo,

Japan, but spent fewer than 165 nights a year in Japan. Id. at 851. During the tax

years in issue Mrs. Jones resided in Anchorage, Alaska, while Mr. Jones was in

Japan. Id. Because Anchorage was JAL’s only U.S. base and a normal stopover,

Mr. Jones was in Anchorage frequently and would stay in petitioners’ townhouse

when there overnight. Id. at 851-852. In Japan Mr. Jones lived in a hotel where

other crew members also lived. Id. at 851. Mr. Jones did not have extensive

contact with Japanese culture but often did socialize with coworkers and

occasionally drove into Tokyo for dinner and entertainment. Id. at 852.
                                        - 12 -

[*12] Additionally, Mr. Jones would visit a local Japanese doctor for medical

attention. Id.

      Mr. Jones would leave his personal belongings in hotel storage while he

was away. Id. at 851. Unlike domestic airlines, JAL did not allow flight crew to

fly for free, so Mr. Jones paid for the trips he took during his time off using

discounted tickets. Id. He had a Japanese driver’s license but did not maintain a

Japanese bank account or Japanese credit cards. Id. Mr. Jones paid Japanese and

U.S. income taxes, and his returns were prepared at his expense. Id. He once

returned a dividend check intended for Alaska residents explaining he was no

longer an Alaska resident. Id.

      The U.S. Court of Appeals for the Fifth Circuit applied the Sochurek factors

to conclude that Mr. Jones was a bona fide resident of Japan, reversing the Tax

Court’s holding to the contrary. Jones v. Commissioner, 927 F.2d at 855. The

Court of Appeals concluded that he intended to become a resident of Japan as he

returned a dividend check to Alaska and intended to remain in Japan until his

anticipated retirement (approximately eight years after his transfer to Tokyo). Id.

at 851, 854. As the Court of Appeals recognized, “[a] taxpayer’s intent plays

perhaps the most important part in determining the establishment and maintenance

of a foreign residence.” Id. at 854 (citing Dawson v. Commissioner, 59 T.C. 264,
                                        - 13 -

[*13] 268 (1972)). The court also rejected our analysis concerning the temporary

nature of Mr. Jones’ housing in a hotel. Id. at 854. As the court stated: “[I]t is not

necessary for a taxpayer to establish a fixed, permanent place of abode in order to

be a ‘resident’ of a foreign country.” Id. (citing Swenson v. Thomas, 164 F.2d

783, 785 (5th Cir. 1947)). Mr. Jones was away from Japan only when work

required or he was on vacation. Id. The court also determined that the fact that

his wife did not join him in Japan should not have been held against him for

purposes of determining his bona fide residence. Id. at 854-855. The court noted

that Mr. Jones was not assimilated into Japanese culture, but it held that the

majority of the Sochurek factors favored bona fide residence. Id. at 855.

      In Cobb v. Commissioner, 62 T.C.M. (CCH) at 409, the taxpayer, Mr.

Cobb, was employed by a domestic air service corporation and was assigned to

work for JAL. While initially based in Alaska, Mr. Cobb later was transferred to

the Narita Airport base in Japan. Id. He lived in a hotel owned by JAL during the

tax years at issue, paying a discounted daily room rate during his stays. Id. He left

his bags in hotel storage while he was away. Id. His wife and children lived in

California while he was in Japan. Id. at 410. Mr. Cobb would visit his family

while he had layovers in California. Id. Mr. Cobb was not integrated into

Japanese culture--he did not learn Japanese and did not participate extensively in
                                       - 14 -

[*14] Japanese social activities. Id. at 409. He did, however, join the swim club

and play golf and tennis while in Japan. Id. Mr. Cobb paid Japanese income tax.

Id. at 410. On these facts, we held that Mr. Cobb was a bona fide resident of

Japan. Id. at 412. On the most significant factor, the taxpayer’s intent, we found

that Mr. Cobb presented documentary evidence that proved his intention was to be

a resident of Japan. Id. Further, in evaluating Mr. Cobb’s visits to the United

States, we recognized that “[w]hile he did sometimes visit with his family when

laid over in Los Angeles, these occasions were indeed visits, limited by

convenience and Mr. Cobb’s flight schedule, and in no way converted the Los

Angeles area into Mr. Cobb’s domicile or place of dwelling.” Id. at 412.

Additionally, we considered Mr. Cobb’s transfer to Japan permanent, whereas we

viewed Mr. Jones’ transfer as temporary because Mr. Jones had been transferred

from Japan twice before. Id.

      We revisited our application of the Sochurek factors to pilots for foreign

airlines in Acone v. Commissioner, T.C. Memo. 2017-162. There we concluded

that the pilot, Mr. Acone, did not establish a bona fide residence in Korea even

though we accepted his testimony that he intended to remain in Korea until he

retired. Id. at *16-*17. We found that he was in Korea only when necessary for

work and returned to the United States whenever possible. Id. at *17-*18. Over
                                        - 15 -

[*15] the course of the two years before the Court, he spent a total of 333 days in

the United States and only 248 days in South Korea. Id. at *17. We found this to

be a critical distinction. Id. at *17-*18. We specifically noted that in Jones the

taxpayer was away only when business required or he was on vacation and he had

returned a dividend check from Alaska; and in Cobb the taxpayer accepted a

permanent transfer to Japan and his occasional visits with family on layovers in

the United States were limited by convenience and his flight schedule. Id. at *21-

*22. “By contrast, Mr. Acone always intended to return to the United States; and

in the meantime, his time in the United States with his family far exceeded * * *

mere ‘visits’ of ‘convenience’”. Id. at *22.

      As we did in Acone, we find here that the Sochurek factors weigh against a

finding of bona fide residence in Korea. While Mr. Hudson credibly testified that

he intended to work for Korean Airlines until his retirement, petitioners have not

shown that he intended to be anything more than a transient. Indeed, Mr. Hudson

demonstrated that he always intended to return to the United States.

      Further, like the pilot in Acone, Mr. Hudson intended to spend all of his

time off work during the years at issue in the United States. Mr. Hudson sought to

travel to his home in the United States as often as work would allow, in contrast to

the visits of convenience described in Cobb. The record before us does not
                                       - 16 -

[*16] specify the number of days Mr. Hudson spent on duty in Korea versus off

duty in the United States (unlike the record in Acone), but we are mindful that

petitioners bear the burden of proof, and the record before us shows that Mr.

Hudson had as many as 132 days off per year and intended to spend these days in

the United States. See Vento v. Dir. of V.I. Bureau of Internal Revenue, 715 F.3d

455, 467 (3d Cir. 2013) (“[E]xtensive absences will negate a finding of bona fide

residency, unless those absences are justified by good-faith reasons, such as the

travel requirements of the taxpayer’s profession[.]”). While we recognize the

similarities between Mr. Hudson’s circumstances and those of the taxpayers in

Jones and Cobb, we conclude that Mr. Hudson’s limited contacts with Korean

culture combined with his extended absences preclude a finding that he was a

bona fide resident of Korea.

      We find, therefore, that Mr. Hudson was not a bona fide resident of Korea

during the years in issue.

      B. Tax Home

      As we have determined that Mr. Hudson was not a bona fide resident, we

need not evaluate whether his “tax home” was in Korea. Sec. 911. Accordingly,

we hold that Mr. Hudson was not a “qualified individual” as defined by section

911(d)(1). Petitioners, therefore, are not entitled to exclude Mr. Hudson’s income
                                       - 17 -

[*17] as a Korean Airlines pilot under the foreign earned income exclusion for the

years in issue.

II. Self-Employment Tax

      We next must determine whether Mr. Hudson’s income is subject to self-

employment tax. Section 1401 imposes a percentage tax on self-employment

income. Self-employment income is defined as the “net earnings from self-

employment derived by an individual * * * during any taxable year”. Sec.

1402(b). Net earnings from self-employment are defined as “gross income derived

by an individual from any trade or business carried on by such individual, less the

deductions allowed by this subtitle which are attributable to such trade or

business”. Sec. 1402(a); see sec. 1.1402(a)-1, Income Tax Regs. The self-

employment tax does not apply to compensation paid to an employee, however.

Sec. 1402(c)(2).

      Whether an individual is an employee or an independent contractor is a

factual question answered by applying principles of common law. Secs. 1402(d),

3121(d)(2); Simpson v. Commissioner, 64 T.C. 974, 984 (1975). Factors to

consider when determining whether an individual worker is an employee or an

independent contractor include:
                                         - 18 -

[*18]          (1) the degree of control exercised by the principal over the
        details of the work;
               (2) which party invests in the facilities used in the work;
               (3) the opportunity of the individual for profit or loss;
               (4) whether or not the principal has the right to discharge the
        individual;
               (5) whether the work is part of the principal’s regular business;
               (6) the permanency of the relationship; and
               (7) the relationship the parties believe they are creating.

Weber v. Commissioner, 103 T.C. 378, 387 (1994), aff’d, 60 F.3d 1104 (4th Cir.

1995). All of the facts and circumstances of each case are considered when

making this determination, and no single factor is conclusive. See Simpson v.

Commissioner, 64 T.C. at 985. The degree of control is critical. See Weber v.

Commissioner, 103 T.C. at 387. An employer-employee relationship exists when

the principal controls the methods to be used in doing the work and controls the

details and means by which the desired result is to be accomplished. See Ellison

v. Commissioner, 55 T.C. 142, 152-153 (1970).

        We hold that Mr. Hudson’s proper work classification during the years in

issue was that of an employee. Korean Airlines exercised considerable control

over his work. While flying Korean Airlines aircraft, Mr. Hudson was required to

abide by the policies and procedures listed in the employee manual he received

from Korean Airlines. See, e.g., Weber v. Commissioner, 103 T.C. 378 (finding

that as the taxpayer was bound by rules determined by his principal, the principal
                                        - 19 -

[*19] held sufficient control for the taxpayer to be classified as an employee).

Further, Mr. Hudson’s schedule, including his vacation and the length of his

layovers, was determined by Korean Airlines. See, e.g., Simpson v.

Commissioner, 64 T.C. at 985 (finding that the taxpayer’s freedom to set his own

office hours and take vacations without his principal’s approval weighed in favor

of treatment as an independent contractor).

      We also reject respondent’s assertion that the GAP agreement is

determinative of Mr. Hudson’s work status. Blodgett v. Commissioner, T.C.

Memo. 2012-298; Jacobs v. Commissioner, T.C. Memo. 1993-570; sec.

31.3121(d)-1(a)(3), Employment Tax Regs. (“If the relationship of employer and

employee exists, the designation or description of the relationship by the parties as

anything other than that of employer and employee is immaterial. Thus, if such

relationship exists, it is of no consequence that the employee is designated as [an]

* * * independent contractor[.]”).

      Accordingly, we hold that Mr. Hudson’s proper work classification was that

of an employee and petitioners are not liable for self-employment tax on the

income Mr. Hudson earned while working as a Korean Airlines pilot.
                                       - 20 -

[*20] III. Section 6662(a) Penalty

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on any underpayment of Federal income tax attributable to a taxpayer’s negligence

or disregard of rules or regulations or substantial understatement of income tax.

“‘[N]egligence’ includes any failure to make a reasonable attempt to comply with

the provisions of * * * [the Code], and the term ‘disregard’ includes any careless,

reckless, or intentional disregard.” Sec. 6662(c). Negligence is strongly indicated

where “[a] taxpayer fails to make a reasonable attempt to ascertain the correctness

of a deduction, credit or exclusion on a return which would seem to a reasonable

and prudent person to be ‘too good to be true’ under the circumstances”. Sec.

1.6662-3(b)(1)(ii), Income Tax Regs. An understatement of income tax is

substantial if the amount of the understatement exceeds the greater of 10% of the

tax required to be shown for the taxable year or $5,000. Sec. 6662(d)(1)(A).

      With respect to an individual taxpayer’s liability for a penalty, section

7491(c) places the burden of production on the Commissioner, requiring the

Commissioner to come forward with sufficient evidence indicating that the

imposition of a penalty is appropriate. Higbee v. Commissioner, 116 T.C. 438,

446 (2001). The taxpayer then bears the burden of proof as to any defense to the

penalty. Id. at 446-447. We anticipate that the Rule 155 computations will
                                        - 21 -

[*21] confirm a substantial understatement of income tax exists for the taxable

years in issue and, therefore, that respondent has met his burden of production.

Sec. 7491(c).

      Taxpayers may absolve themselves of liability for a section 6662(a) penalty

if they can show reasonable cause for the resulting underpayment and that they

acted in good faith. Sec. 6664(c); Higbee v. Commissioner, 116 T.C. at 446-447.

The decision as to whether a taxpayer acted with reasonable cause and in good

faith is made on a case-by-case basis, taking into account all pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most

important factor is the extent of the taxpayer’s efforts to assess the proper tax

liability. Id. Reliance on professional advice may constitute reasonable cause and

good faith if the taxpayer proves, by a preponderance of the evidence, that he

“meets each requirement of the following three-prong test: (1) [t]he advisor was a

competent professional who had sufficient expertise to justify reliance, (2) the

taxpayer provided necessary and accurate information to the adviser, and (3) the

taxpayer actually relied in good faith on the adviser’s judgment.” Neonatology

Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d

Cir. 2002).
                                        - 22 -

[*22] Petitioners contend that their reliance on professional advice constitutes the

reasonable cause and good faith necessary to absolve them of the section 6662(a)

accuracy-related penalty. Mr. Hudson testified credibly that they provided to their

C.P.A. the information the C.P.A. sought to prepare their returns accurately,

including providing information about their outstanding mortgages. Mr. Hudson

also consulted counsel to determine his eligibility for the foreign earned income

exclusion and provided to counsel the information counsel requested (via a

questionnaire) to make that determination. We hold that petitioners’ reliance on

these professionals was reasonable under these circumstances. Because

petitioners have shown that they acted with reasonable cause and in good faith,

they are not liable for the section 6662(a) penalty.

      We have considered all arguments made and facts presented in reaching our

decision, and, to the extent not discussed above, we conclude that they are moot,

irrelevant, or without merit.

      To reflect the foregoing,


                                                       Decision will be entered under

                                                 Rule 155.
