                        T.C. Memo. 2011-26



                      UNITED STATES TAX COURT



               NATHANIEL J. HOLMES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27240-08.              Filed January 31, 2011.



     Nathaniel J. Holmes, pro se.

     Laura A. Price, for respondent.



                        MEMORANDUM OPINION


     GOEKE, Judge:   Respondent determined that income petitioner

received in 2005 from Blackwater Security Consulting (Blackwater)

for dangerous security work while in Iraq was not excludable from

his gross income under section 112.1   This issue and additions to

     1
      All section references are to the Internal Revenue Code in
                                                   (continued...)
                                - 2 -

tax under sections 6651(a)(1) and (2) and 6654 for 2005 are

before us.   For the reasons stated herein, we hold that

petitioner’s income may not be excluded and that he is liable

only for the section 6654(a) addition to tax.

                            Background

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

At the time petitioner filed his petition, he resided in Florida.

     Petitioner was engaged in performing dangerous security

services in Iraq during 2005.   Petitioner was hired and paid by

Blackwater to perform these security services in Iraq.     His work

in Iraq related to military operations.   Petitioner received

compensation of $98,400 for those services.   He also received

$913 in taxable interest from Navy Federal Credit Union.    For

2005 Iraq was identified as a combat zone under Executive Order

12744, 56 Fed. Reg. 2663 (Jan. 23, 1991).

     While in Iraq, petitioner was given a memorandum issued by

Robert L. Hunt, the Acting Deputy Director, Compliance Field

Operations, Internal Revenue Service (IRS).   This memorandum

discussed the appropriate steps for civilian personnel to take

when engaged in an IRS examination and collection activity

involving a taxpayer deployed to a Qualified Combat Zone.

Petitioner did not remember who gave the memorandum to him.



     1
      (...continued)
effect for the year in issue.
                                 - 3 -

      Petitioner did not file an income tax return for 2004 or

2005.     On June 2, 2008, respondent prepared a substitute for

return for petitioner under section 6020(b) for 2005.      At some

point in 2008, petitioner provided respondent with a 2005 Form

1040, U.S. Individual Income Tax Return, dated “28 May 07”.

Petitioner reported zero income and zero tax due on the Form

1040.2    Respondent did not accept the 2005 Form 1040 as a valid

return.     On August 25, 2008, respondent mailed petitioner a

notice of deficiency regarding his 2005 income tax liability.        On

November 10, 2008, petitioner timely filed a petition with this

Court.

                                 Discussion

I.   Section 112

      Section 61 provides that gross income includes all income

from whatever source derived, unless the taxpayer can establish

a specific legislative authorization to exclude income from

taxation.     Commissioner v. Glenshaw Glass Co., 348 U.S. 426

(1955).     Section 112(a)(1) provides:   “Gross income does not

include compensation received for active service as a member

below the grade of commissioned officer in the Armed Forces of

the United States for any month during any part of which such

member--(1) served in a combat zone”.



      2
      Petitioner did not make any estimated tax payments for tax
year 2005 but made estimated tax payments of $55,000 during 2004.
                                 - 4 -

     Section 7701(a)(15) defines “Armed Forces of the United

States” as including:

     all regular and reserve components of the uniformed
     services which are subject to the jurisdiction of the
     Secretary of Defense, the Secretary of the Army, the
     Secretary of the Navy, or the Secretary of the Air
     Force, and * * * includes the Coast Guard. The members
     of such forces include commissioned officers and
     personnel below the grade of commissioned officers in
     such forces.

In 2005 petitioner did not serve in the Armed Forces of the

United States.   He was a private citizen who was hired by and

paid by a private company, Blackwater.

     Petitioner argues that because he was performing services

similar to those performed by the U.S. military and because he

performed those services in a “combat zone”, he should be allowed

to exclude from gross income the pay he received from Blackwater

while performing those duties.    However, at no time in 2005 was

petitioner actually a member of the Armed Forces of the United

States.   Section 1.112-1(a)(4), Income Tax Regs., states:

     Only compensation paid by the Armed Forces of the
     United States to members of the Armed Forces can be
     excluded under section 112, except for compensation
     paid by an agency or instrumentality of the United
     States or by an international organization to a member
     of the Armed Forces whose military active duty status
     continues during the member’s assignment to the agency
     or instrumentality or organization on official detail.
     Compensation paid by other employers (whether private
     enterprises or governmental entities) to members of the
     Armed Forces cannot be excluded under section 112 even
     if the payment is made to supplement the member’s
     military compensation or is labeled by the employer as
     compensation for active service in the Armed Forces of
     the United States. * * *
                              - 5 -

Under section 1.112-1(a)(4), Income Tax Regs., petitioner cannot

exclude the compensation he received from Blackwater in 2005 from

gross income because it was not “compensation paid by the Armed

Forces of the United States to members of the Armed Forces”.

     The Tax Court has held that employees of private companies

performing services similar to those performed by members of the

Armed Forces of the United States while in combat zones do not

qualify for the exclusion under section 112.    See Land v.

Commissioner, 61 T.C. 675 (1974) (a pilot employed by a private

airline flying civilian aircraft under contract with the

Department of Defense in support of the U.S. military in a combat

zone during the Vietnam War was not a member of the Armed Forces

and therefore not entitled to the section 112 exclusion); see

also Hildebran v. Commissioner, T.C. Memo. 2004-42.

     In Hildebran, the taxpayer was employed as a merchant marine

by Bay Ship Management, a private company.     During part of tax

years 1998 and 1999, the taxpayer was assigned to work aboard a

U.S. naval ship which operated in a combat zone.     Id.   The

taxpayer was:

     subject to Navy physical standards and Navy standards
     of appearance, training, and mission completion. * * *
     [The taxpayer] was required to, and did, have security
     clearances, wear uniforms, receive an anthrax
     vaccination, receive training in small arms and
     antiterrorism, and carry a Department of Defense
     identification card which showed his ship assignment
     and specialty.
                              - 6 -

In Hildebran, the Commissioner issued a notice of deficiency to

the taxpayer, who petitioned the Court, arguing that the income

he received while working in a combat zone should be excluded

from gross income under section 112.

     The Court held in Hildebran that because the taxpayer was

not a member of the Armed Forces of the United States during the

years at issue within the meaning of sections 112 and

7701(a)(15), he was not entitled under section 112 to exclude

from gross income any of the wages that he received while working

for Bay Ship Management aboard the Navy ship.   The Court stated

that although the taxpayer met certain Navy standards, “those

facts did not in any way change the status of Mr. Hildebran as a

civilian employee of Bay Ship Management.”   The facts in

Hildebran are similar to the facts in this case.   Although

petitioner may have performed work similar to that of members of

the Armed Forces of the United States while in a combat zone,

those facts do not change the status of petitioner as a civilian

who was recruited and paid by Blackwater, a private company.

Therefore, like the taxpayer in Hildebran, petitioner is not

entitled under section 112 to exclude from gross income the

compensation he received from a private company, Blackwater,

while working in Iraq.

     Petitioner asserts that section 1.112-1(e)(2), Examples (3),

(4), (5), (6), and (7), Income Tax Regs., “clearly illustrate
                               - 7 -

that individuals providing military service in a combat zone need

not be members of the armed forces.”   However, this is not the

case.   Examples (3), (4), (5), (6), and (7) refer to member “B”,

described in Examples (1) and (2) as a member of the Armed

Forces.

     Petitioner also asserts that Congress did not intend to

limit the definition of “Armed Forces of the United States” as

defined in section 7701(a)(15) and that this definition may

include individuals who are not members of the Armed Forces and

who perform services similar to those of the United States

military.   Congress has considered the issue of whether income

earned by individuals who are not members of the Armed Forces of

the United States and who are working in combat zones should be

excluded from gross income, it has yet to amend section 112 to

extend the exclusion to such taxpayers.   H.R. 294, 109th Congress

(2006), proposed to extend the combat zone income tax exclusion

to civilian contract employees serving in combat.    Jackson, Cong.

Research Serv., RL 33230, Proposed Federal Income Tax Exclusion

for Civilians Serving in Combat Zones (2006).   H.R. 294, was sent

to the House Ways and Means Committee and never came forth.

Similar bills were also introduced in 2001, H.R. 351, 107th Cong.

(2001), and in 2003, H.R. 117, 108th Cong. (2003).   Both bills

were also sent to the House Ways and Means Committee and never

came forth.
                                 - 8 -

  II.    Additions to Tax

       Respondent determined that petitioner is liable for

additions to tax for failure to timely file a return under

section 6651(a)(1), failure to timely pay tax under section

6651(a)(2), and failure to pay estimated income tax under section

6654(a).

       Section 6651(a)(1) imposes an addition to tax for failure to

timely file a required Federal income tax return, unless the

taxpayer can establish that the failure is due to reasonable

cause and not due to willful neglect.     Section 7491(c) places the

burden of production on the Commissioner to present sufficient

evidence showing that the addition to tax is appropriate.       Higbee

v. Commissioner, 116 T.C. 438 (2001).     Once the Commissioner

meets this burden, the taxpayer has the burden of proof with

respect to exculpatory factors, such as reasonable cause.       Id. at

446.

       Petitioner admitted on brief that he did not file a return

for calender year 2005.     Petitioner’s only explanation for

failing to file is that in 2005 while in Iraq, he was given a

memorandum that caused him to believe that the income he was

receiving from Blackwater was not taxable.     This memorandum was

an internal memorandum written to give the Commissioner’s

employees field guidance for examination and collection activity

involving taxpayers in Iraq.     The memorandum, titled “Memorandum
                               - 9 -

for Acting Deputy Director, Compliance Field Operations”, was

issued by the Internal Revenue Service Small Business/Self-

Employment Division on June 28, 2004.   The memorandum states that

civilian or military personnel who are in direct support of a

combat zone military initiative and physically located in the

combat area are entitled to the exclusion.   It also states that

time spent in a combat zone by an individual serving in support

of the Armed Forces will be disregarded with respect to “certain

acts required under the Internal Revenue Code.”    It goes on to

state that “This change in procedure will be reflected in the

next revision of the IRM, which is in the process of being

written.”

     Petitioner satisfies all the criteria found in the

memorandum.   He was serving in Iraq alongside the military,

provided security to Government officials, and aided in giving

air support, medical aid, and emergency response assistance.

Petitioner had no background in tax law and was given this

memorandum written by an IRS employee while serving in Iraq.     We

believe that receiving this memorandum while serving in Iraq

could give someone reasonable cause to believe that his payments

from Blackwater were excluded from gross income.    Therefore,

petitioner is not liable for the addition to tax under section

6651(a)(1).
                                - 10 -

       Respondent also determined a section 6651(a)(2) addition to

tax.    Section 6651(a)(2) imposes an addition to tax for failure

to pay the amount shown as tax on a return on or before the due

date prescribed unless the taxpayer can establish such failure

was due to reasonable cause and not willful neglect.     The amount

of the addition is equal to 0.5 percent of the amount shown as

tax on the tax return but not paid, with an additional 0.5

percent each month or fraction thereof during which the failure

to pay continues (up to a maximum of 25 percent).      See Cabirac v.

Commissioner, 120 T.C. 163, 170 n.12 (2003).     For the reasons

stated above, we find that petitioner had reasonable cause and is

not liable for the section 6651(a)(2) addition to tax.

       Respondent also determined that petitioner is liable for an

addition to tax under section 6654 for failure to pay estimated

tax for 2005.    Section 6654(a) imposes an addition to tax for

failure to make timely and sufficient payments for estimated tax.

A taxpayer has an obligation to pay estimated tax for a

particular year only if he has a “required annual payment” for

that year.    Sec. 6654(d).   A required annual payment is equal to

the lesser of:    (1) 90 percent of the tax shown on the taxpayer’s

return due for the year in issue (or, if no return is filed, 90

percent of the tax for such year); or (2) if the taxpayer filed a

return for the immediately preceding taxable year, 100 percent of

the tax shown on that return.    Sec. 6654(d)(1)(B).   Generally,
                             - 11 -

section 6654 provides no exception for reasonable cause.    Sec.

1.6654-1(a)(1), Income Tax Regs.; see also Bray v. Commissioner,

T.C. Memo. 2008-113.

     Petitioner made no estimated tax payments for 2005, and

therefore such payments were less than 90 percent of the amount

of tax shown on the substitute for return; and petitioner failed

to file a 2004 income tax return.    Therefore, petitioner is

liable for the section 6654(a) addition to tax.

     To reflect the foregoing,


                                      An appropriate decision will

                                 be entered.
