William Rogers v. Commissioner, IRS, 783 F.3d 320

Background

Yen-Ling Rogers, a U.S. citizen based in Hong Kong, worked as an international United Airlines flight attendant in 2007 and was paid $41,762.10; her duty time included flights in/over foreign countries, flights in/over the United States, and flights over international waters.
Appellants (Yen-Ling and William Rogers) filed a joint 2007 return excluding all of Rogers’s flight-attendant earnings as foreign earned income under 26 U.S.C. § 911.
The IRS determined a deficiency for the portion of wages attributable to services performed in/over the U.S. and over international waters, and assessed a 20% accuracy-related penalty under § 6662 for negligence.
The Tax Court upheld the IRS: it required apportionment of earnings to exclude only pay attributable to services performed in foreign countries, apportioned non-flight pay according to flight time, and sustained the penalty (reduced based on stipulations).
On appeal, the Rogers challenged the Tax Court’s application of § 911 and the penalty; the D.C. Circuit affirmed, deferring to IRS regulations that treat foreign earned income as income attributable to services performed in foreign countries.
The court remanded one factual point: whether $1,041.82 in Hong Kong "guarantee pay" was properly excluded in full, and otherwise denied fees and costs.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Scope of "foreign earned income" under § 911	All wages from a Hong Kong–based job are "from sources within a foreign country," so all earnings are excludable without apportionment	Regulation and IRS view: foreign earned income is income "attributable to services performed" in foreign countries, so income for services performed in/over U.S. or international waters is taxable	Court affirmed Tax Court: must apportion; only pay attributable to services performed in foreign countries is excludable, and defers to IRS regulation
Treatment of non-flight compensation (vacation, sick, training, guarantee pay)	These pay items should be treated as earned in Hong Kong and excluded	Such items are generally allocated according to the time/apportionment rules unless facts show they were earned while assigned in a foreign country	Court upheld apportionment for most items but remanded to ensure full exclusion of the $1,041.82 Hong Kong guarantee pay
Accuracy-related (negligence) penalty under § 6662	Rogers acted reasonably and in good faith; penalty improper	Appellants had prior deficiency notices and lacked reasonable cause; penalty appropriate	Court affirmed Tax Court’s factual finding sustaining (reduced) penalty; reviewed for clear error and found none
Claim for costs and fees under 26 U.S.C. § 7430	Appellants sought fees and costs	Government’s position was substantially justified	Denied: Appellants did not prevail and government was substantially justified

Key Cases Cited

Comm’r v. Schleier, 515 U.S. 323 (1995) (exclusions from income construed narrowly)
Household Credit Servs. v. Pfennig, 541 U.S. 232 (2004) (agency regulations binding unless procedurally defective or unreasonable)
United States v. Mead Corp., 533 U.S. 218 (2001) (scope of deference to agency interpretations)
Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011) (deference to Treasury in filling tax-code gaps)
Tipton & Kalmbach, Inc. v. United States, 480 F.2d 1118 (10th Cir. 1973) (place of services determines source of personal-services income)
Tax Analysts v. IRS, 350 F.3d 100 (D.C. Cir. 2003) (applying Chevron/Mead principles to IRS regulations)
Calloway v. Comm’r, 691 F.3d 1315 (11th Cir. 2012) (accuracy-related penalty reviewed for clear error)