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Tuesday, February 1, 2011

Court: Blackwater Contractor in Iraq Cannot Exclude Compensation Under § 112

Blackwater The Tax Court yesterday held that a Florida man who earned $98,400 in 2005 working for Blackwater (since renamed Xe) providing security services to the U.S. Army in Iraq could not exclude the compensation from income under § 112 as "combat zone compensation of members of the Armed Forces." Holmes v. Commissioner, T.C. Memo. 2011-26 (Jan. 31, 2011). The Tax Court concluded that the taxpayer did not serve in the Armed Forces of the United States but instead was a private citizen hired by and paid by a private company (Blackwater). The Tax Court refused to impose a penalty because the taxpayer relied on an IRS memorandum wrongly stating that civilian personnel in direct support of combat zone military operations qualified for the § 112 exclusion. (Hat Tip: Bob Kamman.)

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Comments

So someone relies on an IRS memorandum, and the Tax Court later says that the memorandum was wrong. Is there still anyone who thinks that the tax system couldn't use some simplification?

Posted by: Reputo | Feb 1, 2011 7:13:19 AM

What a jackass. I was working over there back then, for the same company and yes, we all heard about this supposed exclusion. Upon reading it, everybody (except this guy) immediately saw that it did not apply to private civilians, but was military only. I seriously hope some self-styled tax professional didn't tell him to try this route…..

Posted by: hahaha | Feb 2, 2011 1:33:06 PM

Apparently the memo was widely circulated. I found a copy of the first page of it and a warning from a professional that it was being misinterpeted. I wonder if the Tax Court judge read it all the way through. I think it was actually about collection issues.

Posted by: Peter J Reilly | Feb 10, 2011 6:36:41 PM

Relative to Reputo's comment. It was an internal memo, which means that it was not subject to the same level of quality control. It was not meant to be telling taxpayers about how to file or not file returns.

Posted by: Peter Reilly | Feb 11, 2011 1:42:03 PM