Foster v. Comm'r

T.C. Summary Opinion 2008-22

UNITED STATES TAX COURT

VERONICA L. FOSTER,1 Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20500-06S. Filed February 28, 2008.

George I Goverman, for petitioner.

Erika B. Cormier, for respondent.

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.

Pursuant to section 7463(b), the decision to be entered is not

1
Petitioner married after filing the petition. Her name is
now Veronica Lucy Leahy. The parties did not request that the
caption of this case be changed.
 - 2 -

reviewable by any other court, and this opinion shall not be

treated as precedent for any other case. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code (Code) in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency of $1,436 in petitioner’s

2002 Federal income tax and an accuracy-related penalty under

section 6662 of $287.20.

The issues for decision are: (1) Whether petitioner is

entitled to deduct the expenses of her master of business

administration (M.B.A.) program at Harvard Business School (HBS);

and (2) whether petitioner is liable for the section 6662 penalty

for negligence or disregard of rules or regulations.

Background

The parties stipulated some of the facts, and they are so

found. We incorporate the stipulation of facts and the attached

exhibits herein by this reference. Petitioner resided in

California when she filed the petition in this case.2

2
The Court conducted the trial of this case in Boston,
Mass., as petitioner requested. Petitioner did not attend the
trial. Presumably, she still lived in California at the time of
trial. As will be discussed infra, petitioner did not provide
any testimony at trial. The record is thus limited to the
stipulation of facts with attached exhibits, matters deemed
admitted, Rule 90(c), and additional exhibits admitted in
evidence at trial.
 - 3 -

Petitioner earned a bachelor of engineering degree from the

University of Canterbury in New Zealand in 1995. This degree is

the equivalent of a bachelor of science in chemical engineering

in the United States. Petitioner’s undergraduate studies did not

include business or business management.

Petitioner worked for International Food and Beverage

Services, an engineering consulting company, as a project manager

on the upgrade of a milk factory in Sydney, Australia, before she

moved to the United States.

In February 2001 HBS offered petitioner admission to the

M.B.A. class of 2003, entering in September 2001. HBS expressly

conditioned its offer on petitioner’s completing certain academic

requirements, including courses in finance and accounting, before

matriculation. Petitioner accepted the HBS offer and moved to

the United States to pursue her M.B.A. At that time, she did not

have a specific job arranged for after graduation.

During her M.B.A. studies, as part of her practical

curriculum training, petitioner worked at Snapple Beverages Corp.

(Snapple) as a corporate strategy consultant. She completed

marketing projects related to beverage consumption in the United

States and to Snapple strategy and profitability.

On April 8, 2003, Refreshment Brands, Inc. (Refreshment

Brands), a beverage company in California, offered petitioner the
 - 4 -

position of vice president of marketing at an annual salary of

$117,500. Petitioner accepted the offer on April 11, 2003.

Petitioner’s 2002 Form 1040NR, U.S. Nonresident Alien Income

Tax Return,3 was prepared by a tax return preparer on April 28,

2003. Petitioner signed her return on May 6, 2003, and stated

her occupation in the United States as “Management”. On Schedule

A, Itemized Deductions, petitioner claimed the fees and tuition

expenses she paid in 2002 for the M.B.A. program as unreimbursed

employee expenses.4

In 2003 petitioner graduated from HBS with an M.B.A. and

began working as vice president of marketing for Refreshment

Brands. The record includes a letter prepared by that company in

support of its petition for an H-1B Visa for petitioner.5 Under

the heading “Specialty Occupation”, that letter stated:

Ms. Foster will be employed in the specialty occupation of
Vice President of Marketing. In this position, she will be
responsible for Brand management, including a marketing
plan, interfacing with advertisement agencies, developing
and implementing budgets, developing POP materials,

3
Petitioner was a citizen of New Zealand in 2002.
4
Petitioner listed $2,950 in fees and $30,050 in tuition,
for a total of $33,000 of unreimbursed employee expenses. After
reduction by 2 percent of her adjusted gross income ($292),
petitioner deducted $32,708 on line 15 of Schedule A, Itemized
Deductions.
5
An H-1B petition is filed by an employer with the
Department of Homeland Security to seek permission for an alien
specialty worker to begin or continue working in the United
States. The specialty worker is expected to possess professional
education, skills, and/or equivalent experience.
 - 5 -

developing and implementing distributor programs and local
marketing, as well as assisting designers on retooling and
repositioning existing brands. Ms. Foster will further be
involved in new product development, in which she will
market research on product and flavor trends, and work with
designers on the development of packaging.

The position of Vice President of Marketing requires
theoretical and practical application of highly specialized
knowledge and attainment of a Bachelor’s Degree in Business
Administration or equivalent. The position requires at
least a Bachelor’s degree in a field related to the
specialty occupation.

Petitioner did not work in marketing before moving to the

United States and commencing her studies leading to an M.B.A.

Respondent determined that petitioner was not entitled to

deduct her education expenses and issued a notice of deficiency

on July 12, 2006. Petitioner timely petitioned this Court for

redetermination.

Discussion

In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct, and the taxpayer bears

the burden of proving that the determination is in error. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant

to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances.

Petitioner has neither alleged that section 7491(a) applies nor

established her compliance with the requirements of section

7491(a)(2)(A) and (B) to substantiate items, maintain records,
 - 6 -

and cooperate fully with respondent’s reasonable requests.

Petitioner therefore bears the burden of proof.

With respect to the section 6662 penalty, pursuant to

section 7491(c), the Commissioner bears the burden of production

and must produce sufficient evidence showing that the imposition

of the penalty is appropriate in a particular case. Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner

meets this burden, the taxpayer must come forward with persuasive

evidence that the Commissioner’s determination is incorrect.

Rule 142(a); Higbee v. Commissioner, supra at 447. To the extent

the taxpayer shows there was reasonable cause for an underpayment

and that she acted in good faith, section 6664(c)(1) prohibits

the imposition of a penalty under section 6662.

Education Expenses

As a general rule, section 162(a) authorizes a deduction for

“all the ordinary and necessary expenses paid or incurred during

the taxable year in carrying on any trade or business”.

Expenditures made by an individual for education are deductible

as ordinary and necessary business expenses if the education

maintains or improves skills required by the individual in her

employment or other trade or business. Sec. 1.162-5(a), Income

Tax Regs.

However, this general rule does not apply if the

expenditures fall within either of two specified categories,
 - 7 -

because those types of education expenses “are personal

expenditures or constitute an inseparable aggregate of personal

and capital expenditures and, therefore, are not deductible”.

Sec. 1.162-5(b)(1), Income Tax Regs. These nondeductible

educational expenses are those incurred to meet the minimum

educational requirement for qualification in a taxpayer’s trade

or business and those which qualify a taxpayer for a new trade or

business. Sec. 1.162-5(b)(2) and (3), Income Tax Regs.

A. Minimum Education Requirement

In seeking the H-1B specialty worker visa for petitioner,

Refreshment Brands described her responsibilities in marketing

terms. The company also stated that the general education

requirement was a bachelor’s degree in a related field and that

the specific education requirement was a bachelor’s degree in

business administration or the equivalent. Before receiving her

M.B.A., petitioner had an engineering degree but no business

degree. The engineering credential satisfied the general

education requirement but not the job-specific requirement of a

degree in business administration. Only her M.B.A. qualified her

for the job. Accordingly, we find that her M.B.A. education was

necessary to satisfy the minimum education requirements for her

new trade or business of marketing.

Petitioner’s counsel argued that respondent gives too much

emphasis to petitioner’s title at Refreshment Brands and that her
 - 8 -

title did not accurately describe her role at the company. He

suggests that the company hired petitioner for her knowledge of

the beverage industry and not for her marketing knowledge.

Petitioner’s counsel tried to show that her experience at Snapple

and her education at HBS were probably irrelevant to most of

Refreshment Brands’s promotion activity. Petitioner’s counsel

did not elicit any testimony or introduce sufficient evidence to

convince the Court of this interpretation of petitioner’s career

progression. In any event, even if we were so convinced, we

would still need to consider the second disqualification category

in section 1.162-5(b), Income Tax Regs.

B. Qualification for New Trade or Business

Petitioner’s counsel argues that petitioner was involved in

management for beverage companies before and after earning her

M.B.A. and that her new degree merely maintained or improved her

skills in working as an entrepreneur, project manager, or

supervisor in the beverage industry. Whether education maintains

or improves skills required by the individual in her employment

is a question of fact. Boser v. Commissioner, 77 T.C. 1124, 1131

(1981). A taxpayer must demonstrate a direct and proximate

relationship between the education and the skills required in her

employment. Kornhauser v. United States, 276 U.S. 145, 153

(1928); Schwartz v. Commissioner, 69 T.C. 877, 889 (1978).
 - 9 -

Petitioner left her position as an engineer in New Zealand

to come to the United States and pursue an M.B.A. She left with

no promise of a specific job waiting for her once she completed

the degree. A currently unemployed taxpayer can remain engaged

in a trade or business in which she was previously involved and

to which she intends to return. Haft v. Commissioner, 40 T.C. 2,

6 (1963). Accordingly, the absence of specific employment does

not necessarily mean that petitioner left her trade or business,

provided that she intended to return to that trade or business

after she completed her education.

There is no dispute that before and after her M.B.A.,

petitioner worked in the beverage industry. The proper focus,

however, is on the effect petitioner’s M.B.A. had on the jobs she

was qualified to perform rather than on the industry within which

she labored. When education qualifies a taxpayer to perform

significantly different tasks and activities from those she could

perform before, then that education is deemed to qualify the

taxpayer for a new trade or business. Robinson v. Commissioner,

78 T.C. 550, 552 (1982). Petitioner must therefore prove that

her M.B.A. did not qualify her to perform significantly different

tasks from those she performed in New Zealand when working as an

engineer. We are instructed to apply an objective standard in

considering whether specific education qualifies a taxpayer for a

new trade or business. Id. at 556-557.
 - 10 -

The Court accepts petitioner’s contention that the M.B.A.

improved her project management skills. By taking management

courses, she likely improved her ability to design and supervise

operations, teams, and projects. Accounting and finance courses

likely improved her ability to manage budgets and to project

costs. We note, however, that the HBS requirement that

petitioner study accounting and finance before matriculation

indicates that HBS demanded greater mastery of these areas (not

only greater than petitioner possessed before the M.B.A. but also

greater than her job as an engineer required). Undoubtedly,

petitioner gained even greater mastery while at HBS.

As part of her M.B.A. curriculum, petitioner extensively

studied marketing, an area her engineering studies did not

cover.6 “An individual who, through education, improves * * *

[her] skills in an existing trade or business may also become

qualified for a new trade or business.” Thompson v.

Commissioner, T.C. Memo. 2007-174. In Thompson, an aeronautical

engineer’s flight and pilot lessons improved his skills as an

engineer but also qualified him for a new trade or business as a

pilot and, therefore, were not deductible.

Before the M.B.A., petitioner worked in New Zealand as an

engineer. While pursuing the M.B.A., she worked for Snapple in

6
In addition to one required marketing course and three
required courses in finance and financial reporting, petitioner
took three marketing electives and one finance elective.
 - 11 -

marketing. After the M.B.A., she joined Refreshment Brands as

its new vice president of marketing. Because petitioner has not

demonstrated that she was qualified to work in marketing before

she began studying at HBS, we find that the M.B.A. qualified her

for a new trade or business.

Petitioner’s counsel relies on three cases he asserts

buttress petitioner’s position. In Glenn v. Commissioner, 62

T.C. 270 (1974), we held that a public accountant could not

deduct expenses incurred preparing for and taking a certified

public accountant examination because certified public

accountants are in a different trade or business from public

accountants, on the basis of an analysis of the tasks and

activities they are qualified to perform. This case is not

helpful to petitioner because, while she may be better qualified

with the M.B.A. to work as a project manager for an engineering

consulting company, she is also qualified to perform myriad

business, management, finance, and marketing tasks she was not

qualified to perform before receiving her M.B.A.

In Sherman v. Commissioner, T.C. Memo. 1977-301, we held

that the taxpayer had established that he was engaged in business

administration before going to HBS and that he stayed in that

field after graduation. The taxpayer in Sherman, like

petitioner, needed neither a leave of absence nor the intention

to return to the same position. Unlike the taxpayer in Sherman,
 - 12 -

however, petitioner has not demonstrated that her trade or

business was business administration before HBS. Rather, the

record reflects that she was qualified to work as an engineer

before HBS and as a marketing executive afterward. Engineering

project management and business administration are not the same

trade or business.7

Finally, petitioner’s counsel relies on Allemeier v.

Commissioner, T.C. Memo. 2005-207, where the taxpayer was already

performing sales, marketing, and management functions before

receiving his M.B.A. and continued to do so while studying for

and after receiving it. In that case, we held that the M.B.A.

expenses were not conditions precedent to his employment and also

did not qualify him for a new trade or business. The M.B.A. did

improve his business, marketing, and sales skills, but the M.B.A.

did not qualify him to perform tasks and activities significantly

different from those he could perform before the M.B.A. In

contrast to the taxpayer in Allemeier, petitioner has not

demonstrated her involvement in nonengineering management before

7
In accord with our holding in Schneider v. Commissioner,
T.C. Memo. 1983-753, the assertion that a taxpayer is in the
business of being a manager is too amorphous to meet the
requirements of sec. 1.162-5, Income Tax Regs. A chef manages
her kitchen; a teacher manages her classroom; a consulting
engineer overseeing a factory upgrade manages her project; a vice
president of marketing manages the advertising, packaging,
promotion, and marketing of her company’s products. While each
“manager” manages, administrates, supervises, and plans, each is
certainly engaged in a different trade or business.
 - 13 -

receiving her M.B.A.; rather, her M.B.A. qualifies her for the

trade or business of business management. Likewise, petitioner

has not proven that her engineering roles included marketing

duties; yet, her position as vice president of marketing

indicates that she was so qualified after the M.B.A.8

We conclude that petitioner’s education expenses are

properly considered personal or capital expenditures not only

because the M.B.A. met the minimum education requirements of her

position at Refreshment Brands but also because the M.B.A.

qualified her for a new trade or business. Personal expenses are

nondeductible under section 262, and capital expenditures are

nondeductible under section 263. On the record before the Court,

even though petitioner remained in the beverage industry, her HBS

education significantly changed her role in that industry, and

that change compels the conclusion that she may not deduct those

expenses. Respondent’s determination is sustained.

8
As indicated, this case was tried in Boston, Mass.,
pursuant to petitioner’s designation. Petitioner’s counsel
presented the case at trial without petitioner’s testimony and
attempted to prove the case through various documents. The Court
sustained respondent’s authenticity and hearsay objections to
most of the documents petitioner’s counsel sought to introduce.
As a result of her failure to testify, the Court is left with a
limited record. See supra note 2. It would have been most
helpful if petitioner had provided an explanation of her duties
before and after receiving the M.B.A. See McIlvoy v.
Commissioner, T.C. Memo. 1979-248; see also Hudgens v.
Commissioner, T.C. Memo. 1997-33.
 - 14 -

Section 6662 Accuracy-Related Penalty

Respondent determined a 20-percent penalty under section

6662(a) on the underpayment of tax resulting from the disallowed

education expense deduction. Respondent asserts that the

underpayment is attributable to negligence or disregard of rules

or regulations. See sec. 6662(b)(1). For the purpose of section

6662, negligence includes any failure to make a reasonable

attempt to comply with tax laws, and disregard includes any

careless, reckless, or intentional disregard of rules or

regulations. Sec. 6662(c).

Section 6664 provides a defense if a taxpayer establishes

that there was reasonable cause for the underpayment and that she

acted in good faith with respect to that portion.9 Sec.

6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.; see also United

States v. Boyle, 469 U.S. 241, 243 (1985); Higbee v.

Commissioner, 116 T.C. at 448. Although not defined in the Code,

“reasonable cause” is viewed in the applicable regulations as the

exercise of “ordinary business care and prudence”. Sec.

9
Petitioner’s counsel argued that the sec. 6662 accuracy-
related penalty should be reduced because substantial authority
exists to support petitioner’s deduction of her M.B.A. expenses,
citing sec. 6662(d)(2)(B)(i). Counsel’s reliance on that section
is misplaced because sec. 6662(d) relates to accuracy-related
penalties imposed on substantial understatements of income tax
under sec. 6662(b)(2). In this case, however, the misconduct for
which respondent seeks to impose the accuracy-related penalty is
negligence under sec. 6662(b)(1), not a substantial
understatement under sec. 6662(b)(2). Sec. 6662(d)(2)(B)(i) is
inapposite.
 - 15 -

301.6651-1(c)(1), Proced. & Admin. Regs.; see United States v.

Boyle, supra at 246. The determination of whether a taxpayer

acted with reasonable cause and in good faith is made on a

case-by-case basis, taking into account all the 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 effort to assess the proper tax liability, including

reliance on the advice of a tax return preparer. However,

reliance on a professional adviser, alone, is insufficient; the

reliance must be reasonable, and the taxpayer must act in good

faith. Sec. 1.6664-4(b)(1), Income Tax Regs.

Respondent argues that petitioner’s failure to investigate

fully the propriety of this deduction is a clear indicium of

negligence, because any reasonable taxpayer would recognize that

an allowable deduction for all the expenses of an advanced degree

is probably too good to be true.10

However, in providing a reasonable cause and good faith

exception to the section 6662 penalty, section 1.6664-4, Income

Tax Regs., also provides a relevant example wherein a taxpayer

engages a professional tax adviser for advice on the

10
Respondent relies on sec. 1.6662-3(b)(ii), Income Tax
Regs., which states that 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’”.
 - 16 -

deductibility of certain items, provides the adviser with all of

the relevant facts, and then follows the adviser’s advice that

the items are fully deductible. Such a taxpayer may be

considered to have demonstrated good faith by seeking

professional advice and to have shown reasonable cause for any

underpayment attributable to that deduction. Sec. 1.6664-

4(b)(2), Example (1), Income Tax Regs. However, a finding of

reasonable cause and good faith requires that the adviser

considered all pertinent facts and circumstances, was

knowledgeable in the relevant aspects of Federal tax law, and

made no unreasonable assumptions. Sec. 1.6664-4(c), Income Tax

Regs.

On the evidence and argument presented by her counsel,

petitioner’s assertion that her trade or business had not changed

relies mostly on her employment in the same industry before and

after the M.B.A., not on a detailed analysis of her positions.

Furthermore, as discussed, only her M.B.A. met the specialty

education requirements of Refreshment Brands; namely, a degree in

business administration. Respondent has met his burden of

production under section 7491(c) to show that imposing the

section 6662 accuracy-related penalty is appropriate.

Petitioner had received and accepted the job offer from

Refreshment Brands before she filed her 2002 Federal income tax

return. On that return, she listed her occupation in the United
 - 17 -

States as “Management”, not engineering. Therefore, at the time

she filed her 2002 Federal income tax return, she knew where and

in what capacity she would be working after graduation.

Petitioner has not produced any evidence that she provided any,

let alone all, of the pertinent details of her employment before

and after her M.B.A. to her tax return preparer.11

Petitioner has not shown that she acted in good faith in

deducting her M.B.A. expenses, that she had reasonable cause for

her position, or that she expended any effort in trying to assess

the proper tax treatment for these expenses. Petitioner has

failed to carry her burden under Rule 142(a) to introduce

persuasive evidence that respondent’s determination is incorrect.

See Higbee v. Commissioner, 116 T.C. at 446.

11
As noted supra, petitioner chose not to appear at trial.
Had petitioner appeared, she might have been able to provide the
specific facts she actually related to her return preparer to
enable that professional to conduct a properly informed analysis.
At trial, petitioner’s counsel stated that petitioner had not
been offered the position in marketing at Refreshment Brands,
Inc. at that time in 2003. The record reflects, however, that
she had not only received but also accepted the job offer when
she filed her 2002 tax return. Counsel then argued that even if
petitioner had reviewed the Code, regulations, Internal Revenue
Service publications, and the relevant cases, she would not have
reached a conclusion different from her tax return preparer’s or
been better able to reach the correct result than they. This
argument asks the Court to assume the very facts that petitioner
must prove to demonstrate that she acted with reasonable cause
and in good faith.
 - 18 -

Respondent’s determination that petitioner is liable for the

section 6662(a) penalty is sustained.

To reflect the foregoing

Decision will be entered

for respondent.