Pagarigan v. Comm'r

T.C. Summary Opinion 2010-167

UNITED STATES TAX COURT

EDRALIN A. PAGARIGAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15711-09S. Filed November 2, 2010.

Keith S. Blair, Curtis E. Tatum, Dominic E. Markwordt

(student), and Gerald Loiacano (student), for petitioner.

Jonathan Hauck and Tyler N. Orlowski, for respondent.

GOLDBERG, 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 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
 - 2 -

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

Respondent determined deficiencies in petitioner’s Federal

income taxes of $2,609 and $8,401, and section 6662(a) accuracy-

related penalties of $521.80 and $1,680.20, for 2005 and 2006,

respectively. After concessions,1 the issues for decision are

whether petitioner’s salary for 2005 and 2006 from the Baltimore

County, Maryland, Public Schools (BCPS) is exempt from Federal

income tax under the Convention With Respect to Taxes on Income,

U.S.-Phil., art. 21, Oct. 1, 1976, 34 U.S.T. 1277 (article 21);

(2) whether petitioner is entitled to deduct $726 for a course

she completed in 2005 in the Philippines to prepare for her

teaching at BCPS; and (3) whether petitioner is liable for the

accuracy-related penalties under section 6662(a) for the 2 years

at issue.

Background

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

The stipulation of facts and the attached exhibits are

1
Respondent’s notice of deficiency determined that
petitioner failed to include a $600 State income tax refund and
$41 of interest income in her 2006 gross income. Petitioner did
not address these issues in her petition or at trial; therefore,
the issues are deemed conceded. See Rules 34(b), 149(b). In
addition, the parties resolved all matters concerning
petitioner’s itemized deductions for the 2 years at issue except
for one expenditure, $726 for a course in the Philippines.
 - 3 -

incorporated herein by this reference. Petitioner resided in

Maryland when she filed her petition.

Petitioner is a citizen of the Republic of the Philippines.

In 2005 petitioner was married and had three children: twins age

11 and a third child age 6. She received a bachelor’s degree in

secondary education and a master’s degree in science education

from Philippine Normal University. She began her teaching career

at St. Bridget School and then in 1996 obtained a teaching

position at Tarlac College of Agriculture (Tarlac). Thus,

petitioner had 12 years of teaching experience when she left the

Philippines for the United States in 2005. Her ending annual

salary at Tarlac was 180,000 pesos, equivalent to $3,272.

Included in this figure are additional benefits that Tarlac

provided its teachers, such as an annual bonus equal to 1 month’s

pay, a clothing allowance, and, depending on circumstances, a

productivity incentive bonus, hazard pay, and other monetary

benefits.

Petitioner entered the United States on July 29, 2005,

arriving in Baltimore to teach for BCPS as part of an

international teaching exchange program sponsored by the U.S.

Department of State (the State Department). This was the first

time she had been to the United States.

Amity Institute (Amity) is a nonprofit organization the

State Department approved to operate an exchange teacher program.
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The exchange teacher program allows qualified foreign teachers to

enter the United States to teach for up to 3 years. Amity does

not directly recruit teachers from the Philippines. During 2004

and 2005 Amity worked with Badilla Corp. (Badilla), a business

entity from the Philippines, and with Avenida & Associates, Inc.

(Avenida), a business entity from the United States. Badilla and

Avenida are affiliated entities who worked together to facilitate

the placement of qualified Filipino teachers in American schools.

Badilla collected background information such as transcripts and

résumés from teachers in the Philippines who were interested in

the teacher exchange program in the United States. Badilla found

its prospective Filipino teachers principally by word of mouth

and seminars conducted by its executives. Avenida or Badilla

charged placement fees and additional charges to help teaching

candidates with, among other tasks, finding employers in the

United States. In the United States, Avenida helped school

districts find promising teaching candidates by providing access

to a database of overseas jobseekers. In late 2004 petitioner

attended an orientation session for an exchange teacher program

Badilla sponsored, at which time she submitted her application

and résumé.

Dr. Donald A. Peccia joined BCPS in October 2004 as the

Executive Director of Human Resources, a position he retained

through the date of trial. As of the date of trial, Dr. Peccia’s
 - 5 -

department employed 71 people who were responsible for the

recruitment, retention, and rewarding of the school system’s

17,000 full-time and thousands of part-time and temporary

employees, extended over 170 schools.

To meet a shortfall in teachers, Dr. Peccia initiated the

idea of BCPS’ recruiting internationally, beginning with a small

“pilot-type program” in the Philippines. In a letter dated

January 28, 2005, Dr. Peccia contacted Avenida, stating that BCPS

would like to hire 12 or more qualified Filipino teachers. From

a preselected group of Filipino teachers, BCPS administrators

chose the candidates that the school system wanted to interview.

In March 2005 Herman James and Joyce Reier, personnel

officers for BCPS, traveled to the Philippines to interview

teaching candidates. On March 7, 2005, Mr. James interviewed

petitioner. Mr. James and Ms. Reier coordinated with Dr. Peccia,

and they agreed to hire 20 teachers from the Philippines. On

March 10, 2005, Mr. James provided petitioner with a preliminary

BCPS contract for the 2005-2006 school year. Petitioner signed

the preliminary contract and dated her signature March 10, 2005.

Petitioner “understood” that BCPS would be evaluating her

performance throughout the school year. If her performance was

satisfactory, BCPS would continue her employment for the

following school year.
 - 6 -

Generally, foreign teachers who want to teach in the United

States may obtain one of two types of visas. One is the H-1B

visa for working professionals. The second is the J-1 visa for

individuals coming to the United States under a cultural exchange

program approved by the State Department. The J-1 visa is more

convenient for foreign individuals who are new teachers in the

United States because the visa timing coincides with the academic

school year in the United States.

Badilla referred petitioner to Amity, who in turn sponsored

petitioner’s J-1 visa. The State Department authorized Amity to

issue Form DS-2019, Certificate of Eligibility for Exchange

Visitor (J-1) Status. The form identifies the visitor;

identifies the visa sponsor; briefly describes the exchange

program, including the start and end dates; identifies the

category of exchange; and states the estimated cost of the

exchange program. At all relevant times, Gertrude Hermann was

Amity’s executive director.

Badilla invited petitioner and the other teachers who had

received employment offers from BCPS to meet at Badilla’s office

in the Philippines on June 14, 2005. At the meeting, Badilla

provided many completed forms that each teacher needed to sign,

including an administrative fee agreement, Amity’s exchange

teacher program contract, and a Form DS-2019. The length of time

listed on the Form DS-2019 was 3 years, the same length as the
 - 7 -

exchange teacher program. Badilla reiterated that BCPS required

satisfactory performance to continue employment beyond the first

year. Petitioner signed the forms and returned them to Badilla

for processing.

Before leaving the Philippines, petitioner obtained a leave

of absence dated June 21, 2005, from her teaching position at

Tarlac “for the duration of the program” to teach for BCPS.

Petitioner incurred expenses before her departure, including

training classes in classroom management and special education,

Avienda’s fees, and airline tickets.

Petitioner entered the United States on July 29, 2005. On

August 22, 2005, she signed a standard State-issued Provisional

Contract for Conditional or Resident Teacher Certificate Holders

(BCPS employment contract), effective beginning August 22, 2005.

The BCPS employment contract was for 1 year, terminating

automatically at the end of the 2005-2006 school year. During

her first month in the United States, petitioner lived in housing

in the Baltimore area that BCPS arranged for the Filipino

teachers it had recruited.

BCPS assigned petitioner to teach biology and earth science

at Chesapeake High School. After 1 month, because of

petitioner’s difficulties dealing with high school students, BCPS

reassigned petitioner to teach secondary science at General John

Stricker Middle School (Stricker). The principal of Stricker
 - 8 -

issued an evaluation dated December 13, 2005, rating petitioner’s

performance as unsatisfactory. Petitioner received a letter

dated January 27, 2006, from the area assistant superintendent

stating that petitioner needed to show major improvement to

continue teaching beyond the 2005-2006 school year.

BCPS offered a “Regular Contract” to petitioner that she

signed and dated May 30, 2006, granting her continued employment

from year to year so long as she met certain conditions. This is

another standard State-issued contract under which after 2 years,

if the teacher met all the requirements of the State, including

satisfactory performance, then the teacher received tenure. For

the 2006-2007 school year, BCPS assigned petitioner to teach at

Cockeysville Middle School.

Working in the United States provided petitioner with a

salary that was considerably greater than the salary she earned

in the Philippines, which as described supra page 3 was $3,272

including benefits. Petitioner’s starting annual salary at BCPS

was $54,449. With respect to Federal income tax withholding,

petitioner did not provide BCPS with Form 8233, Exemption From

Withholding on Compensation for Independent (and Certain

Dependent) Personal Services of a Nonresident Alien Individual.

Consequently, BCPS withheld Federal income tax from petitioner’s

salary during 2005 and 2006.
 - 9 -

Upon the recommendation of her co-Filipino teachers,

petitioner engaged a certain U.S. enrolled agent, Fred R.

Pacheco, to prepare her 2005 and 2006 Federal income tax returns.

She filed Form 1040NR, U.S. Nonresident Alien Income Tax Return,

for each of the 2 years. On the returns, petitioner disclosed

her salary from BCPS and then reported that the salary was exempt

from taxation under article 21.

Petitioner claimed itemized deductions of $1,801 and $22,231

for 2005 and 2006, respectively. The 2005 itemized deductions

consisted solely of State income tax withheld. The 2006 itemized

deductions consisted of $3,926 in State income tax withheld, $210

in charitable contributions, $18,045 in unreimbursed employee

business expenses, and $50 in tax preparation fees. As a result

of the income exclusion, income tax withholding, and itemized

deductions, petitioner requested refunds of $4,656 and $9,469 for

2005 and 2006, respectively.

Petitioner returned to the Philippines twice: Once from

April 6 to April 16, 2006, to visit her family, and a second time

from September 30 to October 2, 2006, to bring her children to

reside with her in the United States. Petitioner’s husband also

relocated to the United States, and petitioner gave birth to the

couple’s fourth child. Under the teacher exchange program,

petitioner’s family could not join her in the United States until

she received a satisfactory evaluation from BCPS. Therefore, the
 - 10 -

earliest petitioner’s family could join her was at the end of the

2005-2006 school year.

Petitioner resigned from BCPS effective June 13, 2008,

writing that the reason was “contract completed”. On the bottom

of the resignation form, her supervisor wrote that petitioner’s

resignation was a “big loss to BCPS”. Petitioner, on her own

initiative, obtained an H-1B visa to remain in the United States

for 3 more years beginning July 20, 2008, and as of the date of

trial, she taught for the Prince George’s County, Maryland,

Public School System for the 2009-2010 school year.

The Internal Revenue Service (IRS) selected petitioner’s

2005 and 2006 Federal income tax returns for examination. The

examining agent sent three questionnaires to petitioner: Form

8784, Questionnaire - Temporary Living Expenses; Form 9210, Alien

Status Questionnaire; and Form 9250, Questionnaire - Tax Treaty

Benefits. Petitioner contacted the IRS regarding the questions

on the forms; then she completed the forms, dated her signature

October 6, 2008, and returned the forms to the IRS.

The Court received into evidence copies of the three

questionnaires that petitioner had completed. On Form 8784

petitioner wrote that she planned to return to the Philippines in

June 2008 or June 2009.2 On Form 9210 petitioner wrote that July

2
Petitioner’s otherwise legible handwriting made it
difficult to conclude whether she wrote 2008 or 2009 on the form.
 - 11 -

29, 2005, was her date of initial arrival, that at that time she

expected to remain in the United States for 3 years, and that

this expectation had not changed. On Form 9250, petitioner

stated that she intended to remain in the United States until

2008.

In the notice of deficiency dated March 26, 2009, the IRS

adjusted petitioner’s income to include the earnings from BCPS

for 2005 and 2006 that petitioner had excluded under article 21.

The notice did not disallow the itemized deductions that she

claimed for 2005 and 2006.

Petitioner filed her petition contesting respondent’s

inclusion of her income from BCPS. Respondent answered, denying

for each of the 2 years at issue that petitioner qualified for

the income exemption under article 21 and that petitioner was not

liable for the accuracy-related penalties. Respondent’s answer

did not raise as a new issue the disallowance of petitioner’s

itemized deductions for 2005 and 2006.

Respondent moved under Rule 121 for partial summary judgment

contending that no material fact existed on the issue of whether

petitioner’s income for the years at issue qualified for

exemption under article 21. Petitioner objected to the granting

of the motion. Respondent’s motion stated that one of the

remaining issues for trial was “whether petitioner erroneously

claimed miscellaneous itemized deductions in tax years 2005 and
 - 12 -

2006”. Both parties fully briefed the issue of income exemption

under article 21. The Court set the motion for hearing at trial.

When the case was called for trial, the Court heard the motion.

The parties relied on the respective positions they had set forth

in their briefs. The Court has denied respondent’s motion for

partial summary judgment.

Shortly before trial, petitioner filed a motion in limine to

exclude the testimony of Dr. Peccia on the grounds of hearsay,

lack of personal knowledge, and relevance. Respondent objected

to the motion. The Court heard arguments on the motion at trial

and took the motion under advisement. The Court has denied

petitioner’s motion. The case was tried and the Court heard

testimony from petitioner, Dr. Peccia, and Ms. Hermann.

In the parties’ stipulation of facts, they agreed in effect

that with respect to the itemized deductions that petitioner

claimed for 2005 and 2006: (1) The notice of deficiency

“incorrectly” allowed or mistakenly failed to disallow the

$18,045 deduction for unreimbursed employee business expenses for

2006; (2) the $18,045 deduction is still at issue; and (3)

petitioner is entitled to deduct all the other itemized

deductions that she claimed for each year at issue. At trial

respondent’s counsel mentioned itemized deductions in his opening

statement, stating that “as for itemized deductions, respondent

has conceded those deductions for which receipts and the business
 - 13 -

purpose have been provided.” During direct examination,

petitioner’s counsel asked petitioner questions concerning union

dues as a component of the $18,045 deduction. On cross-

examination, respondent’s counsel challenged petitioner regarding

the timing, substantiation, and validity of the $18,045 in

expenses. In their respective posttrial briefs, petitioner and

respondent agreed that with respect to the $18,045 deduction,

petitioner is entitled to deduct the following expenses: (1) For

2005 she may deduct $276 in union dues, a fee to “SEVIS” of $100,

and a $1,500 payment to Amity; and (2) for 2006 she may deduct

union dues of $716 and a $750 payment to Amity. They disagreed

solely with respect to the substantiation for a course that

petitioner completed and paid for in 2005 in the Philippines to

allow her to work for BCPS. Petitioner testified that the course

“cost like 40,000 in pesos in Philippine currency”, which the

parties agreed had a currency exchange equivalency of $726.

Respondent contended that this testimony, with nothing more, was

inadequate substantiation. Petitioner did not address her

entitlement to the remaining $14,977 of the $18,045 deduction.

Discussion

I. Income Under Article 21

Petitioner was a nonresident alien for the years at issue

because of her J-1 visa status and her participation in the

exchange teacher program. See sec. 7701(b). In particular,
 - 14 -

section 7701(b)(1)(B) provides that a nonresident alien is a

person who is not a citizen or resident of the United States

within the meaning of section 7701(b)(1)(A).3 Generally, a

nonresident alien individual engaged in trade or business within

the United States is taxed on the taxable income effectively

connected with that trade or business. Sec. 871(b). The phrase

“trade or business within the United States” generally includes

the performance of personal services within the United States at

any time within the taxable year. Sec. 864(b). Compensation

paid to a nonresident alien in exchange for the performance of

services in the United States constitutes income that is

effectively connected with the conduct of trade or business in

the United States. Sec. 1.864-4(c)(6)(ii), Income Tax Regs.

Consequently, petitioner’s wages would ordinarily be included in

gross income under the Code. Section 894(a), however, provides

that the provisions of the Code will be applied to any taxpayer

with due regard to any treaty obligations of the United States

that apply to the taxpayer. Therefore, the treatment of

petitioner’s wages might be altered by applicable treaty

provisions. See id.

3
As a teacher, petitioner is considered an exempt individual
and, therefore, not treated as present for purposes of the
substantial presence test. See sec. 7701(b)(1)(A)(ii),
(3)(D)(i), (5)(A)(ii).
 - 15 -

The United States is a party to an income tax convention

with the Republic of the Philippines. The convention provides an

exemption from U.S. income taxation on income earned by Filipino

teachers teaching in the United States if the requirements of the

convention are satisfied. Article 21 states:

Article 21
TEACHERS

(1) Where a resident of one of the Contracting
States is invited by the Government of the other
Contracting State, a political subdivision or local
authority thereof, or by a university or other
recognized educational institution in that other
Contracting State to come to that other Contracting
State for a period not expected to exceed 2 years for
the purpose of teaching or engaging in research, or
both, at a university or other recognized educational
institution and such resident comes to that other
Contracting State primarily for such purpose, his
income from personal services for teaching or research
at such university or educational institution shall be
exempt from tax by that other Contracting State for a
period not exceeding 2 years from the date of his
arrival in that other Contracting State.

To qualify for the exemption under article 21, a taxpayer

must meet the following requirements: (1) The taxpayer was a

resident of the Philippines before coming to the United States,

(2) she was invited by the Government or a recognized educational

institution within the United States, (3) she was invited for a

period not expected to exceed 2 years, (4) the purpose of the

invitation was for her to teach or engage in research at the

recognized educational institution, and (5) she did in fact come

to the United States primarily to carry out the purpose of the
 - 16 -

invitation. The taxpayer must meet all of the requirements to

qualify for the income exemption.

The only requirement in dispute is whether petitioner’s

invitation to teach in the United States was “for a period not

expected to exceed 2 years”. The text of article 21 does not

specifically state whose expectation controls the length of the

invitation to teach for a period not to exceed 2 years.

Petitioner argues that her expectation as the invitee is the only

expectation that matters. Respondent counters that either the

expectation of the invitor, BCPS, should be decisive, or that the

Court should weigh the expectations of all the parties associated

with the teacher exchange program. In the light of this

ambiguity in the text of article 21, we will consider all the

relevant facts and circumstances, including the expectations of

all the parties. Santos v. Commissioner, 135 T.C. __, __ (2010)

(slip op. at 17). We will construe the language of article 21

liberally. See N.W. Life Assurance Co. of Can. v. Commissioner,

107 T.C. 363, 378 (1996). Then we will make an objective

determination of whether petitioner was invited to the United

States “for a period not expected to exceed 2 years”. See Santos

v. Commissioner, supra.

A. Burden of Proof

Generally, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer bears the burden of proving
 - 17 -

that the deficiency is incorrect. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Furthermore, any deductions

allowed are a matter of legislative grace, and the taxpayer bears

the burden of proving his entitlement to them. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Under section 7491(a) the burden may shift to the

Commissioner regarding factual matters affecting a taxpayer’s

liability for tax if the taxpayer produces credible evidence and

meets other requirements of the section. In her pretrial

memorandum, petitioner mentioned that she would move for a burden

shift under section 7491(a), contending that she had produced

credible evidence and met the other requirements of the section.

At trial, petitioner did not make an oral or written motion for a

burden shift.

We need not, and we explicitly do not, decide which party

bears the burden of proof because as discussed above, applying

Santos v. Commissioner, supra, we will decide this case on an

objective consideration of all the relevant facts and

circumstances.

B. Analysis

We begin our analysis with a discussion of the evidence that

relates to petitioner’s expectation. BCPS required all of its

first year teachers to sign the standard State-issued 1-year
 - 18 -

employment contract. The fact that the contract did not

guarantee employment beyond the first year does not mean that

petitioner expected to stay in the United States for only 1 year.

Petitioner knew that so long as her performance was satisfactory,

BCPS would retain her. We believe it likely that petitioner had

sufficient confidence in her teaching skills to assume that her

performance would be “satisfactory” and therefore she could

expect that BCPS would employ her for the second and third years

and perhaps beyond.

Supporting our belief is the fact that although petitioner

initially received an unsatisfactory evaluation on December 13,

2005, she reached the satisfactory level by the end of the first

school year. As a result, in May 2006 BCPS offered her another

contract that provided tenure after 2 more years of satisfactory

performance. In addition, on petitioner’s resignation letter,

her supervisor wrote that petitioner’s resignation was a “big

loss to BCPS”.

Petitioner also testified that in her mind, the information

in her 3-year J-1 visa application that Amity prepared and she

signed simply established an upper time limit and did not imply a

commitment to stay in the United States for 3 years. Petitioner

uses the same argument with respect to the 3-year exchange

teacher program. While it is true that the documents did not

obligate her to remain in the United States for 3 years, we find
 - 19 -

it particularly hard to believe that petitioner did not expect to

remain in the United States for the duration of the exchange

teacher program. Bolstering this conclusion are petitioner’s own

actions and words. She brought her family to the United States

as soon as the program rules allowed, and she wrote on her

resignation form dated June 13, 2008, that the reason she was

resigning was that the “contract [was] completed”. Her

employment period coincides with the length of the 3-year teacher

exchange program.

Petitioner’s own words in her answers on the three IRS

questionnaires also weigh against her. In response, petitioner

testified and the record indicates that she called the IRS for

help in answering the questions pertaining to her expected length

of stay in the United States. Even assuming the accuracy of

petitioner’s testimony that the IRS told her to complete the

forms as of the date of her telephone call, her answers still

show clearly that her initial expectation was to remain in the

United States for the entire length of the 3-year teacher

exchange program. Furthermore, petitioner introduced no evidence

that she expressed to any of the parties involved that she

expected to remain in the United States for 2 years or less.

Similarly, petitioner did not testify that she expected to remain

in the United States for 2 years or less.
 - 20 -

We also find it highly significant that despite her initial

difficulties with the high school students and her initial

unsatisfactory evaluation, petitioner greatly improved her

performance, received a satisfactory rating, and continued

teaching for BCPS for the entire 3-year program. Thus,

petitioner’s actions indicate a strong commitment to staying in

the United States for 3 years despite the difficulties.

The fact that petitioner obtained a leave of absence is

simply not a decisive factor. Petitioner testified that the

leave of absence is significant evidence in her favor because

Tarlac’s rules limited leaves of absence to 2 years. Without

further support, however, the letter in the record from Tarlac,

which states that petitioner’s leave was “for the duration of the

program”, bolsters that evidence against her. Petitioner’s

request for a leave of absence was a good backup strategy in the

event she decided to return to the Philippines, but it does not

indicate that she expected to stay in the United States for 2

years or less.

In addition, we cannot ignore the financial incentive of

remaining in the United States for as long as possible.

Petitioner and her family incurred significant expenses for her

to participate in the exchange teacher program. These

expenditures are not insignificant in comparison to her earnings

in the Philippines. Moreover, her earnings immediately grew more
 - 21 -

than sixteenfold from $3,272 to $54,449 when she moved from the

Philippines to the United States. Although petitioner testified

her cost of living was lower in the Philippines, the increase in

salary is too large to ignore.

From the perspective of BCPS, the school system absolutely

expected that the Filipino teachers would remain for the entire

3-year exchange teacher program. Dr. Peccia testified that his

Department expected the Filipino teachers to remain within the

school system for exactly the length of the visa, 3 years. He

stated “we had no expectations beyond 3 years and no expectations

of less than 3 years.” Dr. Peccia explained that “it wouldn’t

have been worth the investment” including “the cost of the

[airline] ticket[s], the cost of all the time people were away”.

He added that BCPS helped the Filipino teachers with finding

housing and with obtaining Social Security cards to ease their

physical and psychological transition so that the teachers could

focus on teaching. Dr. Peccia noted that only 1 or 2 of the 20

Filipino teachers did not complete the 3-year term. In other

words, 90 to 95 percent of the teachers remained in the United

States for the full 3 years.

Corroborating this evidence is the testimony of Ms. Hermann,

who stated that BCPS, similar to the other school systems that

hired foreign teachers through the exchange teacher program,

expected the teachers to stay for the entire 3-year program. She
 - 22 -

added that it had been Amity’s experience that only a small

percentage of Filipino teachers returned to the Philippines

before completing the 3-year teacher exchange program and most

participants decided to remain in the United States beyond the 3

years. As of the date of trial, petitioner remained in the

United States teaching in Maryland. The testimony of these two

witnesses is plausible, reliable, and persuasive.

In conclusion, after an objective examination of all of the

relevant facts and circumstances, we find that petitioner and

BCPS expected petitioner to stay in the United States for at

least 3 years, which is greater than the “not expected to exceed

2 years” requirement of article 21. Therefore, petitioner’s

income for June 2005 to June 2007, the first 2 years she was in

the United States, is not exempt from Federal income tax under

article 21.

II. Disallowed Itemized Deductions

After concessions, the parties agree that the only deduction

remaining at issue is $726 for 2005 for a course that petitioner

completed and paid for in 2005 in the Philippines to prepare her

for teaching at BCPS. Petitioner incorrectly claimed the

deduction in 2006 instead of 2005. Although respondent’s notice

of deficiency did not disallow this deduction, and respondent did

not affirmatively raise the issue in his answer, we find that
 - 23 -

petitioner gave her implied consent to try the issue. See Rule

41(b); Nicholson v. Commissioner, T.C. Memo. 1993-427.

Section 162(a) allows a deduction for ordinary and necessary

business expenses paid or incurred during the taxable year in

carrying on any trade or business. The performance of services

as an employee is considered a trade or business for section 162

purposes. Primuth v. Commissioner, 54 T.C. 374, 377 (1970). For

an expense to be necessary, it must be “appropriate and helpful”

to the taxpayer’s business. Welch v. Helvering, 290 U.S. at 113-

114. An expense will be considered ordinary if it is a common or

frequent occurrence in the type of business in which the taxpayer

is involved. Deputy v. du Pont, 308 U.S. 488, 495 (1940).

Taxpayers must maintain records sufficient to substantiate any

deduction they claim. Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.

Petitioner testified credibly that BCPS required her to

complete the course or BCPS would not have allowed her to begin

teaching at its schools. This type of expenditure is an ordinary

and necessary expenditure for an exchange teacher to incur.

Petitioner also testified convincingly that she spent $726

for the course. Petitioner, however, was unable to substantiate

her expenditure. If a taxpayer establishes that an expense is

deductible but is unable to substantiate the precise amount, the

Court may estimate the amount, bearing heavily against the
 - 24 -

taxpayer whose inexactitude is of her own making. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930) (the Cohan

rule). The taxpayer must present sufficient evidence for the

Court to form an estimate because without such a basis, any

allowance would amount to unguided largesse. Williams v. United

States, 245 F.2d 559, 560-561 (5th Cir. 1957); Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).

An expenditure of $726 seems reasonable for completing a

course of study. Nonetheless, the lack of substantiation and the

inexactitude are of petitioner’s own making. Therefore, to avoid

unguided largesse, we hold that under the Cohan rule petitioner

is entitled to deduct $363 for the course in 2005, which is one-

half of the amount that she claimed.

After reading the stipulation of facts, we conclude that

both parties understood that the entire $18,045 deduction for

2006 was still at issue. See Rule 41(b); Nicholson v.

Commissioner, supra. With regard to the remaining $14,977 of the

$18,045 in expenses as described supra page 13 which respondent

did not concede, petitioner did not testify or offer other

evidence to support her entitlement to any deduction. Therefore,

petitioner has abandoned the issue. See Rule 149(b).

III. Accuracy-Related Penalty

Taxpayers may be liable for a 20-percent penalty on the

portion of an underpayment of tax attributable to negligence,
 - 25 -

disregard of rules or regulations, or a substantial

understatement of income tax. Sec. 6662(a) and (b)(1) and (2).

The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code, and

the term “disregard” includes any careless, reckless, or

intentional disregard. Sec. 6662(c). Negligence has also been

defined as the failure to exercise due care or the failure to do

what a reasonable person would do under the circumstances. See

Allen v. Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348,

353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947

(1985). Negligence includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly.

Sec. 1.6662-3(b)(1), Income Tax Regs. An “understatement of

income tax” is substantial if it exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000.

Sec. 6662(d)(1)(A).

The section 6662 accuracy-related penalty does not apply

where the taxpayer shows that he or she acted in good faith and

with reasonable cause. Sec. 6664(c)(1). The determination of

whether a taxpayer acted in good faith and with reasonable cause

depends on the facts and circumstances of each case and includes

the knowledge and experience of the taxpayer and the reliance on

the advice of a professional, such as an accountant. Sec.

1.6664-4(b)(1), Income Tax Regs. For a taxpayer to rely
 - 26 -

reasonably upon advice of a tax adviser, the taxpayer must, at a

minimum, prove by a preponderance of the evidence that: (1) The

adviser was a competent professional with 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 Associates, P.A. v. Commissioner, 115 T.C. 43, 99

(2000), affd. 299 F.3d 221 (3d Cir. 2002). Most important in

this determination is the extent of the taxpayer’s effort to

determine the proper tax liability. Id.

The Commissioner has the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662. To satisfy that burden, the Commissioner must

produce sufficient evidence showing that it is appropriate to

impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446

(2001). Respondent has satisfied his burden by producing

evidence that petitioner reported no income for 2005 and 2006,

failed to substantiate claimed deductions, and had substantial

understatement of income tax for 2006.

Nonetheless, petitioner sought the advice of a return

preparer for her 2005 and 2006 Forms 1040NR. Petitioner stated

that her preparer was an enrolled agent in the United States.

Respondent did not dispute the competency of the preparer. The

preparer counseled petitioner that her income was exempt from
 - 27 -

taxation in the United States under article 21. Petitioner,

having no formal training in taxation and being new to the U.S.

tax system, reasonably relied upon the advice of a competent tax

return preparer and acted in good faith. Therefore, we do not

sustain respondent’s determination that the section 6662

accuracy-related penalty applies for 2005 or 2006.

IV. Conclusion

The Court has considered all arguments made in reaching our

decision, and, to the extent not mentioned, we conclude that they

are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.