Ucol-Cobaria v. Comm'r

T.C. Summary Opinion 2010-162

UNITED STATES TAX COURT

SHIRLEY UCOL-COBARIA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14887-09S. Filed October 27, 2010.

Caroline DeLisle Ciraolo, for petitioner.

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 should 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 $1,994, $5,401, and $157, and section 6662(a)

accuracy-related penalties of $399, $1,080, and $32, for 2005,

2006, and 2007, respectively. After concessions,1 the issues for

decision are: (1) Whether petitioner’s salary for 2005, 2006,

and a portion of 2007 from the Baltimore, Maryland, City 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 certain employment, living, and other

itemized expenses that she claimed for 2005 and 2006; and (3)

whether petitioner is liable for the accuracy-related penalty

under section 6662(a) for any or all of the 3 years at issue.

Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioner resided in

Maryland when she filed her petition.

1
Respondent also determined that petitioner did not include
State income tax refunds and interest income in her gross income
for 2006 and 2007. Petitioner did not address these issues at
trial; therefore, the issues are deemed conceded. See Rule
149(b).
 - 3 -

Petitioner is a citizen of the Republic of the Philippines.

She received a bachelor’s degree in physical therapy from San

Juan de Dios Educational Foundation, Inc. She then attended De

La Salle University, where she received a certificate in teaching

in 2002 and a master’s degree in teaching in 2005. Both of these

institutions are in the Philippines. Petitioner was an eighth

grade science teacher at Paref Woodrose School in Muntinlupa

City, Philippines, from 2002 until she left the Philippines in

2005.

Petitioner entered the United States on June 22, 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). Amity Institute

(Amity) is a nonprofit organization the State Department approved

to operate an exchange teacher program. 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, and

they worked together to facilitate the placement of qualified

Filipino teachers in American schools. Badilla collected
 - 4 -

background information, such as transcripts and résumés, from

teachers in the Philippines who were interested in the exchange

teacher 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

and obtaining visas. 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. She ultimately

submitted her transcript and résumé to Badilla. BCPS worked with

Avenida to receive access to a preselected list of qualified

Filipino teachers. This was the first time BCPS had recruited

teachers from the Philippines. From the preselected teachers

BCPS administrators chose the candidates the school system wanted

to interview. In January 2005 George Duque, manager of

recruitment and staffing for BCPS, traveled to the Philippines to

interview petitioner and other teaching candidates. Shortly

afterwards Badilla informed petitioner that BCPS would be

offering her employment for the 2005-2006 school year.

Petitioner received a letter from BCPS dated February 1, 2005,

officially offering her employment for the 2005-2006 school year.
 - 5 -

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. Petitioner’s parents paid

Avenida $5,200 for the following fees: A $3,200 placement fee, a

$725 U.S. documentation fee, a $500 J-1 visa processing fee, and

a $775 for airfare and travel.

Amity sponsored petitioner’s 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.

An Amity representative explained to petitioner that if she

accepted the teaching offer, 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 -

In a letter to petitioner dated April 11, 2005, Amity

confirmed BCPS’s offer. On April 21, 2005, petitioner signed an

Amity exchange teacher contract with Amity and BCPS. Amity

prepared a Form DS-2019 for petitioner’s signature and mailed it

to her. The length of time listed on the Form DS-2019 for

petitioner’s visa was 3 years, the same length as the exchange

teacher program. Petitioner signed the form and returned it to

Amity for processing.

Petitioner resigned from her teaching position in the

Philippines to teach for BCPS. Upon her arrival in Baltimore on

June 22, 2005, petitioner signed a 1-year lease for an apartment

at Symphony Woods Apartments. On August 10, 2005, petitioner

signed a standard Provisional Contract for Conditional or

Resident Teacher Certificate Holders (BCPS employment contract),

effective beginning August 24, 2005. The BCPS employment

contract was for 1 year, terminating at the end of the 2005-2006

school year. It is the only contract that petitioner signed with

BCPS. All first-year teachers who did not have full professional

certification signed a similar BCPS employment contract. BCPS

assigned petitioner to teach at Lombard Middle School (Lombard).

The BCPS employment contract required teachers to take the

Praxis I and II tests, which are part of the teacher

certification process that many States require, including

Maryland. Petitioner completed the Praxis I test in late 2006.
 - 7 -

Petitioner received a Maryland education certificate in 2007,

valid from July 1, 2005, through June 30, 2010. As of trial,

petitioner had not completed the Praxis II test.

Soon after she began teaching at Lombard petitioner began

experiencing significant difficulties with student behavior and

attitude. Petitioner also sustained physical injuries when two

students began fighting in her classroom and a table was pushed

against her leg. In a November 14, 2005, email to Amity,

petitioner chronicled her difficulties and requested a transfer

to Baltimore County Schools for the following school year.

Petitioner began her email by stating: “i’m really having second

thoughts of continuing my teaching here at baltimore city for the

next school year.” Petitioner’s transfer request was denied, and

she continued teaching at Lombard.

Working in the United States provided petitioner with a

salary that was considerably greater than what she had earned in

the Philippines. In the Philippines petitioner had earned

approximately 20,000 Filipino pesos a month, equivalent to $357

per month or $4,284 per year. Petitioner’s annual salary for her

first year of teaching for BCPS was $34,973, which increased to

$44,733 and $48,674 for her second and third years, respectively.

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
 - 8 -

Services of a Nonresident Alien Individual. Consequently, BCPS

withheld Federal income tax from petitioner’s salary during 2005,

2006, and 2007. Instead, petitioner incorrectly attached Form

8233 to her 2005 Federal income tax return, and she did not

complete the section of the form that requested the applicable

dates of exemption.

Petitioner engaged professional tax preparers to prepare her

2005, 2006, and 2007 Federal income tax returns. For 2005 and

2006 petitioner filed Forms 1040NR, U.S. Nonresident Alien Income

Tax Return. For 2007 she filed Form 1040, U.S. Individual Income

Tax Return. Petitioner reported that her salary from BCPS for

the 2005 and 2006 calendar years was exempt from taxation in the

United States under article 21. Petitioner included all of her

earnings from BCPS for 2007 on her 2007 Federal income tax

return. In her amended petition, however, she contended that the

first 6 months of her 2007 earnings from BCPS were also exempt

from Federal income tax under article 21’s 2-year exclusion.

Petitioner claimed itemized deductions of $8,780 and

$15,805, for 2005 and 2006, respectively, related to her

employment, living, and transportation expenses. She claimed the

$5,350 standard deduction for 2007. As a result of the income

exclusion, income tax withholding, and deductions, petitioner

requested refunds for each year 2005 through 2007.
 - 9 -

Petitioner returned to the Philippines on June 16, 2008,

before her J-1 visa expired on June 27, 2008. She applied for

and obtained an H-1B visa valid from July 14, 2008, through June

20, 2011. She then returned to the United States, and as of the

date of trial, she continued to be employed by BCPS.

The Internal Revenue Service (IRS) selected petitioner’s

2005, 2006, and 2007 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 completed the forms, dated her

signature September 24, 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 marked that she did not request a leave of absence

from her employer in the Philippines, and she added that there

was no reason for her to request a leave of absence. On Form

9210 petitioner wrote that June 22, 2005, was her date of initial

arrival and that at that time she expected to remain in the

United States for 3 years. She answered the next question on

Form 9210, indicating that she revised and renewed her visa

status so that she could stay in the United States for another 3

years.
 - 10 -

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.

In addition, the IRS disallowed $6,908 of the $8,780 in itemized

deductions that petitioner claimed for 2005 and $12,292 of the

$15,805 in itemized deductions that she claimed for 2006 and

allowed the $5,350 standard deduction for 2007. The $6,908 of

disallowed deductions for 2005 consisted of $5,000 for

“legal/documentation” fees, $1,000 for a laptop computer, $200

for computer software, $400 for school supplies, and $308 for

union dues. The $12,292 of the disallowed deductions for 2006

consisted of $6,038 in rent, including utilities; $2,004 for

transportation between her apartment and her teaching job at

Lombard; $930 for an agency fee; $800 for airfare; $1,673 for

computer equipment and supplies; and $847 for “2005 State Refund

not Received”. Petitioner filed her petition contesting all of

respondent’s adjustments.

Respondent moved under Rule 121 for partial summary judgment

concerning the issue of whether petitioner qualified in the years

at issue for the exemption under article 21. Petitioner objected

to the granting of the motion. The issue was fully briefed by

both parties. The motion was set for hearing at trial. When the

case was called for trial, the motion was heard. The parties
 - 11 -

relied on their respective positions set forth in their briefs.

The motion for partial summary judgment has been denied.

The case was then tried, and the Court heard testimony from

petitioner, Mr. Duque, and Ms. Hermann. The Court also received

into evidence a form BCPS completed for Amity entitled “Addendum

to Amity Confirmation of Employment Form 2007/2008” (the

addendum). Mr. Duque signed and dated the form July 1, 2007.

The addendum showed that BCPS had retained 170 of the 178 (95.5

percent) of the Filipino teachers in the past 2 years who had

taught for BCPS through Amity’s exchange teacher program.

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,

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).2 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

2
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).
 - 12 -

“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.

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
 - 13 -

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

invitation. All of the requirements of article 21 must be

satisfied in order for petitioner 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
 - 14 -

expectations of all the parties associated with the exchange

teacher 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 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

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. Petitioner moved for a

burden shift under section 7491(a), contending that she produced
 - 15 -

credible evidence and met the other requirements of the section.

Respondent objected, contending that “petitioner has failed to

introduce credible evidence to support her assertion that her

stay in the United States was expected to last 2 years or less.”

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. Petitioner’s reliance on

the 1-year apartment lease and the 1-year BCPS employment

contract is unconvincing. One-year apartment leases are

commonplace and do little to indicate a tenant’s long-term

expectation to remain in an area.

Likewise, BCPS required all of its first-year teachers to

sign what amounts to a standard 1-year 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. Amity had informed petitioner

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
 - 16 -

would employ her for the second and third years and perhaps

beyond.

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, we find it

particularly hard to believe that petitioner did not expect to

remain in the United States for the duration of the exchange

program.

More persuasive are petitioner’s own words in her answers on

the three IRS questionnaires. Her answers indicate that her

initial expectation was to remain in the United States for the

entire length of the visa and of the 3-year exchange teacher

program. In response to this evidence against her, petitioner

testified that she did not have any help filling out the forms

and that the questions were confusing. This testimony is not

credible because petitioner has a master’s degree in education,

she speaks fluent English, and the questions on the forms are

straightforward, not requiring any technical knowledge.

Furthermore, petitioner introduced no evidence that she

expressed to any of the parties involved that she expected to
 - 17 -

return to the Philippines within her first 2 years in the United

States. Similarly, petitioner did not testify at trial that she

expected to return home within the first 2 years. Instead, she

stated that she determined her expectation regarding the length

of her stay on a “year-to-year” evaluation of her situation.

We also find it highly significant that despite the

students’ bad behavior, her physical injury, and the denial of

her request to transfer to a less harsh classroom environment,

petitioner remained in Baltimore teaching at Lombard and as of

the date of trial continued to work for BCPS. Petitioner’s

actions indicate a strong commitment to staying in the United

States despite the difficulties. The fact that petitioner

resigned her teaching position in the Philippines, while not a

decisive factor, also weighs against her argument.

In addition, we cannot ignore the financial incentive of

remaining in the United States for as long as possible.

Petitioner and her family incurred more than $8,000 in expenses

for petitioner to participate in the exchange teacher program and

to relocate to the United States. This is not an insignificant

sum in comparison to her earnings in the Philippines. Moreover,

her earnings immediately grew eightfold from $4,284 to $34,973

when she moved from the Philippines to the United States.

Further, her earnings of $48,674 in 2007, which was her third
 - 18 -

year at BCPS, were 39 percent greater than her first-year salary

at BCPS.

From the perspective of BCPS, the school system certainly

would not have invested so much time, money, and effort in

recruiting teachers from the Philippines if it did not expect

that the teachers would remain at least for the length of the 3-

year exchange teacher program. Mr. Duque likewise testified that

BCPS wanted to retain the teachers it hired for as long as

possible. Corroborating this testimony is the evidence from the

addendum showing that BCPS retained an extremely high percentage,

95.5 percent, of the Filipino teachers it hired through the

exchange program. Additionally, Ms. Hermann testified that BCPS,

similar to the other school systems that hired foreign teachers

through the exchange program, expected the teachers to stay for

the entire 3-year program. She 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 exchange

teacher program and that most participants decided to remain in

the United States beyond the 3 years. The testimony of these

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
 - 19 -

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

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. 111,

113-114 (1933). 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). In order to deduct a business expense, a taxpayer must

not have received reimbursement and must not have had the right

to obtain reimbursement from his employer. Orvis v.

Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C.

Memo. 1984-533; Leamy v. Commissioner, 85 T.C. 798, 810 (1985).

A. Year 2005

1. Legal/Documentation Fees

Petitioner claimed a $5,000 deduction for 2005 for

“legal/documentation” fees. Petitioner testified that her
 - 20 -

parents paid these fees. This type of transaction is more

appropriately characterized as a nontaxable gift from

petitioner’s parents than as an expense incurred and paid by

petitioner. See, e.g., Cavalaris v. Commissioner, T.C. Memo.

1996-308. Therefore, we sustain respondent’s disallowance of

this deduction.

2. Unreimbursed Employee Business Expenses

Petitioner’s disallowed unreimbursed employee business

expenses for 2005 consisted of $1,000 for a laptop computer, $200

for software, $400 for school supplies, and $308 for union dues.

Laptop computers and computer software are listed property.

Sec. 280F(d)(4). Section 274(d) imposes strict substantiation

requirements for “listed property”. To substantiate expenses for

listed property, a taxpayer must show either by adequate records

or by sufficient evidence corroborating the taxpayer’s own

statement: (1) The amount of each separate expenditure with

respect to an item of listed property; (2) the amount of each

business use based on the appropriate measure and the total use

of the listed property for the taxable period; (3) the date of

the expenditure or use; and (4) the business purpose for an

expenditure or use with respect to any listed property. Sec.

1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985). Petitioner did not substantiate the business use

of the laptop and software. Therefore, we sustain respondent’s
 - 21 -

disallowance of the deduction for petitioner’s laptop and

software expenses.

Petitioner deducted $400 for school supplies. She provided

receipts for $137 worth of school supplies purchased in 2005. We

are satisfied that petitioner spent $137 for school supplies in

2005 and was not reimbursed by BCPS. Therefore, petitioner is

entitled to a deduction of $137 for school supplies for 2005.

See sec. 62(a)(2)(D) (certain expenses of elementary and

secondary school teachers are deductible to determine adjusted

gross income).

Petitioner also claimed $308 for union dues for 2005.

Petitioner provided as evidence her BCPS paycheck for the 2-week

period of November 12-25, 2005. The paycheck showed a biweekly

deduction of $28.72 and a year-to-date deduction of $172.32 for

union dues that she paid to the Baltimore Teachers Union. We

infer that petitioner received two more bi-weekly paychecks in

December with the same amount deducted for union dues.

Therefore, petitioner has substantiated that she paid

$229.76 in union dues in 2005 and is entitled to a deduction in

that amount.
 - 22 -

B. Year 2006

1. Personal Living and Commuting Expenses

Respondent disallowed petitioner’s itemized deductions of

$6,038 for rent, including utilities, and $2,004 for commuting

between her apartment and her teaching job at Lombard.

As a general rule, personal living expenses are

nondeductible. Sec. 262; secs. 1.162-2(a), 1.262-1(b)(5), Income

Tax Regs. Section 162(a)(2), however, allows a taxpayer to

deduct ordinary and necessary travel expenses, including meals

and lodging, paid or incurred while away from home in pursuit of

a trade or business. Commissioner v. Flowers, 326 U.S. 465, 470

(1946).

The reference to “home” in section 162(a)(2) means the

taxpayer’s “tax home”. Mitchell v. Commissioner, 74 T.C. 578,

581 (1980); Kroll v. Commissioner, 49 T.C. 557, 561-562 (1968).

As a general rule, a taxpayer’s tax home is in the vicinity of

his principal place of employment, not where his personal

residence is located, if different from his principal place of

employment. Mitchell v. Commissioner, supra at 581; Kroll v.

Commissioner, supra at 561-562. An exception to the general rule

exists where a taxpayer accepts temporary, rather than

indefinite, employment away from his personal residence; in that

case, the taxpayer’s personal residence may be his tax home.

Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958). The purpose of
 - 23 -

the exception is to mitigate the burden of the taxpayer who must

incur duplicate living expenses due to the exigencies of

business. Kroll v. Commissioner, supra at 562. For purposes of

section 162(a)(2), the taxpayer is not treated as being

temporarily away from home if the period of employment exceeds 1

year. Sec. 162(a) (flush language).

Petitioner contends that her employment with BCPS was

temporary because the BCPS employment contract she signed was for

only 1 year. She contends that her tax home was in the

Philippines, as that was where she resided. In other words,

according to petitioner, her rent, utilities, and commuting

expenses for 2006 are deductible because she expected to stay in

the United States for no more than a year, and thus, her job was

temporary.

Respondent argues that petitioner’s employment at BCPS was

indefinite and that her tax home became Baltimore when she moved

there to teach for BCPS. For the following reasons, we agree

with respondent.

Petitioner resigned her teaching job in the Philippines and

moved to Baltimore on June 22, 2005. She began teaching at

Lombard for BCPS in August 2005. We have already found that

petitioner intended to remain working for BCPS in the Baltimore

area for at least 3 years, which is clearly more than 1 year.

Accordingly, petitioner’s employment with BCPS was not temporary,
 - 24 -

Baltimore was petitioner’s principal place of employment, and

thus Baltimore was her tax home. Moreover, petitioner testified

that she lived with her parents before her move; thus she has not

established either that she had a personal residence in the

Philippines or that she incurred duplicate living expenses.

Consequently, petitioner is not entitled to claim a deduction for

her rent, utilities, or commuting expenses for 2006.

2. Other Itemized Deductions

Respondent disallowed petitioner’s other itemized deductions

for 2006, which consisted of $930 for an agency fee, $800 for

airfare, $1,673 for computer equipment and supplies, and $847 for

“2005 State Refund not Received”.

The agency fee was a portion of the total fee of $3,000 that

petitioner paid to Amity for her participation in the exchange

teacher program. BCPS paid $1,500 of the fee during petitioner’s

first year in the program. Petitioner was responsible for the

two subsequent annual payments of $750, one made in the second

year of the program and one in the third. Petitioner had to pay

the fee to continue her participation in the exchange program.

Petitioner did not substantiate her $930 payment in 2006, but we

are satisfied that petitioner paid a fee of $750 in 2006 to

maintain her standing in the program. Therefore, petitioner is

entitled to a deduction of $750 for 2006.
 - 25 -

Petitioner testified that she paid $800 for a round trip

flight to the Philippines in 2006, but she did not provide any

evidence corroborating the payment or that the flight was

associated with her trade or business of being an employee of

BCPS and was not a personal trip. Therefore, we sustain

respondent’s disallowance of the $800 deduction for airfare.

Petitioner claimed a deduction for computer equipment and

supplies of $1,673 for 2006. She provided no explanation for

having to purchase a second computer for BCPS in 2 years, and she

provided no substantiation of the purchase or of the business use

of the computer. See sec. 274(d). For these reasons, we sustain

respondent’s disallowance of the $1,673 computer equipment and

supplies expense.

Petitioner provided no explanation or evidence to support

the $847 deduction she claimed in 2006 for “2005 State Refund not

Received.” Therefore, we sustain respondent’s disallowance.

III. Accuracy-Related Penalty

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

portion of an underpayment of tax attributable to negligence,

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
 - 26 -

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). 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

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
 - 27 -

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, 2006, and

part of 2007, creating understatements of income taxes due that

were substantial.

Nonetheless, petitioner sought the advice of one return

preparer for her 2005 and 2006 Forms 1040NR and a different

preparer for her 2007 Form 1040. Petitioner stated that her

preparer for 2005 and 2006 was an accountant in the Philippines

and an enrolled agent in the United States. Respondent did not

dispute the competency of either preparer. The preparer of the

Forms 1040NR counseled petitioner that her income was exempt from

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. Respondent’s

adjustments for 2007 were minor, and again, petitioner engaged a

competent preparer to prepare her 2007 Federal income tax return.
 - 28 -

Therefore, we do not sustain respondent’s determination that the

section 6662 accuracy-related penalty applies for 2005, 2006, or

2007.

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.