The opinion
T.C. Summary Opinion 2010-168
UNITED STATES TAX COURT
PATROCINIO POBADORA MALAZARTE, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16393-09S. Filed November 3, 2010.
Leonardo A. Conseco, 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
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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 $3,164 and $10,376, and section 6662(a) accuracy-
related penalties of $633 and $2,075, 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 certain itemized deductions
for 2006; and (3) whether petitioner is liable for the accuracy-
related penalties under section 6662(a) for each of 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
incorporated herein by this reference. Petitioner resided in
Maryland when he filed his petition.
Petitioner is a citizen of the Republic of the Philippines.
In 2005 petitioner was married and had three children and owned a
1
Respondent’s notice of deficiency determined that
petitioner failed to include a $650 State income tax refund and
$12 of interest income in his 2006 gross income. Petitioner did
not address these issues in his petition or at trial; therefore,
the issues are deemed conceded. See Rules 34(b), 149(b).
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home in the Philippines. He received a bachelor’s degree in
political science from the University of San Jose-Recoletos. He
received a master’s degree in education from the University of
San Carlos and a master’s degree in teaching with a
specialization in special education from the University of the
Visayas. Petitioner also finished all of the academic
requirements for a doctorate in education at Cebu Normal
University (Cebu Normal). All of the institutions petitioner
attended are in the Philippines. Petitioner has 17 years of
teaching experience in the Philippines, 10 years at private high
schools and 7 at Cebu Normal. His ending monthly salary at Cebu
Normal was 14,000 pesos, equivalent to $250.
Amity Institute (Amity) is a nonprofit organization the
Department of State (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 that
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
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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. The fees were: A
$3,200 placement fee, a $725 U.S. documentation fee, a $500 J-1
visa fee, and $775 for airfare and travel. In the United States
Avenida helped school districts find promising teaching
candidates by providing access to a database of overseas
jobseekers. In 2004 petitioner attended an orientation session
for an exchange teacher program Badilla sponsored, at which time
he submitted his application and résumé.
Dr. Donald A. Peccia joined BCPS in October 2004 as the
assistant superintendent of human resources, a position he
retained through the date of trial. As of the date of trial, Dr.
Peccia’s 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, working in 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
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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 10, 2005, Ms. Reier interviewed
petitioner. Mr. James and Ms. Reier coordinated with Dr. Peccia,
and they agreed to hire 20 teachers from the Philippines. On the
same day as petitioner’s interview Ms. Reier provided him with a
preliminary BCPS contract for the 2005-2006 school year.
Petitioner signed the preliminary contract and dated his
signature March 10, 2005. Petitioner “understood” that BCPS
would be evaluating his performance throughout the school year.
If his performance was satisfactory, BCPS would continue his
employment for the following school year.
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.
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Badilla referred petitioner to Amity, which 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. The cost of the exchange teacher program was
$3,000. 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
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 to teach for BCPS, petitioner
obtained a 2-year leave of absence from Cebu Normal effective
June 7, 2005, through June 30, 2007.
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Petitioner entered the United States on July 29, 2005. This
was the first time he had visited the United States. After
arriving in Baltimore, he 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. BCPS assigned petitioner to teach special education
at Ridgely Middle School (Ridgely).
Under the exchange teacher program, petitioner’s family
could not join him in the United States until he received a
satisfactory evaluation from BCPS. Therefore, the earliest
petitioner’s family could join him was at the end of the 2005-
2006 school year.
On August 26, 2005, petitioner signed a 1-year lease with
Belvedere Towers effective September 1, 2005, through August 31,
2006. Upon receiving a satisfactory evaluation, petitioner
brought his family to the United States in the summer of 2006 to
live with him. Petitioner then signed a second 1-year lease2
with Southern Management Corp. effective September 14, 2006.
BCPS offered a “Regular Contract” to petitioner effective
August 22, 2006, granting him continued employment from year to
2
The lease states that it is a 1-year lease but also states
Sept. 14, 2006, through Sept. 30, 2007, as the term of the lease.
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year so long as he met certain conditions. Petitioner’s
signature on the regular contract was not dated. A regular
contract is another standard State-issued contract under which
the teacher received tenure after 2 years if the teacher met all
the requirements of the State, including satisfactory
performance. Working in the United States provided petitioner
with a salary that was considerably greater than the salary he
earned in the Philippines, which as described supra page 3 was
$250 a month or $3,000 annually. Petitioner’s starting annual
salary at BCPS was $63,326. 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.
Petitioner engaged a certain U.S. enrolled agent, Fred R.
Pacheco, to prepare his 2005 and 2006 Federal income tax returns.
He filed Form 1040NR, U.S. Nonresident Alien Income Tax Return,
for each of the 2 years. Petitioner did not report his salary
from BCPS on either return.
Petitioner claimed itemized deductions of $2,093 and $18,180
for 2005 and 2006, respectively on his Federal income tax
returns. The 2005 itemized deductions consisted solely of State
income tax withheld. The 2006 itemized deductions consisted of
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$4,570 in State income tax withheld, $155 in charitable
contributions, $13,405 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 $5,452 and $11,505
for 2005 and 2006, respectively.
On February 1, 2008, petitioner signed a resignation form
from BCPS effective June 2008, writing that the reason was
“expiration of 3-year contract w/ BCPS”. Petitioner then
accepted an offer to teach in the Prince George’s County,
Maryland, Public School System (PGCS). PGCS sponsored
petitioner’s H-1B visa valid October 8, 2008, through July 31,
2011. As of the date of trial, he was teaching in PGCS 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 completed the forms, dated his signature
October 6, 2008, and returned them to the IRS.
The Court received into evidence copies of the three
questionnaires that petitioner had completed. On Form 8784
petitioner wrote that he left his permanent residence on July 29,
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2005, and that he planned stay at temporary lodging for 3 years.
Petitioner answered that he did not change his original intention
about the length of his stay. Petitioner also answered that he
was not on a leave of absence from his employer. On Form 9210
petitioner wrote that July 29, 2005, was his date of initial
arrival, that at that time he expected to remain in the United
States for 3 years, and that this expectation had not changed.
On Form 9250, petitioner stated that he was still living in the
United States, and that he intended to remain “N/A”.
In the notice of deficiency dated April 2, 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 also disallowed $13,405 of the $18,180 itemized
deductions that he claimed for 2006. The disallowed deductions
were labeled job search costs and consisted of $3,066 for rent,
$1,724 for transportation, $1,040 for airfare, $6,133 for “agency
fee (recruiter)”, and $1,442 for “2005 State Refund not
Received”. Petitioner filed his petition contesting all of
respondent’s adjustments.
Respondent moved under Rule 121 for partial summary judgment
contending that no issue of material fact existed as to whether
petitioner’s income for the years at issue qualified for
exemption under article 21. Petitioner objected to the granting
of the motion. Both parties fully briefed the issue of income
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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 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 then tried and the Court heard
testimony from petitioner, Dr. Peccia, and Ms. Hermann.
Discussion
I. Income Under Article 21
Petitioner was a nonresident alien for the years at issue
because of his J-1 visa status and his 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).3 Generally, a
nonresident alien individual engaged in trade or business within
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).
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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.
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
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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) he was invited by the Government or a recognized educational
institution within the United States; (3) he was invited for a
period not expected to exceed 2 years; (4) the purpose of the
invitation was for him to teach or engage in research at the
recognized educational institution; and (5) he did in fact come
to the United States primarily to carry out the purpose of the
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 his expectation as the invitee is the only
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expectation that matters. Petitioner testified that “I expected
to stay here for the minimum of one year because that’s the
contract that I signed with BCPS, Ms. Ryer [sic], and the most
would be two years because I was informed during [the] interview
that BCPS would provide [a] two-year probationary period to the
teachers”. Respondent counters that either the expectation of
the invitor, BCPS, should be decisive, or the Court should weigh
the 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.
See 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);
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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 his pretrial
memorandum, petitioner mentioned that he would move for a burden
shift under section 7491(a), contending that he 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. Petitioner’s reliance on
the two 1-year apartment leases 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 the standard State-issued 1-year
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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.
Likewise, petitioner’s reliance on the 2-year probationary
period is misplaced. Petitioner knew that so long as his
performance was satisfactory, BCPS would retain him. Petitioner
had a great deal of teaching experience in the Philippines, and
when questioned about his job performance, petitioner answered:
“I tried my best. I always put my best into what I am doing.”
We believe it likely that petitioner had sufficient confidence in
his teaching skills to assume that his performance would be
“satisfactory” and therefore he could expect that BCPS would
employ him for the second and third years of the exchange teacher
program. Furthermore, the exchange teacher program was a 3-year
program.
Petitioner also testified that in his mind, the information
in his 3-year J-1 visa application that Amity prepared and he
signed simply established an upper time limit and did not imply a
commitment to stay in the United States for 3 years. While it is
true that this document did not obligate him to remain in the
United States for 3 years, we find 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
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words. He brought his family to the United States as soon as the
program rules allowed, and he wrote on his resignation form dated
June 13, 2008, that the reason he was resigning was the
“expiration of 3-contract w/ BCPS”, which coincides with the
length of the 3-year exchange teacher program.
Petitioner’s own words in his answers on the three IRS
questionnaires also weigh against him. His answers show clearly
that his initial expectation was to remain in the United States
for the entire length of the 3-year exhange teacher program.
Furthermore, petitioner introduced no evidence that he expressed
to any of the parties involved that he expected to remain in the
United States for 2 years or less. Similarly, petitioner did not
testify that he expected to remain in the United States for 2
years or less. 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’s request for a leave
of absence was a good backup strategy in the event he decided to
return to the Philippines, but it does not indicate that he
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 his family incurred significant expenses for him
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to participate in the exchange teacher program. These
expenditures are not insignificant in comparison to his earnings
in the Philippines. Moreover, his earnings immediately grew more
than 21-fold from $3,000 to $63,326 when he moved from the
Philippines to the United States. Although petitioner testified
his 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 length
of the 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.
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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
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 he was in
the United States, is not exempt from Federal income tax under
article 21.
II. 2006 Disallowed Unreimbursed Employee Expenses--$13,405
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
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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
deductions they claim. Sec. 6001; sec. 1.6001-1(a), Income Tax
Regs. Petitioner’s disallowed deductions were all labeled job
search costs.
A. “Agency Fee (Recruiter)”--$6,133, “2005 State Refund
not Received”--$1,442, and Airfare--$1,040
Included in the disallowed unreimbursed employee expenses
are an “agency fee (recruiter)” of $6,133, a “State Refund not
Received” of $1,442, and $1,040 for airfare. Petitioner’s $6,133
for job search costs is a combination of expenses he paid in 2005
and 2006. He paid $5,200 to Avenida in fees and $1,500 of the
$3,000 exchange teacher program fee in 2005. The exchange
teacher fee was paid in increments over the 3-year period of the
program. Petitioner paid $1,500 of the fee during his first year
of the program and made two subsequent annual payments of $750,
one in the second year of the program and one in the third.
Petitioner had to pay the fees to come to the United States and
to continue his participation in the exchange program.
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Petitioner did not substantiate his $5,200 in J-1 visa fees in
2005, his $1,500 payment in 2005, or his $750 payment in 2006,
but we are satisfied that petitioner paid these fees in 2005 and
2006 to maintain his standing in the program. Although
petitioner did not deduct any expenses for 2005 and claimed only
$6,133 of expenses for 2006, the record shows that he paid a
total of $6,700 in fees to participate in the teacher exchange
program in 2005. Therefore, petitioner is entitled to a $6,700
deduction for 2005 and a $750 deduction for 2006.
Petitioner provided no explanation or evidence to support
the $1,442 deduction he claimed for “2005 State Refund not
Received” for 2006. Therefore, we sustain respondent’s
disallowance.
Finally, petitioner failed to provide an explanation or
provide evidence to support the $1,040 deduction he claimed for
airfare for 2006. On Form 9210 petitioner merely states “update
my job skills” for the reason for departing from the United
States on December 24, 2005. Without further corroboration,
petitioner’s statement regarding this deduction is too vague for
the Court to allow the deduction without further substantiation.
Therefore, we sustain respondent’s disallowance.
B. Personal Living and Transportation Expenses--$4,790
Respondent also disallowed unreimbursed employee expenses
consisting of $3,066 for rent and $1,724 for transportation
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between petitioner’s apartment and his teaching job at Ridgely.
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, 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
the exception is to mitigate the burden of the taxpayer who must
incur duplicate living expenses because of the exigencies of
business. Kroll v. Commissioner, supra at 562. For purposes of
section 162(a)(2), the taxpayer is not treated as being
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temporarily away from home if the period of employment exceeds 1
year. Sec. 162(a) (flush language).
Petitioner contends that his employment with BCPS was
temporary because the BCPS employment contract he signed was for
only 1 year and because at most he would be in the United States
for only 2 years because of BCPS’ probationary period for new
teachers. He contends that his tax home was in the Philippines,
as that was where he resided with his family. In other words,
according to petitioner, his rent and transportation to and from
work for 2006 are deductible because he expected to stay in the
United States for a minimum of 1 year, the length of the BCPS
employment contract, or a maximum of 2 years, the length of the
probationary period, and thus, his job was temporary.
Respondent argues that petitioner’s employment at BCPS was
indefinite and that Baltimore County became his tax home when he
moved there to teach beginning August 2005 for BCPS. For the
following reasons, we agree with respondent.
Petitioner took a 2-year leave of absence from his teaching
job in the Philippines when he moved to Baltimore County on July
29, 2005. He began teaching at Ridgely for BCPS in August 2005.
Although petitioner testified to owning property in the
Philippines, he provided no list of duplicate living expenses.
We have already found that petitioner intended to remain in the
Baltimore County area for at least 3 years to work for BCPS,
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which is clearly more than 1 year or 2 years. Further, under the
flush language of 162(a), petitioner would no longer be
considered a temporary employee once he started his second year
of teaching for BCPS. Accordingly, Baltimore County was
petitioner’s principal place of employment and thus Baltimore
County was his tax home. Consequently, petitioner is not
entitled to claim a deduction for his rent, transportation to and
from work, or airfare for 2006.
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
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 also 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
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“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 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 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
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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 teaching income for 2005 and
2006, failed to substantiate claimed deductions, and had a
substantial understatement of income tax for 2006.
Nonetheless, petitioner sought the advice of a return
preparer for his 2005 and 2006 Forms 1040NR. Petitioner stated
that his preparer was an enrolled agent in the United States.
Respondent did not dispute the competency of the preparer. The
preparer counseled petitioner that his 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. 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.