                  T.C. Summary Opinion 2010-169



                      UNITED STATES TAX COURT



               ESTRELLA A. LUMABAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16652-09S.            Filed November 3, 2010.



     Keith S. Blair, Curtis E. Tatum, and Gerald Loiacono

(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 $2,744, $5,989, and $4,731 and section 6662(a)

accuracy-related penalties of $549, $1,198, and $946 for 2005,

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

decision are:   (1) Whether petitioner’s salary for 2005 from the

Baltimore County, Maryland, Public Schools (BCPS), for 2006 from

BCPS and the Prince George’s County, Maryland, Public Schools

(PGCS), and a portion of 2007 from PGCS2 are 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 2007; and (3) whether petitioner is liable for the

accuracy-related penalty under section 6662(a) for the 3 years at

issue.



     1
      Respondent’s notice of deficiency for 2005 and 2006
determined that petitioner failed to include a $258 State income
tax refund in her 2006 gross income. Respondent’s notice of
deficiency for 2007 determined that petitioner’s filing status
was incorrect. Petitioner did not address these issues in her
petition or at trial; therefore, the issues are deemed conceded.
See Rules 34(b), 149(b).
     2
      The parties stipulated that should petitioner’s income be
found to be exempt under article 21, the exemption would also
apply to January 1, 2007, through June 21, 2007, even though
petitioner reported all of her income in 2007 on her Federal tax
return and there was no determination in the notice of deficiency
for 2007 concerning her income from that year.
                               - 3 -

                            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.

     Petitioner is a citizen of the Republic of the Philippines.

She received a bachelor’s degree in English from the University

of the East.   She received a master’s degree in administration

from the University of Perpetual Help.     Petitioner also completed

postbaccalaureate classes in special education and leadership.

Both of the institutions petitioner attended are in the

Philippines.   Petitioner began teaching at Bacoor National High

School in Bacoor, Cavite, Philippines, and Cavite School of St.

Mark’s School for Girls in 1983.   Her ending monthly salary in

2005 from teaching was 15,000 pesos, equivalent to $268.

     Amity Institute (Amity) is a nonprofit organization the

United States Department of State (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
                               - 4 -

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 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 and obtaining visas.     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

she submitted her 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.
                                 - 5 -

     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.   Ms. Reier 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,

BCPS offered petitioner a position for the 2005-2006 school year,

and petitioner signed a preliminary contract with BCPS.

Petitioner “understood” that BCPS would be evaluating her

performance throughout the school year.    If petitioner’s

performance was satisfactory, BCPS would continue her 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
                                - 6 -

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.   In 2005 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.
                                - 7 -

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

signed a standard State-issued Provisional Contract for

Conditional or Resident Teacher Certificate Holders (BCPS

employment contract) on August 9, 2005, 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 secondary science at

General John Stricker Middle School (Stricker).

     Under the exchange teacher program, petitioner’s family

could not join her in the United States until she received a

satisfactory evaluation from BCPS.      Therefore, the earliest

petitioner’s family could join her was at the end of the 2005-

2006 school year.    During the years at issue and up to the time

of trial, petitioner was married and had two children.      Although

petitioner’s family visited with her in the United States, they

did not move to the United States and at the time of trial still

resided in the Philippines.

     When petitioner first arrived in the United States, she

lived in a house provided to Filipino teachers who moved to

Baltimore County to teach for BCPS.      The house was owned by Mr.

and Mrs. Encoienda.    Petitioner stayed at the house for

approximately 2 weeks.    After leaving the house, petitioner

signed a 1-year lease with Charlesmont Apartments.
                                 - 8 -

     On March 29, 2006, petitioner received an “unsatisfactory”

evaluation from her principal.    In a letter dated April 27, 2006,

BCPS informed petitioner that “your contract will not be renewed

for the school year 2006-2007”.

     At the completion of the 2005-2006 school year, instead of

returning to the Philippines, petitioner visited her sister in

Los Angeles, California.    While visiting her sister, petitioner

learned that PGCS was hiring teachers for the 2006-2007 school

year.   Petitioner applied for a position with PGCS and accepted

an offer to teach secondary science at Martin Luther King, Jr.

Middle School.   At the time of trial she was still employed by

PGCS.

     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 $268 a

month or $3,216 annually.   Petitioner’s starting annual salary at

BCPS was $56,149.   With respect to Federal income tax

withholding, petitioner did not provide BCPS or PGCS with Form

8233, Exemption From Withholding on Compensation for Independent

(and Certain Dependent) Personal Services of a Nonresident Alien

Individual.   Consequently, BCPS and PGCS withheld Federal income

tax from petitioner’s salary during 2005, 2006, and 2007.

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

Pacheco, to prepare her 2005, 2006, and 2007 Federal income tax
                                 - 9 -

returns.    She filed Forms 1040NR, U.S. Nonresident Alien Income

Tax Return, for 2005 and 2006.    She filed Form 1040, U.S.

Individual Income Tax Return, for 2007.    Petitioner did not

report her salary from BCPS or from PGCS on her 2005 or 2006

return.    Petitioner reported all of her salary for 2007 on her

2007 return.    Petitioner did not tell Mr. Pacheco how long she

expected to stay in the United States.

     Petitioner claimed itemized deductions of $19,073 and

$16,619 for 2006 and 2007, respectively.    The 2006 itemized

deductions consisted of $3,153 for State income taxes withheld,

$12 for charitable contributions, and $15,908 for unreimbursed

employee expenses.    The 2007 itemized deductions consisted of

$4,249 in State income tax withheld, $12,270 in unreimbursed

employee business expenses, and $100 in tax preparation fees.      As

a result of the income exclusion, income tax withholding, and

itemized deductions, petitioner requested refunds of $4,678,

$6,530, and $3,526 for 2005, 2006, and 2007, respectively.

     The Internal Revenue Service (IRS) selected petitioner’s

2005, 2006, and 2007 Federal income tax returns for examination.

The IRS sent petitioner two notices of deficiency dated March 26,

2009.   In the notice pertaining to 2005 and 2006, the IRS

adjusted petitioner’s income to include the earnings from BCPS

and PGCS for 2005 and 2006 that petitioner had excluded under

article 21.    The notice also disallowed $15,858 of the $19,073 in
                              - 10 -

itemized deductions that she claimed for 2006.     In the notice

pertaining to 2007, the IRS disallowed $12,270 of the $16,619 in

itemized deductions that petitioner claimed for 2007.     Petitioner

filed her 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

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.
                                 - 11 -

                               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).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



      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).
                                - 12 -

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
     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
                               - 13 -

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.   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 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
                             - 14 -

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.   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
                               - 15 -

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 the standard State-issued 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.

     The length of petitioner’s J-1 visa was 3 years.    Petitioner

was not asked whether she wanted a different period stated for

the length of her J-1 visa, nor did she make it known that she

wanted a different period.    She simply signed the DS-2019.   While

it is true that this document did not obligate her 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

words.
                             - 16 -

     After her contract was not renewed by BCPS, instead of going

home to the Philippines petitioner visited her sister in Los

Angeles and began searching for other teaching jobs in Maryland.

Petitioner testified that her first year of teaching in the

United States had been “rough”, and she was devastated when her

contract with BCPS was not renewed.   She thought that maybe she

should return to the Philippines.   When questioned as to why she

looked for another teaching position in Maryland, petitioner

testified that “I would want to stay here in America.”

Furthermore, petitioner introduced no evidence that she expressed

to any of the parties involved that she expected to remain in the

United States for a period not expected to exceed 2 years.

Similarly, petitioner did not testify that she expected to remain

in the United States for a period not to exceed 2 years.      Thus,

petitioner’s actions indicate a strong commitment to staying in

the United States for the length of the teacher exchange program

despite the difficulties.

     Petitioner testified that she received a leave of absence,

but she offered no proof of being granted such leave.    If

petitioner did obtain a leave of absence, it is simply not a

decisive factor.

     In addition, we cannot ignore the financial incentive of

remaining in the United States for as long as possible.

Petitioner incurred significant expenses to participate in the
                               - 17 -

exchange teacher program.    These expenditures are not

insignificant in comparison to her earnings in the Philippines.

Moreover, her earnings immediately grew more than seventeenfold

from $3,216 to $56,149 when she moved from the Philippines to the

United States.   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.

     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,
                                - 18 -

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 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

      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-
                                  - 19 -

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, and she provided no further delineation for the

expenses.

       A.     2006 Disallowed Unreimbursed Employee Expenses -
              $15,858

       Petitioner’s unreimbursed employee expenses deduction is a

combination of expenses she paid in 2005 and 2006.       On her

Schedule A, Itemized Deductions, petitioner entitled the entire

amount “job search costs”.       She 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 out in increments over the 3-

year period of the program.       Petitioner paid $1,500 of the fee

during her 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 her participation in the

exchange teacher program.       Petitioner did not substantiate her

$5,200 in J-1 visa fees or her $1,500 payment in 2005 or her $750

payment in 2006, but we are satisfied that petitioner paid these

fees in 2005 and 2006 to maintain her standing in the program.
                                - 20 -

Although petitioner did not claim expenses in 2005, the record

shows that she paid a total of $6,700 in fees to participate in

the exchange teacher program in 2005.     Petitioner also testified

to and substantiated a $100 fee paid to the U.S. Department of

Justice for a Student and Exchange Visitor Program: SEVIS I-901

Fee.    Therefore, petitioner is entitled to a $6,800 deduction for

2005 and a $750 deduction for 2006.

       Petitioner provided no breakdown of the expenses and

provided no substantiation for the remaining $8,308 of “job

search costs” deduction claimed for 2006.     Therefore, we sustain

respondent’s disallowance of this amount.

       B.   2007 Unreimbursed Employee Expenses - $12,270

       Respondent also disallowed an unreimbursed employee expenses

deduction of $12,270 for 2007.     On her Schedule A petitioner

entitled the entire amount “job search costs”.     As stated above,

petitioner did have a $750 fee due to Amity in 2007.     We are

satisfied that petitioner paid that amount to remain in the

exchange teacher program.     Therefore, petitioner is entitled to a

$750 deduction for 2007.

       Again, petitioner provided no breakdown of the expenses and

provided no substantiation for the remaining $11,520 of the “job

search costs” deduction claimed for 2007.     Therefore, we sustain

respondent’s disallowance of this amount.
                                - 21 -

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 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 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
                               - 22 -

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

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 a substantial

understatement of income tax for 2006.

     Nonetheless, petitioner sought the advice of a return

preparer for her 2005, 2006, and 2007 returns.   Petitioner stated
                              - 23 -

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

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, 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.
