                  T.C. Summary Opinion 2011-48



                     UNITED STATES TAX COURT



           AL C. AND YELENA ALEXANDER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 943-10S.                  Filed April 12, 2011.



     Raymond H. Siderius, for petitioners.

     Melanie E. Senick, for respondent.



     ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                                - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

       Petitioners received a notice of deficiency for 2006, 2007,

and 2008 in which respondent determined:     (1) Deficiencies in

income taxes of $8,535, $10,814, and $9,876, respectively, and

(2) accuracy-related penalties under section 6662(a) of $448,

$490.60, and $199.80, respectively.     The issues for decision are:

       (1) Whether petitioners may exclude from gross income the

receipt of certain payments as foster care payments under section

131.    We hold that they may not;

       (2) whether petitioners are entitled to unreimbursed

employee business expenses in an amount greater than that allowed

or conceded by respondent.    We hold that petitioners are so

entitled for 2006 but not otherwise;

       (3) whether petitioners are liable for the accuracy-related

penalties under section 6662(a).     We hold that they are.

                             Background

       Some of the facts have been stipulated, and they are so

found.    We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.     Petitioners resided in the

State of Washington when the petition was filed.

       At all times relevant, Mrs. Alexander was an elementary

school teacher and Mr. Alexander was a high school math and

physics teacher.    During each of the years in issue, in addition
                                - 3 -

to his teaching position, Mr. Alexander was also a judo

instructor.

     In 2006, Mr. Alexander participated in the National Board

Certified Teacher process.    Although Mr. Alexander was not

successful in his bid for national certification at that time, he

paid an assessment fee of $2,500 as a result of this pursuit.

     During each of the years in issue, Mr. Alexander’s parents,

Konstantin and Tatiana, lived in petitioners’ home.    Petitioners

were qualified individual providers for the Washington State

Department of Social and Health Services (DSHS) and provided

services for Konstantin and Tatiana under the Washington State

Medicaid Personal Care (MPC) program.2

     The DSHS employment guide for individual providers states

that “The person you provide services for is referred to as your

employer”.    The employment guide further states that “The tasks

you will do for your employer support his or her well-being and

help him or her continue to live as independently as possible at

home.”   The employer is a client of DSHS, and DSHS coordinates

and pays for the services of the individual provider.    At the end

of each month, petitioners were required to submit timesheets to



     2
        The services petitioners provided to Konstantin and
Tatiana were nonmedical and included assistance with daily living
activities such as “eating, bathing, transfer (i.e. moving from a
bed to a chair), bed mobility (i.e. position), locomotion (i.e.
walking or moving around), medication management, and assistance
with using the toilet.”
                                 - 4 -

DSHS for the services provided to Mr. Alexander’s parents during

that month.     The employment guide states that if an individual

provider wants Federal income tax withheld, the individual

provider must submit a Form W-4, Employee’s Withholding Allowance

Certificate, to DSHS.

     A DSHS case manager is assigned to, inter alia, assist DSHS

clients with developing a plan of care that documents the

client’s choice of services and qualified providers.

Konstantin’s case manager, Dakarie Johndro (Ms. Johndro), stated

that the MPC program is “an in-home program” designed to “help

clients remain as independent as possible * * * so they can avoid

a nursing home.”3    Ms. Johndro also stated that case managers do

not interview the potential individual providers because the case

managers are “not the ones hiring * * * [the individual

providers]”, but rather the clients hire the individual

providers.    Ms. Johndro’s assessment report for Konstantin dated

August 18, 2010, indicates that Konstantin was “informed of the

settings in which he can receive care and he continues to choose

independent living without 24 hour care.”     Furthermore, Ms.

Johndro stated that Konstantin was not placed in petitioners’

home by DSHS.



     3
        There is a dearth of evidence regarding Tatiana in the
record. However, the parties proceeded on the basis that Ms.
Johndro is the case manager for Tatiana and that the facts
regarding Konstantin are equally applicable to Tatiana.
                               - 5 -

     For 2006, 2007, and 2008, petitioners received Forms W-2,

Wage and Tax Statement, from DSHS of $16,948, $28,052, and

$31,088, respectively.   All of the Forms W-2 from DSHS reflected

withholding for Social Security and Medicare taxes, but none

reflected any Federal income tax withholding.

     For each of the years at issue, petitioners included the

amount reflected on the Forms W-2 in gross income but then

deducted the full amount on line 21 of their tax return, claiming

that the amount was excludable from gross income pursuant to

section 131.4

     For 2006, 2007, and 2008, petitioners deducted amounts on

Schedule A, Itemized Deductions, for unreimbursed employee

business expenses of $16,993, $21,439, and $6,656, respectively.

     In the notice of deficiency respondent disallowed the

exclusions from income pursuant to section 131 and most of the

deductions claimed for unreimbursed employee business expenses.

Respondent also determined that petitioners are liable for the

accuracy-related penalties under section 6662(a).




     4
        For 2006, petitioners actually received $26,149 but only
reported $16,948 in their gross income. Petitioners, however,
excluded $26,149 on line 21 of their 2006 return. Nonetheless,
the discrepancy in these amounts is not at issue in this case.
                                - 6 -

                              Discussion

A.   Burden of Proof

      Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

      Under section 7491(a)(1), the burden of proof may shift from

the taxpayer to the Commissioner if the taxpayer produces

credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s liability.     Petitioners have not

alleged that section 7491(a) applies, nor did they introduce a

sufficiency of evidence to invoke that section; therefore, the

burden of proof remains on petitioners.

      Exclusions and deductions are a matter of legislative grace

and are narrowly construed.     INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934).   Consequently, the taxpayer bears the burden of

proving that he or she is entitled to any deduction or exclusion

claimed.   Interstate Transit Lines v. Commissioner, 319 U.S. 590,

593 (1943).

B.   Qualified Foster Care Payments

      Section 61(a) provides generally that “gross income means

all income from whatever source derived”.     Gross income is an

inclusive term with broad scope, designed by Congress to “exert
                              - 7 -

* * * ‘the full measure of its taxing power.’”     Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429 (1955) (quoting Helvering

v. Clifford, 309 U.S. 331, 334 (1940)).   Section 61(a)(1)

specifically includes compensation for services.

     Section 131(a) provides that gross income shall not include

“qualified foster care payments.”   A “qualified foster care

payment” as described in section 131(b)(1) is any amount:

     (A) which is paid by--

          (i) a State or political subdivision thereof, or

          (ii) a qualified foster care placement agency, and

     (B) which is--

          (i) paid to the foster care provider for caring
     for a qualified foster individual in the foster care
     provider’s home, or

          (ii) a difficulty of care payment.[5]

     As relevant herein, a “qualified foster individual” is

described in section 131(b)(2) as any individual living in a

foster family home in which the individual was “placed by * * *

an agency of a State or a political subdivision thereof”.    Sec.

131(b)(2)(A).

     The amounts at issue can be qualified foster care payments

only if they were paid to petitioners as foster care providers

for qualified foster individuals.   See sec. 131(b)(1)(B)(i).   To



     5
        Difficulty of care payments as described in sec. 131(c)
are not at issue in this case.
                               - 8 -

be qualified foster individuals, Mr. Alexander’s parents must (1)

live in a “foster family home” and (2) have been “placed by” an

agency of the State or political subdivision thereof in the

foster family home.   See sec. 131(b)(2)(A).

Foster Family Home

     First, neither section 131 nor its legislative history

defines “foster family home”, and there are no regulations

addressing this statute.   Under Washington State law a “foster

family home” is

     an agency which regularly provides care on a twenty-
     four hour basis to one or more children, expectant
     mothers, or persons with developmental disabilities in
     the family abode of the person or persons under whose
     direct care and supervision the child, expectant
     mother, or person with a developmental disability is
     placed; [Wash. Rev. Code Ann. sec. 74.15.020(1)(e)
     (West Supp. 2001).]

Petitioners have not demonstrated that they operated a foster

family home within the meaning of Wash. Rev. Code Ann. sec.

74.15.020(1)(e).

     Under Washington State law, an adult family home is “a

residential home in which a person or persons provide personal

care, special care, room, and board to more than one but not more

than six adults who are not related by blood or marriage to the

person or persons providing the services.”     Wash. Rev. Code Ann.

sec. 70.128.010(1) (West 2002 & Supp. 2011).    Regardless of

whether an “adult family home” is a “foster family home” under

section 131, petitioners are related to Mr. Alexander’s parents;
                               - 9 -

thus petitioners’ home does not qualify as an “adult family home”

under Wash. Rev. Code Ann. sec. 70.128.010(1).

     In addition, the MPC program in which Mr. Alexander’s

parents participated is an in-home program designed to “help

clients remain as independent as possible” and to avoid a nursing

home.   Ms. Johndro, the case manager, indicated in her assessment

report for Konstantin that he chose “independent living without

24 hour care.”   Thus, the MPC program treated petitioners’ home

as Mr. Alexander’s parents’ home as opposed to a foster family

home.

     In sum, petitioners have not shown that they operated a

foster family home within the meaning of section 131.

“Placed by” a State Agency

     Second, the qualified foster individual must be “placed by

* * * an agency of a State or a political subdivision thereof”.

Sec. 131(b)(2)(A).   “As a general matter, if the language of a

statute is unambiguous on its face, we apply the statute in

accordance with its terms, without resort to extrinsic

interpretive aids such as legislative history.”   See, e.g.,

Garber Indus. Holding Co. v. Commissioner, 124 T.C. 1, 5 (2005),

affd. 435 F.3d 555 (5th Cir. 2006); see also Micorescu v.

Commissioner, T.C. Memo. 1998-398 (stating “that the intent of

Congress as expressed in the pertinent legislative history

comports with the plain meaning of the language in section
                                - 10 -

131.”).   As previously stated, the MPC program in which Mr.

Alexander’s parents participated is an in-home program designed

to “help clients remain as independent as possible”.    Ms. Johndro

stated that Mr. Alexander’s parents were not placed in

petitioners’ home by DSHS, and her assessment report for

Konstantin further states that Konstantin “continues to choose

independent living without 24 hour care.”    Finally, Ms. Johndro

stated and the individual provider employment guide also states

that an employer-employee relationship was established when Mr.

Alexander’s parents selected petitioners to be their individual

providers.   Hence, Mr. Alexander’s parents were not “placed by

* * * an agency of a State or a political subdivision thereof” in

petitioners’ home within the meaning of section 131.

     Because petitioners did not operate a foster family home and

because Konstantin and Tatiana were not placed by an agency of

the State in petitioners’ home, Mr. Alexander’s parents are not

qualified foster individuals.

     Although we commend petitioners for the support and

compassion they have shown Mr. Alexander’s parents, we cannot

grant them the relief they seek.    Accordingly, we hold that

petitioners are not entitled to exclude from gross income the

receipt of payments under Washington’s MPC program as foster care

payments under section 131 for the years at issue.
                                - 11 -

C.   Unreimbursed Employee Business Expenses

      Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    The term “trade or business” as

used in section 162(a) includes the trade or business of being an

employee.     Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970).

The determination of whether an expenditure satisfies the

requirements for deductibility under section 162 is a question of

fact.     Commissioner v. Heininger, 320 U.S. 467, 475 (1943).    In

general, an expense is ordinary if it is considered normal,

usual, or customary in the context of the particular business out

of which it arose, Deputy v. du Pont, 308 U.S. 488, 495 (1940),

and an expense is necessary if it is appropriate and helpful to

the operation of the taxpayer’s trade or business, Commissioner

v. Tellier, 383 U.S. 687, 689 (1966); Carbine v. Commissioner, 83

T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985).       On

the other hand, section 262(a) generally disallows a deduction

for personal, living, or family expenditures.

      Respondent has allowed or conceded that petitioners are

entitled to deduct unreimbursed employee business expenses for

2006, 2007, and 2008 of $3,573.40, $4,829.00, and $3,608.80,

respectively.6


      6
        For each year respondent allowed or conceded $1,688 for
union dues and $641 for mileage. For 2006, respondent also
                                                   (continued...)
                              - 12 -

      Petitioners have demonstrated that they are entitled to an

additional deduction for 2006 of $2,500 for Mr. Alexander’s

original National Board Certified Teacher certification process.

Beyond this additional deduction for 2006, petitioners have not

established that they are entitled to unreimbursed employee

business expenses in any greater amounts.   Thus, we hold that

petitioners are entitled to an additional deduction of $2,500 for

unreimbursed employee business expenses for 2006 but are not

otherwise entitled to deductions for unreimbursed employee

business in excess of the amounts previously allowed or conceded

by respondent for any of the years in issue.

D.   Section 6662 Penalty

      Section 6662(a) and (b)(1) imposes a penalty equal to 20

percent of the amount of any underpayment attributable to

negligence or disregard of rules or regulations.   The term

“negligence” includes any failure to make a reasonable attempt to

comply with tax laws, and “disregard” includes any careless,

reckless, or intentional disregard of rules or regulations.    Sec.



      6
      (...continued)
allowed or conceded $842.00 for airfare and car rental for Mr.
Alexander’s AP Institute Training in Honolulu, HI, and $402.40
for airfare for Mr. Alexander’s travel for judo. For 2007,
respondent also allowed or conceded $2,500 for Mr. Alexander’s
National Board Certified Teacher retake process fees. For 2008,
respondent also allowed or conceded $884.81 for airfare and car
rental for Mr. Alexander’s AP International Institute in
Honolulu, HI, and $394.99 for airfare related to Mr. Alexander’s
travel for judo.
                               - 13 -

6662(c).    Negligence also includes any failure to keep adequate

books and records or to substantiate items properly.    Sec.

1.6662-3(b)(1), Income Tax Regs.

       Section 6664(c)(1) provides an exception to the imposition

of the accuracy-related penalty if the taxpayer establishes that

there was reasonable cause for, and the taxpayer acted in good

faith with respect to, the underpayment.    Sec. 1.6664-4(a),

Income Tax Regs.    The determination of whether the taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account the pertinent facts and circumstances.

Sec. 1.6664-4(b)(1), Income Tax Regs.    Generally, the most

important factor is the extent of the taxpayer’s effort to assess

the proper tax liability for such year.    Id.

       With respect to a taxpayer’s liability for any penalty,

section 7491(c) places on the Commissioner the burden of

production, thereby requiring the Commissioner to come forward

with sufficient evidence indicating that it is appropriate to

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

447 (2001).    Once the Commissioner meets his burden of

production, the taxpayer must come forward with persuasive

evidence that the Commissioner’s determination is incorrect.     See

id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S. at

115.
                               - 14 -

     Respondent determined the accuracy-related penalties only on

the disallowance of petitioners’ deductions for unreimbursed

employee business expenses.    Respondent has proven, and has

therefore discharged his burden of production under section

7491(c), that petitioners failed to properly substantiate the

disallowed items.   See sec. 1.6662-3(b)(1), Income Tax Regs.

     Petitioners have not met their burden of persuasion with

respect to reasonable cause and good faith.7    Thus, on the record

before us, we are unable to conclude that petitioners acted with

reasonable cause and in good faith within the meaning of section

6664(c)(1).   Accordingly, petitioners are liable for the

accuracy-related penalty under section 6662(a) on that part of

the underpayment for each year attributable to disallowed

deductions for unreimbursed employee business expenses.

                              Conclusion

     We have considered all of the arguments made by petitioners,

and, to the extent that we have not specifically addressed them,

we conclude that they do not support a result contrary to that

reached herein.

     To reflect the foregoing,


                                           Decision will be entered

                                     under Rule 155.


     7
        At trial, petitioners had little to say about this issue
other than to imply that it was not conceded.
