United States Tax Court

T.C. Summary Opinion 2024-7

JOSE BANUELOS AND CAROL ANN BANUELOS,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 1142-22S. Filed May 22, 2024.

__________

Jose Banuelos and Carol Ann Banuelos, pro sese. 

Ashleigh E. Edwards, Janice B. Geier, and Kenrick C. Parker, for 

respondent.

SUMMARY OPINION

FRIED, Special Trial Judge: This case was heard pursuant to the 

provisions of section 74631 of the Internal Revenue Code in effect when 

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.

In a notice of deficiency (notice) dated October 4, 2021, respondent 

determined a deficiency in petitioners’ 2018 federal income tax and an 

accuracy-related penalty pursuant to section 6662(a). 

After a concession,2 the issue for decision is whether petitioners 

are entitled to a deduction for unreimbursed employee business 

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax 

Court Rules of Practice and Procedure.

2 Respondent concedes the section 6662(a) accuracy-related penalty.

Served 05/22/24
2

expenses related to Jose Banuelos’s (petitioner) employment as an 

administrative law judge.

Background

The underlying facts in this case are easily summarized, even 

without the convenience of a stipulation of facts. When the Petition was 

filed, petitioners resided in California. 

In 2018 petitioner was employed as a retired annuitant 

performing the duties of an administrative law judge for the State of 

California. Retired annuitants assist the Department of Social Services 

State Hearings Division (SHD) when “caseload demand exceeds [current 

administrative law judge] capacity to hear and decide cases.” Petitioner

conducted hearings involving public benefits issues including SSI 

eligibility, CalFresh (formerly known as food stamps), state Medicare

eligibility, foster care determinations, and adoptions. He did not receive 

fees from the public for the services rendered in his role as a retired 

annuitant.

Petitioner was paid hourly wages on the days he conducted 

administrative hearings. Pursuant to SHD policy, for general 

jurisdiction and disability cases a retired annuitant was paid for eight

hours per hearing day plus an additional 3.3 hours for each decision 

written. Petitioner often spent more than 3.3 hours drafting decisions, 

but he was not compensated for the additional drafting time. Petitioner

was also paid for travel time and received a per diem when traveling.

He did not receive any paid sick leave or paid vacations.

The State of California issued petitioner a Form W–2, Wage and 

Tax Statement, reporting that the State of California paid petitioner 

wages of $24,091 in 2018 and that, with respect to these wages, the State 

of California withheld federal and state income tax but did not have 

Social Security tax or retirement contributions withheld.

Petitioners prepared their 2018 joint federal income tax return 

and filed it on or around October 17, 2019. The $24,091 of compensation 

that petitioner received from the State of California was reported as 

wages on the return. Petitioners attached Form 2106–EZ, 

Unreimbursed Employee Business Expenses, to their return and 

claimed a $25,457 deduction for unreimbursed employee business 

expenses related to petitioner’s employment as an administrative law 

judge for the State of California.
3

In the notice, respondent disallowed the entire deduction 

petitioners claimed for unreimbursed employee business expenses 

because, according to the notice, petitioner is “not considered a fee-based 

government official,” and therefore does not meet one of the limited 

exceptions permitting the deduction of such expenses.

Discussion

In general, the Commissioner’s determinations in a notice of 

deficiency are presumed correct, and the taxpayer bears the burden of 

proving that the determinations are erroneous. Rule 142(a); Welch v. 

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

As we have observed in countless opinions, deductions are a 

matter of legislative grace, and the taxpayer bears the burden of proving 

entitlement to any claimed deduction. 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). 

Section 162 allows deductions for trade and business expenses. 

Section 62(a)(1) allows deductions for those expenses to be made from 

gross income when computing adjusted gross income (AGI) except for 

those expenses incurred by a taxpayer as an employee. An employee is 

not permitted to deduct trade and business expenses unless subject to 

an enumerated exception under section 62(a)(2).

As relevant, section 62(a)(2)(C) allows as a deduction from gross 

income in computing AGI “[t]he deductions allowed by section 162 which 

consist of expenses paid or incurred with respect to services performed 

by an official as an employee of a State or a political subdivision thereof 

in a position compensated in whole or in part on a fee basis.”

Respondent contends that under Jones v. Commissioner, 146 T.C. 

39 (2016), petitioner should not be treated as a fee basis employee 

because his compensation was not based on fees collected from the 

public, and that consequently petitioners were not entitled to a 

deduction for unreimbursed employee business expenses. By contrast, 

petitioners contend that petitioner was a fee for service employee, and 

not a salaried state employee. They argue that petitioner should be 

considered an employee paid on a “fee basis” within the meaning of the 

Fair Labor Standards Act (FLSA), see 29 C.F.R. § 541.300(a) (2019), and 

therefore permitted to deduct unreimbursed employee business 

expenses under section 162.
4

FLSA regulations provide that “[a]n employee will be considered 

to be paid on a ‘fee basis’ within the meaning of these regulations if the 

employee is paid an agreed sum for a single job regardless of the time 

required for its completion.” 29 C.F.R. § 541.605(a) (2019).

The above-referenced regulations were promulgated for the 

purpose of defining employees exempted from section 13(a)(1) of the 

FLSA. See 29 C.F.R. § 541.0 (2024). In Jones, 146 T.C. at 47–48, this 

Court specifically declined to apply the definition of “fee basis” found in 

29 C.F.R. § 541.605 to the interpretation of section 62(a)(2)(C), and we 

will decline to do so again here. Instead, in Jones, 146 T.C. at 48, the 

Court held that a fee basis employee is an employee who received fees 

directly from the public in exchange for services that he rendered. This 

is true even if the salary the employee receives is funded, in part, by 

collected fees. Id.

Petitioners attempt to distinguish their case from Jones on the 

grounds that petitioner was an hourly employee and was not an 

“elected” or “appointed” official and that as a retired annuitant he did 

not receive retirement benefits, health benefits, or paid vacation or sick 

leave. However, petitioners have not shown that the facts present in this 

case differ in any material way from those in Jones.

The record establishes that petitioner did not receive fees directly 

from the public in exchange for the services he rendered. Instead, the 

State of California paid petitioner an hourly rate for each hearing day 

and decision written. Because petitioner was not compensated in whole 

or in part on a fee basis, petitioners are not entitled to a deduction for 

unreimbursed employee business expenses related to petitioner’s 

employment as an administrative law judge.

To reflect the foregoing, 

Decision will be entered for respondent with respect to the 

deficiency and for petitioners with respect to the section 6662(a) penalty.