T.C. Mem o. 2 01 5- 15 5

UNITED STAT ES TAX COURT

COLLEEN J. O’ CONNOR AND MARK C. TRACY, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 14 35 4- 13 . Fi le d Au gu st12 , 20 15 . Co ll eenJ. O’Con no r an d M arkC. Tracy, pro ses e. S. Mark B arn es , for

res po nd en t.

MEMORANDUM OPINION BUCH, Ju dg e: Res po nd en t i ss ue d p et it io ne rs a no ti ce o f de fic ie nc y de te rm in in g t he fol lo win g d efi ci en ci es an d p en al ti es with re sp ectto th ei r Fed eral in co m e ta x fo r y ears 20 10 an d 2 01 1: 1 Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 (co nt in ue d...)- 2 -

[* 2] Year Defi ci en cy Pen al ty se c. 66 62 (a) 20 10 $3 ,29 5 $6 59 20 11 5,5 15 1,1 03 The is su es be fo re u s ar e whe th er p et it io ne rs m ay de du ctex pe ns es ass oc ia te d with M r. Tracy’ s l eg al educ at io n a ndwhet he r th ey are l iabl e fo r acc ur acy-rela te d pe na lt ie s und er s ect io n 6 66 2( a). W e h ol d t ha t the y m ay no t d educ t the ex pe ns es an d t ha t the y

are l iabl e fo r th e p en al ti es .

Bac kg ro un d Thi s ca se was s ub m it te d u nd er Ru le 12 2. Mr. Trac y

is a U.S. cit iz en . From Apr il 19 98 to Ju ly 200 4 M r. Tracy at te nd edth e Uni ve rs ity

of He id el be rg , wher e h e fo cu se d o n Germ anleg al stud ie s. To p ract ic e la w inGerm an y , on e m us t co m pl et e v ari ou s re qu ire m en ts , in cl ud in g pa ss in g t wo s ta te ex am in at io ns . After c om pl et in g t he writ te n s ect io n o f th e se co ndst at e ex am in at io n, M r. Tracy m ov edto Sal t Lak e Ci ty, Utah , to co m pl et e th e th ree- m on th ele ct iv e st at io n o f hi s Germ anleg al tra in in g a t a l aw fi rm . In J un e 20 07 Mr. Trac y

co m pl et edall of t he ne ces sa ry requi rem en ts an d was li cen se d t o (...co nt inue d) 1 Rev enue Co de (Co de ) in effe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. All m on et ary am ou nt s ar e ro un de d t o t he ne ares t d ol la r.- 3 -

[* 3] pr act ic e la w inGerm an y . Also in20 07 Mr. Trac y ass um edpro

ject m an ag em en t o f a m

ul ti m il li on -d ol la r res id en ti al bu il di ng pro ject i n S al t Lak e Ci ty. In20 09 whi le st il l l iv in g i n Ut ahMr. Trac y en te redlaw s ch oo l atth e Uni ve rs ity

of S anDieg o. Mr . Tracy tra ve le d b ackan d fo rth fro m Sal t Lak e Ci ty to SanDieg o, Ca li fo rn ia , whi le co m pl et in g h is de gr ee. Mr. Tra cy was n otem

pl oyed an d d idno t re cei ve an y

Fo rm s W-2, Wage an d Tax Sta te m en t, dur in g 2 01 0 a nd 20 11 . Mr. Tracy recei ve d h is juri s d oc to r (J .D.) in20 12 . In l at e Feb ru ary 20 14 Mr. Trac y

satforth e b ar ex am in at io n i n New Yo rk . In Ap ril 20 14 th e New York St at e Bo ardof Law Ex am in ers no ti fie d M r. Tracy th athe ha d p as se d t he ba r ex am in at io n a ndwas e li gi bl e to ap pl y foradm is si on to th e b ar. Late r in 20 14 , fo ll owi ng sev eral y ears of i nv es ti ga ti on , Mr. Tracy comm en ceda $4 0 m il li on qu i ta m act io n fi le d u nd er the Fal se Cla im s Act , 31 U.S.C. sec . 37 29 (20 12 ), inth e U.S. Dis tri ctCo urt fo r th e Dis tri ctof Ut ah . Pet it io ne rs ti m el y

fil edth ei r 20 10 an d 2 01 1 F orm s 1 04 0, U.S. In di vi du al In co m e Tax Return. In20 12 pe ti ti on ers fil eda Fo rm 10 40 X, Am en de d U.S. In di vi du al Inc om e Tax Return, fo r 20 10 . Peti ti on ers att ach edFo rm s 2 10 6- EZ, Unr ei m bu rs edEm

pl oyee Bu si ne ss Exp en se s, t o t he 20 10 Fo rm 10 40 X andth e 20 11 Fo rm

10 40 rep orti ng tra ve l, m eal s an d e nt ert ai nm en t, an d o th er b us in es s ex pe ns es rel at edto Mr. Trac y ’s leg al educ at io n. Th e In te rn al Rev enue Serv ic e- 4 -

[* 4] (IRS ) ex am in edpe ti ti on ers ’ 20 10 Fo rm 10 40 X and20 11 Fo rm

10 40 . On Mar ch25 , 20 13 , th e IRS is su eda no ti ce o f de fic ie nc y di sa ll owi ng de du ct io ns for th e ex pe ns es st emm in g fr om Mr. Trac y ’s leg al educ at io n andde te rm in in g accu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a). Pet it io ne rs , whi le li vi ng in 2 Utah , ti m el y

pe ti ti on ed . Res po nd en t d is pu te s o nl y th e d educ ti bi li ty of th e ex pe ns es ; the ir p aym en t i s n otat i ss ue . Dis cu ss io n I. Burd enof P ro of The Co m m is si on er’s d et erm in at io ns inth e n ot ic e o f de fic ie nc y are g en eral ly pr es um edco rrec t, an d t ax pa y ers be ar the bu rd enof p ro vi ng ot he rwis e. The 3 bu rd enwith re sp ectto a factua l i ss ue m ay sh iftto th e Co m

m is si on er u nd er s ect io n 74 91 (a) i f th e ta xp ay er i nt ro du ces cred ib le ev id en ce re ga rd in g t he is su e, ha s co m pl ie d wi th th e n eces sa ry

subs ta nt ia ti on requi rem en ts , has m ai nt ai ne d a ll reco rd s, an d h as co op erat edwith re as on ab le reque st s b y th e Co m mis si on er fo r witne ss es , in fo rm at io n, d oc um en ts , m eet in gs , andin te rv ie ws. Pet it io ne rs do no t

The pa rti es st ip ul at ed , witho utfurth er ex pl an at io n, tha t the am en de d re tu rn 2 is th e b as is forth e ad

jus tm en ts for20 10 . Peti ti on ers di d n otcla im de du ct io ns for th e ex pe ns es rel at edto Mr. Trac y ’s leg al educ at io n o n t he 20 10 Fo rm 10 40 . Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). 3- 5 -

[* 5] cla im

th atth e b ur de n h as sh ift edto res po nd en t, an d l ik ewis e th e rec or d d oe s no t d em on st rat e th atitis ap pr op ria te to sh iftth e b ur de n t o re sp on de nt . II. Ord in ary an d Nec es sa ry Exp en se s Sect io n 1 62 all ows a ta xp ay er t o d educ t “ al l the ord in ary an d n eces sa ry ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or bu si ne ss ”. Edu cat io na l ex pe ns es are co ns id eredord in ary an d n eces sa ry bu si ne ss ex pe ns es if the educ at io n:

(1 ) Mai nt ai ns or i m

pr ov es sk il ls requi redby the in di vi du al in hi s emplo ym en t o r ot he r tr ad e o r bu si ne ss , or (2 ) Mee ts th e ex pr es s re qu ire m en ts of t he in di vi du al ’s em pl oyer, or the requi rem en ts of app li cab le law o r reg ul at io ns , im po se d a s a c on di ti on to th e ret en ti on by the in di vi du al of a n es tabl is he d e m

pl oym en t re la ti on sh ip , st atus , or ra te of co m pe ns at io n. [ 4 ] It i s a que st io n o f fac t wh ethe r th e educ at io n m ai nt ai ns or i m pr ov es sk il ls requi redby the tax pa y er i n h is tra de or b us in es s. The ex pe ns e is de du ct ib le on ly 5 if t he tax pa y er i s es tabl is he d i n t he tra de or b us in es s atth e ti m e h e p ay s o r in cu rs th e ex pe ns e. The t ax pa y er m us t s ho w th atth e educ at io na l ex pe ns e is di rect ly and 6

Sec. 1 .16 2- 5( a), In co m e Tax Reg s. 4 W as se na ar v . Comm is si on er, 7 2 T.C. 1 19 5, 1 19 9 (1 97 9) . 5 Ju ng rei s v . Comm is si on er, 5 5 T.C. 5 81 , 58 8 (1 97 0) . 6- 6 -

[* 6] pr ox im at el y

rel at edto th e sk il ls requi redinhi s trad e o r bu si ne ss . Howev er, 7 a p reci se co rrel at io n i s n otne ces sa ry . Add it io na ll y , when ev al ua ti ng whet he r th e 8 educ at io na l ex pe ns e qua li fie d t he tax pa y er fo r a n ew tr ad e o r bu si ne ss an d i s th eref or e n on de du ct ib le , th e Co urt u se s a “ co m m on se ns e ap pr oa ch ” co m pa rin g

“ th e types of t as ks an d a ct iv it ie s wh ic h t he tax pa y er was qu al ifi edto pe rfo rm be fo re the acqui si ti on of apa rti cu la r ti tl e o r de gr ee, an d t ho se whi chhe is qu al ifi edto pe rfo rm

aft erwar ds .” 9 The pa rti es ha ve st ip ul at edth atMr. Tracy was n otem pl oyed dur in g 2 01 0 an d 2 01 1. Acco rd in gl y , pet it io ne rs m ay de du ctMr. Trac y ’s edu cat io na l ex pe ns es on ly if th ey

cansh ow tha t the educ at io n m ai nt ai ne d o r im pr ov edsk il ls requi redin hi s trad e o r bu si ne ss . Res po nd en t ar gu es th atth e fac ts of t hi s ca se are s im il ar t o tho se in Hor ody sky

v. Co m m is si on er, 5 4 T.C. 4 90 (19 70 ). In t ha t ca se Mr. Ho ro dysky rece iv edhi s l aw de gr ee an d p ract ic edlaw i n P ol an d. Ho wev er, aft er Po landcam e un de r So vi etrul e, he m ov edto Germ an y an d re cei ve d aGerm ande gr ee o f la w. Kornh au se r v. Un it edSta te s, 2 76 U.S. 14 5, 1 53 (19 28 ); B os er v . 7 Co m m is si on er, 7 7 T.C. 1 12 4, 1 13 1 (1 98 1) , aff’d wit ho utpubl is he d o pi ni on (9t h Ci r. Dec. 2 2, 1 98 3) . Sch wart z v . Comm is si on er, 6 9 T.C. 8 77 , 88 9 (1 97 8) . 8 Glen n v . Comm is si on er, 6 2 T.C. 2 70 , 27 5 (1 97 4) . 9- 7 -

[* 7] Sh ortl y

aft er re cei vi ng th atde gr ee, h e m ov edto Ohi o. Aft er l iv in g i n Oh io fo r al m os t 1 5 years, M r. Horo dysky ap pl ie d t o the Supr em e Co urt o f Ohi o fo r adm is si on to th e b ar, b uthe was d en ie d a dm is si on be cau se he ha d n otco m pl et ed th e fo rm al educ at io n re qu ire m en ts . Mr. Hor od y sky en ro ll edas ani gh t s tu de ntin Cl ev el an d M ars ha ll Law Sch oo l an d a tt em pt edto de du cthi s educ at io na l ex pe ns es . The Co urt s us ta in edth e d is al lo wan ce o f th e d educ ti on , st at in g t ha t the educ at io na l ex pe ns es were n otrequi redforMr. Ho ro dysky to m ai nt ai n h is sk il ls or t o re ta in hi s p os it io n b ecau se he was n oty etanatt orne y adm it te d i n Oh io at t he ti m e h e in cu rredth e ex pe ns es . “ Iness en ce, p et it io ne r ha s co m m en dabl y in ve st edm

uc h o f hi s t im e to m eetth e m in im um requi rem en ts forqu al ifi cat io n i n ane w tra de or bu si ne ss inth is co un try, andth e ex pe ns es th ereo f, be in g o f a p ers on al na tu re, can no t p ro pe rly be d educ te d fr om hi s t ax ab le in co m e fo r an y of t he y ears in qu es ti on .” 1 0 Pet it io ne rs arg ue th atth ei r si tu at io n i s d iff eren t b ecau se th e St at e o f New York, wh ere M r. Tracy pa ss edth e b ar ex am in at io n i n 2 01 4, al lo ws fo rei gn -tr ai ne d la wy ers to si t fo r th e b ar ex am in at io n wi th ou t co m pl et in g aleg al educ at io n pr og ram inth e Uni te d S tate s. Th eref or e, th ey arg ue , Mr. Tracy was no t en te rin g in to a ne w tra de or b us in es s, an d t he pa rti es ha ve alr eady st ip ul at edth atMr. Trac y Hor od y sky

v. Co m m is si on er, 5 4 T.C. 4 90 , 49 3 (1 97 0) . 1 0- 8 -

[* 8] ha s m etth e m in im

um requi rem en ts of t he leg al pro fes si on . Alth ou gh we ag ree t ha t p et it io ne rs ’ arg um en t i s g en eral ly true , itdo es no t t el l the en ti re s to ry . The pa rti es st ip ul at edon ly tha t M r. Tracy ha s m etth e m in im um requi rem en ts of t he leg al pro fes si on inGerm an y . Thatfactdo es no t au to m at ic al ly qu al ify him to be a le ga l p ro fes si on al inth e Uni te d S ta te s. InNew York , for ei gn tra in edap pl ic an ts m ay

si t fo r th e b ar ex am in at io n o nl y if c ert ai n re qu ire m en ts are fu lfi ll ed . Becaus e Mr. Tra cy di d n otrece iv e anLL.M. from anAm eri canBar 1 1 Ass oc ia ti on ap pr ov edlaw s ch oo l, h e wou ldbe requi redto pro ve th athi s l eg al stud ie s p ro gr am

“was subs ta nt ia ll y

equi va le ntindurat io n t o the leg al educ at io n pr ov id edby an Am eri canBar As so ci at io n app ro ve d l aw sc ho ol inth e Uni te d St at es , andinsubs ta nt ia l co m pl ia nc e with t he in st ru ct io na l an d a cad em ic cal en dar requi rem en ts ” p ro vi de d b y th e St at e o f New York. Add it io na ll y , Mr. Tracy 1 2 wou ldha ve to sh ow tha t the law o f Germ an y is ba se d o n p rin ci pl es of En gl is h co m m on law an d h is leg al stud ie s p ro gr am was “ th e subs ta nt ia l equi va le ntof t he le ga l educ at io n p ro vi de d b y anAm eri canBar As so ci at io n app ro ve d l aw sc ho ol in

N.Y. R. 52 0.6 . 1 1 See N.Y. R. 5 20 .6(b )(1 )(i )(a) . 1 2- 9 -

[* 9] th e Uni te d S ta te s.” Pet it io ne rs ha ve no t p ro vi de d a ny evi de nc e to sh ow tha t 1 3 th es e requi rem en ts ha ve be enm etan d t ha t M r. Tracy was en ti tl edto si t fo r th e New Yorkbar ex am in at io n b efo re h e co m pl et edhi s J .D. Thus , inli ne with o ur pr eced en t, Mr . Tracy

ha d n otest ab li sh edhi m se lf i n t he leg al pro fes si on inth e Uni te d S tate s, an d h is educ at io na l ex pe ns es were i nc urredinass oc ia ti on with en te rin g i nt o ane w tra de or b us in es s. Pet it io ne rs als o arg ue th atth e educ at io na l ex pe ns es are d educ ti bl e und er se ct io n 1 62 as l on g a s M r. Tracy was act iv e in“ any tra de or b us in es s” . Duri ng 20 10 an d 2 01 1 M r. Tracy was a la w stud en t. He m ay als o h av e b eenin vo lv ed with m an ag in g ares id en ti al bu il di ng pro ject, an d h e m ay

ha ve be enin vo lv edina qu i t am leg al act io n, b utth e rec or d i s u nc le ar re ga rd in g wh enMr. Trac y un de rto ok th es e act iv it ie s. Ev enass um in g t ha t M r. Tracy was in vo lv edinth es e act iv it ie s du rin g 2 01 0 a nd20 11 , pet it io ne rs ha ve no t s ho wn an y co nn ect io n b etweenth es e act iv it ie s an d M r. Tracy’ s l eg al educ at io n. Acco rd in gl y , we su st ai n re sp on de nt ’s di sa ll owa nc e o f de du ct io ns for ex pe ns es rel at edto Mr. Trac y ’s leg al educ at io n.

See N.Y. R. 5 20 .6(b )(1 )(i )(b ). 1 3- 10 -

[* 10 ] III. Sec ti on 66 62 (a) Acc ur acy-Rela te d P en al ti es Sect io n 6 66 2( a) an d (b )(1 ) im po se s a 2 0% a ccu racy-rela te d p en al ty on “ an y po rti onof a n u nd erp aym en t o f ta x re qu ire d t o b e sh own on a return” if the un de rp aym en t i s due to ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns . As de fin ed in th e Co de , “ ‘neg li ge nc e’ inc lu de s an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with t he pro vi si on s o f th is ti tl e, an d t he term ‘ di sr eg ard ’ in cl ud es an y care le ss , reck le ss , or i nt en ti on al di sr eg ard .” Negl ig en ce h as be enfurth er d efi ne d 1 4 as a “ ‘lackof due care or f ai lu re t o d o wh ata reas on ab le an d o rd in ari ly pru de nt pe rs on wou lddo un de r th e ci rcu m st an ces .’ ” A retu rnpo si ti onis no t n eg li ge ntif 1 5 itis gro un de d i n areas on ab le ba si s. Howev er, a re turnpo si ti on th atis “ m erel y 1 6 arg uabl e o r th atis m erel y a co lo rab le cla im ” d oe s n otsat is fy th e rea so nabl e b as is st an da rd . The p en al ty also wil l n otap pl y to an y po rti on of t he un de rp aym en t fo r 1 7 whi chth ere i s re as on ab le cau se an d t he tax pa y er ac te d i n g oo d fa ith. 1 8 Sec. 6 66 2( c). 1 4 See Nee ly v. Comm is si on er, 8 5 T.C. 9 34 , 94 7 (1 98 5) (qu ot in g M arce ll o v . 1 5 Co m m is si on er, 3 80 F.2d49 9, 5 06 (5t h C ir. 1 96 7) , aff’g i n p art , rem an di ng inpa rt 43 T.C. 16 8 (1 96 4) , andT.C. Mem o. 1 96 4- 29 9) . Sec. 1 .66 62 -3 (b )(1 ), In co m e Tax Reg s. 1 6 Sec. 1 .66 62 -3 (b )(3 ), In co m e Tax Reg s. 1 7 Sec. 6 66 4( c)(1 ). 1 8- 11 -

[* 11 ] Res po nd en t b ears th e b ur de n o f pr oduc ti on as t o the pe na lt ie s, an d h e h as 1 9 sa ti sf ie d h is bu rd en . This areaof l aw is well set tl ed , andres po nd en t’s p os it io n i s ba se d o n a45 -y ear- ol d c as e wit h fa ct s v ery si m il ar t o t ho se th atare b efo re u s. Pet it io ne rs ha ve fai le d t o s ho w th atth ey ha d areas on ab le ba si s fo r de du ct in g t he ex pe ns es ass oc ia te d wi th Mr. Trac y ’s leg al educ at io n. Pe ti ti on ers ’ on ly argu m en t i s tha t the pe na lt ie s s ho ul d n otap pl y be cau se th ey

sh ou ldpre va il on th e m eri ts . Add it io na ll y , pet it io ne rs ha ve fai le d t o p ro ve an y ot he r de fen se s. Acco rd in gl y , we su st ai n t he pe na lt ie s u nd er s ect io n 6 66 2( a) fo r 20 10 an d 20 11 . IV. Con cl us io n On the ba si s o f ou r ex am in at io n o f th e rec or d b efo re u s, we fi ndth at pe ti ti on ers are n oten ti tl edto de du ctth e ex pe ns es ass oc ia te d wi th Mr. Trac y ’s le ga l educ at io n b ecau se th e educ at io n d idno t m ai nt ai n o r im pr ov e sk il ls requi red

See S ec. 7 49 1( c). 1 9- 12 -

[* 12 ] in hi s trad e o r bu si ne ss . Furt he r, th ey are l iabl e fo r acc ur acy-rela te d pe na lt ie s fo r 20 10 an d 2 01 1. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor res po nd en t.