1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

T.C. Summary Opinion 2009-71

UNITED STATES TAX COURT

NICHOLAS GARRETT RAY AND MICHELLE SHERE RAY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17674-07S. Filed May 11, 2009. 

Nicholas Garrett and Michelle Shere Ray, pro sese.

Chong S. Hong, for respondent.

GERBER, 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
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2At the opening of the trial respondent’s counsel advised

the Court that all adjustments had been resolved with the

exception of the educational expenses and the charitable

contributions. Respondent’s counsel did not say whether the

accuracy-related penalty remained in dispute; however, the

outcome of the case has obviated the need to address the penalty. 

3No questions were raised in this case about sec. 7491 and

the burden of proof or the burden of production.

4Although this case is captioned in the name of Nicholas

Garrett and Michelle Shere Ray, Michelle Ray prefers use of the

surname “Johnson”. 

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

for any other case.

Respondent determined a $5,397 income tax deficiency for

petitioners’ 2005 tax year and a section 6662(a) accuracy-related

penalty of $1,079.40. The issues we consider are whether

petitioners are entitled to their claimed deductions for

educational expenses and/or charitable deductions and whether

they are liable for an accuracy-related penalty.2

Background3

Petitioners are Nicholas Ray (Mr. Ray) and Michelle

Johnson.4 Petitioners filed a joint Form 1040, U.S. Individual

Income Tax Return, for 2005 with the filing status “Married

filing jointly”. Petitioners resided in California at the time

their petition was filed. On their 2005 Form 1040 petitioners

claimed charitable cash or check contributions of $11,247 and

contributions other than cash of $300 for total contributions of
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$11,547. Respondent disallowed $11,727 of charitable

contribution deductions, an amount $180 more than the amount

petitioners claimed. 

During 2005 petitioners belonged to a church that was

qualified as a nonprofit organization under section 501(c)(3) to

which contributions would normally be tax deductible. 

Petitioners did not receive any goods or services from their

church. Petitioners regularly made contributions to their church

for tithing, building fund, and other purposes. 

During 2005 petitioners paid $10,460 to their church. 

Petitioners produced 30 copies of checks totaling $9,780 and

additional evidence from their bank that two more checks totaling

$680 had been issued during 2005. Petitioners are entitled to

charitable contribution deductions of $10,460 for 2005. 

Mr. Ray is a teacher who received his bachelor of arts

degree with a major in history during 2004. Mr. Ray was teaching

under a so-called emergency credential, which in effect meant

that he did not have tenure in the school system. He began

teaching on February 14, 2005, under the emergency credential,

which would expire in 1 year. There were educational

requirements for the extension of the emergency credential, which

could be extended for 1 additional year. The next level of

teaching status was a so-called preliminary credential, which

also was not a tenured position. 
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In all other respects Mr. Ray had the obligations, rights,

and privileges of a tenured teacher. He had a voice (vote) in

all faculty decisions; the school system made contributions to

his retirement plan; and there were continuing education

requirements to maintain his emergency credentials and his

teaching position for a second year. During 2005 Mr. Ray

incurred expenses for educational courses to maintain his

teaching status for 2005 or 2006. Mr. Ray’s courses might also

have qualified him to obtain a preliminary credential which,

although not a tenured position, was a more permanent position in

the school system. Once Mr. Ray obtained a preliminary

credential, he had 5 years to obtain a permanent teaching

certificate. Mr. Ray’s courses did not lead to a master’s or

other advanced educational degree. There were also educational

requirements, on a 5-year cycle, for all teachers, irrespective

of whether their teaching position was permanent.

Ms. Johnson is also a teacher, and she attended college

during 2004 and 2005 to earn her bachelor of science degree in

liberal studies. Ms. Johnson received her bachelor’s degree in

October 2006. During December 1995 Ms. Johnson had received an

associate degree in the science of child development and family

relations. Ms. Johnson had a regular (5 year) teaching

credential, valid March 1, 2006, through March 1, 2011, enabling

her to teach in the care, development, and instruction of
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children in a child development program. Respondent conceded

that Ms. Johnson’s 2005 educational expenses were deductible and

did not qualify her for a new position, even though the courses

taken would result in extending her associate degree to a

bachelor’s degree.

Discussion

Section 162(a) generally allows as a deduction “all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”. Expenditures

made by an individual for education are deductible as ordinary

and necessary business expenses if the education maintains or

improves skills required by the individual in her employment or

other trade or business. Sec. 1.162-5(a), Income Tax Regs. The

general rule under section 1.162-5(a), Income Tax Regs., however,

does not apply if the expenditures fall within either of two

specified categories; i.e., they are nondeductible expenditures

if: (1) They are incurred to meet the minimum educational

requirements for qualification in a taxpayer’s trade or business;

or (2) they qualify the taxpayer for a new trade or business. 

See Robinson v. Commissioner, 78 T.C. 550, 552 (1982); sec.

1.162-5(b), Income Tax Regs.

An individual who, through education, improves his or her

skills in an existing trade or business may also become qualified

for a new trade or business. Thompson v. Commissioner, T.C.
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Memo. 2007-174. If the education in question qualifies the

taxpayer to perform significantly different tasks and activities

than he or she could perform before the education, then the

education is deemed to qualify the taxpayer for a new trade or

business. Robinson v. Commissioner, supra at 552 (citing Browne

v. Commissioner, 73 T.C. 723, 726 (1980), Diaz v. Commissioner,

70 T.C. 1067, 1074 (1978), affd. without published opinion 607

F.2d 995 (2d Cir. 1979), Glenn v. Commissioner, 62 T.C. 270, 275

(1974), and Weiszmann v. Commissioner, 52 T.C. 1106, 1110 (1969),

affd. 443 F.2d 29 (9th Cir. 1971)). The mere capacity to engage

in a new trade or business is sufficient to disqualify the

expenses for the deduction. Weiszmann v. Commissioner, supra at

1111.

Respondent agrees that Ms. Johnson is entitled to claim her

educational expenses, so there is no need to address her

circumstances. With respect to Mr. Ray, however, respondent

contends that his educational expenditures were to meet the

minimum requirements for a job and, therefore, are not

deductible. Mr. Ray contends, however, that he had met the

requirements to teach on an emergency credential. Petitioner did

not know at the end of 2005 whether he had qualified for a

preliminary credential. Accordingly, at the end of 2005 Mr. Ray

was merely able to show that he was attempting to seek a
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preliminary credential and that he was attempting not to lose his

teaching status under the emergency credential.

In a substantially similar case involving a California

teacher with emergency credentials, we held that the taxpayer’s

educational expenses were deductible. Orr v. Commissioner, T.C.

Memo. 1992-566. In that case we held that the taxpayer: 

who has already obtained a baccalaureate degree, has

met the minimum educational requirements for

qualification as an elementary or secondary school

teacher in the State of California. Therefore, the

educational costs incurred to meet additional

requirements of the employer are deductible. 

That holding was in view of a thorough analysis of Federal tax

statutes and regulations and California law governing teaching

positions. 

Respondent, however, argues that a change in California law

would change the outcome because of the requirements set forth in

section 1.162-5(b)(2)(ii), Income Tax Regs. That regulation was

referenced and discussed in Orr v. Commissioner, supra. 

Accordingly, we consider whether respondent’s argument is

correct.

Sec. 1.162-5(b)(2)(ii), Income Tax Regs., states that 

The minimum educational requirements for qualification of a

particular individual in a position in an educational

institution is the minimum level of education (in terms of

aggregate college hours or degree) which under the 

applicable laws or regulations * * * is normally required of

an individual initially being employed in such a position. 

* * *
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Respondent argues that a change in California law since Orr

v. Commissioner, supra, was decided would change the application

of the above-quoted regulation in this case. The change

referenced by respondent is that at the time of Orr, to acquire a

teaching credential California law required a bachelor’s degree

and completion of 5 years of total study within 5 years from the

date of issuance of an emergency credential. See Cal. Educ. Code

sec. 44259 (West 1978). Current California law does not allow a

5-year period to complete the postbachelor professional education

courses. See Cal. Educ. Code sec. 44259(a) (West 1990). Instead

the current law provides for a staging process, beginning with an

emergency credential for 1 and up to 2 years, and then a

preliminary credential leading to a permanent credential. With

respect to preliminary and permanent credentials, California

requires continuing education in order to remain certified to

teach in either category.

The difference cited by respondent is without a distinction. 

It merely changes the form (reduces the 5-year period to a 2-year

period) and not the substance or effect of the prior California

requirements. Under either the 1978 or the 1990 version of the

California statute, a bachelor’s degree is the threshold for a

teaching credential. See sec. 1.162-5(b)(2)(iii), Example (1),

Income Tax Regs. Mr. Ray had a teaching credential and he had

therefore met the minimum educational requirements for
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5Sec. 6662(d)(1)(A) requires that an understatement exceed

the greater of 10 percent of the tax required to be shown on the

return or $5,000 to be “substantial” and thus to trigger the

accuracy-related penalty.

qualification so that his educational expenditures were for the

purpose of maintaining and improving his skills and not for

qualification. There is no actual or rational difference between

a teacher on an emergency or regular credential being required to

take educational courses in order to be retained, even though the

interval may be different. Accordingly, we hold that Mr. Ray and

Ms. Johnson are entitled to deduct $24,883 in educational

expenses and related expenses for 2005.

We have found that petitioners have substantiated $10,460 of

charitable contributions and accordingly hold that they are

entitled to deduct them for their 2005 tax year. 

In view of our holding that petitioners are entitled to all

of their claimed educational expense deductions and because they

have shown entitlement to more than 90 percent of their claimed

charitable contribution deductions, there will not be a

“substantial understatement” of tax large enough to trigger the

application of the section 6662(a) and (b)(2) accuracy-related

penalty.5 Accordingly, we hold that petitioners are not liable

for an accuracy-related penalty.
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To reflect the foregoing,

Decision will be entered

under Rule 155.