Taxpayer Wins Case Against IRS; Higher Education Expenses More Likely to Be Deductible
The U.S. Tax Court in the District of Columbia handed a Maryland nurse (and taxpayers who pursue a Masters in Business Administration) a major victory last month. The court ruled that the 47-year-old woman had properly deducted nearly $15,000 in business school tuition. This ruling could make it possible for many other professionals to deduct the expense of an MBA.
The IRS regulation provides that education expenses are not deductible if the education qualifies the individual for a new trade or business. If the education qualifies the individual for a new trade or business, then the cost of the education is categorized as a personal expense and constitutes an accumulation of personal capital. (Treas. Reg. 1.162-5(b)(3)) The courts have reasoned that whether the education qualifies the taxpayer for a new trade or business is an objective inquiry analyzing the tasks and activities the taxpayer was able to perform before the education in comparison to those the taxpayer was qualified to perform afterward. Singleton-Clarke v. Commissioner, T.C. Summ. Op. 2009-182 (Dec. 2, 2009).
In Singleton-Clarke, the tax court allowed the licensed nurse to deduct the cost of an MBA degree earned from the University of Phoenix. In the court’s opinion, the judge analyzed the petitioner’s job history from three different hospitals and compared the job descriptions. The court concluded that the taxpayer’s three previous jobs were nearly identical, and she would have been hired even without the MBA degree. In other words, the court found that the new MBA degree may have been a helpful addition to her qualifications but was not an essential prerequisite for her to secure the position.
The court then examined the issue of whether the MBA degree allowed the nurse to qualify for any new trade or business. Comparing the MBA with a law degree, the court reasoned that an MBA is a more general course of study that does not lead to a professional license or certification. The court concluded that the decisive factor is whether the taxpayer was already established in her trade or business. In this case, the court ruled in favor of the taxpayer because she had twenty years of experience performing tasks and activities in the same profession before beginning her MBA program.
This case could be an important victory for taxpayers who pursue an MBA degree and are concerned about the deductibility of the cost.
If you have any questions about your personal situation please contact Peter King at 703-992-6790 or email at peter@hfkllp.com. |
