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Grad School Deduction Disallowed Where Taxpayer Was Not Established in a Trade or Business. (Parker Tax Publishing January 2014)

A student could not deduct post-graduate educational expenses as unreimbursed employee business expenses because he was not established in a trade or business before enrolling in the post-graduate program. Hart v. Comm'r., T.C. Memo. 2013-289 (12/23/13).

In January 2009, Adam Hart enrolled in a master's of business administration (M.B.A.) program with a concentration in finance. During the year, Adam worked for a healthcare distribution company, as a payroll processor, and at a retail pharmacy store. None of the employers required Adam to attend M.B.A. courses for his position. Adam received from his college a Form 1098-T, Tuition Statement, reporting qualified tuition expenses of $18,600. Adam filed a joint federal income tax return with his wife, Lisa, for 2009. On their Schedule A, Itemized Deductions, for that year, the couple claimed an itemized deduction for the tuition expenses as unreimbursed employee expenses. After processing the return, the IRS disallowed the deduction.

OBSERVATION: An individual's work-related education expenses may also qualify for other tax benefits, such as the tuition and fees deduction and the American opportunity and lifetime learning credits. An individual may qualify for these other benefits even if he or she does not meet the requirements for an employee business expense deduction.

Code Sec. 162 provides a deduction for all ordinary and necessary expenses paid or incurred during the tax year in carrying on a trade or business. Reg. Sec.1.162-5(a) provides that a taxpayer may deduct educational expenses as ordinary and necessary business expenses if the education: (1) maintains or improves skills required by the individual in his or her employment or trade or business, or (2) meets requirements imposed by an employer as a condition of employment. Educational expenses are not deductible as ordinary and necessary business expenses if the educational courses lead to the taxpayer qualifying for a new trade or business.

Under Code Sec. 67(a), miscellaneous itemized deductions are allowed only to the extent the total of such deductions exceeds 2 percent of adjusted gross income.

OBSERVATION: Employees generally can deduct the expenses they incur for education if the education either (1) maintains or improves skills required in the employee's present work, or (2) is required by the employer or the law to keep the employee's salary, status, or job, and the requirement serves a business purpose of the employer.

Adam argued that he was in the business of selling pharmaceuticals, and the M.B.A. classes he took enabled him to obtain employment.

The IRS contended that Adam was not established in a trade or business in 2009, and his employers did not require him to enroll in an M.B.A. program as a condition of employment.

The Tax Court held that Adam was not established in a trade or business before enrolling in the M.B.A. program. The court cited Link v. Comm'r., 90 T.C. 460 (1988), in which the Tax Court concluded that a taxpayer must be established in a trade or business or carrying on a trade or business before any educational expenses are deductible under Code Sec. 162. The term "carrying on a trade or business," the Tax Court noted, entails continuous and regular activity. Adam worked with a healthcare distribution company at the time he began the M.B.A. program, the court noted, and during 2009, he held three different jobs. Although Adam showed that he was qualified to sell pharmaceuticals, his qualification for selling pharmaceuticals was not the same as carrying on a trade or business. Moreover, Adam's employment in the pharmaceutical sales field was not continuous, and there was no evidence that Adam was carrying on a trade or business before he enrolled in the M.B.A. program. As a result, the court concluded that Adam's educational expenses were not deductible as unreimbursed employee expenses.

For a discussion of unreimbursed employee expenses, see Parker Tax ΒΆ85,105. (Staff Contributor Parker Tax Publishing)

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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