Academic journal article Journal of Corporation Law

The Deductibility of MBA Degree Expenses under Treasury Regulation 1.162-5: Are You One of the Lucky Few Who Qualify?

Academic journal article Journal of Corporation Law

The Deductibility of MBA Degree Expenses under Treasury Regulation 1.162-5: Are You One of the Lucky Few Who Qualify?

Article excerpt

I. INTRODUCTION

II. BACKGROUND

  A. The Struggle with the Deductibility of Educational Expenses Prior
    to Regulation 1.162-5

    1. A Change in History: The Hill Case in the Tax Court

    2. A Change in History: The Hill Case on Appeal

  B. The IRS Releases Treasury Regulation 1.162-5 in 1958: The
     Subjective Standard

  C. The IRS Revamps Treasury Regulation 1.162-5 in 1967: The Current
    "Objective" Standard

    1. The Objective Non-Deductibility of Educational Expenses in
      Fields of Study with Education and Examination Prerequisites

    2. The "Objective" Approach to Educational Expense Deductibility in
      Fields of Study with No Formal Education or Examination
      Prerequisites

III. ANALYSIS: THE SHORTCOMINGS OF THE "OBJECTIVE" STANDARD OF
  DEDUCTIBILITY UNDER REGULATION 1.162-5 WHEN APPLIED TO MBA
  DEGREE EXPENSES

  A. Losing Objectivity Through the Use of "Commonsense"

  B. Qualifying for a New Trade or Business with an MBA Degree

    1. Comparing Education to Work Clothing

    2. MBA Degree Expenses: Not What the Code or Regulations
       Contemplated

  C. "Commonsense" Produces Unfair Results

  D. "Commonsense" Leaves Room for Abuse

IV. RECOMMENDATION: DENY EDUCATIONAL EXPENSE DEDUCTIONS FOR COSTS
  INCURRED TO OBTAIN AN MBA DEGREE IN ALL CIRCUMSTANCES

  A. Getting Back to an Objective Approach

  B. Promoting Equal Treatment Among Taxpayers

  C. Eliminating Opportunities for Abuse of Tax System

  D. Reduction of Administrative Costs

  E. Eliminating the Business Start-Up Expense Argument

V. CONCLUSION

I. INTRODUCTION

Individual taxpayers incurring expenses for education face a significant challenge when determining whether those expenses are deductible as trade or business expenses for income tax purposes. The Internal Revenue Code ("Code") allows taxpayers to deduct "the cost of earning a living" by taxing their "net profits [from a trade or business] rather than ... gross receipts or gross income." (1) Therefore, employees can either deduct their employment expenses from gross income if the employer reimburses the taxpayer for those expenses or as a miscellaneous itemized deduction if the employer provides no reimbursement. (2) With respect to educational expenses, the threshold requirement for deductibility is that the expenses are incurred while "carrying on a[] trade or business." (3) After meeting this threshold requirement, Treasury Regulation 1.162-5 imposes four additional tests that the education must pass to qualify for deductibility. (4) Under these four tests, the education must not (1) be the "minimum educational requirements" for the taxpayer's position or (2) "qualify[] [the taxpayer] in a new trade or business," and the education must either (3) "maintain or improve [the taxpayer's] skills" or (4) be an "express requirement of the [taxpayer's] employer" for retention of the position. (5)

The courts employ a number of different analyses and standards when determining whether educational expenses meet these four tests. (6) Thus, two different taxpayers incurring expenses for the exact same education could be subject to a different analysis and standard, depending on their unique circumstances, which could ultimately lead to contradictory outcomes. This inconsistency leaves a taxpayer hoping to get a deduction for educational expenses largely at the mercy of the judge.

One specific type of education, the Masters of Business Administration ("MBA") degree, results in taxpayers falling victim to this disparity when determining the deductibility of expenses incurred to obtain the degree. In a recent case, the Tax Court allowed an employee of an orthodontic laboratory to deduct the expenses he incurred while pursuing an MBA degree. (7) The outcome of the case hinged on the "upward-bound" (8) disallowance test of the current regulation, which denies a deduction where the education "qualif[ies the taxpayer] in a new trade or business. …

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