|
Note: The
following is an excerpt from the introduction to the article
as published in The Tax Lawyer. Author citations
have been omitted for brevity. Tax Section members may read
the article in its entirety in Adobe
Acrobat format.
INTRODUCTION
NO M.B.A. LEFT BEHIND: PROFESSIONAL EDUCATION AS A
BUSINESS EXPENSE IN ALLEMEIER V. COMMISSIONER
In Allemeier v. Commissioner,1 the Tax Court upheld a deduction for the cost
of acquiring a Masters in Business Administration (M.B.A.) as an ordinary and
necessary business expense. In its memorandum decision, the court allowed the
deduction after finding that the degree neither qualified the taxpayer to enter a
new trade or business nor served to meet the minimum education requirement of
the taxpayer’s trade.2 Allemeier represents one of the few successful attempts to
deduct the cost of a degree program under section 162(a).3
Section 162(a) does not specifically mention education expenses, but Regulation
section 1.162-5(b)(3) states that “education which is part of a program of
study which will lead to [qualification] in a new trade or business” is not
deductible.4 While the regulation calls for an objective inquiry into the taxpayer’s
new qualifications,5 this Note demonstrates that in Allemeier, the Tax Court
adopted a subjective analysis of the taxpayer’s intentions to arrive at its ultimate
conclusion that, objectively, the taxpayer was not qualified for a new trade or
business.
The Tax Court discussed four previous cases in which a taxpayer claimed a
deduction for tuition leading to an M.B.A. In three of those cases, the taxpayer
lost.6 The only case the Tax Court cited in which a taxpayer successfully deducted
tuition for an M.B.A. was Blair v. Commissioner, which also looked
subjectively at the taxpayer’s likely future work endeavors to determine whether,
objectively, her M.B.A. qualified her for a new trade or business.7 This subjective
analysis is far from explicit—indeed, the Tax Court specifically denied its
use.8 However, no other sound distinction exists between Allemeier, Blair, and those cases in which the deduction for an M.B.A. was denied. While the test
remains largely an objective inquiry into qualifications, practitioners should note
the Tax Court’s willingness to consider subjective factors in cases where the
education achieved was of a more general nature and did not lead to professional
certification or licensure.9
Part I of this Note describes the statutory framework of section 162(a) and
Regulation 1.162-5, as well as the Regulation’s evolution from a subjective test
to its current form, which employs the objective qualification for new trade
standard. Part II describes the facts of the case. Part III argues that the Court’s
reasoning in Allemeier is inconsistent with the current objective standard. First,
the court’s attempt to distinguish negative precedent is ineffective because those
cases concerned different portions of the regulation. In doing so, the court neglected
to discuss the facts of several cases which did suggest non-deductibility.
Second, the weight of the authority demonstrates that graduate education leading
to a degree only rarely passes the new trade or business test. Finally, the court’s
analysis in Allemeier makes sense only when viewed as an inquiry into the
taxpayer’s subjective intent and the likelihood of his entering a new trade. Part
IV concludes that the case law is in a state of flux, and that by successfully
exploiting the current ambiguity in the operative test, practitioners may secure
victories for clients even when a course of education might otherwise qualify the
taxpayer for a new trade or business. |
