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Higher Education Expense, Deductible ?

When you can deduct Higher Degree Expenses
When you can deduct Higher Education Expense

There are tax benefits of Higher Education-with limitation of course. This is an excellent case to clarify issues surrounding the destructibility of the higher education expenses.

Background

Alex Kopaigora began working for Marriott International Corp. in 2002 as an accounting manager. In June 2006, Kopaigora accepted a position as senior assistant controller for the Marriott hotel in Los Angeles International Airport (Marriott LAX), where he was responsible for managing a team of employees, reviewing employee performances annually, participating in hiring activities, and training employees. Kopaigora’s duties included preparing financial reports, creating budgets, analyzing financial data, producing forecasts to enable reaction to business changes, and monitoring different departments’ performances. Additionally, Kopaigora conducted audits, prepared an accounting of taxes, prepared financial reports according to generally accepted accounting principles (GAAP), enforced internal controls, reconciled balance sheets, and ensured compliance with reporting requirements.

In July 2010, Kopaigora enrolled in the executive master of business administration (EMBA) degree program at Brigham Young University (BYU) in Utah in order to improve his leadership skills in corporate finance and management. Kopaigora worked at Marriott LAX on the weekdays and traveled to Salt Lake City every other weekend to attend classes at BYU. In April 2011, while Kopaigora was still working towards his EMBA degree, his employment with Marriott was terminated. Despite this setback, he continued to pursue his EMBA degree at BYU and looked for full-time employment within the corporate finance and accounting field as a controller, assistant controller, senior manager, vice president, or director.

Kopaigora graduated from the EMBA degree program in August 2012 and, in September, he was hired as vice president of finance of a small financing company. As vice president, Kopaigora was responsible for overseeing department managers, managing and leading a team of employees, supervising employees in daily issues of accounting, cash, risk, and business operations, and participating in hiring and training. Additionally, Kopaigora was responsible for auditing, accounting for taxes, setting up monthly reporting according to GAAP, and enforcing internal controls.

On his 2011 joint return, Kopaigora claimed an $18,879 deduction for his EMBA degree expenses, which included charges for his EMBA tuition, airfare between California and Utah, meals, and mileage. Following an examination, the IRS disallowed these deductions.

Analysis

Code Sec. 162 requires a taxpayer to be presently engaged in a trade or business in order for education expenses to be deductible. Reg. Sec. 1.162-5(b) disallows a deduction for education expenses for: (1) education required to meet the minimum requirements of a taxpayer’s trade or business, or (2) a program of study leading to the qualification of a taxpayer in a new trade or business. If the taxpayer can show that neither of the disqualifying factors applies, Reg. Sec. 1.162-5(a)(1) provides that the taxpayer can deduct the education expenses if the education maintains or improves skills required by the taxpayer in his or her employment or other trade or business.

Before the Tax Court, Kopaigora argued that he was entitled to deductions for his education expenses because he was established in the business of corporate finance and management before beginning his pursuit of an EMBA degree, he continued to be established in this business during his temporary unemployment, and his EMBA degree did not qualify him for a new trade or business. The IRS argued that Kopaigora did not carry on his trade or business through the 2011 tax year because he was unemployed for an indefinite period, the EMBA degree was a general degree that did not maintain or improve specific skills required for his employment, and the degree qualified him for a new trade or business.

The Tax Court determined that the facts supported Kopaigora’s argument, and held that the expenses he incurred to obtain his EMBA degree were deductible as unreimbursed employee expenses under Code Sec 162. When Kopaigora enrolled in the EMBA degree program, the court said, he was a well-established finance and accounting business manager at Marriott LAX. The court noted that he managed the hotel’s financial operations and auditing departments, he was responsible for large groups of employees from various backgrounds and specializations, and he made sure the hotel’s business practices were in compliance with GAAP. When his employment was abruptly terminated, the court found, he continued to take courses at BYU that improved his managerial and leadership skills – skills that were appropriate and helpful to his position as a business manager. The courses Kopaigora chose to fulfill his degree requirements, the court said, did not qualify him for a new trade or business because he was not qualified to perform new tasks or activities with the conferral of his degree. Instead, the court stated, Kopaigora chose courses in a line of study that he was familiar with – management and finance. The court determined that even though Kopaigora took a few courses that were outside that scope, those courses by themselves could not have prepared him to enter a new trade or business.

In addition, the court noted that Kopaigora’s unemployment did not prevent him from continuing his trade or business as a finance and accounting business manager for purposes of Code Sec. 162. The court found that after Kopaigora’s employment at Marriott LAX was terminated, he actively sought employment within the corporate finance and accounting field for the remainder of his time at BYU, and his active job search paid off. Although Kopaigora was hired after he graduated, the court found nothing in the record suggesting that the degree was a prerequisite for the job.

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