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.
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.