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A Little Learning Is a Dangerous Thing to Deduct

By Albert B. Crenshaw
Sunday, August 22, 2004; Page F04

Tax law has long allowed a taxpayer to deduct the cost of work-related education if it maintains or improves skills needed in his or her present job or business, or if it is required by an employer.

But education that qualifies a person for a new trade or business, or that is needed to meet the minimum requirements to keep a job the person already has, is not deductible.

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For example, a high school history teacher who takes additional history courses to improve her knowledge of her subject would likely qualify. But if she had not yet graduated from college and were teaching on a temporary certificate while taking courses to finish college, there would be no deduction because the degree is a minimum requirement to keep her job. And if she went out and got a law degree there would also be no deduction because, however much the degree might help her with her teaching, it would also qualify her for a new career as a lawyer.

But in some situations the Internal Revenue Service rules aren't so easy to parse. And now, it seems, the IRS is taking a hard line and the U.S. Tax Court is backing it up.

Consider the master of business administration degree. An MBA would presumably improve the skills of someone already working in business. But plenty of senior executives don't have one, so it wouldn't seem to be a minimum requirement for the field. Therefore, business school students already working in the field should be able to deduct the cost of their degrees, right?

Actually, no, the U.S. Tax Court said earlier this month.

In the case of a woman who worked as a financial analyst for Merrill Lynch and later Raymond James Financial Inc. and then left to get her MBA at Northwestern University, the court found that not only was her degree a minimum educational requirement to be an investment banker, but it also qualified her for a new trade or business.

So her deduction failed on both counts.

Though the woman, Tracy L. McEuen, argued that she had been an "investment banker" in both her jobs, the court concluded that the financial analyst position she held at both firms was "a subordinate temporary position lasting a maximum of three years." The next job up the ladder, that of "associate," required an MBA, the court noted.

Further, the court said, "if the education qualifies the taxpayer to perform significantly different tasks and activities than could be performed before the education, the education qualifies the taxpayer for a new trade or business." It then pointed to the fact that after obtaining her MBA, McEuen did not take an investment banking job but instead entered the general management program of a home furnishing manufacturer -- for which an MBA was a prerequisite.


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