Small Business Taxes & ManagementTM--Copyright 2010, A/N Group, Inc.
You may have read about the case of the nurse who bested the IRS and got to deduct her MBA tuition. It's more complicated than the general press would have you believe. The case provides an insight into the reasoning of the Court, and adds to the line of cases that have allowed such a deduction, but the facts of the case are important. Before considering any action, read the details of the case, below. You should also keep in mind that the case was a Summary Opinion so technically it cannot be cited as precedent.
There are a number of tax benefits available to taxpayers taking courses for higher education. You may even be able to deduct (as an itemized deduction on Schedule A) courses related to your trade or business. You can deduct such education expenses if the education:
(1) Maintains or improves skills required by the individual in his employment or other trade or business, or
(2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.
On the other hand, if the education qualifies the individual for a new trade or business, then the education expenses are not deductible because the education is a personal expense.
In the case of Lori A. Singleton-Clarke (T.C. Summ. Op. 2009-182) the taxpayer was a registered nurse and for a number of years worked in various capacities for a number of hospitals, medical centers, and long-term care facilities. From 1993 to 2004 she held various nursing management positions of increasing responsibility, eventually serving as a director of nursing for a 150-bed subacute long-term care facility, responsible for "24/7" management of 110 nurses plus technicians. From 2004 to 2008 the taxpayer worked sequentially at three different hospitals. Though her titles were different, her tasks, activities, and responsibilities were nearly identical, concentrating in a nonsupervisory capacity as a quality control coordinator.
The IRS contended that without receiving the MBA/HCM in April 2008 the taxpayer would not have obtained her final job, the one she started in September 2008 at St. Mary's, because the St. Mary's job description, in addition to requiring an RN license, which she already possessed, required at least a bachelor of science in health care administration, which the taxpayer had not previously earned.
Though the titles of the jobs varied, the taxpayers three jobs since 2004 were nearly identical, requiring serving as a quality control coordinator at acute care hospitals and medical centers. The Court believed that her last position would have gladly hired her as a performance management coordinator even without the MBA/HCM. All three quality control positions required an RN license or a bachelor's in nursing, with clinical or risk management experience; credentials which the taxpayer possessed. The first two employers had hired her without the MBA/HCM. Further, she was a multiple award winner, having received recognition three times from the Governor of Maryland and from three other prominent organizations. Moreover, the taxpayer had worked her way up to serving as a director of nursing responsible for 110 nurses plus additional technicians, clearly indicating high competence. All three quality control positions, while important, were a step down in status and pay from her former duties. For all of these reasons, we find that the MBA/HCM may have been a helpful addition to her qualifications, but was not an essential prerequisite for her to secure the final position.
New Trade or Business?
The second prong of the regulations is whether the education qualifies the taxpayer for a new trade or business, not just the final job. The IRS contended that the MBA/HCM does qualify petitioner for a new trade or business, because in the IRS's words, under the regulation "the tasks and activities she was qualified for before she obtained the degree are different than those which she is qualified to perform afterwards". The Court disagreed.
An MBA degree is different from a degree that serves as foundational qualification to attain a professional license. For instance, this Court had denied deductions for law school expenses, because a law degree qualifies a taxpayer for the new trade or business of being a lawyer. An MBA is a more general course of study that does not lead to a professional license or certification. The Court noted that it has had differing outcomes when deciding whether a taxpayer may deduct education expenses related to pursing an MBA, depending on the facts and circumstances of each case. The decisive factor generally is whether the taxpayer was already established in their trade or business.
For example, in the following two cases the Court held that the taxpayers were not entitled to deduct their MBA expenses. In Link the taxpayer had not established a trade or business. After graduating with an undergraduate degree in May 1981, he worked during the summer but then promptly commenced his MBA coursework in September 1981. Similarly, in Schneider the taxpayer, after graduating from West Point, served honorably in the Army for 5 years before resigning from active duty with the rank of captain and immediately starting in Harvard's MBA program. Although the taxpayer established outstanding management experience in the Army, he had never worked in business, and therefore the Court in that case decided his "work as an Army officer is a different trade or business from the consulting business for which his course of study at Harvard prepared him."
In contrast, in Sherman the Court held that another former Army officer was entitled to deduct the expense of his Harvard MBA. The difference is that the former officer in Sherman had worked for 2 years as a civilian employee after resigning his Army commission and before matriculating to Harvard. Moreover, the duties of the taxpayer in Sherman during his 2 years of civilian work included formulating and monitoring management plans and reviewing and evaluating policies involving purchasing, inventory control, and personnel management. These were the types of subject matters taught in the MBA program.
In Allemeier before beginning an MBA program, the taxpayer had already worked 3 years for a pediatric orthodontic laboratory, during which time his responsibilities expanded to include designing marketing strategies for additional products, organizing informational seminars, and traveling extensively to conventions to lead seminars. The Tax Court held that the taxpayer's trade or business did not significantly change because the MBA merely improved preexisting skills for the same general duties he was already performing before enrolling in the MBA program.
After analyzing the taxpayer's situation, the Court noted her facts and circumstances far more closely resembled the cases that allowed a deduction for pursuing an MBA. The facts in favor of the taxpayer were even stronger than those in the three cases where the taxpayers prevailed. She worked for 1 year as a quality control coordinator and had more than 20 years of directly related work experience, gaining vast clinical and managerial knowledge in acute and subacute health care settings, before beginning the MBA/HCM program.
Finally, the Court said the MBA/HCM may have improved the taxpayer's preexisting skill set, but objectively, she was already performing the tasks and activities of her trade or business before commencing the MBA. For all of the above reasons, the Court found that petitioner's MBA/HCM did not qualify her for a new trade or business, and we hold, therefore that the taxpayer could deduct her education expenses for 2005.
Summary and Caution
There's no question the current case adds to a line of existing ones and improves your chances of sustaining a deduction if your facts are close to those in prior cases. But it doesn't overturn prior law. If your current occupation is a nurse working with patients and without managerial responsibilities, the expenses of getting an MBA will be challenged by the IRS. But even if all your courses aren't deductible, some of the requirements for a degree may be. For example, your current job might require additional accounting skills.
Because the outcome depends so heavily on the facts, discuss your situation with a tax professional.
Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 01/12/10