Facts: This case decided on April 27, 2017 involves a University of Washington computer science graduate living in California that claimed deductions for costs (tuition and travel) to attend an Executive MBA program. The petitioner had previously worked as a project manager for a computer software company and in the year in question ran her independent consulting business. Petitioner enrolled in the EMBA program when she learned that management professionals working for the companies that she sought as customer were attending this EMBA program; attending this EMBA was viewed as a networking opportunity that would enable her to be introduced to her customers -- customers who needed a consultant to design, develop, test, and implement computer software systems that improved business processes.
Petitioner claimed $59,282 in tuition costs and $4,973 in car and truck expenses for her travel to UCLA to attend the EMBA classes and events and $449 for supplies. Petitioner claimed a loss of $64,704 from her business on the 2012 tax return.
The IRS issued a notice of deficiency in September 2015 and advised it was seeking a section 6662(a) accuracy-related penalty of $3,598.
The U.S. Tax Court heard the case pursuant to provisions of section 7463; in this case, it means that the decision is not reviewable by any other court and this opinion is not treated as precedent for any other case.
Issue: Whether the expenses claimed by petitioner were deductible? Whether the accuracy-related penalties should be imposed?
Held: The deduction is denied. The court held
"Even if the taxpayer is engaged in a trade or business and the education expenses may maintain or improve his or her skills, education expenses are not deductible if the expenses are for: (1) education required to meet the minimum requirements of the taxpayer's trade or business or (2) a program of study leading to the qualification of the taxpayer in a new trade or business. Sec. 1.162-5(b)(2) and (3), Income Tax Regs."
The Court distinguished the fact pattern here to those presented in Allemeier v. Commissioner, 2005 Tax Ct, Memo Lexis 208 and Blair v. Commissioner, T.C. Memo. 1980-488 ruling against petitioner.
As for the accuracy-related penalty, the Court found that petitioner had substantially understated their income tax and were liable for an accuracy-related penalty under section 6662(a) and (b)(2) for 2012. While a taxpayer can avoid the above penalty provided they show reasonable cause and good--pursuant to sec. 6664--they failed to provide an affidavit from the accountant that they said thought the tuition and travel related expenses were deductible. The Court held that "Petitioner wife's general statements that petitioners relied on their accountant are not sufficient to prove reasonable cause and good faith for the disallowed deductions. Petitioners have failed to prove that they acted with reasonable cause and good faith and therefore are liable for an accuracy-related penalty."
Take Away. Petitioners decided to proceed pro se. They should have consulted with a tax attorney prior to enrolling in the course of study to discuss the issue of reporting the costs as a business expense and, at the very least, consulted with or retained a tax attorney when they received notice from the Service of the examination. I think the taxpayers took an aggressive position taking the deduction and that while pursuing the action pro se saved some money (professional fees), they could have done a better job on appeals and possibly avoided the accuracy-related penalties. In short, this is a tragic and costly situation that I think could have been avoided if addressed earlier.