This is a long post because the decision will have some widespread implications, even though it is a tax court summary opinion, which is by definition of no precedential value.
Question for the Tax Court
Is a registered nurse working in an administrative role in the healthcare industry entitled to deduct the costs of an MBA with a focus in healthcare management, or does the MBA qualify her for a new trade or business, thus not deductible?
Petitioner, Ms. Singleton-Clarke, is a registered nurse (RN) with 24 years experience. From 2004 to 2007 she worked for Civista Medical Center. (3). Her job title was quality improvement coordinator and her responsibilities were to coordinate the quality improvement and risk management activities for the hospital. (3). The minimum education and experience requirements were 'a Bachelor of Science degree in Nursing or equivalent education and experience' . . . and 'current licensed as a RN . . . .' (4).
From 2007 to 2008 she worked for Children's National Medical Center in Washington, D.C. (4). Her job requirements stated: 'Bachelor's in Nursing; Master's in Public Health preferred. Two years quality improvement experience in a hospital setting . . . . ' (4).
In late 2008, she began working at St. Mary's Hospital. Her title is performance management coordinator, and . . . her duties focus on coordinating, planning, and implementing the Hospital's performance improvement activities. The job qualifications are: RN license required. B.S. Health Care Administration required--Masters preferred.
Petitioner began taking courses at the University of Phoenix in March 2005, graduating in April 2008 with an MBA/HCM. (5). The MBA/HCM provides students 'with the business management skills needed to manage successfully in today's health care delivery systems.' The program features courses in 'health care organizations, health care finance, quality and database management, health care infrastructure, and health care strategic management.'
Ms. Singleton-Clarke paid the entire cost of the program and none of her employers had a reimbursement policy for the MBA/HCM program. Ms. Singleton-Clarke deducted $14,787 in unreimbursed employee business expenses for education expenses. The IRS disallowed the entire amount.
When Are Education Expenses Deductible?
Section 1.162-5, Income Tax Regs., Expenses for Education (the regulation), interpreting section 162, Trade or Business Expenses, governs whether a taxpayer may deduct education expenses. The regulation provides that a taxpayer may deduct education expenses as ordinary and necessary business 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.
Sec. 1.162-5(a)(1) and (2), Income Tax Regs.
Conversely, the regulation provides that 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 or constitutes an accumulation of personal capital. Sec. 1.162-5(b)(3), Income Tax Regs.
Whether the education qualifies the taxpayer for a new trade or business is an objective inquiry analyzing the tasks and activities the taxpayer was able to perform before the education in comparison to those the taxpayer was qualified to perform afterward. (citations omitted). In other words, the relevant standard is whether the education objectively qualifies the taxpayer for a new trade or business. (citations omitted). Accordingly, the taxpayer's subjective intent in undertaking the education is not relevant, and likewise it is not material whether the taxpayer does in fact become employed in a new trade or business. (citations omitted).
IRS's First Contention: The MBA/HCM was a prerequisite to the St. Mary's job
The IRS contends that without receiving the MBA/HCM in April 2008 petitioner 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 . . . required at least a bachelor of science in health care administration, which petitioner had not previously earned.
Tax Court's Answer: No.
We believe that St. Mary's would have gladly hired petitioner . . . even without the MBA/HCM. All three positions, [prior to her St. Mary's position], required an RN license or a bachelor's in nursing, with clinical or risk management experience; credential the petitioner possessed. (10).
[W]e find that the MBA/HCM may have been a helpful addition to her qualifications, but was not an essential prerequisite for petitioner to secure the position at St. Mary's.
IRS's Second Contention: The MBA qualifies petitioner for a new trade or business
The IRS contends that the MBA/HCM does qualify petitioner for a new trade or business, because in respondent'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'.
Tax Court's Answer: The MBA does not qualify petitioner for a new trade or business
An MBA degree is different from a degree that serves as foundational qualifications 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. (11).
An MBA is a more general course of study that does not lead to a professional license or certification. (11).
This Court has had differing outcomes when deciding whether a taxpayer may deduct education expenses related to pursuing an MBA, depending on the facts and circumstances of each case. (12).
Analyzing petitioner's situation, her facts and circumstances far more closely resemble the cases that allowed a deduction for pursuing an MBA. Petitioner 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 University of Phoenix MBA/HCM program. (15).
[T]he MBA/HCM may have improved petitioner's preexisting skill set, but objectively, she was already performing the tasks and activities of her trade or business before commencing the MBA. (16).
I think the Tax Court missed the mark here. They do a wonderful job of articulating the law but then drop the ball when applying the facts to the law. Its analysis regarding whether an MBA qualifies the taxpayer for a new trade or business is overly generous, and is almost certain to allow any taxpayer with even remote ties to any sort of existing trade or business a free ride on the Fisc's shoulders for an MBA.
A walk through the regulations will help highlight my point. The regulations lay out a test that has two prongs, both of which must be satisfied before education expenses are deductible.
The first prong can be satisfied in one of two ways: either by showing that the MBA "improves existing skills required by the employer or trade or business" OR by showing that the MBA "is required condition of retaining the current job". Here, Ms. Clarke's MBA was not a condition to her keeping her job, thus she had to show that the MBA improves the skills required by her current job, namely "coordinating, planning, and implementing the Hospital's performance improvement activities." No big disagreement here, an MBA improves this required skill.
The second prong is always the more difficult prong for taxpayers to pass. The second prong requires a showing that the MBA does not qualify you for a new trade or business. It does not matter whether the taxpayer actually takes a job in a new trade or business, it only matters that the taxpayer is now qualified to do something different. A key question is whether the taxpayer's current trade or business should be considered in determining if the education qualifies the taxpayer for a "new" trade or business. Based on examples provided in the IRS regulations, I think the answer is yes. How do you know if the taxpayer is qualified to do something "new" without comparing a "hypothetical new trade or business" to the "old trade or business"?
Here, Ms. Clarke's "old" trade or business is in the field of healthcare management. Now that she has an MBA, is she qualified to leave healthcare management and go work in a different industry? This is where the Tax Court's analysis completely breaks down. The Court considers an MBA, "a general course of study" that may or may not qualify the taxpayer for a new trade or business depending on the facts and circumstances. It might be helpful to know that all MBA's from accredited institutions require 2/3 of the studies to be in various areas of accounting, marketing, operations management, etc. The other 1/3 can focus in concentrations or other areas of study. Ms. Clarke's MBA/HCM from the University of Phoenix is no different. 36-54 credit hours must be in required courses of study such as accounting, marketing, business law, management, economics, etc. After which, 15 credits can be taken in areas of study/concentration such as Health Care Management.
I find it extremely unreasonable to conclude that this course of study does not qualify Ms. Clarke to leave the field of healthcare management and pursue any myriad of job opportunities in other industries with her new MBA. I would conclude that she is absolutely qualified to "perform tasks and activities different" from those she was qualified to do before her MBA. To conclude otherwise ignores the fact that 2/3 of her course of study were not relevant to her existing position.