Tax Research Assignment #1
Ima Nurse is a registered nurse who has been working as a Medicare reimbursement specialist at a hospital since 2008. She has enrolled in an MBA program for two reasons: 1) to increase her financial knowledge and skills needed in her current position and 2) to increase her managerial skills in order to enhance her prospects of eventually obtaining her supervisor’s position. An MBA degree is not a specific requirement for the supervisory position. During 2011, she paid $10,500 for tuition and fees at UMSL. Her employer, the hospital, reimbursed her 60% of tuition costs or $6,300 as part of their education assistance program and this amount was not included ...view middle of the document...
Sec 132 (d) defines “working condition fringe benefit” as a payment by the employer that would have been deductible as a business expense under IRC Section 162 if the payment had been made by the employee and is closely related to his or her job. In other words, Ima can exclude from gross income the remaining $1,050 only if she could otherwise qualify to deduct the payment as a business expense under IRC Section 162, had she paid it herself. The deductibility would be discussed as part of the review of Issue 2.
2. ISSUE 2: Is the amount she paid in tuition and fees - $10,500 – fully deductible from AGI or toward AGI, partially deductible from AGI or toward AGI, or not deductible at all?
Pursuant to IRC Section 127, no other deductions or credits are allowed for the amount excluded from gross income under this section. Therefore, Ima cannot deduct the $5,250 she already excluded from gross income. She can exclude the remaining reimbursement balance of $1,050 from gross income altogether (per the discussion of Issue 1) and deduct the $4,200 portion she paid out of pocket as long as they meet deductibility criteria as stated in Reg. Section 1.162-5. This regulation requires that the qualifying education expenses be connected with the employee’ trade or business (i.e., they must be job-related) and then satisfy four criteria in order to be deducted. According to this section, employees can deduct educational expenses if: 1) the coursework allows them to improve or maintain their job skills; or 2) if their employer or the law requires them to attend the classes in order to continue their employment. Furthermore, the employees cannot deduct educational expenses if 3) the courses are taken to comply with minimum employment requirements; and 4) the courses prepare the employee for a new trade or business.
Since one of the reasons Ima has decided to pursue an MBA degree is to gain financial knowledge needed in her current position, the coursework would enhance her work-related skills which satisfies condition #1. Also, her employer does not require her to obtain an MBA degree in order to stay employed; therefore the goal of taking courses is not to comply with minimum employment requirements. Requirement number four presents the main question – would the MBA qualify her for a new trade or business? Would a promotion into her supervisor’s position represent a new trade?
According to Reg. Section 1.162-5(b)(3)(i) “in the case of an employee, a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as is involved in the individual's present employment.” A promotion into a supervisor would still involve performing substantially the same tasks and activities at the same place of employment, so an MBA degree would not qualify Ima for a new trade. This is further supported by two Tax Court decisions reached in the following two cases. In Blair v. Commissioner, TC Memo 1980-488 the taxpayer...