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Dao Nguyen
is an attorney with Adelman, Ortiz, and Associates. Her employer is
paying her tuition for her to complete an MBA at Seattle University. The
cost is $18,000 per year. Dao is working while going to school and plans
to continue working for Adelman, Otiz, and Associates when she completes her
MBA.
Dao comes to
you to for advice. She is unsure whether the $18,000 fringe benefit is taxable.
Prepare a
memo for the tax file and a client letter to Dao.
Findings: Because the MBA does not
qualify Dao for a new license or trade, the education is deductible, qualifies
as the working benefit fringe, and is not taxable.
Reasoning & Authority: Per IRC
Sec. 132.d, a working condition fringe applies to property or services provided
to an employee of the employer, to “the extent that if the employee paid for
such property and services, such payment would be allowable as a deduction
under section 162 or 167.”
Furthermore, IRC Sec. 1.162-5(a),
has the general rule that “expenditures made by an individual for education…
are deductive as ordinary and necessary business expenses… if the education-
Section (b)(2)(i) says that “once an
individual has met the minimum educational requirements for qualification in
his employment or other trade or business (as in effect when he enters the
employment or trade or business), he shall be be treated as continuing to meet
those requirements even though they are changed.”
This analysis falls under Section
1.162-5(b), which has the general rule of nondeductionable educational
expenditures, which says they “are not deductible as ordinary and necessary
business expenses, even though the education may maintain or improve skills
required by the individual in his employment or other trade or business or may
meet the express requirements of the individual’s employer or of applicable law
or regulations.”
Additionally, the
education costs that meet the tests aren't deductible if the education:
(a) is needed to
meet the minimum requirements for qualification in taxpayer's trade or
business, see ¶ L-3713 et seq.; or
(b) will qualify
the taxpayer in a new trade or business, see ¶ L-3715 et seq.
The question becomes what qualifies
as qualifying “the taxpayer in a new trade or business?” In Daniel R Allemeier,
Jr v. Commissioner 2005-207, Code Sec(s). 62; 162; 274; 6662; 7491, 08/31/2005,
the courts found that an “MBA rather improved preex- [pg. 1512]isting skills
that petitioner used before enrolling in the MBA program.” That case concluded
that deducting the education expenses of an MBA was not an underpayment due to
business expenses. An MBA is just a degree, not a new license, nor does it
qualify a recipient for another license or program. It is a general course of
study, and does not meet the relevant standard of qualifying the taxpayer for a
new trade or business.
In the Lori A. Singleton-Clarke v.
Commissioner 2009-182, Code Sec(s) 162, 12/2/2009, the court found that the 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. For all of the above reasons, we find that petitioner's MBA/HCM
did not qualify her for a new trade or business, and we hold, therefore that
petitioner may deduct her education expenses for 2005.
Conclusion/Findings:
It is generally accepted that (1) as long as the education did not qualify the
taxpayer for a new skill or trade, and (2) that the taxpayer was already
performing the tasks and activities of her trade or business before commencing
the MBA, it is deductible. Since it would be deductible, it qualifies as a
working fringe benefit. Therefore, since Dao already was an attorney and an MBA
does not qualify her for a new trade or job, and she was already firmly
established in her trade by working at the law firm, and she can not be taxed
on the benefit of her education.
Letter
Dear Dao,
This letter provides you with our opinion regarding the tax
consequences as well as the tax questions that are in your mind. However, your
taxpayer is paying for your studies, and
it will benefit and your company. Therefore, there will be no tax on the fees
of your MBA course that your employer or company is paying.
You are going to get the skill through a degree, and there is no need to get to a new license, therefore,
under the section?” In Daniel R Allemeier, Jr v. Commissioner 2005-207, Code Sec(s).
62; 162; 274; 6662; 7491, 08/31/2005 of the court; it is analyze that there is no need to pay the tax. New license and to
working independently can result in
paying tax; however, in the case of
education one shouldn’t pay the tax.
MBA fringe benefits
taxable is not valid under the section of IRC Sec. 1.162-5(a) according to this
section the one person who used to maintain the skills in his employment or for
the new business than he should pay the tax. And also if the person takes a loan
for the retention for the establishment of the employment or status than the
tax is also applied.
Under the Code Sec(s) 162, 12/2/2009, in the Lori A.
Singleton-Clarke v. Commissioner 2009-182, court found that MBA improved that petitioner’s
preexisting set of skill if she already performs
the all duties and activities without doing her MBA because of this reason for
2005 petitioner should deduct her education expenses.
Moreover,
this is accepted that for a new trade or
skill the education didn’t qualify the taxpayer and the other point is that if
the person is already performing their
duties without commencing the MBA then it might be deductible, therefore as
working fringe benefits it qualifies.
Regards
________________
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