The Tax Court said no to an accountant and tax preparer who tried to deduct the cost of law school.
Emmanuel Santos, who had a number of degrees and work experience in tax, accounting and financial planning, tried to deduct his tuition expense for law school on his 2010 tax return. The Tax Court denied the deduction in Santos v. Commissioner, T.C. Memo 2016-100, filed May 17, 2016.
Santos earned a bachelor’s degree in accounting in 1989 and began working as a tax return preparer in 1990. He became an enrolled agent in 1995 and earned a master’s degree in taxation in 1996. He then began offering accounting and financial services to his clients. At some point he enrolled in law school, graduating in 2011. He was admitted to the California Bar in 2014 and admitted to practice before the U.S. Tax Court. In 2015 he started a law firm with his father.
On his Schedule C for 2010, Santos deducted $20,275 for law school tuition and fees for the “business or profession” of “tax and financial planning.” The Tax Court based its denial of the deduction on Code section 262, which provides that no deduction is allowed for personal, living or family expenses. Expenditures made by taxpayers in obtaining or furthering their education are considered personal expenses and are not deductible unless they qualify under section 162, the court noted. “Section 1.162-5(a), Income Tax Regs., permits a deduction for education expenses that (1) maintain or improve skills required by the taxpayer in his or her employment or (2) meet the express requirements of the taxpayer’s employer…,” the court stated.
Expenses for education that are part of a program of study that will lead to qualifying the taxpayer for a new trade or business are specifically listed as nondeductible by the regulations. The court cited a number of decisions upholding the regs, including a case in which a CPA could not deduct the cost of a law degree, even though he undertook the education to improve his accounting and tax skills and never intended to engage in the practice of law. Because binding precedent holds that the regulation is valid, the court declined to reconsider the validity of Reg. section 1.162-5, as Santos urged.
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