The United States Tax Court just made it easier for MBA students, and especially Executive MBA students, to deduct degree-related expenses come tax time — including tuition.
In a decision released this month, the court ruled in favor of Alex Kopaigora, who earned his EMBA from Brigham Young University’s Marriott School of Business in 2011. Kopaigora, who worked in Los Angeles but commuted every two weeks to Utah while getting his degree, and his wife Elizabeth had sought to deduct $18,879 on their 2011 tax return for tuition, commuting, and other expenses. The IRS objected, in part because for several months while he was studying at BYU Kopaigora was unemployed after losing his job with the Marriott Hotel in Los Angeles International Airport.
The IRS cited a rule (Section 162) that for education expenses to be deductible, a taxpayer must be “presently engaged” in related trade or business. The Tax Court judge disagreed, ruling that because Kopaigora had actively sought employment in his field for the remainder of his time at BYU — a search that paid off when he was hired by a small California-based finance firm shortly after graduating — he was entitled to the deductions. The ruling saved Kopaigora approximately $2,111.
More than a couple grand in one EMBA’s pocket, the ruling may save thousands of dollars for many future MBAs and EMBAs, says Robert Willens, an adjunct professor and tax expert at Columbia Business School. “It’s hard not to see this case as a real positive,” Willens told Poets&Quants. “It is a very important case.”
TWO KEY POINTS MAKE THIS AN IMPORTANT CASE
Kopaigora v. Commissioner “checks all the boxes,” Willens adds. “There are two important things here. The deduction was allowed even though for a substantial part of the time during which he was at school, he was not working. And that’s a big issue with conventional MBAs because in order to claim the deduction, you have to be carrying on a trade or business at the time the expense is incurred. And the IRS frequently tries to argue that a conventional MBA who is not working for two years is not carrying on a trade or business, for the simple reason that he or she is not gainfully employed while pursuing the MBA.”
The IRS has lost other cases on this point, Willens says, in large part because the courts seem to have accepted the argument that business school is only a “temporary cessation or a hiatus in the conduct of the trade or business,” one that will end with the student returning to the trade or business from which he or she came after matriculating at school. The court recognizes the students “always intended to resume the trade or business as soon as graduation rolled around,” says Willens, who advises Columbia students on their tax options as part of his Investment Banking Tax Factors class.
The second important element of the Kopaigora case, Willens says, is that it reinforces the view that B-school is not subject to regulations forbidding deductions for educational pursuits — such as law school, for example, or medical school — that qualify someone for a new trade or business. “The courts have been pretty lenient about MBAs,” Willens says. “The courts have always been pretty clear about the fact that an MBA, while it’s a wonderful degree to have, doesn’t qualify you for a new trade or business. And this is another case that confirms that fact — to the point where I think the IRS will stop arguing at this point that an MBA qualifies one for a new trade or business. I think they’ve gotten the message that the courts are not going to accept that theory.
“We’ve had real good success in that. There are cases that confirm that theory, but it’s always good to have another one. This is a big win.”
NO PRECEDENT? NOT SO FAST
Kopaigora v. Commissioner, like all Tax Court cases, can’t be appealed, and while it theoretically can’t be used as precedent either, Willens says it will impact how the IRS approaches future cases. “Admittedly, it’s not theoretically supposed to be cited as precedent,” he says, “but (such opinions) clearly are, and the IRS obviously is aware of these decisions and would certainly be reluctant to make the same arguments that prove to be unsuccessful even in a summary case.”
Still, MBAs and EMBAs looking to deduct their tuition shouldn’t expect a free hand. The government doesn’t give up so easily, Willens says.
“This case can’t be appealed, but there’s no shortage of cases — they can bring other cases,” says Willens, who has taught at Columbia for 24 years and advised hundreds of students on deducting tuition and other degree-related expenses. “There’s been a surprisingly large number of MBA cases through the years. (The IRS will) still bring cases where they feel like they have the facts to win the case, so while this case can’t be appealed, they’ll find another one, no doubt.”
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