of MBA Educational Expenses Under the Allemeier Opinion
Homer L. Bates and Bobby E. Waldrup
APRIL 2006 - Historically,
the IRS and U.S. Tax Courts have conservatively applied the
requirements for the deductibility of education expenses under
IRC section 162, as interpreted by Treasury Regulations section
1.162-5. Despite the nature of the Master’s of Business
Administration (MBA) as a generalized skills–enhancement
degree, the courts have generally classified this degree with
more-targeted profession-oriented degrees in the denying of
deductibility. In the September 2005 CPA Journal,
Cynthia Bolt-Lee discussed the tax deductibility of advanced
business degrees, primarily the MBA (“Deductibility
of Advanced Business Degrees”). Bolt-Lee concluded:
“Court rulings differ widely from case to case. Generally
speaking, the courts and the IRS appear to be continuing their
conservative approach when interpreting the requirements of
qualifying deductible education expenses.” Recently,
the results of the Tax Court case of Daniel R. Allemeier
v. Comm’r (TC Memo 2005-207) provided a more liberal
interpretation of this regulation, permitting the taxpayer
to deduct the tuition costs of his MBA program despite his
steady professional advancement during his MBA studies. The
outcome and facts of this case are of interest to the thousands
of current and future MBA students, especially the two-thirds
of them who attend part-time programs.
section 162 allows for the deduction of ordinary and necessary
expenses incurred in carrying on a trade or business. Treasury
Regulations section 1.162-5 details the guidelines for determining
which educational expenses incident to a taxpayer’s
trade or business are deductible. The IRS’s guidelines
for determining the deductibility of work-related education,
from Publication 970, are illustrated in Exhibit
2002, the Tax Court ruled in Galligan (TC Memo
2002-150) that a law librarian could not deduct her law
school expenses because the expenses qualified her for a
new trade or business. She argued that attending law school
improved and maintained her skills as a law librarian. The
court argued that even though this argument was valid, the
program of study also qualified her for a new trade or business.
Because of the law degree, she became eligible for admission
to the state bar and to enter the general practice of law.
It was not relevant that it also helped her in the performance
of her duties in her present position. In McEuen
(TC Memo 2004-107), the taxpayer was denied the costs of
obtaining an MBA from Northwestern University. She was employed
by two financial analyst firms after receiving her baccalaureate
degree. It was known at these firms that an MBA was required
for promotion. She resigned her position and entered and
completed the MBA program at Northwestern University. After
graduation, she took a position that required the MBA. The
court denied the deduction, ruling that the tasks and activities
at her new position were different than those at her previous
position and, therefore, the MBA qualified her for a new
trade or business.
Sherman (TC Memo 1977-301), the Tax Court sided
with the taxpayer and allowed the deduction of his expenses
incurred in receiving his MBA from Harvard University. Sherman
was employed by the Army and Air Force Exchange Service
as a manager. Upon being accepted into the Harvard MBA program,
he requested a leave of absence, which was denied. He resigned
and completed his MBA program two years later. He reapplied
to the Exchange Service, but a position was not available.
He then accepted a corporate managerial position. The IRS
argued that Sherman was not in a trade or business at the
time he incurred the educational expenses. The Tax Court
disagreed with the IRS and allowed the deduction. The Sherman
case is important because the taxpayer was a full-time,
unemployed MBA student and his educational expenses were
deductible because the court held that he was involved in
a trade or business and was only temporarily away from it.
Schneider (TC Memo 1983-753), the court ruled that
Schneider’s duties as an Army officer did not constitute
a trade or business and therefore his Harvard MBA qualified
him for a new trade or business. Schneider argued that his
position in the Army was that of a manager and his studies
at Harvard improved his managerial skills. The court did
not agree with this argument, stating that under this view
nearly anyone could claim to be a manager in a trade or
business. In the August 31, 2005, Allemeier Tax
Court ruling, however, Justice Kroupa ruled that the taxpayer
should have been allowed a tax deduction of over $15,000
in tuition-related expenses incurred in pursuing an MBA
from Pepperdine University.
Allemeier Tax Court Memorandum
1996, Allemeier had been employed as a salesman by a laboratory
that specializes in making removable orthodontic appliances.
He was initially employed part-time, and became a full-time
employee in 1997 after receiving a bachelor’s degree
in sports medicine. Allemeier was initially hired to sell
a single product; however, he performed very well in his
position, and as a result his responsibilities increased
to multiple products and services. In addition to selling,
his increased duties included designing marketing strategies,
organizing seminars, traveling to meet staff, and promoting
various products. All these tasks were required by his position
and performed prior to his obtaining an MBA degree.
started his MBA studies at Pepperdine University in 1999
and finished in late 2001. Before enrolling in the MBA program,
and before graduation, he had received several promotions.
In these new positions, his duties steadily expanded to
include such actions as analyzing financial reports and
designing action plans for sales. Allemeier remained a full-time
employee while pursuing the MBA degree.
issues. Allemeier deducted $17,500 of tuition
expenses as unreimbursed employee business expenses on his
2001 federal income tax return. The IRS (respondent) disallowed
the deduction, and Allemeier filed a petition for relief
in the U.S. Tax Court. The court specifically focused upon
two of the now-well-examined criteria for this type of deduction:
the minimum education requirement for promotion, and the
qualification for a new trade or business.
first issue examined by the court was whether the MBA was
the minimum education requirement not for initial employment,
but rather for promotion after initial hiring. The IRS argued
that the MBA degree was not required for Allemeier to be
initially hired, but was required for promotion. The evidence
offered by the IRS centered around Allemeirer’s parallel
enrollment in the MBA program and his advancements at work.
second issue examined by the court was whether the MBA qualified
Allemeier for a new trade or business. The IRS argued that
Allemeier’s evolving duties and increased responsibilities
after he enrolled in the MBA program demonstrated that he
entered into a new trade or business. Prior to beginning
the MBA program, Allemeier’s duties were primarily
sales-related and involved minimal financial and managerial
duties. After he entered the MBA program, he advanced to
other jobs, and his duties involved advanced managerial,
marketing, and financial tasks. The IRS argued that: “the
MBA qualified petitioner for the specific new trade or business
of ‘advanced marketing and finance management.’”
factors. On the first issue, of whether the
MBA was a prerequisite to Allemeier’s being promoted,
the court rejected the argument of the IRS. In the stated
opinion of Judge Kroupa:
find no evidence … that petitioner was required
to begin the MBA program to receive the promotions at
issue. … Encouraging petitioner to obtain the MBA
and speculating that he might advance faster with the
MBA is not tantamount to a requirement that petitioner
obtain the MBA. … We decline to find that a minimum
education requirement existed merely because petitioner’s
promotions happened to coincide with his enrollment in
the MBA program.
the second issue, of whether the MBA qualified the petitioner
for a new trade or business, the court also sided with Allemeier’s
argument that the MBA merely enhanced and maintained skills
already used in his job, and did not qualify him for a new
trade or business or for any particular promotions. Allemeier
further argued that the MBA improved the abilities he already
possessed prior to entering the program. The court agreed,
recognizing that Allemeier’s tasks prior to and after
entering the MBA program involved the same types of duties:
excelled in his duties and was rewarded with increased
responsibility, including management, marketing, and finance-related
tasks. The record establishes that he performed these
myriad tasks before he enrolled in the MBA program. Once
he enrolled, but before he finished the MBA program, he
was promoted to new positions involving more complex tasks,
but still involving the same marketing, finance, and management
duties. … Simply acquiring new titles or abilities
does not necessarily constitute the entry into a new trade
or business program. … The MBA rather improved preexisting
skills that petitioner used before enrolling in the MBA
court also distinguished the MBA program from educational
programs qualifying taxpayers for professional certification
or license. Law school expenses have been consistently denied
deductions because the taxpayer qualified for a new trade
or business of being an attorney, even if the duties performed
before and after the education were similar. Courts have
also argued that a licensed public accountant is a different
trade or business from a certified public accountant and
that the educational expenses to become a CPA are not deductible
[Glenn v. Comm’r (Dec. 32, 613) 62 T.C. 270.
275 (1974)]. The MBA did not lead Allemeier to qualify for
a professional certification or license.
primary characteristics of Allemeier and the three
other cases discussed above are compared in Exhibit
2. (Galligan is not included because it did
not involve an MBA program.) Several characteristics of
Allemeier stand out. First, Allemeier received
his MBA education part-time while being employed in a trade
or business full-time. The MBA was not a requirement for
the trade or business, nor was it required for promotion.
Finally, Allemeier was involved in his trade or business
before, during, and after his MBA training; Schneider and
McEuen, however, were not. The court held that the MBA trained
them for new trades or businesses.
Graduate Management Admission Council recently reported
that, according to a special report by the U.S. Department
of Education, two-thirds of domestic MBA students are enrolled
in part-time or executive programs. These programs are growing
much faster than traditional full-time programs. The majority
of the students in part-time programs are employed full-time
and may benefit significantly from the deductibility of
education expenses. In determining whether educational expenses
for an MBA are deductible, students and their tax advisors
should consider the criteria used by Justice Kroupa in Allemeier:
Allemeier was in a trade or business prior
to, during, and after pursuing his MBA degree.
He continued in the same trade or business while completing
his MBA requirements. Remaining with the same employer
may have been a positive factor in the decision and should
be taken into account by present MBA students.
The MBA was not required for the initial position
or for subsequent promotions. The MBA degree
was not a condition for continued employment. Allemeier
was initially hired without the MBA degree; in fact, he
was initially hired part-time without any degree and was
hired full-time after completing a nonbusiness degree
in sports medicine. His supervisor strongly recommended
that he pursue the MBA degree, but it was not required
for subsequent promotions. He was promoted prior to entering
the MBA program and was promoted again while in the program.
His specific academic business knowledge did not appear
to be a major factor in his initial hiring or in his promotions.
His sports medicine background appeared to be a factor
in his initial hiring. Present MBA students should determine
whether their present position or the position of their
immediate supervisor requires an advanced business degree.
The job requirements before and after entering
the MBA program were not substantially different. Allemeier
was initially hired as a salesperson and was promoted
to more advanced but similar positions before entering
the MBA program and while in the program. His trade or
business was considered the same before, during, and after
the MBA program. Current MBA students should examine whether
their duties have changed significantly since beginning
the MBA program or will change upon its completion.
The MBA program was not a requirement for
a professional certification or licensure.
The MBA program is a general business program to prepare
students for general business duties and not for certification.
The education expenses of an MBA program concentrating
on accounting and preparing students for the CPA exam
would not be tax deductible because of the professional
certification preparation feature. MBA students should
determine whether professional certification (CPA, CMA,
CIA, CFP) was a result of their graduate training.
Students, Take Note
number of students earning the MBA degree has grown significantly
over the past decade, to over 110,000 in 2000, an increase
of 46% from 1990. Presently there are over 2,000 graduate
business programs offered by over 1,200 different institutions
worldwide. Enrollments in part-time MBA programs comprise
approximately two-thirds of all enrollments, and are also
increasing, along with the costs of such programs (Gene
J. Koprowski, “Will MBAs Seek New Certification?,”
College Journal from the Wall Street Journal, Sept.
14, 2004). For example, the 2005–2007 total class
program fees for the Weekend MBA program at Michigan State
are $44,700 for in-state students, up from $42,700 for the
2004–2005 program (bus.msu.edu/wmba/).
The executive MBA at University of California Irvine has
a cost of $67,500 for the 2005–2006 class
Part-time and executive MBA programs are growing in both
popularity and cost.
criteria used in Allemeier should be applicable
to many part-time MBA students. The decision may be a means
by which many current and future MBA students can decrease
their out-of-pocket educational expenses.
L. Bates, PhD, CPA, is the Coggin Teaching Professor
of Accounting, and Bobby E. Waldrup, PhD, CPA,
is an assistant professor of accounting, both in the department
of accounting and finance, Coggin College of Business, University
of North Florida, Jacksonville, Fla.