Master of business administration degree, the sherman case, tax deductions


For years, the deductibility of educational expenses was a contentious area of tax law. However, over the past decade Congress has passed numerous provisions designed to allow taxpayers to deduct the cost of education. Thus, the emphasis has changed from “is the expense deductible” to “what kind of expense is it”, “who wants to take it” and “in what form do they want to take the deduction”?

It has always been more difficult to deduct the expenses of getting a graduate education, and was impossible if it lead to a professional degree (e.g. law, medicine, CPA). Deducting the expenses of an MBA degree, however, was a different matter. The MBA did not prepare someone to enter a new field, since anybody could own a business, thus, MBA expenses were the source of several law suits that tried to draw some bright line tests. However, Congress has rendered some of those tests unnecessary for some tax payers and may have simply created new tests and new methods of deductibility for others.

However, taking the deduction under §162 results in a greater deduction and is not subject to AGI limitations. Therefore, it is still important to analyze the deduction under §162 and only rely on the other provisions, if necessary. This is especially important because the IRS has not acquiesced to the Tax Court’s positions despite the numerous cases to the contrary. Therefore, although the regulation seems clear and the cases have gone so far as to indicate they are not going to follow the IRS’s Revenue Ruling, the IRS seems entrenched in its position establishing a continuous string of ever increasing hurdles that are not on the face of the Regulation, congressional intent, or the court case of petitioners.

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