Rev. Rul. 80-173

ISSUE

Are an airline pilot's expenditures on tuition and fees for an aviation program involving the flying of certain types of small aircraft, deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code when such expenses are directly reimbursed by veterans' benefit payments paid pursuant to 38 U.S.C. section 1677 (1976), as amended by Act of Nov. 23, 1977, Pub. L. 95-202, section 102(1), 91 Stat. 1433?

FACTS

The taxpayer, a captain-pilot with a major airline, enrolled in an aviation program in which licensed pilots receive training in certain types of small aircraft. The total cost of the course was 10x dollars.

The taxpayer is a veteran, and therefore was receiving reimbursement from the Veterans' Administration under 38 U.S.C. section 1677 (1976) to the extent of 90 percent of the training expenditure. Such reimbursement is exempted from taxation by 38 U.S.C. section 3101 (1976), as amended by Act of Oct. 18, 1978, Pub. L. 95-479, section 301, 1978-2 C.B. 377.

LAW AND ANALYSIS

Section 262 of the Code provides that except as otherwise expressly provided, no deduction shall be allowed for personal, living, or family expenses.

Section 162 of the Code provides for the deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Whether expenditures for education are deductible under section 162 of the Code and section 1.162-5 of the Income Tax Regulations is highly factual and cannot be determined on the basis of the facts described above. However, as a general rule, if the training is necessary to maintain or improve skills required in the taxpayer's employment, the expense would be deductible. If the expenditure is necessary to meet the minimal educational requirements of the employment, or if the education qualifies the taxpayer for a new trade or business, the expenditure is not deductible.

If under the facts of a particular case, it is determined that an expense is otherwise properly deductible under section 162 of the Code, a taxpayer is not allowed a deduction for an expense to the extent it is allocable to a payment for which the taxpayer has been reimbursed (or for which the taxpayer's right to reimbursement has become fixed or mature). See Rev. Rul. 78-388, 1978-2 C.B. 110. Rev. Rul. 78-388 holds that certain moving expenses and the loss attributable to abandoned leasehold improvements, to the extent they are reimbursable, are not deductible under either section 162 or 165 of the Code.

If an expense has been (or will be) reimbursed in whole or in part, any deduction otherwise allowable with respect to the expense is disallowed to the extent of the reimbursement. In such a case, the taxpayer suffers no economic detriment and incurs no expense in making the expenditure to the extent of the reimbursement.

HOLDING

Provided it is determined that a deduction is allowable to the taxpayer under section 162 of the Code and section 1.162-5 of the regulations, the taxpayer may not deduct the 9x dollars under section 162 of the Code, which is the amount of the reimbursement to the taxpayer by the Veterans' Administration under 38 U.S.C. section 1677. Whether 1x dollars is deductible will depend on all the facts and circumstances in each case.

This holding applies only to reimbursement payments made under 38 U.S.C. section 1677. For treatment of subsistence and educational allowance payments made under 38 U.S.C. section 1681 (1976), which are not reimbursement payments determined by reference to amounts actually expended for tuition and fees, but rather are in the nature of a living stipend determined without regard to amounts expended, see Rev. Rul. 62-213, 1962-2 C.B. 59.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 62-213 is distinguished and clarified.