MBA Student Gets Expense Deduction but Not Fee Award

Julien J. Lardet-Maurin & Terry Gene
Conley, Jr.,
Petitioners
v.
Commissioner of Internal Revenue,
Respondent

United States Tax Court

ORDER AND DECISION

Currently pending before the Court is Julien J. Lardet-Maurin & Terry Gene Conley, Jr., (petitioners') motion for reasonable litigation or administrative costs, filed on December 1, 2020, pursuant to section 7430.¹ Respondent filed a response opposing petitioners' motion, and although petitioners filed a motion for leave to file a reply, they did not do so. Neither party requested an evidentiary hearing, and after review of the record, we conclude that such a hearing is not necessary to dispose of petitioners' motion. See Rule 232(a)(2). We will decide the matter on the basis of the record that has been developed to date.

Background

Mr. Lardet-Maurin began a Master of Business Administration (MBA) program at the Kellogg School of Management at Northwestern University in the fall of 2014. Prior to receiving his degree, Mr. Lardet-Maurin was employed as a Senior Consultant with Monitor Deloitte. During the course of his MBA program, Mr. Lardet-Maurin was a summer intern with the Boston Consulting Group (BCG). After graduation from the MBA program in 2016, Mr. Lardet-Maurin was employed by BCG, where he is employed as a Project Lead. Petitioner deducted his MBA-related expenses on petitioners' Federal income tax return for the 2016 tax year. Specifically, petitioners claimed $11,353 related to Mr. Lardet-Maurin's tuition expenses.

On December 20, 2019, the Internal Revenue Service (IRS) issued petitioners a Notice of Deficiency disallowing petitioners' tuition expenses and asserting a penalty pursuant section 6662. The reason the IRS listed for the disallowance was that the courses Mr. Lardet-Maurin enrolled in were part of a program of study that may lead to qualifying him for a new trade or business. Petitioners timely filed a petition in this case on January 10, 2020. After communications between the parties, respondent ultimately conceded the case. On November 13, 2020, the Court entered a stipulated decision that reflected the parties' agreement that petitioners were not liable for any deficiency or penalty for the 2016 tax year.²

Discussion

I. Applicable Legal Framework

As relevant here, section 7430 provides to a taxpayer an award of reasonable litigation costs in a proceeding brought by or against the United States involving the determination of any tax, interest, or penalty.³ Reasonable litigation costs include court costs and fees paid or incurred for the services of an attorney. Sec. 7430(c)(1) and (2).

A judgment for reasonable litigation costs incurred in connection with a court or administrative proceeding may be awarded if a taxpayer: (1) is the prevailing party; (2) has exhausted his administrative remedies with the IRS; and (3) did not unreasonably protract the proceedings. See sec. 7430(a), (b)(1), (3); Polz v. Commissioner, T.C. Memo. 2011-117; Nguyen v. Commissioner, T.C. Memo. 2003-313. The requirements of section 7430 are conjunctive, and failure to satisfy any one of the requirements preclude an award of costs. See Rule 232(e); Alterman Tr. v. Commissioner, 146 T.C. 226, 227 (2016); Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 441 (1997). Section 7430 is a waiver of sovereign immunity and must be strictly construed in the Commissioner's favor. See Estate of Cervin v. Commissioner, 200 F.3d 351, 355 (5th Cir. 2000), aff'g T.C. Memo. 1998-176; Simpson v. Commissioner, T.C. Memo. 1995-194. The decision to award fees is within the sound discretion of the Court. See Morrison v. Commissioner, 565 F.3d 656, 661 n.3 (2009).

To be a prevailing party, the taxpayer must: (1) substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented and (2) satisfy the applicable net worth requirement. Sec. 7430(c)(4)(A). The taxpayer will nevertheless fail to qualify as the prevailing party if the Commissioner's position in the proceeding is shown to have been substantially justified. Sec. 7430(c)(4)(B)(i); see also Pierce v. Underwood, 487 U.S. 552, 565 (1988). Although the taxpayers have the burden of proving that they meet the requirements of a prevailing party, the Commissioner must show that his position was substantially justified. See Rule 232(e); sec. 7430(c)(4)(B).

Of the requirements outlined above, respondent concedes that: (1) petitioners have substantially prevailed with respect to the most significant issue presented in this case; (2) they have exhausted the administrative remedies available to them within the IRS; and (3) petitioners have not unreasonably protracted the Court proceedings or the administrative proceedings.

Respondent contends, however, that the petitioners have not met the net worth requirements set forth under section 2412(d)(2)(B) and section 301.7430-5(g), Income Tax Regs., and are therefore not the prevailing party. Respondent further argues that the amount of costs claimed by petitioners is not reasonable, and that respondent's position was substantially justified.

II. Substantially Justified

The Commissioner's position is substantially justified if, on the basis of all the facts and circumstances and the legal precedents relating to the case, the Commissioner acted reasonably. Pierce v. Underwood, 487 U.S. at 565; Swanson v. Commissioner, 106 T.C. 76, 86 (1996)). In other words, to be substantially justified, the Commissioner's position must have a reasonable basis in both law and fact. Pierce v. Underwood, 487 U.S. at 563-565. Thus, the Commissioner's position may be incorrect but nevertheless be substantially justified “if a reasonable person could think it correct”. Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443 (quoting Pierce v. Underwood, 487 U.S. at 566). Courts have generally found that the Commissioner's position was substantially justified in cases that mainly involve factual issues. See, e.g., Bale Chevrolet v. United States, 620 F.3d 868 (8th Cir. 2010).

Conceding a case, even in full, does not necessarily mean that the position of the United States was not substantially justified. Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443.

We evaluate respondent's litigating position on the basis of its actions after the filing of the petition. See Friends of Benedictines in Holy Land v. Commissioner, 150 T.C. 107, 117-118 (2018); St. Claire v. Commissioner, T.C. Memo. 2016-192.⁴ In this instance, we evaluate whether respondent's litigating position regarding petitioners' deduction for MBA-related expenses was substantially justified.

III. Application to the Motion

Section 162(a) generally allows deductions for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. Education expenses are considered ordinary and necessary business expenses if the education maintains or improves skills required by the taxpayer in his employment or meets the express requirements of the taxpayer's employer imposed as a condition of the taxpayer's continued employment, status, or rate of compensation. Sec. 1.162-5(a), Income Tax Regs.

However, this general rule does not apply if the expenditures are those incurred to meet the minimum educational requirement for qualification in a taxpayer's trade or business or if they qualify a taxpayer for a new trade or business. Sec. 1.162-5(b)(2) and (3), Income Tax Regs. These categories of education expenses are personal expenditures and are not deductible. Sec. 1.162-5(b)(1), Income Tax Regs. Whether a program of study qualifies the taxpayer for a new trade or business is a question of fact. See Reisinger v. Commissioner, 71 T.C. 568, 572 (1979).

A degree can qualify a taxpayer for a new trade or business depending upon the tasks and activities he was qualified to perform before the education in question and those he was qualified to perform afterwards. See Glenn v. Commissioner, 62 T.C. 270, 275 (1974); Weiszmann v. Commissioner, 52 T.C. 1106, 1110 (1969), aff'd per curium 443 F.2d 29 (9th Cir. 1971). When the degree qualifies the taxpayer to perform significantly different tasks and activities from those he could have performed without the degree, then that education is deemed to qualify the taxpayer for a new trade or business. Robinson v. Commissioner, 78 T.C. 550, 552 (1982). This is an objective test. See Diaz v. Commissioner, 70 T.C. 1067, 1073 (1978). Conversely, if the degree merely “enhances” preexisting skills rather than qualifies the taxpayer to perform “significantly” different tasks and activities, then the education expenses are deductible. See Allemeier v. Commissioner, T.C. Memo. 2005-207, 2005 WL 2092919, at *5.

As relevant to our disposition of petitioners' motion, the record reveals, inter alia, that Mr. Lardet-Maurin was employed as a Senior Consultant with Monitor Deloitte prior to his enrollment in his MBA program. It does not appear that this role contained any management responsibilities. The record further reflects that after Mr. Lardet-Maurin's graduation, he was employed with BCG, where he is now a Project Lead. It is an objectively reasonable position that the MBA provided Mr. Lardet-Maurin managerial training that could have qualified him for a new trade or business. Although Mr. Lardet-Maurin remained in the consulting industry, his MBA education could have significantly changed his role in that industry, which supports the notion that he may not have been able to deduct those expenses.

We therefore find it reasonable for the Commissioner to have taken the position that the MBA degree obtained by Mr. Lardet-Maurin qualified him for a new trade or business. Although respondent ultimately conceded the case, in these circumstances respondent's position was substantially justified.⁵ See also Allemeier v. Commissioner, T.C. Memo. 2006-28, 2006 WL 354650, at *2-*3. Thus, petitioners are therefore not the prevailing party within the meaning of section 7430(c)(4)(A), and we hold that petitioners are not entitled to an award of litigation costs.

We have considered all of the arguments made by the parties and, to the extent they are not addressed herein, we deem them to be moot, irrelevant, or without merit.

Upon due consideration, it is

ORDERED that petitioners' motion for reasonable litigation and administrative costs, filed December 1, 2020, is denied. It is also

ORDERED AND DECIDED that there is no deficiency in Federal income tax due from, nor overpayment due to, petitioners for the 2016 tax year, and there is no penalty due from petitioners for the 2016 tax year under the provisions of section 6662(a).

(Signed) Courtney D. Jones
Judge