February 5, 2014

Adam Hart may have seen himself as an established pharmaceutical salesman, but the Tax Court didn’t agree.

Hart graduated from college in 2007. In 2009, he enrolled in an M.B.A. program with a concentration in finance.

Hart deducted $18,600 as an unreimbursed employee business expense for his education costs paid during 2009. The IRS denied the deduction.

Hart’s employment history during 2009 was as follows:

  • Jan. 1 to April 30, 2009 – employed by Priority Healthcare Distribution as a cancer pharmaceutical salesman
  • May 1 to Aug. 10, 2009 – unemployed
  • Aug. 11 to Oct. 1, 2009 – employed by ADP Totalsource as a cancer pharmaceutical sales account manager
  • Oct. 2 to Oct. 11, 2009 – unemployed
  • Oct. 12 to Dec. 31, 2009 – employed as entry-level professional for Walgreen Co.

None of his 2009 employers required Hart to attend M.B.A. courses. Hart contended that he was in the business of selling pharmaceuticals and that the M.B.A. classes he took enabled him to obtain employment in 2009.

The IRS contended that Hart was not established in a trade or business during 2009 and that his employers did not require him to enroll in an M.B.A. program.

Implicit in claiming a business expense deduction for education expenses is the notion that the taxpayer must be established in a trade or business before any expenses are deductible. The IRS contended that Hart was not established in a trade or business before entering the M.B.A. program.

Hart contended that he was engaged in a trade or business because he focused on the selling of cancer pharmaceuticals, which is a specialized field.

The Tax Court sided with the IRS and denied the deduction. The court’s reasoning included the following:

  • Hart graduated from college only two years before starting his M.B.A. program.
  • Carrying on a trade or business has been defined as entailing continuous and regular activity.
  • Hart’s employment in the cancer pharmaceutical sales field was not continuous.
  • There is no evidence that Hart was carrying on a trade or business before he enrolled in the M.B.A. program.

Because the court ruled that Hart was not engaged in a trade or business, it had no reason to decide whether the M.B.A. program would qualify Hart for a new trade or business (Adam E. Hart et. ux. v. Commissioner, T.C. Memo 2013-289, Dec. 23, 2013).

This article was originally posted on February 5, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.