Tax Court Rules against Deduction of MBA Tuition

The U.S. Tax Court has ruled against a business student who tried to deduct the cost of tuition for his Masters of Business Administration program, a case that could have major implications for other MBA students who hope to make their tuition more affordable.

In a ruling Monday, U.S. Tax Court Judge Kathleen Kerrigan decided against Adam Edward Hart and his wife Lisa Denning Hart. Adam Hart enrolled in an MBA program with a concentration in finance at Rollins College in Winter Park, Fla., in January 2009. That year, he was employed by a company called Priority Healthcare Distribution, and later after brief periods of unemployment for ADP Totalsource and Walgreen, but none of his employers required him to attend MBA courses. He now works for McKesson as a drug sales representative.

He received a Form 1098-T tuition statement for 2009 reporting qualified tuition expenses of $18,600. When he and his wife filed a joint tax return for that year, they claimed the same amount as an itemized deduction for unreimbursed business expenses on Schedule A, noting that it was for “MBA tuition.” They also applied the threshold of 2 percent of adjusted gross income to the itemized deduction, reducing the amount to $17,138. However, the IRS disallowed the deduction.

Hart claimed that he was in the business of selling pharmaceuticals and that the MBA classes enabled him to obtain employment in 2009. The IRS, for its part, contended that he was not established in a trade or business in 2009, and that his employers did not require him to enroll in an MBA program.

The court noted that implicit in Section 162 of the Tax Code, and the IRS regulations, is the fact that a taxpayer must be established in a trade or business before any expenses can be deductible. The IRS argued that Hart was not established in a trade or business before he entered the MBA program at Rollins. Hart claimed that he was in a trade or business because he focused on the specialized field of selling cancer pharmaceuticals.

“After reviewing the record in this case, and despite an effective pro se representation, we find that petitioner husband was not established in a trade or business before enrolling in the MBA program, and therefore his expenses are not deductible,” Judge Kerrigan wrote.

Hart told Reuters that he plans to ask the Tax Court to reconsider his case after presenting new evidence that he had more work experience before he began the MBA program. If he loses the appeal, he could end up owing the IRS up to $10,000.