T.C. Memo. 1997-33
UNITED STATES TAX COURT
JOHN H. HUDGENS III, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7062-94. Filed January 21, 1997.
John H. Hudgens III, pro se.
Lawrence B. Austin, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
POWELL, Special Trial Judge: This case was assigned
pursuant to the provisions of section 7443A(b)(3) and Rules 180,
181, and 182.1
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Respondent determined deficiencies in petitioner's Federal
income taxes for the taxable years 1990 and 1991 in the amounts
of $641 and $776, respectively.
After concessions, the sole issue is whether petitioner is
entitled to deduct as educational expenses costs incurred
obtaining a master of laws (LL.M.) in taxation under section 162.
Petitioner resided in Columbia, South Carolina, at the time he
filed his petition.
FINDINGS OF FACT
Petitioner graduated from The Citadel in 1984 with a B.S.
degree in business administration. Soon thereafter, petitioner
enrolled at the University of South Carolina (USC). In December
1987, petitioner graduated from USC with a J.D. degree and a
master's in taxation from the business school. Petitioner
accepted a position on the tax staff of Arthur Andersen & Co.
(Arthur Andersen) in January 1988. At Arthur Andersen,
petitioner spent approximately 30 to 40 percent of his time
preparing tax returns, 40 to 50 percent researching the tax law,
and the remainder consulting clients about tax matters.
In March 1990, petitioner quit his job at Arthur Andersen.
After leaving Arthur Andersen, petitioner worked for John Shell
Associates, Inc., a temporary accounting firm for 4 weeks.
Petitioner did not plan to rejoin either firm. He then went on
active duty with the National Guard and completed an advanced
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officer training course at Fort Knox, Kentucky. In August 1990,
petitioner enrolled at Emory University School of Law (Emory) in
Atlanta, Georgia, to obtain an LL.M. in taxation. Petitioner
graduated with an LL.M. from Emory in May 1991.
Prior to his graduation from Emory, petitioner began
discussions concerning the possibility of his employment with The
Southeastern Trust Co. (STC), a privately owned, State-chartered
trust company. Because STC was a young company, it was initially
able to offer petitioner only a part-time position. Petitioner
worked part-time for STC from September 1, 1991 to January 31,
1992. In February 1992, petitioner became a full-time employee
of STC as one of STC's five principal trust officers. Between
August 1, 1991 and January 31, 1992, petitioner also worked part
time for Jack Williamson & Associates (Williamson), a small
accounting firm. Petitioner anticipated that his part-time
employment with Williamson would be temporary. Petitioner also
attended additional National Guard annual training after his
graduation from Emory. On his 1991 Federal income tax return,
petitioner reported income in the amount of $2,800 from 5 months'
employment at Williamson2 and $6,217 from STC. Petitioner also
reported $7,123 of income from the National Guard activities.
2
For 1991, petitioner reported wages in the amount of $16,140.
According to the two Forms W-2 attached, petitioner received
wages in the amounts of $6,217 from STC and $7,123 from the
Department of Defense. We assume that the remaining $2,800 was
received from Williamson.
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Hugh Z. Graham, Jr. (Mr. Graham), an executive vice-
president of the Columbia, South Carolina, office of STC
described the business of STC as
65 to 80 -- 65 to 70 percent investment management for our
clients.
The rest of the services that we provide are the other
fiduciary kinds of things that you would see in a trust
company such as bill paying, and report making, and you
know, investment, objective-setting, and those kinds of
things, like that.
And then, of course, there is the necessity to -- for
all the peripheral things, like the fiduciary tax aspects of
what we do * * *
Mr. Graham further testified that (1) petitioner's duties
included account administration and primarily new business
development; (2) all of the principal trust officers performed
similar duties; (3) excluding petitioner, none of the principal
trust officers were certified public accountants or possessed a
master's degree in taxation, and only one other was an attorney;
(4) petitioner prepared most of the fiduciary tax returns for the
Columbia office; (5) petitioner served as treasurer of STC; and
(6) all of the principal trust officers provided some tax advice.
Petitioner's description of the duties he performed at STC
generally matched Mr. Graham's; however, petitioner emphasized
the tax aspects to a greater extent.
On his 1990 and 1991 Federal income tax returns petitioner
claimed employee business expense deductions for the cost of
obtaining his LL.M. degree in the amounts of $11,476 and $13,033,
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respectively. In the notice of deficiency respondent, among
other things, disallowed the educational expense deductions.
OPINION
Section 162(a) allows a deduction for all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. Personal expenses are not
deductible. Sec. 262(a). Expenses for education may be
deductible as expenses of a trade or business if certain
requirements set forth in the regulations are met.3 See sec.
1.162-5, Income Tax Regs. As a threshold matter, the statute
requires that a taxpayer incur the educational expenses in
"carrying on" a trade or business. Sec. 162(a).
Whether a taxpayer is engaged in a trade or business and the
nature of that trade or business are questions of fact. Ford v.
Commissioner, 56 T.C. 1300, 1307 (1971), affd. 487 F.2d 1025 (9th
Cir. 1973). A taxpayer may be in the trade or business of being
an employee. Primuth v. Commissioner, 54 T.C. 374, 377 (1970).
The temporary cessation of a trade or business does not preclude
a finding that a taxpayer was carrying on that trade or business
during the period of cessation. Haft v. Commissioner, 40 T.C. 2,
6 (1963). Thus, even an unemployed taxpayer may be considered to
be carrying on a trade or business if the taxpayer was previously
3
Respondent does not contend that petitioner fails to satisfy
the limitations set forth in the regulations concerning the
deduction of costs for entry-level or upward-bound education.
See sec. 1.162-5(b), Income Tax Regs.
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involved in and intended to return to a particular trade or
business. Id. In order to take advantage of what has been
described as the "hiatus" principle, a taxpayer must show that
during the hiatus he intended to resume the same trade or
business. See Estate of Rockefeller v. Commissioner, 762 F.2d
264, 270 (2d Cir. 1985) (citing Sherman v. Commissioner, T.C.
Memo. 1977-301), affg. 83 T.C. 368 (1984). If substantial
differences exist in the tasks and activities of the employments
undertaken before and after the period of education, then each
employment constitutes a separate trade or business. Davis v.
Commissioner, 65 T.C. 1014, 1019 (1976). For example, this Court
has held that a helicopter pilot is engaged in a different trade
or business than an airline pilot. Lee v. Commissioner, T.C.
Memo. 1981-26, affd. 723 F.2d 1424 (9th Cir. 1974). Similarly,
we have held that a licensed practical nurse is not in the same
trade or business as a registered nurse. Reisinger v.
Commissioner, 71 T.C. 568 (1979).
Petitioner asserts that, under the hiatus principle, he was
engaged in a trade or business as a "tax consultant" while
earning his LL.M. at Emory, because in his view he was employed
as a "tax consultant" both before and after his enrollment at
Emory. Petitioner primarily relies on a comparison of his duties
at Arthur Andersen with his duties at STC. Respondent contends
that the nature of petitioner's employment differed substantially
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before and after the educational hiatus, and as such, the
educational expenses are nondeductible personal expenses.
We recognize at the outset that in today's business world
the effects of tax laws are driving considerations in virtually
all decisions. In this sense, a knowledge of the tax laws may
well be a common denominator in various professions from legal
practice as a tax lawyer, to the practice of tax accounting, to
the business of asset management, and so on. Nonetheless, we
still recognize the separateness of these trades or businesses,
even though the lines of demarcation may become somewhat blurred.
Regardless of how we define petitioner's occupations, we
conclude that the duties petitioner performed at Arthur Andersen
differed substantially from the duties petitioner performed at
STC. At Arthur Andersen petitioner predominantly prepared tax
returns and researched tax issues. In contrast, the raison
d'etre for STC was not preparing tax returns or researching
clients' tax problems; it was managing assets. While petitioner
may have prepared some tax returns and researched some tax issues
at STC, those roles were entirely ancillary to the function of
managing client's assets and acquiring new clients.4 In sum,
petitioner's employment at STC did not constitute the same trade
or business as his employment at Arthur Andersen, because the
4
Indeed, petitioner recognized in his opening statement that
"the duties and tasks and responsibilities at the Southeastern
Trust Company may be, in many respects, different from his duties
at Arthur Andersen".
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tasks and activities performed at STC differed substantially from
the tasks and activities performed at Arthur Andersen.
In passing, petitioner mentions that his duties at
Williamson were not substantially different from his duties at
Arthur Andersen. While this contention may not be disputed, it
is not dispositive of the issue before us, because the record
does not support the conclusion that petitioner's temporary,
part-time work at Williamson established him in the trade or
business of accounting after he attended Emory. Indeed,
petitioner disavowed any intent to return to the accounting
profession at that time. Cf. Link v. Commissioner, 90 T.C. 460
(1988), affd. without published opinion 869 F.2d 1491 (6th Cir.
1989); Reisine v. Commissioner, T.C. Memo. 1970-310.
Accordingly, we hold that petitioner may not deduct the
educational expenses in issue. To reflect the concessions,
Decision will be entered
under Rule 155.