T.C. Memo. 2003-68
UNITED STATES TAX COURT
PIETER WEYTS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10054-01. Filed March 12, 2003.
Pieter Weyts, pro se.
Diana P. Hinton, for respondent.
MEMORANDUM OPINION
POWELL, Special Trial Judge: Respondent determined a
deficiency of $4,270 in petitioner’s 2000 Federal income tax.
The issues are whether petitioner is (1) entitled to a deduction
under section 162 for educational expenses, (2) entitled to an
exemption under Article 21 of the Convention for the Avoidance of
Double Taxation, Oct. 13, 1972, U.S.-Belg., 23 U.S.T. (Part 3)
2687; (3) entitled to a charitable contribution deduction under
section 170, and (4) entitled to an education loan interest
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deduction under section 221.1 Petitioner resided in New York,
New York, at the time the petition was filed.
Background
Educational Expenses and Article 21 Exemption
Petitioner is a citizen of Belgium. In June of 1997,
petitioner graduated from Katholieke Universiteit Leuven in
Belgium, where he earned a law degree. After graduation and
until the following August, petitioner worked as a legal
assistant for his father, a Belgian attorney. Petitioner was not
admitted to the Belgian bar. In Belgium, a law school graduate
must work for 3 years as a “studiare” or apprentice before
qualifying for admission to the bar.
In August of 1997, petitioner came to New York City to
attend Columbia University School of Law (Columbia). In May of
1998, he was awarded a Master of Laws (LL.M.) in Corporate
Finance. In July of 1998, petitioner sat for and passed the New
York State bar examination.
Petitioner desired to work temporarily as an attorney in New
York City. He was advised to obtain a J.D. degree to increase
his marketability in the competitive New York City legal
community. Petitioner enrolled in the J.D. program at Columbia
1
Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the year in issue, and
Rule references are to the Tax Court Rules of Practice and
Procedure.
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in August of 1998. Petitioner received 1 year of credit towards
his J.D. graduation requirements from his studies in the LL.M.
program which would have enabled him to graduate in May of 2000.
Petitioner, however, decided to enroll in a joint J.D./M.B.A.
program that extended his studies for 1 more year.
During the summer of 1999, petitioner worked as a summer
associate for the law firm of Kelley Drye & Warren, LLP (Kelley
Drye). In July of 1999, petitioner was formally inducted into
the New York State Bar. The following summer, from approximately
May to August of 2000, petitioner was employed as a summer
associate at the law firm of Davis Polk & Wardwell (Davis Polk).
Petitioner received both monetary compensation from Davis Polk
and 3 hours of class credit.
On his 2000 Federal income tax return, petitioner claimed a
Schedule A itemized deduction of $36,154 for educational
expenses. Upon examination, respondent disallowed the deduction.
Charitable Contribution Deduction
Sometime in 2000, petitioner paid $700 to attend a student
benefit to raise money for an informal organization to allegedly
aid minority student’s scholarships. This amount entitled
petitioner to attend a benefit at which a dinner was served.
Petitioner did not attend the dinner. On his 2000 return,
petitioner did not claim a charitable contribution deduction for
the amount paid. Petitioner now claims that he is entitled to
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deduct $620 for the gift because $80 was attributable to services
rendered in the form of the dinner.
Deduction for Education Loan Interest
Before he commenced his studies at Columbia, petitioner
allegedly borrowed money from a Dutch bank to finance his
educational expenses. The loan was secured by the home of
petitioner’s parents, and his parents were guarantors on the
loan. EURO 6,197 was paid as interest in 2000, and the parties
agree that the dollar conversion is $5,329. Petitioner claims
that he is entitled to a deduction for education loan interest
under section 221.
Discussion
Section 162 Deduction for Educational Expenses
“Expenditures made by a taxpayer in obtaining an education
or in furthering his education are not deductible unless they
qualify under section 162 and § 1.162-5”. Sec. 1.262-1(b)(9),
Income Tax Regs.; see also Boser v. Commissioner, 77 T.C. 1124,
1132 (1981). Section 162(a) limits deductions for all “ordinary
and necessary expenses” to those incurred “carrying on any trade
or business”. The determination of whether a taxpayer is engaged
in a trade or business “requires an examination of the facts in
each case.” Higgins v. Commissioner, 312 U.S. 212, 217 (1941).
“[T]o be engaged in a trade or business, the taxpayer must be
involved in the activity with continuity and regularity and that
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the taxpayer’s primary purpose for engaging in the activity must
be for income or profit.” Commissioner v. Groetzinger, 480 U.S.
23, 35 (1987). Moreover, to qualify for the deduction, the
taxpayer must be established in the trade or business at the time
the educational expenses are incurred. Jungreis v. Commissioner,
55 T.C. 581, 588 (1970).
The issue before the Court is whether petitioner was in a
trade or business of practicing law during 2000. Admission to
the bar is not tantamount to being engaged in a trade or business
of practicing law. Wassenaar v. Commissioner, 72 T.C. 1195,
1199-1200 (1979). And, a law clerk who is employed in private
practice while attending law school and before admission to a bar
is not engaged in a trade or business of practicing law. See
Johnston v. Commissioner, T.C. Memo. 1978-257.
Petitioner relies on Ruehmann v. Commissioner, T.C. Memo.
1971-157. In Ruehmann, the Court held that the taxpayer’s
expenses to obtain an LL.M. were deductible under section 162.
Id. The taxpayer passed the State bar exam in his second year of
law school. After graduation, the taxpayer worked in a law firm
for a short time before starting his LL.M. studies. At the law
firm, the taxpayer “was employed as a lawyer, paid the same
salary as other beginning lawyers who were members of the Bar,
and assigned the same type of work that other lawyers of
comparable experience in the * * * Firm were assigned.” Id.
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Petitioner argues that he was similarly situated. He was a
member of the New York State Bar while employed at Kelley Drye
and at Davis Polk as a summer associate. With respect to his
work at Davis Polk, however, petitioner earned 3 hours of class
credit towards his J.D./M.B.A. degrees for his work at Davis
Polk. Furthermore, the arrangement of being a summer associate
is more indicative of an educational pursuit, rather than being
engaged in a trade or business of practicing law. The title is
also more indicative of being a law clerk. Indeed, petitioner
testified: “I have always been a full-time student from 1997
through 2001”, and he maintained a student visa throughout this
period. Petitioner also failed to establish that his
compensation and assignments were similar to other full-time
associates at Kelley Drye and/or Davis Polk.
In sum, we believe that petitioner had an “uninterrupted
continuity in his legal education.” Wassenaar v. Commissioner,
supra at 1199; see also Link v. Commissioner, 90 T.C. 460 (1988),
affd. without published opinion 869 F.2d 1491 (6th Cir. 1989);
Baker v. Commissioner, 51 T.C. 243, 247 (1968). Between 1997 and
2001, petitioner was a full-time student and earned three law
degrees. Petitioner enrolled in each degree program immediately
after completion of the preceding one. Petitioner was not
engaged in a trade or business of being a practicing attorney.
Having decided that petitioner does not satisfy the
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requirements of section 162, we need not decide whether
petitioner satisfies the requirements of section 1.162-5, Income
Tax Regs. Accordingly, petitioner is not entitled to a deduction
for his educational expenses.
United States-Belgium Income Tax Convention Article 21 Exemption
Article 21 of the Convention for the Avoidance of Double
Taxation, Oct. 13, 1972, U.S.-Belg., 23 U.S.T. (Part 3) 2687,
2704, provides:
ARTICLE 21. STUDENTS AND TRAINEES
(1)(a) An individual who is a resident of one of the
Contracting States at the time he becomes temporarily
present in the other Contracting State and who is
temporarily present in that other Contracting State for the
primary purpose of:
(i) Studying at a university or other recognized
educational institution in that other Contracting State
* * * * * * *
shall be exempt from tax by that other Contracting State
with respect to amounts described in subparagraph (b) for a
period not exceeding 5 taxable years from the date of his
arrival in that other Contracting State.
(b) The amounts referred to in subparagraph (a) are:
* * * * * * *
(iii) Income from personal services performed in that
other Contracting State in an amount not in excess of 2,000
United States dollars * * *.
Respondent argues that petitioner is a resident of the
United States and thus may not claim the Article 21 exemption
because he was not “temporarily present” in the United States
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with the primary purpose to pursue a course of study.
To determine residency, an alien individual is a resident of
the United States for Federal income tax purposes if the
individual meets the “substantial presence test”. Sec.
7701(b)(1)(A)(ii). “[A]n individual meets the substantial
presence test * * * if--(i) such individual was present in the
United States on at least 31 days during the calendar year, and”
applying a mathematical formula, was present during the current
year and the preceding 2 years for 183 days or more. Sec.
7701(b)(3)(A).
However, an individual is not treated as being in the United
States if the “individual is an exempt individual for such day”.
Sec. 7701(b)(3)(D)(i). An exempt individual is, inter alia, “a
student”. Sec. 7701(b)(5)(A)(iii). A student is an individual
“who is temporarily present in the United States–-(I) under
subparagraph (F) or (M) of section 101(15) of the Immigration and
Nationality Act” and “who substantially complies with the
requirements for being so present.” Sec. 7701(b)(5)(D)(i) and
(ii).
During the year 2000, petitioner was present in the United
States under subparagraph (F) of section 101(15) of the
Immigration and Nationality Act, 8 U.S.C. sec. 1101(a)(15)(F)(i)
(2003), commonly referred to as an (F)(1) visa. Thus, petitioner
was a “student” during 2000, and was not considered to be a
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resident of the United States for Federal income tax purposes.
Petitioner was present in the United States with the primary
purpose of studying at a university. Accordingly, we find that
petitioner is entitled to the Article 21 exemption.
Section 170 Charitable Contribution Deduction
Section 170(a) provides a “deduction [for] any charitable
contribution” made to a qualified donee under section 170(c).
Section 170(f) provides recordkeeping requirements for certain
charitable contributions. Any charitable contribution of $250 or
more will be disallowed “unless the taxpayer substantiates the
contribution by a contemporaneous written acknowledgment”
prepared by the donee. Sec. 170(f)(8)(A). The written
acknowledgment must include (1) the amount of cash contributed,
(2) whether the donee organization provided any goods or services
in consideration of the donation, and (3) a description and good
faith estimate of the value of those goods or services. Sec.
170(f)(8)(B). A written acknowledgment is contemporaneous if the
taxpayer obtains the statement
on or before the earlier of--
(i) the date on which the taxpayer files a return
for the taxable year in which the contribution was
made, or
(ii) the due date (including extensions) for
filing such return. [Sec. 170(f)(8)(C).]
Petitioner does not have a contemporaneous written
acknowledgment from the donee to substantiate the contribution.
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Petitioner argues, however, that we should apply the rule in
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), to allow the
deduction. The Cohan rule is invoked in situations where
“Absolute certainty * * * is usually impossible and is not
necessary” and where a close approximation can be made “bearing
heavily * * * upon the taxpayer whose inexactitude is of his own
making.” Id. at 543-544.
We find the application of the Cohan rule to be
inappropriate in this case. Section 170(f) was added by the
Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, sec.
13172, 107 Stat. 312. The House of Representatives proposed to
enact section 170(f) due to
Difficult problems of tax administration [that] arise
with respect to fundraising techniques in which an
organization that is eligible to receive tax deductible
contributions provides goods or services in consideration
for payments from donors. * * * the committee believes that
there will be increased compliance with present-law rules
governing charitable contribution deductions if a taxpayer
who claims a separate charitable contribution of $750[2] or
more is required to obtain substantiation from the donee
indicating the amount of the contribution and whether any
goods, service, or privilege was received by the donor in
exchange for making the contribution. * * * [H. Rept. 103-
111, 1993-3 C.B. 167, 361.]
To allow petitioner the charitable contribution deduction in
the circumstances here would contravene the specific statutory
2
The Senate amendment proposed to change the threshold
amount to $250. H. Conf. Rept. 103-213 (1993), 1993-3 C.B. 393,
443. The Senate version was later adopted in conference. H.
Conf. Rept. 103-213, at 445, supra, 1993-3 C.B. at 361.
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language and purpose of recordkeeping for contributions in excess
of $250. We find that petitioner is not entitled to a charitable
contribution deduction.
Education Loan Interest Deduction Under Section 221
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving the entitlement to any
deduction claimed. See Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). A taxpayer is required to
maintain records sufficient to establish the amount of his or her
income and deductions. Sec. 6001; sec. 1.6001-1(a), (e), Income
Tax Regs.
Section 221(a) provides that a deduction is allowed for an
amount equal “to the interest paid by the taxpayer * * * on any
qualified education loan.” Section 221(d) defines a “qualified
education loan” as “any indebtedness incurred by the taxpayer
solely to pay qualified higher education expenses”.
The only documentary evidence concerning the alleged
educational loan is a letter from the Cooperative Rabobank West-
Zeeuws-Vlaanderen U.A. addressed to P.A.E.L. Weyts (we assume
petitioner) in Brugge, Belgium, stating that the interest paid on
the “mortgage loan” in 2000 was EURO 6,197.28 and that the
balance of the loan as of January 1, 2001, was EURO 123,946.28.
The record does not include the loan agreement or any documentary
evidence of when and how, if at all, petitioner paid the
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interest. This is particularly troublesome because these are the
type of records that would be readily available to petitioner,
and petitioner’s failure to provide these records leads to the
inference that they would not be favorable to petitioner’s case.
Additionally, we are bothered by the fact that the loan was
secured by a mortgage on his parents’ residence. Finally, given
petitioner’s expenses at Columbia, it is unclear from what source
of funds petitioner made any interest payments. The inferences
suggest that petitioner may not have incurred or been legally
responsible for the loan. Accordingly, we find that petitioner
did not meet his burden of proof3 and is not entitled to an
education loan interest deduction under section 221.
To reflect the foregoing,
Decision will be entered
under Rule 155.
3
Sec. 7491(a)(1) provides that the burden of proof shall
be on respondent in certain situations. This provision does not
apply if the taxpayer has not maintained required records. Sec.
7491(a)(2). In the circumstances here, at a minimum, a taxpayer
claiming an interest expense would be required to maintain the
basic debt instrument.