T.C. Summary Opinion 2003-58
UNITED STATES TAX COURT
YUANQIANG ZHANG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2117-02S. Filed May 20, 2003.
Yuanqiang Zhang, pro se.
Milan K. Patel, for respondent.
DINAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioner’s Federal
income tax of $6,437 for the taxable year 2000.
The issue for decision is whether petitioner is entitled to
deduct as trade or business expenses various costs he incurred in
connection with a Master of Business Administration (M.B.A.)
degree program.
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioner resided in New
York, New York, on the date the petition was filed in this case.
Petitioner has earned a bachelor’s degree in engineering, a
bachelor’s degree in economics, and a master’s degree in social
science and international trade. From January 1997 through June
1999, petitioner was with the Beijing, China, office of Andersen
Consulting, working as a consultant in the strategic services
group. In this position, he helped foreign companies develop
joint venture strategies and financial structures for operations
in China; he advised foreign companies on Chinese tax policies;
and he helped companies develop marketing strategies for sales in
China.
In Fall 1999, petitioner commenced studies as a full-time
student in the M.B.A. degree program at the Massachusetts
Institute of Technology, Sloan School of Management (MIT).
During the year in issue, petitioner continued as a full-time
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student in this program. During the summer of that year, he was
employed for 10 weeks by Latona Associates, a private equity
firm, where he worked on acquisition strategies and performed
valuations of companies. Petitioner received academic credit for
this employment. The courses which petitioner completed as part
of the M.B.A. program covered areas including economics,
management, finance, accounting, technology and computer
networks, marketing, telecommunications, “eCommerce”,
investments, investment banking, and mergers and acquisitions.
While enrolled in the M.B.A. program, petitioner received an
offer from the Andersen Consulting office in New York for
employment as a manager in the strategy competency group. At
Andersen, a manager is two titles above that of petitioner’s
former position as a consultant. Petitioner declined this offer,
accepting instead a position as an associate with the investment
banking division of Morgan Stanley. This latter position was
offered to petitioner in 2000, contingent upon petitioner’s
completion of the M.B.A. degree program at MIT. Petitioner
received a signing bonus during the year 2000 from Morgan
Stanley. After completing his degree in June 2001, petitioner
began working at Morgan Stanley the following August. When
petitioner began working at Morgan Stanley, he assisted clients
with acquiring secured financing. Petitioner has remained
employed at Morgan Stanley as an investment banker.
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Petitioner filed an individual Federal income tax return for
taxable year 2000 using a Form 1040NR, U.S. Nonresident Alien
Income Tax Return. On this return, petitioner claimed a
miscellaneous itemized deduction of $34,126. The expenses for
which this deduction was claimed were as follows, before
application of the section 67(a) limitation on miscellaneous
itemized deductions:
M.B.A. tuition $29,860
Books and school supplies 2,286
Computer depreciation 495
Job search expenses 869
Summer job expenses 918
Travel to school 552
34,980
In the statutory notice of deficiency, the sole adjustment was
respondent’s disallowance of this deduction. Petitioner concedes
$169 of the M.B.A. tuition and $50.86 of the computer
depreciation, and he concedes the entire amounts of the job
search, summer job, and travel expenses. The amounts remaining
at issue all relate to expenses petitioner allegedly incurred in
connection with the M.B.A. program.
In general, expenses which are ordinary and necessary in
carrying on a trade or business are deductible in the year in
which they are paid. Sec. 162(a). Such expenses may include
educational expenses paid in carrying on the trade or business of
being an employee. Sec. 1.162-5, Income Tax Regs. To be
deductible, such expenses must be for education which (1)
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maintains or improves skills required by the taxpayer in his
employment, or (2) meets the express requirements of the
taxpayer’s employer, or of applicable law or regulations, imposed
as a condition to the retention by the taxpayer of an established
employment relationship, status, or rate or compensation. Sec.
1.162-5(a), Income Tax Regs. However, expenses which fall into
either of these categories are nevertheless not deductible if the
education (1) is required in order to meet the minimum
educational requirements for qualification in the taxpayer’s
employment, or (2) qualifies the taxpayer for a new trade or
business. Sec. 1.162-5(b), Income Tax Regs.
The first category of deductible expenses is for education
which maintains or improves skills required by the taxpayer in
his employment. Sec. 1.162-5(a)(1), Income Tax Regs. The
regulations state that this category of expenses “includes
refresher courses or courses dealing with current developments as
well as academic or vocational courses”. Sec. 1.162-5(c)(1),
Income Tax Regs. We find that the M.B.A. program did not serve
to maintain or improve skills required in petitioner’s employment
within the meaning of the regulations. The courses which
petitioner completed as part of the M.B.A. program were varied
and encompassed a large number of business fields: The courses
covered areas including economics, management, finance,
accounting, technology and computer networks, marketing,
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telecommunications, “eCommerce”, investments, investment banking,
and mergers and acquisitions. From the record before us, we
conclude that the M.B.A. program in this case served to improve
petitioner’s “general understanding and competency”, Coughlin v.
Commissioner, T.C. Memo. 1969-80, rather than to improve specific
skills required in petitioner’s employment. See, e.g., Menas v.
Commissioner, T.C. Memo. 1969-114 (courses in an M.B.A. program
were not directly related to the skills used by an Internal
Revenue Service agent); Coughlin v. Commissioner, supra, (courses
required for a bachelor’s degree in business administration
provided only an increase in “general understanding and
competency” and did not have a direct relation to the taxpayer’s
employment as a method and controls analyst for an insurance
company). While the M.B.A. program did focus on “business
administration”, it was nonetheless a generalized field of study
which provided an education in a number of areas not necessarily
applicable to petitioner’s employment prior to or after the year
in issue.
Our finding is reinforced by the fact that petitioner was
not employed on a permanent or indefinite basis while he
completed the M.B.A. program. Prior to the program, petitioner
was a consultant for companies doing business in, or interested
in doing business in, China. During the program, petitioner was
employed only in a temporary position in which he earned academic
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credit. Following the program, petitioner became an investment
banker whose focus was on various secured financing strategies.
While there is certainly a degree of overlap between the
positions he held before and after the M.B.A. program, when
petitioner left his position in Beijing he did not express an
intent to return to that position after he earned the M.B.A., nor
did he know where he would be employed following the completion
of the program. The connection between the M.B.A. program and
petitioner’s potential employment following the program was too
tenuous at that time for the education to be considered as having
maintained or improved skills required in that employment. See
generally Schneider v. Commissioner, T.C. Memo. 1983-753
(taxpayer not carrying on a trade or business within the meaning
of section 162(a) where he resigned his commission from the Army
in order to pursue an M.B.A. and another degree with no intention
of returning to the Army).
Because the education petitioner obtained in the M.B.A.
program did not serve to maintain or improve skills required in
petitioner’s employment, petitioner is not entitled to a
deduction pursuant to the first category of deductible expenses
under section 1.162-5(c)(1), Income Tax Regs.
The second category of deductible expenses is for education
which meets the express requirements of the individual’s employer
or of applicable law or regulations. Sec. 1.162-5(a)(2), Income
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Tax Regs. The regulations provide that, within this category of
expenses:
Only the minimum education necessary to the retention
by the individual of his established employment
relationship, status, or rate of compensation may be
considered as undertaken to meet the express
requirements of the taxpayer’s employer.
Sec. 1.162-5(c)(2), Income Tax Regs. As discussed above, during
the year in issue petitioner had left his former employment and
had not yet started his new employment. Thus, because petitioner
did not have an established employment relationship, status, or
rate of compensation during that year, petitioner is not entitled
to a deduction pursuant to the second category of deductible
expenses under section 1.162-5(c)(2), Income Tax Regs.
Because petitioner’s education expenses do not fall into
either category of deductible expenses under the regulations,
petitioner is not entitled to the deductions claimed for the
M.B.A. program. We need not address whether the expenses fall
into either of the categories of nondeductible expenses under
section 1.162-5(b), Income Tax Regs.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.