T.C. Memo. 2016-100
UNITED STATES TAX COURT
EMMANUEL A. SANTOS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5864-14. Filed May 17, 2016.
Emmanuel A. Santos, for himself.
Nicholas R. Rosado, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MORRISON, Judge: On December 11, 2013, the respondent (referred to
here as the “IRS”) issued a notice of deficiency to the petitioner, Emmanuel A.
Santos, determining an income-tax deficiency of $3,423 for the 2010 taxable year.
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[*2] Santos timely filed a petition under section 6213(a)1 for redetermination of
the deficiency. We have jurisdiction under section 6214(a). The only issue
remaining for decision is whether Santos is entitled to deduct his law school
tuition and fees of $20,275. We hold that he is not.
FINDINGS OF FACT
The parties stipulated some facts, and they are so found. Santos resided in
California at the time he filed the petition.2
Santos earned a bachelor’s degree in accounting.3 In 1990, he began
working as a tax-return preparer. In 1995, he became an “enrolled agent”, a
person authorized to represent taxpayers before the IRS. In 1996, Santos earned a
master’s degree in taxation. He began offering other services to his clients,
including accounting and financial planning.
1
All references to sections are to sections of the Internal Revenue Code of
1986, as amended, in effect for the 2010 taxable year.
2
Therefore, an appeal of our decision in this case would go to the U.S. Court
of Appeals for the Ninth Circuit, see sec. 7482(b)(1), unless the parties designate
the Court of Appeals for another circuit, see id. para. (2).
3
On brief, Santos claims that his degree was awarded in May 1989 by
Indiana University (Bloomington), but we are unable to confirm the veracity of
this claim on the record.
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[*3] At some point Santos enrolled in law school.4 He was attending law school
in 2010. During that year, he paid tuition and fees of $20,275. He graduated from
law school in 2011. In July 2011, he took the California bar examination. The
record does not reveal whether this was the only time he took the bar examination.
In December 2014, he was admitted to the State Bar of California and admitted to
practice before the U.S. Tax Court.
In 2015, Santos started a law firm, Santos and Santos Law Offices, LLP,
with his father. The firm performs multiple services including legal
representation, tax planning, accounting, and financial planning.
Santos timely filed his federal income tax return for the 2010 taxable year
(on a Form 1040). He attached a Schedule C (“Profit or Loss From Business”) to
his Form 1040 for the “business or profession” of “tax and financial planning”.
On his Schedule C, Santos deducted expenses of $119 for laundry and cleaning,
$3,603 for license and permits, $8,755 for dues and subscriptions, $1,934 for
continuing education, and $20,275 for law school tuition and fees.
In the notice of deficiency the IRS allowed deductions of zero for laundry
and cleaning expenses, $2,850 for license and permits expenses, $7,381 for dues
4
On brief, Santos claims that he attended John F. Kennedy University
College of Law, but we are unable to confirm the veracity of this claim on the
record.
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[*4] and subscription expenses, $1,934 for continuing education expenses, and
zero for law school tuition and fees expenses.
At trial the parties agreed that the correct deductible amounts of these
expenses were zero for laundry and cleaning, $3,150 for license and permits, and
$8,627 for dues and subscription. Whether Santos is entitled to a deduction of
$20,275 for his law school tuition and fees remains at issue.
OPINION
As the taxpayer, Santos has the burden of proof. See Tax Ct. R. Prac. &
Proc. 142(a); sec. 7491(a) (imposing the burden of proof on the IRS under
conditions not shown by Santos to be satisfied).
Section 162(a) allows a deduction for all ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business.
Section 262 provides that no deduction is allowed for personal, living, or family
expenses. Expenditures made by a taxpayer in obtaining or furthering his or her
education are considered personal expenses and are not deductible unless they
qualify as a deduction under section 162 and the accompanying regulations. Sec.
1.262-1(b)(9), Income Tax Regs. Section 1.162-5(a), Income Tax Regs., permits a
deduction for education expenses that (1) maintain or improve skills required by
the taxpayer in his or her employment or (2) meet the express requirements of the
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[*5] 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 of compensation. Section 1.162-5(b)(1), Income Tax
Regs., provides that two types of educational expenses are not deductible. One
type is expenses for education that is part of a program of study which will lead to
qualifying the taxpayer for a new trade or business. Id. subpara. (3)(i). The
regulation gives the following example of the expenses of this type: “A, a
self-employed individual practicing a profession other than law, for example,
engineering, accounting, etc., attends law school at night and after completing his
law school studies receives a bachelor of laws degree. The expenditures made by
A in attending law school are nondeductible because this course of study qualifies
him for a new trade or business.” Id. subdiv. (ii), Example (1). Courts have held
that a law degree qualifies a law student for a new trade or business (the business
of being an attorney) and that thus the cost of a law degree is a nondeductible
educational expense as set forth in the regulation. Melnik v. United States, 521
F.2d 1065, 1065 (9th Cir. 1975) (IRS field agent could not deduct cost of law
degree because the degree qualified him for a new trade or business); O’Donnell v.
Commissioner, 62 T.C. 781, 783 (1974) (certified public accountant could not
deduct cost of law degree, even though he undertook the education to improve his
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[*6] accounting and tax skills and never intended to engage in the practice of law),
aff’d without published opinion, 519 F.2d 1406 (7th Cir. 1975); Taubman v.
Commissioner, 60 T.C. 814, 819 (1973) (accountant could not deduct cost of law
degree because the degree qualified him for a new trade or business); Weiler v.
Commissioner, 54 T.C. 398, 401-402 (1970) (cost of legal education was not
deductible by IRS agent, even if the agent remained in his same position or limited
his future work to tax accounting or tax law). Therefore Santos’s law school
tuition and fees are not deductible.
Santos challenges the validity of the regulation in question. The Treasury
Department promulgated section 1.162-5, Income Tax Regs., in 1967, 32 Fed.
Reg. 6679 (May 2, 1967), after having published the regulation in proposed form
in 1966, 31 Fed. Reg. 12843 (Oct. 1, 1966). Shortly after the Treasury
promulgated the regulation, the Tax Court held that the regulation was valid, and
the Court of Appeals for the Ninth Circuit affirmed. Weiszmann v. Commissioner,
52 T.C. 1106, 1111-1112 (1969), aff’d, 443 F.2d 29 (9th Cir. 1971). Although the
Court of Appeals’s opinion did not separately discuss the validity of the
regulation, it stated: “We approve the Tax Court opinion”. Weiszmann v.
Commissioner, 443 F.2d at 30.
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[*7] Our Opinion in Weiszmann--holding that the regulation is valid--is binding
precedent. Furthermore, the Tax Court is bound by the precedent of the Court of
Appeals for the circuit to which our cases are appealable. Golsen v.
Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).
Therefore, the Court of Appeals’s affirming opinion in Weiszmann is also binding.
Because binding precedent holds that the regulation is valid, we decline to
reconsider the validity of section 1.162-5, Income Tax Regs.
We recognize that the tests for determining whether a regulation is valid
today are different from those of the Weiszmann era. And we recognize that
precedent may lose its force when the underlying law upon which the precedent
was based has changed. Patterson v. McLean Credit Union, 491 U.S. 164, 173
(1989). However, we see no such change that would justify deviating from the
Weiszmann precedent. In Weiszmann we determined that the regulation was
consistent with the “statutory law” and was not “arbitrary”. Weiszmann v.
Commissioner, 52 T.C. at 1111. This is similar to the test employed by the U.S.
Supreme Court in 2011 in Mayo Found. for Med. Educ. & Research v. United
States, 562 U.S. 44 (2011). In Mayo Found., the Supreme Court held that a tax
regulation was valid because Congress had not “directly addressed the precise
question at issue”, id. at 52 (quoting Chevron, U.S.A., Inc. v. Natural Res. Def.
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[*8] Council, Inc., 467 U.S. 837, 843 (1984)), and because the regulation was a
“reasonable interpretation of the enacted text”, id. at 57.5
Santos urges us to employ various other tests to hold that the regulation is
invalid. We decline to reconsider Weiszmann on these additional grounds. First,
it is questionable that the additional tests that Santos cites should govern the 1967
education-expense regulation. Santos argues that the Treasury Department failed
to adequately respond to the comments from the public about the regulation in its
proposed form, relying on Altera Corp. & Subs. v. Commissioner, 145 T.C. __, __
(slip op. at 65) (July 27, 2015), which held that a regulation under section 482 was
invalid because, in promulgating the regulation, the Treasury did not “adequately
respond to commentators”. Altera in turn relied upon Motor Vehicle Mfrs. Ass’n
of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983), which held that
in adopting a rule an agency must “examine the relevant data”. Altera is
5
In Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44,
57 (2011), the Supreme Court considered whether a particular tax regulation, that,
like sec. 1.162-5, Income Tax Regs., was issued under the authority of sec.
7805(a) (granting authority to the Treasury Department to prescribe “all needful
rules and regulations for the enforcement” of the Internal Revenue Code), should
be examined under the test employed in Chevron U.S.A., Inc. v. Natural Res. Def.
Council, Inc., 467 U.S. 837 (1984), or should instead be examined under the test
employed in Nat’l Muffler Dealers Ass’n, Inc. v. United States, 440 U.S. 472
(1979). Mayo Found. held that the regulation in question in that case should be
examined under the Chevron test. Id.
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[*9] distinguishable. Altera held that the validity of the regulation in the particular
circumstances of that case hinged on an “empirical determination” and “in no way
depends on * * * [Treasury’s] interpretation of section 482 or any other statute.”
Altera Corp. & Subs. v. Commissioner, 145 T.C. at __ (slip op. at 46). By
contrast, the education-expenses regulation is an interpretation of sections 162 and
262. See Taubman v. Commissioner, 60 T.C. at 817.6 Second, Santos did not
raise his theories that the regulation was invalid until after trial. As a result,
neither the trial record nor the court papers in this case contain any information
regarding the public’s comments to the regulation in question. Without knowing
what the public comments were, it seems difficult, if not impossible, for the Court
to evaluate the adequacy of the Treasury Department’s response to the public
comments when it promulgated section 1.162-5, Income Tax Regs.
In reaching our holdings, we considered all arguments made, and, to the
extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
6
Santos also argues that the 1967 regulation violates the Regulatory
Flexibility Act of 1980, 5 U.S.C. secs. 603-605 (2012). That Act requires an
agency to consider the effect of regulatory action on small businesses when
promulgating regulations that may affect small businesses. 5 U.S.C. secs. 603(a),
604(a), 605(b). But the Act by its own terms applies only to regulations
promulgated after 1980. Pub. L. No. 96-354, sec. 4, 94 Stat. at 1170 (1980).
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[*10] To reflect the foregoing,
Decision will be entered under
Tax Court Rule of Practice and
Procedure 155.