T.C. Summary Opinion 2016-35
UNITED STATES TAX COURT
ALEX KOPAIGORA AND ELIZABETH S. KOPAIGORA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12382-13S. Filed August 2, 2016.
Barbara Zanzig Lock, for petitioners.
S. Mark Barnes and Charles B. Burnett, for respondent.
SUMMARY OPINION
NEGA, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was filed.1
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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Pursuant to section 7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a deficiency of $2,111 in petitioners’ Federal income tax
for the 2011 tax year. After concessions, the sole issue for decision is whether
petitioners may deduct, as unreimbursed business expenses under section 162,
costs incurred by Alex Kopaigora (petitioner) that relate to his pursuit of an
executive master of business administration (EMBA) degree.
Background
Some of the facts have been stipulated and are so found. The stipulation of
facts and the accompanying exhibits are incorporated herein by this reference.
Petitioners resided in California when their petition was filed.
Petitioner began working for Marriott International Corp. in 2002 as an
accounting manager. In June 2006 petitioner accepted a position as senior
assistant controller for the Marriott hotel in Los Angeles International Airport
(Marriott LAX). In his role as senior assistant controller, petitioner was
responsible for managing a team of employees, reviewing employee performances
annually, participating in hiring activities, and training employees. Petitioner’s
duties included preparing financial reports, creating budgets, analyzing financial
data, producing forecasts to enable reaction to business changes, and monitoring
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different departments’ performances. Additionally, petitioner conducted audits,
prepared an accounting of taxes, prepared financial reports according to generally
accepted accounting principles (GAAP), enforced internal controls, reconciled
balance sheets, and ensured compliance with reporting requirements.
In July 2010 petitioner enrolled in the EMBA degree program at Brigham
Young University (BYU) in Utah in order to improve his leadership skills in
corporate finance and management. Petitioner would work at Marriott LAX on
the weekdays and would travel to Salt Lake City, Utah, every other weekend to
attend classes at BYU.
Petitioner took the following courses in pursuit of his EMBA degree:
Introduction to Management; Introduction to Management 2; Corporate Financial
Reporting; Entrepreneurial Management; Leadership; Operations Management;
Business Finance; Marketing Management; Management and Information
Technology; Human Resources Management; Managerial Accounting 1; Business
Ethics; Strategy; Selected Topics in Management; Global Business Negotiations;
Strategy Implementation and the General Manager’s Role; Foreign Business
Excursion; Introduction to Global Management; and Spreadsheets for Business
Analysis.
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On April 18, 2011, while petitioner was still working towards his EMBA
degree, his employment with Marriott International Corp. was terminated for
reasons that were later found to be unjustified. After his termination from Marriott
International Corp. petitioner continued to pursue his EMBA degree at BYU and
look for full-time employment within the corporate finance and accounting field as
a controller, assistant controller, senior manager, vice president, or director.
Petitioner graduated from the EMBA degree program in August 2012. On
September 2, 2012, petitioner was hired as vice president of finance of Driveit
Financial Services (Driveit), a small financing company. As vice president,
petitioner was responsible for overseeing department managers, managing and
leading a team of employees, supervising employees in daily issues of accounting,
cash, risk, and business operations, and participating in hiring and training.
Additionally, petitioner was responsible for auditing, accounting for taxes, setting
up monthly reporting according to GAAP, and enforcing internal controls.
Petitioners timely filed their 2011 Federal income tax return and claimed an
$18,879 deduction for petitioner’s EMBA degree expenses as unreimbursed
employee expenses on Schedule A, Itemized Deductions. These expenses
included charges for petitioner’s EMBA tuition, airfare between California and
Utah, meals, and mileage. The parties do not dispute that petitioner paid the
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expenses for which petitioners claimed a deduction on their 2011 tax return.
However, on brief respondent contends that of these expenses $4,332 was paid in
2010 and not in 2011.
Discussion
The taxpayer bears the burden of proving that he or she is entitled to any
deductions claimed. See New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). However, the burden of proof shifts to the Commissioner if the taxpayer
introduces credible evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer and the taxpayer satisfies certain other
conditions. Sec. 7491(a).
Section 162(a) allows a deduction for ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on any trade or
business. A taxpayer may deduct certain unreimbursed employee expenses as
ordinary and necessary business expenses under section 162. Orvis v.
Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533;
Lucas v. Commissioner, 79 T.C. 1, 6 (1982).
Education expenses are deductible if they satisfy the general requirements
under section 162 as well as the specific requirements under the regulations.
Section 162 requires a taxpayer to be presently engaged in a trade or business in
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order for education expenses to be deductible. See Link v. Commissioner, 90 T.C.
460, 463-464 (1988), aff’d, 869 F.2d 1491 (6th Cir. 1989); Schneider v.
Commissioner, T.C. Memo. 1983-753. A taxpayer may be engaged in a trade or
business, although unemployed, if the taxpayer was previously involved in and
actively sought to continue in that trade or business while pursuing a defined
degree program related to his or her line of work. Furner v. Commissioner, 393
F.2d 292, 294 (7th Cir. 1968) (teacher continued to carry on her trade or business
while simultaneously pursuing a graduate degree program and actively seeking
employment in her line of work); rev’g 47 T.C. 165 (1966); see also Picknally v.
Commissioner, T.C. Memo. 1977-321; Sherman v. Commissioner, T.C. Memo.
1977-301.
The regulations disallow a deduction for education expenses for: (1)
education required to meet the minimum requirements of a taxpayer’s trade or
business or (2) a program of study leading to the qualification of a taxpayer in a
new trade or business. Sec. 1.162-5(b), Income Tax Regs. When evaluating
whether education expenses qualify the taxpayer for a new trade or business, the
Court uses a “commonsense approach” comparing “the types of tasks and
activities which the taxpayer was qualified to perform before the acquisition of a
particular title or degree, and those which he is qualified to perform afterwards.”
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Glenn v. Commissioner, 62 T.C. 270, 275 (1974); Weiszmann v. Commissioner,
52 T.C. 1106, 1110 (1969), aff’d, 443 F.2d 29 (9th Cir. 1971); see also O’Connor
v. Commissioner, T.C. Memo. 2015-155, aff’d, __ F. App’x __, 2016 WL
3548416 (10th Cir. June 28, 2016).
If the taxpayer can show that neither of the disqualifying factors applies, the
taxpayer can deduct the education expenses if the education maintains or improves
skills required by the taxpayer in his or her employment or other trade or business.
Sec. 1.162-5(a)(1), Income Tax Regs. Required skills in a taxpayer’s employment
are those skills that are appropriate or helpful in the taxpayer’s employment or
trade or business. See Knudtson v. Commissioner, T.C. Memo. 1980-455.
A taxpayer who travels away from home primarily to obtain education may
deduct the relevant costs for travel, meals, and lodging while away from home
provided that the cost of the education is properly deductible under section 162.
See sec. 1.162-5(e)(1), Income Tax Regs. However, costs attributable to personal
activity, such as recreation, are not allowable as a deduction. See sec. 162(a); sec.
1.162-5(e)(1), Income Tax Regs.
Petitioners argue that they are entitled to deductions for petitioner’s
unreimbursed employee expenses because petitioner was established in the
business of corporate finance and management before commencing his pursuit of
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an EMBA degree, he continued to be established in this business during his
temporary unemployment, and his EMBA degree did not qualify him for a new
trade or business. Furthermore, petitioners claim that they meet the requirements
of section 7491(a) to shift the burden of proof to respondent with respect to all
factual issues because the parties stipulated that the substantiation of expenses was
not at issue in this case and petitioners cooperated with respondent’s reasonable
requests for information, documents, and meetings.
Respondent argues that petitioner did not carry on his trade or business
through the 2011 tax year because he was unemployed for an indefinite period, the
EMBA degree was a general degree that did not maintain or improve specific
skills required for his employment, and the degree qualified him for a new trade or
business.
We believe that the facts support petitioners’ argument. When petitioner
enrolled in the EMBA degree program, he was a well-established finance and
accounting business manager at Marriott LAX. He managed the hotel’s financial
operations and auditing departments, he was responsible for large groups of
employees from various backgrounds and specializations, and he made sure the
hotel’s business practices were in compliance with GAAP. When his employment
was abruptly terminated, he continued to take courses at BYU that improved his
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managerial and leadership skills--skills that were appropriate and helpful to his
position as a business manager. The courses petitioner chose to fulfill his degree
requirements did not qualify him for a new trade or business because he was not
qualified to perform new tasks or activities with the conferral of his degree.
Instead, petitioner chose courses in a line of study that he was familiar
with--management and finance. Even though petitioner took a few courses that
were outside this scope, we do not believe that these courses by themselves could
have prepared him to enter a new trade or business.
Finally, petitioner’s unemployment did not prevent him from continuing his
trade or business as a finance and accounting business manager for purposes of
section 162. After petitioner’s employment at Marriott LAX was terminated he
actively sought employment within the corporate finance and accounting field for
the remainder of his time at BYU, and his active job search paid off. Soon after he
graduated from the EMBA degree program, petitioner was hired by another
company to perform duties that were substantially similar to the duties of his
former job. Although petitioner was hired after he graduated, nothing in the
record suggests that the degree was a prerequisite for the job. See sec. 1.162-
5(b)(2), Income Tax Regs. We hold that petitioner’s EMBA degree tuition
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education expenses are deductible as unreimbursed employee expenses under
section 162.
A spreadsheet that petitioners entered into evidence to substantiate
petitioner’s “EMBA related Expenses” shows that petitioner paid some of these
education expenses in 2010 rather than in 2011, the year at issue. Specifically, an
entry dated January 1, 2011, lists “2010 Unclaimed EMBA Costs” of $4,332.
Despite the parties’ stipulation that substantiation of education expenses is not at
issue, respondent argued for the first time on brief that $4,332 of petitioners’
education expenses was not deductible because it was paid in 2010 rather than in
the year at issue. Generally, the Court will not allow a party to raise an issue on
brief if consideration of that issue would surprise and prejudice the opposing
party. See, e.g., Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 349 (2013).
Clearly, petitioners were not surprised by the timing of the payments petitioner
himself made, but to avoid any prejudice to petitioners we reopened the record to
allow them to provide evidence regarding the timing of the $4,332 payment of
education expenses. In response, petitioners acknowledged that $4,332 of
education expenses was actually paid in 2010. We believe the record satisfies
respondent’s burden under Rule 142(a) as to any new matter raised. This, coupled
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with petitioners’ admission, is enough to sustain respondent’s determination with
respect to the deduction for $4,332 of education expenses.
We have considered the other arguments of the parties, and they are not
material to our conclusions.
To reflect the foregoing,
Decision will be entered
under Rule 155.