Since the Supreme Court had changed how the validity of a regulation was determined in the case of Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011), the taxpayer in Santos v. Commissioner, TC Memo 2016-100 decided to challenge a regulation on the books since 1967.
Mr. Santos, an enrolled agent with a master’s degree in taxation, decided to attend law school, graduating in 2011 and was admitted to practice law in the state of California in 2014. Mr. Santos sought to claim a deduction for the $20,275 he had paid in 2010 for tuition and fees in attending law school.
Reg. §1.162-5(a) allows a taxpayer a deduction for education related trade or business expenses in either of the following two situations:
(a) General rule. Expenditures made by an individual for education (including research undertaken as part of his educational program) which are not expenditures of a type described in paragraph (b) (2) or (3) of this section are deductible as ordinary and necessary business expenses (even though the education may lead to a degree) if the education—
(1) Maintains or improves skills required by the individual in his employment or other trade or business, or
(2) Meets the express requirements of the individual’s employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.
In this case going to law school would clearly seem to improve the skills necessary for tax practice since that work involves dealing with legal issues, so things start out well.
But the regulation goes on to disallow the deduction, even if the above conditions are met. In particular, note the following found at Reg. §1.62-5(b)(3)(i):
(3) Qualification for new trade or business.
(i) The second category of nondeductible educational expenses within the scope of subparagraph (1) of this paragraph are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business…
Example 1 goes on to provide the following specific example that is particularly a problem in this case:
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.
The Court notes that Mr. Santos is challenging the validity of that regulation, first issued in 1967. The question of the regulation’s validity had been challenged before, and in 1969 the Tax Court had upheld the validity of the regulation:
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.
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.
But what about the fact that this decision was made over forty years ago, and the Mayo decision changed the way we look at the validity or regulations? Shouldn’t the Court reconsider the issue?
The Court noted that there did not appear to be any inconsistency between the tests it had applied in Weiszman and that would apply under Mayo. As a practical matter, this author believes that, if anything, Mayo’s test is much easier for the IRS to meet than the ones applied in 1969.
But what about the Tax Court’s 2015 decision in Altera Corp. & Subs. v. Commissioner, 145 TC No. 3 where a regulation had been found invalid because the IRS had failed to properly consider comments it received prior to issuing a final regulation?
The Court noted:
Altera is 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.