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Engineer Can't Deduct Ph.D. Educational Expenses Because Degree Leads to a New Trade or Business

(Parker Tax Publishing November 2017)

The Court of Federal Claims denied an engineer's tax refund claim based on a deduction for educational expenses relating to his pursuit of a doctoral thesis. The court concluded that the expenses incurred in obtaining a Ph.D. were nondeductible because the (1) courses did not maintain or improve the skills required by the engineer's employer, and (2) because obtaining a Ph.D. leads to a new trade or business as a university professor. Czarnecki v. U.S., 2017 PTC 471 (Fed. Cl. 2017).

Jerry Czarnecki is an experienced engineer with a Bachelor's of Science degree in engineering and a Master's degree in applied mathematics. Czarnecki enrolled in a structural engineering program at MIT in 1998 after working as a research engineer for several years. He took courses, sat for his doctoral examinations, and presented his dissertation research project. He then conducted doctoral research at Los Alamos National Laboratory.

Czarnecki went back to working as a research engineer in 2001. He continued in that role until 2007, when he took a job with the U.S. Navy performing structural engineering work for submarine design. In 2008, Czarnecki became a licensed professional engineer in New York. He then began working for the Navy Surface Warfare Center in Indiana. During this time, Czarnecki conducted research and writing in connection with his doctoral thesis. He left his job with the Navy in 2011 and, in 2014, stopped working on his doctoral thesis without obtaining a degree.

In 2014, Czarnecki filed an amended return for 2010 claiming a refund of over $8,700 for educational expenses related to his doctoral studies, which he said maintained and improved the skills required of him by his employer. Czarnecki argued that he was entitled to deduct these expenses as an ordinary and necessary business expense. The IRS disallowed the claim and Czarnecki filed a claim for refund in the Court of Federal Claims.

Reg. Sec. 1.162-5(a) provides that educational expenses are deductible as ordinary and necessary business expenses if the education (1) maintains or improves skills required in the taxpayer's present employment, or (2) meets the express requirements of the employer. However, under Reg. Sec. 1.162-5(b), even if the study is required by an employer, and the taxpayer does not intend to change careers, the expenses are not deductible if the study leads to qualifying the individual for a new trade or business.

Czarnecki argued that his doctoral studies maintained or improved his skills because they satisfied the continuing education requirements for registered professional engineers. He also asserted that he used the knowledge gained through his studies in his career, and that the underlying principles of his doctoral studies were the same as those that applied to his work for the Navy. Czarnecki contended that his education did not qualify him for a new trade or business as a professor because pursuit of a Ph.D. did not necessarily imply an intent become a professor and because holding a Ph.D. alone is insufficient for employment as a professor. The IRS argued that Czarnecki's school expenses were nondeductible because his education would lead to qualifying him for a new trade or business as a university professor.

The Court of Federal Claims agreed with the IRS and held that Czarnecki's educational expenses were nondeductible because his studies did not maintain and improve required skills and because they qualified him for a new trade or business as a professor. The court rejected Czarnecki's argument that his studies maintained and improved his skills for the engineering profession because he used the knowledge gained through those studies in his career. The court found that Czarnecki did little more than assert a connection between his studies and his work, and offered no facts to demonstrate how his education maintained or improved the skills required of him by his job with the Navy. The court also did not agree with Czarnecki's argument that his studies fulfilled the continuing education requirements for registered professional engineers. The court found that Czarnecki's license did not require continuing education until three years after his being licensed. Therefore, Czarnecki's continuing education obligation did not begin until 2011 and was not required in 2010.

The court also found that Czarnecki's expenses were nondeductible because he would have objectively fulfilled a significant requirement for becoming a university professor if he had completed his doctoral studies. The fact that the Ph.D. degree alone would not have been enough to qualify Czarnecki for a professorship was irrelevant; all that was required under the regulations, according to the court, was that the studies could lead to qualifying Czarnecki for a job in a new field.

For a discussion of the deductibility of work-related educational expenses, see Parker Tax ¶85,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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