ON APPEAL FROM THE UNITED STATES TAX COURT (T.C. Docket No. 0555-76)
Before Seitz, Chief Judge, Rosenn, Circuit Judge, and Shapiro, District Judge.*fn*
Linda M. Liberi Toner (the taxpayer) appeals a final decision of the Tax Court that determined a deficiency of $177.41 against her for deductions relating to her educational expenses.
In 1971, taxpayer became a teacher at St. Clement's, a parochial school in the Archdiocese of Philadelphia. She taught both religious and secular subjects to fifth grade students. At the time of her initial employment, the taxpayer had graduated from high school and had completed two years of a four-year college degree program.
At all relevant times the Archdiocese has only required a high school diploma for its elementary school teachers. Upon commencing employment taxpayer was required by the Archdiocese to sign and did sign an agreement that if she lacked a bachelor's degree she would take a minimum of six college credits each year until she obtained a degree. At the time, a teacher with a bachelor's degree received a higher salary than a teacher with similar teaching experience but without such a degree. In all other respects, the taxpayer had full faculty status at St. Clement's.
In 1973, taxpayer took 15 hours of credit at Villanova University and thereby earned her degree. On her 1973 federal income tax return, taxpayer claimed a deduction in the amount of $906.28 for her 1973 educational expenses. Based on a disallowance of the deduction, a deficiency notice was sent to the taxpayer. The taxpayer thereafter filed a timely petition with the Tax Court. The case was assigned to a single judge who filed findings of fact and an opinion that resulted in a decision reflecting a deficiency of $177.41. The judge's decision in turn was reviewed by the full Tax Court, which voted 8 to 7 against the taxpayer. Toner v. Commissioner, 71 T.C. 772 (1979). This appeal followed.
Section 162(a) of the Internal Revenue Code permits deduction of "ordinary and necessary business expenses." On the other hand, § 262 prohibits deductions for personal expenditures. This case presents an issue, the deductibility of educational expenses when the student is already employed, that places these two statutory provisions in tension. The tension is the result of the fact that educational expenses in such a situation by their very nature often contain both personal and business elements.
To resolve this tension, the government has promulgated Treas.Reg. § 1.162-5. Subsection (a) first sets forth the general rule as to when expenditures for education are deductible. Subsection (b) then states certain exceptions when expenses are nondeductible even though the expenditures satisfy (a). The general rule announced in § 1.162-5(a) is:
(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 ...