Saturday, May 14, 2022

Company’s Tuition Payment Was Not Deductible


Let me give you a fact pattern and you tell me whether there is a tax deduction.

·      You own a company.

·      A young man is dating your daughter.

·      The young man wants to take a computer course at Northwestern University. If it turns out he has both aptitude and interest, perhaps he can maintain the company’s website, at least for a while.

·      The company pays for the course.

Let me up the ante: is there a tax deduction to you and tax-free income to the young man?

You are thinking: maybe.

For example, my firm pays for my expenses when I attend professional seminars or conferences. Then again, my CPA license carries a continuing education requirement, so the seminars and conferences are necessary for me keep my gig as a practicing CPA.

Sounds like a working condition fringe benefit. The “working condition” qualifier means that the employer is paying for something that the employee could deduct (at least before the tax Code nixed miscellaneous itemized deductions) had the employee paid for it.

Alternatively, there are companies who pay (or help pay) tuition for employees who go to college. There are hitches to this educational assistance arrangement, though: it has to be available to everybody, cannot discriminate in favor of highly-compensated employees, and so on.

I am not seeing a tax deduction down either path. Why? Notice that a fringe benefit or assistance program requires an employer:employee relationship. You have no such relationship with the young man.

I suppose you could make him an employee.

No, you say.  Dating your daughter does not put him on the payroll.

You circle back to the possibility that he could take care of your website, at least for a while. That costs money to do. If he did so for free, or at a substantially reduced rate, the cost of that course could be a drop in the bucket compared to what you would have paid a webmaster.

OK. I am certain that the tuition is more than $600, so you pay for the course, send him a 1099 and he will have to settle-up while he files his tax return. On the upside, he should get a tax credit for taking that course.

Nope, you say. You want to deduct it as a business expense but not issue a W-2 or a 1099. None of that.

And that is how Robert and Swanette Ward appeared before the Tax Court. Clearly the IRS disagreed with the tax outcome they wanted.

Here is the Court:

While [] has provided services to Sherwin [CTG: Mrs Ward’s company] free of charge that would likely have cost Sherwin more than the amount of the tuition, we nonetheless find that the petitioners have not established that Sherwin is entitled to deduct the tuition.”

Why not?

Mr [] was not an employee of Sherwin.”

Yes, but what of the possibility that he would help with the website?

The Wards did not have an agreement with Mr [] that he would perform any services in exchange for the tuition payment.”

What, do you want a written contract or something?

Sherwin paid the tuition without any expectation of a return and thus did not have a business purpose for the payment. The tuition was a personal expense, and Sherwin is not entitled to deduct it.”

Why is the Court is circling the wagons on this one?

Folks, sometimes tax law occurs in the folds and the corners. There is something I have not yet told you that might explain the Court’s obstinacy.

That young man eventually married your daughter.

The Court saw a personal expense all the way.

I get it.

There is a distinction in the Code between deductible business expenses and nondeductible personal expenses. One could reason that showing some business angle or benefit – however abstract or hypothetical – can make the expense deductible, even if the primary factor for incurring the expense was personal. One would be wrong, but one could reason.

Our case this time was Sherwin Community Painters Inc v Commissioner, T.C. Memo 2022-19.

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