I admit: I
got a chuckle from reading the case.
The
taxpayers (Tanzi's) are married, and for the year in question they were
employed by Seminole State College, which is Sanford, Florida. I remember a
conversation with a Sanford CPA a year or two ago lamenting that there no
longer was separation between Orlando and Sanford. I was in Orlando this year,
and he is right - there isn't.
Our taxpayer
was an adjunct instructor teaching communications, and his wife worked at the campus
library. Although an adjunct, he held a PhD in communications, so we can
presume he was hoping for a permanent full-time position.
On their 2011 return they deducted
the following as employee expenses:
(1)
100% of their telephone, internet and television
(2)
depreciation
(3)
books, CDs and DVDs
(4)
computer expenses
The IRS bounced the employee expenses
and sent them a notice for approximately $3,000.
Employee expenses are a subset of
"miscellaneous deductions." One has to itemize to get to
miscellaneous deductions, and even then these miscellaneous deductions are not
what they used to be. The common itemized deductions are mortgage interest,
real estate taxes and contributions. Living in Florida, our taxpayers did not
have to concern themselves with another common itemized deduction - state
income taxes. Chances are the first three got them into itemized deduction range,
and their miscellaneous deductions then became usable. It is rare that
miscellaneous deductions by themselves will be enough to get you to itemize.
Miscellaneous
deductions are not tax-efficient, though. The Code requires that you reduce
your miscellaneous deductions by 2% of your adjusted gross income, so that portion
is immediately forfeited.
EXAMPLE: You and your spouse make a combined $150,000. You would have to immediately reduce your miscellaneous deductions by $3,000 (i.e., $150,000 times 2%). If your miscellaneous deductions totaled $3,500, only $500 would be deductible. And yes, it is intentional. It is a way for Congress to pry a few more tax dollars from everyone who incurs employee expenses.
COMMENT: My daughter is working before returning to graduate school. She is required to use her car for work. Although reimbursed something for mileage, it is not the full rate permitted by the IRS. Her employer explained to her that she could deduct the difference come tax time. As her dad and tax advisor, I explained that this was not true. She would not have enough to itemize, and her unreimbursed mileage would be deductible only if she itemized.
By the way,
you forfeit all miscellaneous deductions if you are subject to the AMT
(alternative minimum tax). As I said, they are not efficient.
The Tanzi's
were deducting employee business expenses. The IRS was questioning how 100% of
their telephone and internet - just to start - became business. There is a
long-standing doctrine that an employee is "in the business" of being
an employee, but one still has to show some nexus between the expenses and
being an employee. I receive a W-2, for example, but I cannot deduct my
Starbucks tab solely for the reason that I am an employee. I would have a
business nexus if I met a client there, but not because I was picking up coffee
for my commute to the office.
The IRS
wanted to know what that nexus was.
The Tanzi's
argued that they must constantly expand their "general knowledge" to
be effective at their jobs. Mr Tanzi explained that individuals holding
terminal degrees - such as himself, coincidently - especially bear a lifelong
burden of "developing knowledge, exploring [and] essentially
self-educating." Mr. Tanzi insisted that all expenses paid in
pursuing his general knowledge should be deductible as unreimbursed business
expenses.
COMMENT: If Mr Tanzi won this argument, I would immediately try to expand the Tanzi doctrine to include tax CPAs with Masters degrees who also maintain a tax blog. Our burdened ranks must constantly expand our general knowledge to be effective at our jobs. I for example sometimes work with and write about international tax matters. Seems to me that a trip overseas to visit my wife's family should be deductible, as it expands my knowledge of being overseas, or some reasoning along those lines.
The tax Code recognizes that some expenses are
simply personal in nature. There is even a Code section that says this out
loud:
Section 262 - Personal, living, and family expenses
(a) General rule
Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.
Here is the Court:
While we find credible the Tanzi's testimony that they spent significant time and resources educating themselves, we do not believe the expenses are ordinary and necessary for the trades of being a professor or a campus librarian but rather are personal, living or family expenses nondeductible under section 262(a)."
No surprise for
the Tanzi's, but I am a bit disappointed. Looks like I won't be able to deduct
my life expenses as ordinary and necessary to the business of being a tax CPA
and blogger. Those tax refunds would have been sweet.
