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.
