Wassenaar v. Commissioner
72 T.C. 1195, 1979 U.S. Tax Ct. LEXIS 48 (1979)
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Rule of Law:
Expenses for education are not deductible as an ordinary and necessary business expense under IRC § 162 if they are incurred to qualify the taxpayer for a new trade or business. A taxpayer must be currently established in and carrying on a trade or business to deduct educational expenses for maintaining or improving skills related to it.
Facts:
- Paul R. Wassenaar graduated from Wayne State University Law School in June 1972.
- During law school in 1971, Wassenaar worked as a summer associate for a law firm and also received compensation for work on the law review.
- Immediately after graduating from law school, from September 1972 to May 1973, Wassenaar attended New York University (NYU) and earned an LL.M. degree in taxation.
- Wassenaar passed the Michigan bar exam in October 1972 but was not formally admitted to the Michigan bar to practice law until May 1973, after completing his LL.M. program.
- Throughout his time at NYU in New York, Wassenaar considered his principal residence to be in Holland, Michigan.
- Following his graduation from NYU, Wassenaar moved to Detroit and began his first job as an attorney with the law firm of Miller, Canfield, Paddock & Stone.
- Prior to law school, Wassenaar held a variety of non-legal jobs.
Procedural Posture:
- Paul R. Wassenaar filed his 1973 federal income tax return, deducting $2,781 in educational expenses.
- The Commissioner of Internal Revenue disallowed the deduction and issued a notice of deficiency for $521.
- Wassenaar, the petitioner, challenged the deficiency by filing a petition in the U.S. Tax Court.
- In his petition, Wassenaar also asserted a new claim for a $919 deduction for moving expenses.
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Issue:
Does the cost of a Master of Laws (LL.M.) in Taxation qualify as a deductible ordinary and necessary business expense under Section 162 for a recent law school graduate who has not yet been formally admitted to the bar or begun practicing law?
Opinions:
Majority - Judge Simpson
No. The costs of obtaining a Master of Laws degree are not deductible as a business expense because the taxpayer was not yet engaged in the trade or business of being an attorney. The court reasoned that to deduct educational expenses under Section 162, a taxpayer must already be established in the trade or business that the education is intended to maintain or improve. Wassenaar’s prior work as a law clerk and on law review did not constitute the trade or business of practicing law, as he was not yet admitted to the bar. His LL.M. studies were part of a continuous program of education to qualify him for a new trade or business—practicing law—which makes the expenses non-deductible personal expenses under Treasury regulations. The court also rejected his other claims, finding that the LL.M. expenses were not a reasonable or ordinary expense for preparing his personal tax return under Section 212, and his moving expenses from New York were non-deductible under Section 217 because New York was a temporary residence, not his principal residence.
Analysis:
This decision firmly establishes that for the purposes of deducting educational expenses, the 'trade or business' of being an attorney does not begin until one is admitted to the bar and commences practice. It clarifies that preparatory activities, including post-J.D. specialized education like an LL.M., are considered part of the initial qualification for the profession, not an improvement of skills within an existing profession. This case creates a bright-line rule that is critical for law students and recent graduates, preventing the deduction of costs for advanced degrees obtained before one has actually begun to practice law.
