## Facts

- Daniel R. Allemeier, Jr. worked for Selane Products, Inc., a dental-products manufacturer, as a sales representative and increasingly performed managerial functions (e.g., training and coordinating with management).
- Selane’s CEO encouraged Allemeier to obtain an M.B.A. to improve skills and advancement prospects, but the degree was not required for employment or promotion and Selane did not reimburse tuition.
- Allemeier pursued an M.B.A. while working full time and was promoted to a managerial title during the program; his duties substantially overlapped with responsibilities he already performed.
- On his 2001 return, Allemeier deducted M.B.A. tuition and related expenses as unreimbursed employee business expenses and also claimed other miscellaneous employee business expenses (including items subject to strict substantiation rules).
- The IRS issued a notice of deficiency determining an income-tax deficiency and an accuracy-related penalty under I.R.C. § 6662, disallowing the education deduction as nondeductible under Treas. Reg. § 1.162-5 and disallowing most other expenses for inadequate substantiation.
- Allemeier petitioned the U.S. Tax Court for redetermination.

## Issues

1. Whether Allemeier’s M.B.A. tuition and related costs were deductible under I.R.C. § 162 and Treas. Reg. § 1.162-5 as education that maintained or improved skills, or nondeductible because the education met minimum requirements or qualified him for a new trade or business.
2. Whether Allemeier substantiated his other claimed unreimbursed employee business expenses as required by I.R.C. §§ 162 and 274 and related regulations.
3. Whether Allemeier was liable for the I.R.C. § 6662(a) accuracy-related penalty, or was protected by reasonable cause and good faith under I.R.C. § 6664(c).

## Decision

- The court held the M.B.A. education expenses were deductible as ordinary and necessary employee business expenses.
- The court disallowed most other claimed miscellaneous employee business expenses due to insufficient substantiation, including failures under the strict requirements of I.R.C. § 274(d) for certain categories.
- The court did not sustain the I.R.C. § 6662 accuracy-related penalty.

## Legal Principles

- Education expenses are deductible under I.R.C. § 162 and Treas. Reg. § 1.162-5(a) when they maintain or improve skills required in the taxpayer’s current trade or business (or are expressly required by an employer or law to retain employment).
- Education expenses are not deductible under Treas. Reg. § 1.162-5(b) if they (1) meet the minimum educational requirements of the taxpayer’s present trade or business or (2) qualify the taxpayer for a new trade or business.
- Whether education qualifies a taxpayer for a new trade or business is evaluated in a fact-intensive manner, commonly focusing on the taxpayer’s duties before and after the education; a change in title without a substantial change in duties may not establish a new trade or business.
- For expenses governed by I.R.C. § 274(d), deductions require specific substantiation (e.g., amount, time, place, and business purpose) through adequate records or sufficiently corroborated evidence; general testimony or incomplete documentation is insufficient.
- The IRS bears the burden of production for penalties under I.R.C. § 7491(c); a taxpayer may avoid an accuracy-related penalty by showing reasonable cause and good faith under I.R.C. § 6664(c).

## Conclusion

The Tax Court permitted deduction of Allemeier’s M.B.A. tuition because it improved skills used in his existing sales/management work and did not function as a minimum requirement or qualification for a new trade or business, but it disallowed most other employee expense deductions for lack of the substantiation required by the Internal Revenue Code and declined to impose the accuracy-related penalty based on reasonable cause and good faith.


Allemeier v. Comm’r, 90 T.C.M. (CCH) 197 (2005)