A case out of the Tax Court yesterday afternoon illustrates that deductions are rarely straight-forward; we often have to jump through multiple hoops of staute before a deduction is allowable.
In Helguero-Balcells v. Commissioner, T.C. Summary Opinion 2012-31, Graciela Helguero-Balcells (Balcells) was an assistant professor at Lynn University. She held a Ph.D. in global and international education as well as a Ph.D. in Spanish literature.
Balcells did quite a bit of traveling to further her education and improve her teaching skills. She deducted the following expenses on her tax return as unreimbursed employee expenses:
Educational Expenses
Madrid, Spain: Balcells made two trips to Spain, one lasting 11 days and the other 60 days in furtherance of one of her Ph.D. degrees by attending a symposium and presenting papers. The duration of the business portion of either trip was not substantiated. She was not entitled to reimbursement from Lynn for this trip.
Montreal, Canada: Balcells spent six days performing research related to one of her dissertations. She did not submit a request for reimbursement.
Attendance at Conferences
Balcells attended conferences in Rome, Tampa, Chicago, and Nashville. She requested reimbursement but was denied for her trips to Rome, Tampa, and Nasville. She did not request reimbursement for the Chicago trip.
Education Expenses, In General
Education expenditures, including travel expenses while away from home in connection with such education, may be deducted as trade or business expenses if the education maintains or improves the skills required by a taxpayer in his or her employment or if the education meets the express requirements of the taxpayer’s employer.[i]
A taxpayer may deduct travel and related expenses incurred to attend seminars, conferences, or continuing education courses related to the taxpayer’s trade or business, but only if the taxpayer is not entitled to reimbursement for the expenses from the taxpayer’s employer. If an employee is entitled to reimbursement under the employer’s reimbursement policy and fails or forgets to seek it, the employee is not allowed a deduction for the expenses.
Foreign Travel Substantiation
An additional requirement is placed on foreign travel expenses incurred for education. Foreign travel expenses, if otherwise deductible, are subject to the allocation requirements of I.R.C. § 274(c).[ii] Section 274(c) generally requires the proration of foreign travel expenses between business and nonbusiness expenses.
Section 274(c)(1) provides that no deduction is allowed for that portion of the expenses attributable to travel outside the U.S. which is not allocable to the taxpayer’s trade or business; thus, an allocation between business time and personal time is required. This provision does not apply, however, if (a) the travel outside the U.S. does not exceed one week, or (b) the portion of the time of such travel which is not attributable to the pursuit of the taxpayer’s trade or business is less than 25% of the total time of such travel.[iii]
Tax Court’s Decisions
Educational Expenses
Balcell’s trips to Madrid and Montreal constituted legitamate educational expenses under Section 162, as they imporved her skills as a teacher. At issue, however, was whether Balcell was required to allocate her foreign travel time between business and personal time, and if so, if she adquately substantiated the business portion of her trip.
Because the Madrid trips exceeded one week, Balcells was required to allocate her time between business and personal pursuant to Section 274(c). Because Balcells was unable to substantiate the percentage of time spent on business, the Tax Court disallowed all related expenses.
Montreal: The trip did not last more than one week; thus, no allocation was required. The expense was allowed in full.
Conference Expenses
Again, there was no doubt that the costs Balcells incurred to attend conferences were legitamate business expenses. The issue for the Tax Court was whether Balcells was entitled to remibursement for these expenses under Lynn University’s reimbursement policy.
Because Balcells applied for reimbursement (but was denied) for the conferences attended in Rome, Nashville, and Tampa, the Tax Court permitted her to deduct the expenses as unreimbursed employee expenses. The court denied her expenses related to the Chicago conference, however, because Balcells failed to request reimbursement and could not prove reimbursement would have been denied if it had been requested.
[i] Treas. Reg. §1.162-5(a)(1), (2)
[ii] Treas. Reg. §1.274-4(a).
[iii] I.R.C. § 274(c)(2); Treas. Reg. §1.274-4(b).
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