The Sixth Circuit has affirmed a district court decision that granted the government summary judgment on a doctor's claim that he was entitled to a business expense deduction for the repayment of funds he received from a medical center to cover his education costs. The court agreed with the lower court that the repayment was a nondeductible personal expense.
Tripp and Holley Dargie brought a taxpayer lawsuit in 2012 claiming the Internal Revenue Service (IRS) improperly denied them a business expense deduction for repaying $73,000 plus interest that Tripp Dargie (Dr. Dargie) had originally received from Middle Tennessee Medical Center (MTMC) to cover the cost of his medical education. The district court granted summary judgment to the United States, finding that because Dr. Dargie had used the funds to meet the initial educational requirements for becoming a physician, the repayment was a personal expense and nondeductible.
Excerpt from the case:
Dr. Dargie asserts that the $121,440 amount he sent UT in 2002 was a "damages payment" for breaching the Agreement with MTMC to work in Murfreesboro after his medical training.1 Consequently, he argues the payment was an ordinary and necessary business expense permitted under I.R.C. § 162(a) because it enabled him to pursue his for-profit medical practice in a different area of the state. The government contends that the payment to UT does not qualify as a deduction because educational expenses that allow an individual to meet the minimum requirements for practicing a given profession are personal. A taxpayer may deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." I.R.C. § 162(a); see also Treas. Reg. § 1.162-1. "For an expense to be deductible under section 162(a), it must meet five basic elements: (a) It must be ordinary; (b) it must be necessary; (c) it must be paid or incurred by the taxpayer in the taxable year; (d) there must be a trade or business; and (e) the expense must arise in connection with or proximately result from that trade or business." Peters, Gamm, West & Vincent, Inc. v. Comm'r, 71 T.C.M. (CCH) 2789, 1996 WL 182545, at *4 (1996). The main point of contention in this case surrounds the last element: whether the expense the Dargies are claiming arose in the course of a trade or business or whether it was a personal expense.
To determine whether an expense is a non-deductible personal expense or a deductible business expense, courts look to "the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer." United States v. Gilmore, 372 U.S. 39, 49 (1963). Thus, the circumstances under which Dr. Dargie received the money determine its business or personal characterization, not the circumstances under which he repaid it.
In this case, Dr. Dargie does not dispute that MTMC paid for his medical education and that education enabled him to meet the prerequisites for working as a physician. Moreover, U.S. Treasury regulations specifically categorize as nondeductible "expenditures made by an individual for education which is required of him in order to meet the minimum educational requirements for qualification in his employment or other trade or business." Treas. Reg. § 1.162-5(b)(2); see Keane v. Comm'r, 75 T.C.M. (CCH) 2046, 1998 WL 126857, at *3 (1998) (holding that "[e]ducational expenses incurred to allow [a] taxpayer to meet the minimum educational requirements for his job qualification are considered personal expenses."); see also Taubman v. Comm'r, 60 T.C. 814, 819 (1973) (holding that law school tuition expenses are nondeductible under I.R.C. § 162 because they allow a taxpayer to qualify in a new trade or business). Dr. Dargie cites no court decision that upholds a business deduction in a circumstance similar to his.