In a recent Memorandum decision, the Tax Court found that a couple was not permitted to take a tax deduction on their federal income tax returns for certain expenditures that they argued were incurred to “expand their general knowledge”.
In the case (Lawrence A. Tanzi, et ux., TC Memo 2016-148 (Tax Ct.), the Internal Revenue Service focused on the taxpayers’ 2011 tax return, finding a deficiency by virtue of disallowing certain unreimbursed employee business expenses. These expenses included the costs of their home Internet, cell phone, computer and satellite television, and books, DVDs, and CDs for a “professional library.”
Dr. Lawrence A. Tanzi held a Phd. In Communication and was employed as a math and communications adjunct professor at Seminole State College in the year in question. His spouse, Patsy Jean Tanzi, was employed as a librarian at the same college.
Dr. Tanzi argued that, as a professor holding a doctorate, he bore a lifelong burden of “developing knowledge, finding knowledge, exploring, [and], essentially, “self-educating” and that he and his librarian wife must constantly expand their general knowledge to be effective at their jobs. He insisted that due to this burden, all expenses paid in adding to his “general knowledge” should be deductible as unreimbursed employee business expenses.
The Taxpayers’ deducted: 1) 100% of their telephone, Internet, and television expenses, all of which were classified as “electronic support”; 2) depreciation expenses for assets allegedly purchased in prior years; 3)expenses incurred in purchasing books, “DVDs, and CDs for a “professional library”; and 4) computer equipment expenses.
The Tax Court rejected this argument, concluding that these expenses were personal living expenses, rather than “ordinary and necessary for the trades of being a professor or a campus librarian.”
The couple further failed to show the amount of business use of their home computer relative to the total use; nor did they provide any support for its depreciation. They also failed to show the business portion of the cell phone or Internet service while working at home.
The definition of a trade or business has been found to include services as an employee. The primary basis for the denial of these deductions in the Tanzi case by the Tax Court centers on whether the expenses deducted are “ordinary and necessary” for a professor and a librarian. In many cases, with proper documentation, expenses incurred by a university professor are ordinary and necessary and thus, if unreimbursed, are deductible in computing taxable income.
What appears to have happened in this case is that the taxpayers’ were too aggressive in taking the deductions for items that could have, and likely, should have, been split between personal use and business use. Had they maintained more accurate records splitting the costs among personal and business with detailed explanations of the business purpose for the expenditure, they would have had a far greater chance of succeeding in the defense of their tax position. The burden of proof is on the taxpayers’ in cases such as this and arguing that the expenses were incurred to increase general knowledge does not allow the Court much room for leniency. Further, the failure to maintain appropriate records likely served to make the Court’s decision fairly easy.
Should you have questions regarding this case, please contact Bob Grossman or Don Johnston at 412-338-9300.
