                  T.C. Summary Opinion 2004-107



                     UNITED STATES TAX COURT



     WILL M. McEUEN III AND TRACY L. McEUEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8668-02S.             Filed August 3, 2004.


     Will M. McEuen III and Tracy L. McEuen, pro sese.

     Timothy A. Lohrstorfer, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year at issue.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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       Respondent determined a deficiency in petitioners' 1998

Federal income tax of $2,558.    The parties agree that respondent

correctly determined that petitioners have unreported income of

$7 from the refund of State income tax for the prior year.

       The issue remaining for decision is whether petitioners are

entitled to deduct on Schedule A, Itemized Deductions,

educational expenses of $20,317.    Respondent did not challenge

petitioners' entitlement to additional itemized deductions of

$3,794.    Because the amount of unchallenged itemized deductions

is less than the standard deduction, respondent allowed the

standard deduction in the deficiency determination.

       Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits received in evidence

are incorporated herein by reference.     At the time the petition

was filed, petitioners resided in York, South Carolina.

                             Background

       Tracy L. McEuen (petitioner) earned a B.A. degree, with

distinction, in mathematics and economics, from Indiana

University in 1992 and began working at Merrill Lynch (M-L) the

same year.    Petitioner was employed as a "financial analyst" at

M-L.    Financial analysts could remain at M-L for a maximum of 3

years, as did petitioner.    To become an "associate" at M-L, a

candidate was required to have an M.B.A. degree.    Petitioner left

M-L in 1995.
                               - 3 -

     Petitioner went to work for Raymond James Financial, Inc.

(James), in June of 1995.   Petitioner was hired as a financial

analyst with the corporate finance department of James.     At the

time of her employment, the department described itself as

consisting of "23 investment bankers and eight financial

analysts".   The financial analyst program at James was a 2- to 3-

year program.   In order to be an "associate" at James, an M.B.A.

degree was required.

     In the investment banking industry during the years 1995 and

1996, an M.B.A. degree was required to obtain a position as an

associate with an investment banking firm.

     Analysts at James are evaluated according to fairly

subjective criteria such as:   (a) Mastery of analytics; (b)

attention to detail; (c) teamwork and positive attitude; and (d)

communication and leadership skills.

     Associates at James are evaluated according to performance

criteria grouped under five categories:     (1) "General Performance

Expectations"; (2) "Recruiting and Team Building"; (3)

"Management and Supervision of Banking Analysts"; (4) "Execution

of Business"; and (5) "Business Generation".     Under the heading

"Management and Supervision of Banking Analysts", James

performance criteria state that associates are responsible for

supervising and training analysts.     The criteria include a
                               - 4 -

statement that "The Associate is responsible for the quality of

the work produced by Analysts under their supervision."

     Financial analysts and associates were not, however, always

assigned to all of the same securities transactions.   Sometimes

the work of the team was distributed so that an analyst would

work only with a vice president or managing director on a

transaction without the involvement of an associate.   At James,

both analysts and associates received health insurance benefits

and section 401(k) benefits.

     While petitioner was working at James, she was accepted at

the Kellogg School of Management at Northwestern University

(Kellogg).   Petitioner concluded that it was impractical for her

to pursue an M.B.A. while she was employed because of the long

hours an analyst is required to work.   Petitioner resigned her

position at James in June of 1996 to attend Kellogg.

     While at Kellogg, petitioner, an exceptional student,

majored in marketing, "organizational behavior", and finance.

She received her master of management degree in June of 1998.

During the period of 1996 through 1998, the master of management

degree at Kellogg was the equivalent of the master of business

administration degree at other institutions.

     After her graduation from Kellogg, petitioner did not return

to an investment banking firm as an analyst or associate.

Petitioner was hired by Spring Industries in September of 1998.
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Spring Industries is a manufacturer of home furnishings.

Petitioner was hired into the "General Management Program"

(program).   Candidates for the Spring Industries program were

required to have an M.B.A. or equivalent.    As described by Spring

Industries, the program "is a proving ground for future top

executives" and "prepares associates for careers in marketing,

finance or operations management."     When petitioner completed the

program with Spring Industries, she became an "associate brand

manager".

     On their joint Form 1040, U.S. Individual Income Tax Return,

for 1998, petitioners deducted on Schedule A $20,317 for

"REQUIRED EDUCATION" (having reduced $21,125 by $808, 2 percent

of reported adjusted gross income).

                            Discussion

     The Court decides this case on the preponderance of the

evidence, regardless of the allocation of the burden of proof.

Section 74911 is therefore inoperative.

     Petitioner argues that she was employed as an "investment

banker" with the M-L and James companies, having the job title

"financial analyst".   She did not abandon her trade or business

as an "investment banker" by attending Kellogg for 2 years, she


     1
      Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations by the Commissioner
commencing after July 22, 1998, the date of its enactment by sec.
3001(a) of the Internal Revenue Service Restructuring and Reform
Act of 1998, Pub. L. 105-206, 112 Stat. 726.
                               - 6 -

alleges, and her master's degree expenses were incurred to

maintain and improve her skills.   In the alternative, she asserts

that the expenditures were required as a condition to the

retention of an existing employment relationship, status, or rate

of compensation.

     Section 162 allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Although section 162 does not

explicitly mention expenditures for education, section 1.162-5,

Income Tax Regs., provides objective tests for determining

whether such expenditures are deductible.   Diaz v. Commissioner,

70 T.C. 1067, 1072-1073 (1978), affd. without published opinion

607 F.2d 995 (2d Cir. 1979); Taubman v. Commissioner, 60 T.C.

814, 817 (1973).

     The general rule of the regulation allows the deduction of

educational expenses if the education maintains or improves the

skills required by the individual in his or her employment or

other trade or business, or meets the express requirements of the

employer or applicable law.   Sec. 1.162-5(a), Income Tax Regs.

     Section 1.162-5(b)(2) and (3), Income Tax Regs., provides,

however, that if a taxpayer is pursuing a course of study that

meets the minimum educational requirements for qualification in

that employment or will qualify her for a new trade or business,

the expenditures are not deductible.
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     Since the satisfaction of either of the two "disallowance"

tests will prohibit the deduction whether or not either of the

two "allowance" tests is met, the analysis of the Court will

begin with the disallowance tests of section 1.162-5(b)(2) and

(3), Income Tax Regs.

     Petitioner, in advancing her argument, focuses on the

similarities between her duties as a financial analyst and those

of the associates at the investment banking firms of M-L and

James.   She characterizes both positions as "investment banking"

positions.   The fact that an individual is already performing

service in an employment status, however, does not establish that

she has met the minimum educational requirement for qualification

in that employment.   Sec. 1.162-5(b)(2)(i), Income Tax Regs.    The

minimum education necessary to qualify for a position must be

determined from a consideration of such factors as the

requirements of the employer, the applicable law and regulations,

and the standards of the profession, trade, or business involved.

Davidson v. Commissioner, T.C. Memo. 1982-119.

     Although the duties of the analyst and the associate

overlapped, the financial analyst position was, at both M-L and

James, a subordinate temporary position lasting for a maximum of

3 years.   The associate position at both companies was a

permanent career position that could lead to higher level

positions in the investment banking firm.   The Court notes also
                               - 8 -

that in corporate literature, James describes its corporate

finance department as consisting of "23 investment bankers and

eight financial analysts".   The Court concludes that associates

are among the "23 investment bankers" and that James did not

consider the financial analysts as having yet achieved the status

of "investment banker", even though in a broader sense they were

in the investment banking business.

     At M-L, James, and in the investment banking industry in

general, during the years 1995 to 1996, an M.B.A. degree was

required to obtain a position as an associate, an investment

banker, with an investment banking firm.   Because the expenses at

issue were incurred and paid by petitioner in order to obtain a

degree meeting the minimum educational requirements for

qualification as set by her employers and the industry in which

she was working, they are nondeductible personal expenditures.

See McCartin v. Commissioner, T.C. Memo. 1987-159; Antuna v.

Commissioner, T.C. Memo. 1977-435; sec. 1.162-5(b)(1), Income Tax

Regs.

     Even if petitioner's M.B.A. was not the minimum education

requirement to be an investment banker, if the degree would "lead

to qualifying * * * [her] in a new trade or business", her

expenses are not deductible.   Sec. 1.162-5(b)(3), Income Tax

Regs.   This rule applies even though the studies are required by

the employer or applicable law, even though the taxpayer does not
                               - 9 -

intend to enter the new field of endeavor, and even though the

taxpayer's duties are not significantly different after the

education from what they had been before the education.    Kersey

v. Commissioner, T.C. Memo. 1993-641, affd. without published

opinion 50 F.3d 15 (9th Cir. 1995); sec. 1.162-5(b)(1), Income

Tax Regs.

     If the education qualifies the taxpayer to perform

significantly different tasks and activities than could be

performed before the education, the education qualifies the

taxpayer for a new trade or business.     Glenn v. Commissioner, 62

T.C. 270, 275 (1974); Weiszmann v. Commissioner, 52 T.C. 1106,

1110 (1969), affd. per curiam 443 F.2d 29 (9th Cir. 1971).

Therefore, if petitioner's master's degree qualified her to

perform significantly different tasks and activities than she

performed before the education, the education qualified

petitioner for a new trade or business.

     After petitioner obtained her master's degree in management,

she did not obtain a position with an investment banking firm.

Petitioner was hired by Spring Industries, a manufacturer of home

furnishings, into its "General Management Program".    A

prerequisite to being hired under the program was an M.B.A. or

equivalent.   The purpose of the general management program was to

train future executives and prepare them for careers in

marketing, finance, or operations management.
                              - 10 -

     Petitioner argues that being hired into the general

management program did necessarily mean an assignment to upper

management would follow.   Although petitioner's education would

not by itself qualify her for a new profession, the regulation

requires only that the program of study being pursued "will lead

to qualifying" petitioner in a new trade or business.    Sec.

1.162-5(b)(3)(i), Income Tax Regs.     Payments for education that

must be combined with an examination or experience to qualify a

taxpayer for a new trade or business are not deductible.    See

Cristea v. Commissioner, T.C. Memo. 1985-533 (and cases cited

therein).

     From the record in this case, the Court concludes that

petitioner's degree led to qualifying her to perform

significantly different tasks and activities than she performed

before the education.   The education therefore qualified

petitioner for a new trade or business.

     Because petitioner's satisfaction of both "disallowance"

tests of section 1.162-5(b)(2) and (3), Income Tax Regs., will

prohibit the deduction of her educational expenses, the Court

will not address respondent's argument that petitioner was not

engaged in a trade or business in 1998.

     To the extent the Court has not addressed other arguments

and contentions petitioner raised, the Court concludes they are

without merit.   Respondent's determination that petitioners are
                             - 11 -

not entitled to deduct the educational expenses at issue here is

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                        Decision will be entered

                                   for respondent.
