Penalty for Frivolous Tax Court Action
If you bring a frivolous case to the Tax Court or unreasonably fail to pursue IRS administrative remedies, the Tax Court may impose a penalty of up to $25,000. Furthermore, if you appeal a Tax Court decision and the federal appeals court finds that the appeal was frivolous, the court may impose a penalty.
Recovering Attorneys’ Fees
Attorneys’ fees include the fees paid by a taxpayer for the services of anyone who is authorized to practice before the Tax Court or IRS.
Are MBA Courses Deductible?
The cost of MBA courses is deductible if the courses enhance the skills required in your current position, are not a minimum job requirement, and do not qualify you for a new business. If an MBA degree is required to obtain a promotion to a new position, the MBA is a minimum job requirement and no deduction will be allowed. For a deduction, the courses must be related to your existing job responsibilities and not lead to qualification for a new business. The Tax Court has allowed deductions for MBA expenses where individuals with some managerial or administrative experience took the courses to improve skills needed for their existing jobs.In one case, a college graduate who took a summer job before starting MBA courses was not allowed a deduction because he had not yet established himself in a business or employment; the summer position was just a temporary stage between schooling.If your employer reimburses you for MBA courses that qualify for a deduction, the reimbursement is a tax-free working condition fringe benefit; see 3.6.
Doctor’s Malpractice Insurance
A self-employed doctor may deduct the premium costs of malpractice insurance. However, a doctor who is not self-employed but employed by someone else, say a hospital, may deduct the premium costs only as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. Whether malpractice premiums paid to a physician-owned carrier are deductible depends on how the carrier is organized. If there is a sufficient number of policyholders who are not economically related and none of whom owns a controlling interest in the insuring company, a deduction is allowed provided the premiums are reasonable and are based on sound actuarial principles.In one case, physicians set up a physician-owned carrier that was required by state insurance authorities to set up a surplus fund. The physicians contributed to the fund and received nontransferable certificates that were redeemable only if they retired, moved out of the state, or died. The IRS and Tax Court held the contributions to the fund were nondeductible capital expenses.In another case, a professional corporation of anesthesiologists set up a trust to pay malpractice claims, up to specified limits. The IRS and Tax Court disallowed deductions for the trust contributions on the grounds that the PC remained potentially liable. Malpractice claims within the policy limits might exceed trust funds and the PC would be liable for the difference. Since risk of loss was not shifted to the trust, the trust was not a true insurance arrangement.
Substantiating the Sideline Business
In claiming home office expenses of a sideline business, it is important to be ready to prove that you are actually in business; see 40.10. In the case cited in the Example in 40.16, the Tax Court held that the doctor’s personal efforts in managing the six units for tenants were sufficiently systematic and continuous to put him in the rental real estate business. In some cases, the rental of even a single piece of real property may be a business if additional services are provided such as cleaning or maid service.
Rehabilitating Pre-1936 Building
In one case, the IRS and Tax Court interpreted the 75% external wall test for pre-1936 buildings as requiring that at least 75% of the existing external walls be retained in the same place, thereby denying the credit for a pre-1936 building that was relocated and then renovated. However, a federal appeals court disagreed, holding that there is no relocation restriction; the credit is allowed provided at least 75% of the external walls are retained as such after the renovation.