Wednesday, October 10, 2012
The cost of a professional education such as law school or medical school is almost always incurred as an investment in a future career. And like any investment, the cost ought to be recoverable over time against the income the investment generates. While the useful life of a professional career is indeterminate, Congress has now provided an arbitrary 15-year period over which to recover the costs of intangibles as well as pro-opening expenditures, two categories each describing the cost of a professional education. Accordingly, just as tax theory suggests, the current statutory scheme authorizes the amortization of the cost of a professional education. I conclude that a court should invalidate Treasury Regulation 1.262-1(b)(5) insofar as it establishes a conclusive presumption that all educational expenditures incurred by a taxpayer in anticipation of entering a new trade or business are "personal" and therefore nondeductible. In response, the government should revise Treasury Regulation 1.162-5 to provide that some educational expenditures are personal and therefore nondeductible and nonamortizable, some educational expenditures are immediately deductible, and some educational expenditures are nondeductible but amortizable. The first category of educational expenditures would include the cost of classes taken primarily for non-profit-seeking motives such as the occasional art history class or an evening class on home gardening; it might also include the cost of a college education in most circumstances. The second category of educational expenditures would include the cost of classes primarily taken for use in the taxpayer's trade or business or other profit-seeking activity and as to which the benefit of the education largely will be short-term. This category might include annual CLE classes taken by a lawyer to familiarize herself with current cases and rulings that seem important initially but generally wane in importance quickly. The third category would include educational expenditures incurred primarily in connection with profit-seeking activities but whose value will extend in large measure across multiple taxable years. This would include not only start-up professional education expenditures but also the cost of obtaining an LLM in taxation by a practicing attorney.