Michael T Wing CPA wrote:

- quote -

No, I'm saying that such expenses relate to your trade or
business of "the performance of services by the taxpayer as
an employee" and therefore would fall both under Section 162
*AND* 62(a)(1)'s push of the expense below the line. The
Tax Court specifically rejected the idea that one had to be
currently employed to get those expenses so long as the goal
was to become employed. Note that for awhile the IRS
attempted to argue that if you failed to obtain employment
the expenses weren't deductible, but eventually abandoned
that position (see Revenue Ruling 75-120 where the IRS
"caved" on this position).

However, in the fact pattern of being an employee

- quote -

The issue is whether the expense was incurred with a view
towards your "trade or business" of being an employee--if it
was, the deduction gets yanked below the line by Section
62(a)(1). Remember, the clear DEFAULT for Section 162
expenses is above the line--the below the line treatment is
the special case, not the normal result.

- quote -

There you have the problem of an inconsistent position
<grin> , and the IRS may very well take your "concession" of
being an employee as a cave-in on Section 62(a)(1). I
suspect, as well, the Tax Court might go there simply
because, in the alternative, they would point out they
*could* rule since there were no wages, there's no valid
withholding *AND* only a potential claim for refund by the
partnership but no offset of the tax liability.

- quote -

In that case, then it should be easy to find a case where a
judge did rule just that way <grin> . Or at least a TAM
where the National Office moved a deduction below the line.

My suspicion is that if a judge was tempted to go here, he
would end up hiding behind Section 212 in the opinion rather
than get into the quagmire of the employee issue.

- quote -

I would have to argue it's not available. That is, how do
you justify the disallowance (which would have to come under
Section 162) and then turn around and allow the expense
(which would then have to fall under the very same Section
162)? If the agent concedes Section 162, I think it's game,
set, match to the taxpayer and (as I noted) it goes above
the line.

That is, either it's disallowed because it's not "ordinary
and necessary" (that's why the partners won't pay even
though they have an explicit or implicit agreement to share
the expenses of the enterprise) *OR* it's disallowed because
the taxpayer arguably has a right to reimbursement (again
under that same explicit or implicit agreement). In essence,
whatever result you arrive at it has to get back to the IRC
at some point to justify the position. And, as I've noted,
Section 62(a)(1) makes it clear that ALL Section 162
expenses go above the line *EXCEPT* those incurred as an
employee.

- quote -

While I have problems there (it certainly looks like a trade
or business expense via the same argument you make for the
employee above <grin> ), I think it's going to be a lot
easier for an agent to write it up as a 212 allowance. And,
certainly, I wouldn't be averse to suggesting that option if
an agent was having real problems with a Schedule E expense
(in essence, we're really splitting the different by getting
a partial disallowance with the 2% and all that <grin> ).
Any port in a storm, shall we say <grin> ...

But, as I note, Section 62(a)(1) makes it pretty clear where
trade or business expenses go by default.

--
Ed Zollars, CPA
Phoenix, Arizona

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CPA Ed Zollars <ezollar[at]mindspring.com> wrote:

- quote -

I agree.

- quote -

So you are saying that the IRC requires a CURRENT employment
relationship in order to deduct job related expenses on
Schedule A? So, "job search" expenses while unemployed
should go ABOVE the line? Ditto with education expenses
incurred while between jobs and not technically employed by
anyone? Or our you saying that such expenses are
categorically NON deductible because there is no CURRENT
employment relationship at the time the expenses are
incurred?

What if I quit my "employee" job as a tax manager with a CPA
firm to pursue a Masters in Taxation degree on a full time
basis. And, after completing the program, I am unable to
secure re-employment with a CPA firm. Therefore, I become
self-employed (stealing lots of clients from my former
employer - the jerks! <g> ). Is the cost of the masters
degree program non-deductible because I wasn't technically
"employed" at the time? Or, does it magically become an
above the line deduction because I became self-employed soon
AFTERWARDS? (Assume for the sake of the foregoing that the
degree program meets the nominal requirements for deductible
education expenses under the circumstances.)

Or, what if the a "partner" is treated as an "employee" of the
partnership for tax withholding and W-2 purposes (under the oft'
mentioned "no harm, no foul" concept)? Where would this person
deduct unreimbursed job related expenses?

I could go on ad nauseum, but I won't. <g
Look, I'm not saying that you haven't read the code
"correctly," because I believe that you have. I'm simply
pointing out that in the ~real world~ of facts,
circumstances and opinionated judges, there appear to be
many deviations from the strict framework that you have
described.

I certainly agree that where a partnership agreement
requires a partner to incur certain expenses and clearly
states that the partner is not entitled to reimbursement for
same, such expenses are properly deductible on Schedule E
above the line. Such an arrangement is effectively a
"special allocation with substantial economic effect."

But, the case is much less clear when a partner
~unilaterally~ incurs business expenses on his own and the
partnership agreement is silent on either the authorization
of the expenditures or the entitlement to reimbursement for
same. In such cases, I don't think the IRS is wildly off
base to disallow the related deductions. But, in such cases,
I do believe that an alternant theory under the "convenience
of the employer" concept (which does NOT require the
EXPLICIT approval of the employer) is available. And,
certainly, if the situation looked sticky from the git-go, I
might advise the "partner" client to skip Schedule E and
head directly to Schedule A instead. (And I don't think I'm
going to lose my license over that advice! <g> )

If you want to characterize my argument as an attempt to
move from the purview of 162 to 212, that's OK with me.
Either way (under my theory) the unauthorized "outside"
deductions land below the line.

MTW

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Michael T Wing CPA wrote:
- quote -

clear on this matter--Section 62(a)(1) allows business
deductions above the line *EXCEPT FOR* those incurred as an
employee. So if you aren't an employee, the deduction goes
into the computation of adjusted gross income, while if you
are an employee it goes below the line subject to the 2% of
AGI.

All of this has nothing to do with whether the deduction is
otherwise allowable (the question of whether the partnership
should have paid it). That deals with the issue of whether
you have *ANY* deduction of *ANY* sort to begin with (that
is, was the payment an "ordinary and necessary" business
expense).

The only way it gets on Schedule is if it were to be held
the person was an employee. If his standing is anything
else (whatever that "else" might be), the deduction goes
above the line.

- quote -

way they could sustain the position you are advancing would
be to hold the amount is a Section 212 expense *OR* find
that a partner is an employee as a matter of law under the
IRC. Given the fiasco that results from the latter holding
on other aspects of the IRC (my head spins when thinking
about what happens if they are an employee for IRC but not
ERISA purposes and we talk about qualified plans <grin> ),
they simply aren't going to go there <grin> . That leaves
you only Section 212.

- quote -

As I note above, I'm not arguing partners are unique.
Rather, Section 62(a)(1) makes it clear that *EMPLOYEES* are
unique (and not very well liked by Congress, but that's
another issue). And partners aren't that class of "special"
taxpayers.

- quote -

Again, that's not my issue. That goes to the issue of
whether an item is currently deductible at *all* and not
*where* it can be deducted. If it's deductible per 162 and
related sections, it would go above the line. If it's not
deductible and must be capitalized, then it doesn't get
treated as an employee business expense.

--
Ed Zollars, CPA
Phoenix, Arizona

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CPA Ed Zollars <ezollar[at]mindspring.com> wrote:

- quote -

Well, I don't see it that way. <g> I am not proposing a
global redefinition of "partners" as "employees" for any and
all purposes. I am simply providing an alternate treatment
in this particular context for the problem we've heard about
(anecdotally, at least) of the IRS disallowing deductions
for "outside" expenses where the partnership agreement was
silent on the issue. In that case, it seems to me that a
partner ought to be allowed to do what any other working
person can do: Claim deductions for "job related" expenses
on Schedule A. Indeed, claiming expenses on Form 2106
doesn't even require that you be currently employed! <g
In a perfect world there probably shouldn't be any "outside"
partnership expenses. And/or in a perfect world the IRS
should draft regs to explain how all of this should work,
especially the thorny issue of individual partners claiming
home office deductions under 280A. But, we don't live in a
perfect world. <g> My solution isn't perfect, but I think it
is supportable under the circumstances, and it would
certainly be better than going for an all-or-nothing
above-the-line deduction and losing. <g
Further, I don't think the IRC intended to anoint "partners"
as a unique breed of taxpayers. Like all other taxpayers,
partners must still distinguish between capital items and
business expenses (and, of course, personal expenses). In
many of the cases I've seen involving "outside" expenses,
many such items related to defending capital ownership
percentages and the like. These certainly appear to be
capital expenses to me, and I don't think being a partner
makes them magically deductible (above the line or
otherwise).

MTW

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CPA Ed Zollars <ezollar[at]mindspring.com> wrote:

- quote -

Well, for that matter, why should it also change if the LLC
"checks the box" and then files a sub-S election? The
rationale for differing treatments between proprietorships,
partnerships and S-corps seem to be self-fulfilling...ie:
the rules are different ~because~ they're different. Or
something like that. <g
But, back to the issue of comparing proprietors to partners,
there IS a bona fide distinction between sole owner and
multiple owner entities. This gets to that thorny issue of
whether a partner is dealing on behalf of the partnership,
or is dealing in his own separate capacity. If he is dealing
on behalf of the partnership, they why didn't the
partnership pay or reimburse the expense? By the same token,
if the partnership DOESN'T pay the expense, it would appear
that the partner is dealing in some separate capacity. You
don't have this "schizophrenic" problem in the case of a
sole proprietorship.

This, of course, leaves us to consider the case of a sole
owner S-corp. Why should that be treated any differently
than a sole proprietorship? The answer seems to rest in the
"legal fiction" that the corporation is a bona fide separate
entity from the individual. And that leads us back to the
very same issue noted above: On ~whose~ behalf is the
individual dealing at any given point in time?

MTW

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