Rev. Rul. 60-97

Advice has been requested concerning the Federal income tax treatment of expenses incurred by taxpayers for education.

The provisions of the Internal Revenue Code of 1954 here pertinent are found in section 162(a) which states that in computing taxable income, there shall be allowed as a deduction `all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.' Among the items representing business expenses are `taveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business.'

Section 262 of the Code provides, however, with exceptions not here material, that no deduction shall be allowed for personal, living, or family expenses.

Regulations (section 1.162-5) were promulgated under section 162 of the Code in order to differentiate between expenditures for education which constitute ordinary and necessary expenses paid or incurred in carrying on a business activity and those which are personal in nature. The regulations also removed the uncertainties as to the deductibility of educational expenses by employees as distinguished from self-employed persons. They make it clear that both employees and self-employed individuals can deduct educational expenses which qualify as ordinary and necessary business expenses.

The regulations provide that expenditures made by a taxpayer for his education are deductible if they are for education undertaken primarily for the purposes of (1) maintaining or improving skills required by the taxpayer in his employment or other trade or business, or (2) meeting the express requirement of a taxpayer's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the taxpayer of his salary, status or employment. Taxpayers are entitled to deductions only if they are engaged in a trade or business (whether self-employed or engaged in the performance of services as an employee) and have met at least the minimum requirements for qualification or establishment in that trade or business. In determining what the minimum requirements of a taxpayer's trade or business are, consideration must be given to such factors as the requirements of the taxpayer's employer (either present or prospective), the laws and regulations of the particular jurisdiction, and the standards of professional, trade and business groups.

A taxpayer who is not currently employed or is not otherwise actively engaged in a trade or business is not entitled to a deduction for the expenses of any education undertaken during such period of unemployment or inactivity. Therefore, if a taxpayer who has ceased to engage in employment or other business subsequently undertakes education or training preparatory to resuming engagement in such employment or other business, the cost of such education is not deductible. A taxpayer will not be considered to have ceased to engage in his employment or other business during an off-duty season, when he is an vacation, or when he is on temporary leave of absence. Thus, a teacher will not be considered to have ceased to engage in his employment during the period between one school term in which he was employed and the next consecutive school term regardless of whether he was under a contract of employment during such intervening period.

Whether expenditures are for education undertaken primarily for the purpose of `maintaining or improving skills' required by the taxpayer in his employment or other trade or business must be determined upon the basis of all the facts involved. The tests of the regulations are framed to fit a wide variety of situations. In order to satisfy any of these tests, if called upon to do so in connection with the audit of a return or claim for refund, it is not enough to assert or deny the purpose of the taxpayer in general terms. Rather, it is necessary that the taxpayer show his purpose through specific facts. In this connection it will be necessary for him to establish that the education does maintain or improve skills required in his employment or other business. The skills `required' by the taxpayer in his employment or other trade or business are those which are appropriate, helpful, or needed.

If it is customary for other established members of the taxpayer's trade or business occupying positions similar to that of the taxpayer to undertake education of the type pursued by the taxpayer, the taxpayer will be considered to have undertaken such education for the purpose of maintaining or improving skills. The further and overriding rule which must be applied in every case is that even if the education maintains or improves skills required by the taxpayer in his trade or business, the cost thereof will not be deductible if the education is required of the taxpayer in order to meet the minimum requirements for qualification or establishment in his intended trade or business or specialty therein. The expense of such education is not deductible because it is personal in nature.

Once a taxpayer has met minimum requirements for establishment in his intended trade or business, the cost of education undertaken primarily for meeting the express requirements of a taxpayers employer (or the requirements of applicable law or regulations) imposed as a condition to retention of the taxpayer's salary, status or employment is deductible. Generally, this is true even though a new position, a substantial advancement, or qualification in a new field may result. (See, however, the subdivision of this Revenue Ruling entitled, `Complete course of study leading to qualification or establishment,' beginning on page 73.) However, the deduction of expenses incurred for this purpose is limited to expenses for the minimum education required as a condition to the retention of the taxpayer's salary, status, or employment. Expenses for education in excess of that necessary to retain the taxpayer's salary, status, or employment may be deducted only if such excess education is undertaken primarily for the purpose of maintaining or improving skills required in the taxpayer's employment or other trade or business.

The regulations prohibit the deduction of expenditures made by a taxpayer for his education if they are for education undertaken primarily for the purpose of obtaining a new position or substantial advancement in position, or primarily for the purpose of fulfilling the general educational aspirations or other personal purposes of the taxpayer. The fact that the education undertaken meets express requirements for the new position or substantial advancement in position is an important factor indicating that the education is undertaken primarily for those purposes. If education is not necessary to retention of position and it meets express requirements for a new position or substantial advancement in position, the taxpayer must show that his primary purpose in acquiring the education is to maintain or improve skills required in his present employment or other business. The taxpayer will be considered to have made such a showing if it is customary for other established members of the taxpayer's trade or business occupying positions similar to that of the taxpayer to undertake such education.

Summarizing, therefore, it may be said that expenses voluntarily undertaken primarily for the purpose of maintaining or improving skills required by a taxpayer in his employment or other trade or business are deductible as well as those incurred primarily because required as a condition to retention of his salary, status or employment; that expenses incurred primarily for either of these two purposes are deductible whether the taxpayer is self-employed or is engaged in the performance of services as an employee; and the fact that academic credit, a degree, a new job, or advancement may result does not preclude a deduction so long as the education is primarily undertaken for one of the two purposes specified in the regulations as causing the expenses to qualify for deduction.

Minimum Requirements for Qualification or Establishment

Section 1.162-5(b) of the regulations specifically provides that `if education is required of the taxpayer in order to meet the minimum requirements for qualification or establishment in his intended trade or business or specialty therein, the expense of such education is personal in nature and therefore is not deductible.' It therefore is necessary to determine in every case whether a taxpayer has met these minimum requirements.

The following is a description of the application of this minimum requirement rule to teachers and school administrators. These taxpayers must meet both local and state requirements.

The state's minimum requirements for qualification or establishment in his intended position have been met by a teacher or school administrator when he has acquired the education necessary to hold a continuing certificate in that position. For the purposes of this Revenue Ruling, a continuing certificate is one which need not be renewed, is renewable or convertible on the basis of experience only, or is renewable indefinitely by acquiring education which is not directed toward required conversion to another type of certificate. In other words, a teacher has met the state's minimum requirements when he is eligible for a certificate and is not required to take additional education showing progress toward the attainment of another type of certificate. The name or term applied to a certificate is not controlling.

If a teacher who has a continuing certificate is required by his employer, whether local board, district or school (public or private), to meet other educational requirements for employment in his position, he must meet these requirements before he will be considered to be qualified or established in his position. A change of employers, therefore, may require teachers as well as other taxpayers to meet different minimum reqjirements. (See the subdivision of this Revenue Ruling entitled, `Increased Requirements-Changed Duties,' beginning on page 73.)

Whether university and college faculty members, have met the minimum requirements for qualification or establishment in their intended positions must be determined in the light of the governing regulations of the various institutions. A university or college faculty member has met the minimum requirements for establishment in his position when higher educational attainments are not required of him as a condition of continuing with the institution as a faculty member. (See discussion below, however, relative to increased requirements.) If such a faculty member undertakes additional education which he is not required to take in order to remain on the faculty, he will be entitled to deductions provided the education was undertaken for the purpose of maintaining or improving skills required by the taxpayer in his position.

The regulations of universities and colleges often require faculty members to attain certain levels of education either prior to appointment or within a specified period of time after appointment. If an individual is employed with the understanding that he must obtain certain additional education within a specified period of time in order to remain on the staff, expenses incurred for such education represent expenses incurred in meeting minimum requirements for establishment in the taxpayer's intended position and are not deductible. Thus, for example, if an individual is appointed as an instructor in a college having a policy that within five years he must acquire a master's degree and thus qualify as an assistant professor in order to remain on the faculty of the institution, the expenses incurred in earning the master's degree represent expenses incurred in acquiring the minimum qualifications for establishment in his intended position and are not deductible.

Substantial Advancement

The regulations provide that expenditures made by a taxpayer for his education are not deductible if they are for education undertaken primarily for the purpose of obtaining a substantial advancement in position. Example (6) contained in section 1.162-5(e) of the regulations makes it clear that in the case of teachers an in-grade increase in salary pursuant to a salary schedule does not constitute a substantial advancement in position. A teacher who incurs expenses for education which are otherwise deductible and, as a result, receives an in-grade increase in salary need not show that the education was not undertaken primarily for the purpose of obtaining the in-grade increase. An `in-grade' increase is an automatic step in a salary schedule for a specified level of education. A shift from one step in a salary schedule for a specified level of education (such as a bachelor's degree) to the corresponding, or next higher step, in a salary schedule for the next higher level of education ( i.e. a master's degree) will be treated as an in-grade increase in salary and will not constitute a substantial advancement in position.

Increased Requirements-Changed Duties

Once a taxpayer has met the minimum requirements for establishment in his intended position, expenses incurred in meeting increased requirements thereafter established for that position are deductible, provided the increased requirements are imposed primarily for a bona fide business purpose of the employer. See the next subdivision of this Revenue Ruling for an application of this rule.

Also, in the case of an established taxpayer, expenses of additional education necessitated by a change of duties with the same employer (whether at the request of the taxpayer or his employer) are deductible provided the new duties do not constitute a new position and the cost of the education otherwise qualifies for deduction under the regulations. For example, if the new duties do not constitute a new position and the taxpayer receives a substantial increase in salary as a result of taking the additional education, the cost of such education will be deductible provided the taxpayer can show his primary purpose was to retain his position or improve required skills. In the case of an established teacher, a change of duties with the same school district or other employer will not constitute a new position if the duties involve the same general type of work (for example, teaching as distinguished from administrative duties) and if the teacher is not required to obtain a different type of certificate (such as a change from an elementary certificate to a secondary certificate).

Complete Course of Study Leading to Qualification or Establishment

The regulations provide that if education is required of the taxpayer in order to meet the minimum requirements for qualification or establishment in his intended trade or business or specialty therein, the expense of such education is personal in nature and therefore is not deductible. If a taxpayer who is established in his position undertakes education which is a part of a complete course of study that the taxpayer intends to pursue, such as that required to obtain a Bachelor of Laws degree, and such complete course of study will lead to qualifying the taxpayer in a new trade or business or specialty therein, it will be considered, for purposes of this Revenue Ruling, that such education was undertaken to qualify the taxpayer in such new trade or business or specialty. Accordingly, the cost of such education will not be deductible. See example 10 below. However, a taxpayer may deduct the cost of courses in a new field or specialty if they meet the tests of deductibility provided in the regulations and provided they are not intended to be combined with other courses so as to lead to qualification in that field or specialty.

Except as provided in the next sentence, if an employee is established in his position and Thereafter he is required by his employer, for a bona fide business purpose, to undertake additional education in order to retain his position, the cost of such education will be deductible. However, if the education required by the employer represents a complete course of study which will lead to qualifying the taxpayer in a new trade or business or specialty therein, it will be considered, for purposes of this Revenue Ruling, that the requirement was imposed primarily for the benefit of the employee and not primarily for a bona fide business reason of the employer and, accordingly, the cost of such education will not be deductible.

Key Questions

The following is the suggested order in which questions should be resolved in determining the deductibility of expenses incurred for education:

Has the taxpayer met the minimum requirements for qualification or establishment in his intended position?

If `no,' no deductions are allowable.

If `yes,' is education undertaken primarily to meet employer requirements to retain taxpayer's position?

If `yes,' the taxpayer is entitled to deductions unless (1) the education leads to qualifying the taxpayer in his intended trade or business and taxpayer knew of this employer requirement before assuming his position with his employer, or (2) the employer's requirement is imposed primarily for the benefit of the taxpayer and not primarily for a bona fide business purpose.

If `no,' is it customary for other established members of taxpayer's trade or business occupying positions similar to that of the taxpayer to undertake education of the type pursued by the taxpayer?

If `yes,' the taxpayer is considered to have undertaken education for the purpose of maintaining or improving needed skills and is entitled to deductions.

If `no,' the taxpayer must show by other means that his primary purpose was to maintain or improve needed skills. If the education undertaken meets express requirements for a new position or substantial advancement, the taxpayer, must show that the education was not undertaken primarily for the purpose of meeting those requirements.

Where Deduction Is Reported on Return

The rules applicable to the deduction of business expenses in general apply to expenses for education which qualify as business expenses.

Under section 62 of the Code, expenses incurred by a self-employed taxpayer for education are deductible on page 1 of Form 1040, U.S. Individual Income Tax Return, in computing his adjusted gross income, if they meet the tests set forth above.

In the case of an employee, however, the nature of such expenses will determine whether they are deductible on page 1 or page 2 of Form 1040. An employee's traveling expenses (including the cost of meals and lodging) while away from home overnight, and transportation expenses (excluding the cost of meals and lodging) not involving overnight travel, incurred in pursuing educational activities, the expenses of which are deductible, may be claimed on page 1 of Form 1040 in computing adjusted gross income. An employee's expenses for tuition, books, laboratory fees, and similar items incurred in pursuing similar education activities are likewise deductible in com-computing his adjusted gross income to the extent his employer reimburses him for such expenses and provided he reflects the amount of such reimbursement in his gross income. See section 1.162-17 of the Income Tax Regulations relating to the reporting and substantiation of employees' expenses. His unreimbursed expenditures for such tuition, books, laboratory fees, and similar items are deductible on page 2 of the return, provided, of course, the standard deduction is not claimed and the optional tax table is not used.

Travel and Transportation Expenses

The following are the general rules for the deductibility of travel and transportation expenses: (1) Commuting from a taxpayer's place of abode to any business post situated within the area which constitutes his principal or regular business location constitutes a personal expense; (2) expenses of transportation incurred between business posts within the same area or incurred in daily round trips between the general area which constitutes his principal or regular business location and a minor or temporary post of duty situated beyond that general area are deductible; and (3) overnight traveling expenses (including the cost of meals and lodging) necessarily incurred while carrying on a business activity at a minor or temporary post of duty in a more distant location where it is reasonably or economically impractical to live at `home' constitute deductible traveling expenses. Rev. Rul. 190, C.B. 1953-2, 303; Rev. Rul. 55-109, C.B. 1955-1, 261.

In determining the deductibility of traveling and transportation expenses incurred in connection with acquiring education at an educational institution, the taxpayer may select the institution which best serves his needs and he will not be denied a deduction solely because attendance at the institution of his choice resulted in greater expenditures than he would have made if he had attended another institution. This is true whether foreign or local universities are attended. A factual determination must be made as to whether the travel away from home was primarily to obtain education the expenses of which are deductible or whether the travel was primarily for personal reasons. See section 1.162-5(d) of the Income Tax Regulations. If the relative amount of time devoted to personal activities or some other factor suggests a trip is made primarily for personal purposes, the taxpayer must be able to show that, notwithstanding this fact, the travel was primarily to obtain the education.

A taxpayer undertaking education during an off-duty period or temporary leave of absence may deduct his expenses of travel, meals and lodging in addition to tuition costs, fees, cost of books, etc., if the expenses otherwise qualify for deduction and if there is a firm understanding or obligation that the taxpayer will return to his employment at the end of the off-duty period or the temporary leave of absence.

In this connection, anticipated or actual presence for more than a year at a particular location strongly tends to indicate `indefinite' as distinguished from `temporary' presence there. In the event a taxpayer undertakes education requiring absence from his duties and business post for an indefinite period, he will not be considered as traveling away from `home' so as to be entitled to deduct expenses incurred for travel, meals and lodging. However, tuition, fees, cost of books and other necessary items may be deductible, provided the education is of the type giving rise to deductions.

The following example demonstrate the application of the rules contained in this Revenue Ruling:

Example (1) . A fifth-grade teacher has had four years of college study which for many years has been the minimum state requirement for a continuing certificate for such teachers. The state changes its requirements for such certificate. New fifth-grade teachers are required to have five years of college study when hired and fifth-grade teachers already employed are given five years within which to acquire the fifth year of college study. Fifth-grade teachers already employed who had previously met the requirements for a continuing certificate are entitled to deductions for expenses incurred in meeting the increased requirements.

Example (2) . Mr. B . is a teacher in the seventh grade of a school system organized on the 8-4 plan (8 years elementary and 4 years high school). He has a continuing elementary certificate. The system is reorganized to the 6-3-3 plan (6 years elementary, 3 years junior high, and 3 years senior high school). Mr. B is to continue to teach seventh-grade pupils who will now be attending junior high school in the reorganized system, but he must obtain a secondary certificate. He must obtain additional courses to qualify for such certificate. Mr. B's expenses incurred in obtaining this additional education are deductible even though he obtains a different type of certificate, because he is merely meeting increased educational requirements imposed by his employer for the same position.

Example (3) . Miss D , a first-grade teacher in School District X wishes to become a sixth-grade teacher in the same school district. This school district requires all elementary school teachers to have a certain number of college credits and an elementary certificate. A sixth-grade teacher must have certain courses not required of a first-grade teacher. Miss D takes the three additional courses specifically required to qualify her as a sixth-grade teacher and is transferred. No new certificate is involved. Since Miss D has the same employer, her duties involve the same general type of work, and no new type of certificate is involved, she is entitled to deduct the cost of the additional courses.

Example (4) . A taxpayer engaged in teaching second grade does not possess a degree but has a teacher's certificate which, under state law, is renewable indefinitely by periodic acquisition of a specified number of academic credits without progressing toward the attainment of another type of certificate. Such a certificate is a continuing certificate and indicates for purposes of this Revenue Ruling that the taxpayer has met the state's minimum requirements for qualification in his position. No further local requirements are imposed on the taxpayer. In addition to undertaking study required for renewal of his certificate, the taxpayer, primarily for maintaining or improving needed skills, pursues study which leads to a degree. The taxpayer is entitled to deduct the cost of the voluntary education (which leads to a degree) as well as that required to renew his certificate.

Example (5) . A high school teacher of mathematics who has a continuing high school certificate is advised by his employer that he must transfer to fill a vacancy in the science department and that this transfer will necessitate his taking two specified courses in science. The teacher takes these two courses and receives another continuing high school certificate reflecting this fact (or his certificate is endorsed to show this fact). This case represents a change of duties in the same position and does not represent qualifying for a new position. Therefore, the expenses for the two courses are deductible. In the case of such a transfer at the request of the teacher, the expenses are, for the same reasons also deductible.

Example (6) . School District A in State Y requires that seventh-grade teachers have at least a bachelor's degree. Miss S , with a bachelor's degree, is employed by this School District. She accepts employment as a seventh-grade teacher in the same State but in School District C which requires its seventh-grade teachers to have at least a master's degree. Miss S is given two years within which to acquire a master's degree. In undertaking the required education, Miss S is meeting minimum requirements for qualification in a new position. The expenses of such education are, accordingly, not deductible.

Example (7) . A fourth-grade teacher in School District W undertakes education which maintains and improves his skills as a fourth-grade teacher and also meets the express educational requirements to qualify him as a principal in that school district. The education is not required as a condition to the retention of his salary, status or employment and is not of a type customarily undertaken by other established fourth-grade teachers. Since the education meets the express requirements for a new position, the taxpayer will be entitled to a deduction only if he can show that the education was undertaken primarily for the purpose of maintaining or improving skills required in his position and not primarly to secure the new position.

Example (8) . A fifth-grade teacher holding a continuing certificate in State Y accepts employment as a fifth-grade teacher in State Z . State Z requires fifth-grade teachers to have a fifth year of college study in order to be eligible for a continuing certificate whereas State Y required only four years of college study for such a certificate. Since the teacher has only four years of college study, she is given a certificate by State Z which is renewable annually for five years, at the end of which time she must be eligible for the continuing certificate. She undertakes a fifth year of college work. Expenses incurred in acquiring the education necessary for the continuing certificate in State Z are incurred in meeting the minimum requirements for qualification in a new position and are not deductible.

Example (9) . Mr. G is employed as an instructor in a college where instructors and assistant professors are appointed annually or for a specified period not to exceed three years. A person is not permitted to be retained by the college at the rank of instructor for more than five years. An individual may continue as a faculty member without progressing beyond the rank of assistant professor. Mr. G undertakes education which will enable him to qualify as an assistant professor. The expenses of such education are incurred in meeting minimum requirements for establishment in his intended position and are, accordingly, not deductible.

Example (10) . A trust officer in a bank undertakes to study law. The knowledge of the law will be helpful in discharging his duties. His employer does not require him to engage in such studies. He registers for the entire regular curriculum leading to a bachelor of laws degree. Since the taxpayer is pursuing a complete course of education in law which will lead toward qualifying him in that field, in which he has not previously qualified, his expenses for such education are considered to have been incurred for the purpose of qualifying in that new field and are, therefore, not deductible. Also, if the bank imposes upon the taxpayer, as a condition to the continued retention of his position with it, the requirement that he pursue a complete law course, the cost of such education is not deductible because the requirement is considered to be imposed primarily for the employee's benefit and not primarily for a bona fide business purpose of the employer.

Example (11) . A teacher who lives in City R teaches school in City T . During the summer he undertakes in City R education the expenses of which qualify for deduction. The teacher regularly spends his summers at his residence and would be there regardless of whether he attends school. His expenditures for meals or lodging are not deductible because they constitute personal living expenses. His expenses incurred for transportation between his residence and the school attended are in the nature of commuting expenses and also are not deductible. Expenditures for tuition, books, fees, etc., are deductible as education expenses to the extent provided in the regulations.