Recent rulings can save you $$$$

The idea of trying to challenge the Internal Revenue Service is more likely to create visions of defeat and punishment than triumph and reward. But some taxpayers do take on the IRS and win — through a ruling by either the IRS or the Tax Court — providing hope and possible tax savings for all of us.

Notable recent taxpayer victories and the lessons they provide…


Lori Singleton-Clarke, a nurse in Bryantown, Maryland, who managed 110 nurses and technicians in a long-term-care facility, deducted nearly $15,000 in one year for online courses to obtain a Master of Business Administration (MBA). She pursued the degree to become more effective in her duties and because she felt that she was at a professional disadvantage working with more highly educated doctors. She took the courses online for convenience, eventually obtaining her MBA from the University of Phoenix. The IRS rejected the deduction, and Singleton-Clarke challenged that rejection in Tax Court, arguing her case at a one-hour trial without the help of a lawyer.

IRS position: The cost of an MBA isn’t deductible for a nurse, because an MBA is focused on a different type of trade or business (not nursing). Only the cost of education that maintains or improves a current job or profession is deductible. In fact, after receiving her degree, Singleton-Clarke obtained a new supervisory position at the facility where she had been working.

Tax Court ruling: Earning an MBA doesn’t automatically mean that you are in a new business. It is a general course of study that does not necessarily lead to a new profession. (Case: Lori Singleton-Clarke, TC Summary Opinion 2009-182.)

Lesson: When claiming a deduction for higher education, specify whether it is a general degree, such as an MBA, or a degree directly related to the profession that you already are in, such as a master’s degree or doctorate in education earned by a teacher. This is different from a degree in law, medicine or other profession that leads to special licensing or certification, which counts as a new trade or business and is not deductible.

Note: If a deduction cannot be claimed, it still may be possible to claim a lifetime learning credit. This tax credit is for 20% of tuition and fees up to $2,000 per tax year and applies to all higher learning.


Richard Glen Venet, a 48-year-old Michigan resident, was laid off from his job after 22 years and couldn’t find a new job for four years. Because he had mounting credit card debts and he was falling behind on his mortgage, he withdrew $110,691 from his IRA to avoid foreclosure on his home. He set aside $22,138 of that amount to cover taxes on the withdrawal but did not pay any early distribution penalty — even though he was under age 59½ — because the deduction was the result of a financial hardship. He used about $80,000 to pay off mortgage and credit card debt and put the rest in his bank account, which he drew on to help pay for his daughter’s college education.

IRS position: Venet is liable for the early withdrawal penalty on the entire amount because he failed to show that any exception to the 10% penalty for a distribution before age 59½ applied.

Tax Court ruling: Part of the money that was withdrawn from the IRA is not subject to an early withdrawal penalty, because there is an exemption for withdrawals used to pay higher education costs for a taxpayer or taxpayer’s spouse or dependent. Unfortunately, there is no exemption from the penalty for “hardship” withdrawals from an IRA, regardless of financial need. In this case, $9,300 used to pay for the daughter’s room and board at college was exempt from the penalty — but not the rest of the withdrawal. (Case: Richard Venet, TC Memo 2009-268.)

Lesson: Even though a taxpayer can lose on one issue, he/she can win on another for a partial victory. In addition to education, there is an exemption for paying health insurance premiums when a person is unemployed or paying unreimbursed medical expenses exceeding 7.5% of adjusted gross income.


If you have a life insurance policy that you no longer need or want — for example, you bought it to protect your family but your children are grown and self-sufficient — you may be able to pocket some money by selling the policy to a third party or surrendering the policy to the insurer. Many taxpayers believe that they shouldn’t be taxed when surrendering a life insurance policy. And they have been proved right — in some cases.

IRS ruling: Some or all of the funds received when a life insurance policy is sold or surrendered may be tax-free. Whether part of the money you receive is treated as highly taxed ordinary income, a capital gain, or neither depends on the premiums that you have paid, the type of policy you own and whether you sell or surrender the policy.

If you…

  • Surrender a whole-life policy, money received from the insurance company up to the amount of the premiums you have paid over the years is not taxed. Money that you receive in excess of the total premiums you have paid is taxed as ordinary income. (Cash surrender value is determined by the policy contract.)
  • Sell a whole-life policy, your taxable gain is the amount that you have received on the sale in excess of the total premiums you have paid over the years, which may be greater than your gain in a surrender. Part of any such gain on the sale is ordinary income, but part is a capital gain — capital gains are taxed at no more than 15% (0% for those in the 10% and 15% tax brackets). The portion of the gain that would have been ordinary income if the policy had been surrendered instead of sold continues to be ordinary income — any gain in excess of that is a capital gain.
  • Sell a term policy, all of the gain is a capital gain because there is no cash surrender value in the case of a term policy, which pays a stated death benefit but does not provide anything to the policyholder or to the beneficiary of the policy beyond this benefit. (Ruling: IRS Revenue Ruling 2009-13.)

Lesson: You may be able to turn a nonproductive asset — a life insurance policy — into some cash with favorable tax treatment. But before you sell or surrender a policy, it is wise to talk with an estate-planning adviser to determine the tax consequences. You also can learn more about the possible consequences online at the Web sites of the Insurance Information Institute ( and the National Association of Insurance Commissioners (


If you’re buying a home, you may not be able to go it alone — you may need co-owners or someone who can guarantee the mortgage. But these parties may not be eligible for a first-time home buyer tax credit or a repeat home buyer tax credit. How does this impact the ability of home buyers to claim a tax credit of up to $8,000?

Example: A father who owned a home wanted to help his daughter purchase her first home by guaranteeing her mortgage. Would she still qualify for the first-time home buyer tax credit?

IRS rulings: Having a co-owner or guarantor won’t prevent an eligible buyer from claiming the tax credit. (To determine who is an eligible buyer, go to

How the rulings apply…

Guarantors. If a lender requires that a buyer have someone guarantee to pay the loan if the main borrower defaults, the buyer can claim the credit even if the person guaranteeing the mortgage would not qualify for the credit. (Ruling: IRS Chief Counsel Letter, INFO 2009-0101.)

Co-owners. If two people who aren’t married buy a home together, the fact that one is not eligible doesn’t deprive the other buyer of the credit. The eligible buyer can claim the full credit for the home. If both buyers qualify, then the credit must be shared between them. (Ruling: IRS Notice 2009-12.)

Lesson: To help you swing the purchase, you can use the help of a co-owner or mortgage guarantor — even if that person wouldn’t qualify for the credit.

Note: If you are looking to qualify for the tax credit, you need to have closed on the sale by April 30, 2010 (or June 30, 2010, if you were in contract by the end of April).

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