Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-62

1976-1 C.B. 12

Section 61
Section 117
Section 162

IRS Headnote

Educational expenses paid by employer; job-related law courses. Amounts a government agency pays to a correspondence school for employees' job-related law courses, leading to a degree but not entitling them to sit for any State Bar Examination, are noncompensatory business expenses for the agency and are not includible in the employees' gross income. However, amounts paid to reimburse employees for expenses incurred in taking job-related evening law school courses, the completion of which with other courses not job-related leads to a degree and entitles them to sit for bar examinations, are personal expenses under section 1.162-5 of the regulations and includible in the employees' gross income.

Full Text

Rev. Rul. 76-62

Advice has been requested whether amounts paid by a government agency for educational courses taken by its employees are includible in the employees' gross incomes under the circumstances described below.

To improve the effectiveness of employees in the performance of their duties, a government agency initiated a training program under which employees in the agency are encouraged, for the purpose of self-development on their own time, to enroll in correspondence courses limited to job-related subjects. The training is designed, supplied, and administered by the correspondence school with the job-related subjects determined by the agency. Participants in the program are selected by officials of the agency. It is expected that all eligible employees who desire to participate in the program will be enrolled. The costs of the courses, including tuition, books, and materials, are billed to the agency and are paid directly to the correspondence school by the agency. Participating employees, if they so desire, may extend their enrollment in the correspondence school to courses that are not job-related but the cost of these courses are paid for by the employees themselves. Employees participating in the training program of the agency generally come within the situations described below.

Situation 1: An employee of the agency, who holds a degree in accounting and meets the minimum job requirements, enrolled in a correspondence course in law and took job-related courses that maintain or improve the skills required in connection with the employee's employment. The cost of the courses was paid directly to the correspondence school by the agency. After completing the job-related courses, the employee extended enrollment in the correspondence school to take courses that were not job-related and the employee paid the cost of these courses. Upon completion of the entire correspondence course in law, the employee will receive a degree, but will not be qualified to sit for any State Bar Examination, since the correspondence school is not accredited in any state.

Situation 2: An employee of the agency, who holds a degree in accounting and meets the minimum job requirements, decided to attend law school in the evening to obtain a law degree. Under the agency's training program, the employee is reimbursed for expenses incurred in taking the job-related law school courses that maintained or improved the skills required in connection with the employee's employment. The employee was not reimbursed for expenses incurred in taking courses that were not job-related. Upon completion of the entire course, the employee will receive a law degree and will be qualified to sit for a State Bar Examination.

Section 61 of the Internal Revenue Code of 1954 provides that, unless otherwise excluded by law, gross income means all income from whatever source derived including, but not limited to, compensation for services, including fees, commissions, and similar items.

Section 117(a) of the Code provides, subject to certain limitations and qualifications, that gross income of an individual does not include amounts received as a scholarship at an educational institution or as a fellowship grant. A scholarship or fellowship grant as defined in section 1.117-3 of the Income Tax Regulations is an amount paid to or for the benefit of an individual to aid in the pursuit of studies.

Section 1.117-4(c) of the regulations provides, in part, that any amounts paid or allowed to or on behalf of an individual to enable the individual to pursue studies or research shall not be considered to be an amount received as a scholarship or fellowship grant, if such amount represents compensation for past, present, or future employment services or if the studies or research are primarily for the benefit of the grantor.

Section 162 of the Code provides for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. To the extent, therefore, that educational expenses qualify as "ordinary and necessary" trade or business expenses they are allowable deductions. Section 1.162-5 of the regulations provides, in general, that expenditures made by an individual for the individual's education are deductible if they are for education that (1) maintains or improves skills required by the individual's employment or other trade or business, or (2) meets the express requirements of the individual's employer or the requirements of applicable law or regulations imposed as a condition to the retention by the individual of established employment relationship, status, or rate of compensation. Under these circumstances, educational expenditures are ordinary and necessary business expenses of the employee. No deduction is allowable for expenditures for education required of the individual in order to meet the minimum educational requirements for employment qualification in the individual's employment or other trade or business or for expenditures for education that is part of a program of study being pursued that will lead to qualifying the individual in a new trade or business even though the education may maintain or improve skills required by the individual in the individual's employment or other trade or business or may meet the express requirements of the individual's employer or of applicable law or regulations. Under these circumstances, educational expenditures are personal expenses of the employee.

Under the facts in both Situation 1 and Situation 2 the job-related courses taken by the employees make them more effective employees. Therefore, the amounts paid are primarily for the benefit of the employer-grantor and do not qualify as scholarships or fellowship grants under section 117(a) of the Code.

The educational expenses incurred by the agency on behalf of the employee in Situation 1 for job-related correspondence courses would, with respect to the employee, be ordinary and necessary business expenses under section 1.162-5 of the regulations. That is, had the employee incurred the expense it would have been deductible since the courses the employee took maintained or improved skills required in the employment and were not part of a program of study being pursued by the employee that led to qualifying the employee in a new trade or business. This is based on the fact that completion of the correspondence course would not qualify the employee to sit for a State Bar Examination. Accordingly, since the educational expenses incurred by the agency in Situation 1 are not characterized as personal expenses under section 1.162-5 of the regulations, they are noncompensatory business expenses of the agency and are not includible in the employee's gross income.

The educational expenses incurred by the agency on behalf of the employee in Situation 2 for job-related law school evening courses would, with respect to the employee, be personal expenses under section 1.162-5 of the regulations. That is, had the employee incurred the expenses, they would not be deductible educational expenses since the courses taken, even though they maintained or improved skills required in the employee's employment, were part of a program of study being pursued that led to qualifying the employee in the new trade or business of law. See Jeffrey L. Weiler, 54 T.C. 398 (1970). Accordingly, since the educational expenses incurred by the agency in Situation 2 are characterized as personal expenses under section 1.162-5 of the regulations, they are compensatory business expenses of the employer and are includible in the employee's gross income.