The Tax Court disallowed a county judge's deduction for unreimbursed business expenses as a deduction for adjusted gross income (AGI) because his judicial position failed to satisfy the requirements of Sec. 62(a)(2)(C). According to the court, the judge was not compensated in whole or in part on a fee basis, a requirement of Sec. 62(a)(2)(C); thus, the judge's job-related expenses were a miscellaneous itemized deduction, not an above-the-line deduction.
Facts: Michael Jones was a judge in the Maricopa County, Ariz., Superior Court, a general jurisdictional court for the county. The court was partially funded by fees for case filings and other documents, as well as for licenses and other services. Jones's salary was funded by the county's general fund and the state of Arizona. He also was a participant of Arizona's Elected Officials' Retirement Plan, which was funded in part from the fee revenue.
Due to Maricopa County's budget cuts, the judge incurred many unreimbursed expenses related to his judicial duties. After consulting with a CPA, he deducted the expenses as a deduction for AGI under Sec. 62(a)(2)(C) on his and his wife's 2008, 2009, and 2010 joint federal income tax returns. The IRS disallowed all of the deductions, but later allowed some of them and reclassified them as miscellaneous itemized deductions. The taxpayer petitioned the Tax Court for relief.
Issues: Generally, unreimbursed employee business expenses are an itemized deduction, deductible to the extent they exceed 2% of a taxpayer's AGI. An exception to the general rule, Sec. 62(a)(2)(C), allows a deduction for AGI for the unreimbursed employee business expenses of a public official paid or incurred while performing services as an employee of a state or one of its political subdivisions when the official is "compensated in whole or in part on a fee basis."
The taxpayer argued that "a position compensated in whole or in part on a fee basis" is a position that is completely or partially funded by fees paid by members of the public for services rendered and that his position as a judge qualified. The IRS argued that the judge must receive fees directly from the public for his services to qualify for the exception.
Holding: Congress intended to limit the deduction for unreimbursed employee expenses when it allowed only the excess of those expenses above 2% of a taxpayer's AGI as an itemized deduction, the Tax Court noted. Because an extremely large number of government agencies, departments, courts, and boards receive fees, the taxpayer's interpretation of Sec. 62(a)(2)(C) would provide an exception to that general rule for a vast number of government employees, according to the court. The court held that if Congress had wanted to create such a large exception, it could have expressly done so but did not. Instead, the court held that an above-the-line deduction is available only if a public official can show that fees are received directly from the public for the services provided.
The taxpayer argued that even if the fees must be received directly from the public, he was a fee-basis official because (1) some of the court fees go directly into the retirement fund in which he participated, and (2) judges in Maricopa County can and do directly receive fees for wedding ceremonies. The court rejected both arguments, holding that the fees that go into the retirement fund were not paid directly to him by the public and that he never charged a fee for any of the wedding ceremonies he performed. Furthermore, the court said, the fact that other judges collect wedding fees does not mean that his judicial position was compensated completely or partly by fees.
The court held the taxpayer was not subject to the accuracy-related penalty, however, since he relied on professional advice and the position taken was reasonable, given the ambiguity of the law.
- Jones, 146 T.C. No. 3 (2016)
—By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota—Duluth.