Deduction Denied For Repayment of Medical Grant

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While in medical school a student agreed to work after completing medical school for four years as a doctor in the medically underserved area of Murfreesboro, TN. In exchange for doing this the University of Tennessee College of Medicine agreed to pay his tuition and reasonable expenses. After completing his residency, he changed his mind and went into private practice. Because he didn’t live up to his agreement, the school required him to repay $121,440.

He took a deduction for the repayment on Schedule C as a ordinary and necessary business expense. The IRS disallowed the deduction and he sued the IRS in a U.S. District Court. The court upheld the IRS’s disallowance. He then appealed to the Sixth Circuit Court of Appeals.

The doctor argued that the payment was for “damages” due to a breach of contract and was an ordinary and necessary expense to allow him to earn a profit as a doctor. The Court held for the IRS stating that the repayment was a personal expense. It was personal, rather than business, because the claim arose for a payment of education expense to obtain the necessary training and qualifications to practice medicine. Even if he had originally paid the tuition while in medical school, it would not have been deductible as a work-related education expense because the education was necessary to be able to practice mdicine-i.e., he had not met the required minimum qualifications to practice medicine. Thus, the repayment is treated as the same thing [Tripp Dargie, 6th Circuit, 2/5/14].

Author’s note: If he had personally paid for books, tuition, and fees, he may have been able to claim a lifetime learning credit. But the court did not address this issue and whether the credit may be available for the repayment.

{as reported in J.K. Lasser’s Monthly Tax Letter, April 2014}

In accordance with Circular 230 Disclosure

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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