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This is to follow my recent post regarding whether PPP loan expenses should be tax deductible, Attorney Daniel J. Leer represented John Manocchio in the Tax Court and in the Ninth Circuit Court of Appeals case of Manocchio v. Commissioner of Internal Revenue Service, and has given me interesting input with respect to my previous post entitled Are PPP Loan Expenses Deductible? It’s Complicated.
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Hopefully the loss of this case in the tax court will be vindicated by an eventual appeal of the Tax Court’s position. Mr. Leer’s position on this is as follows:
“[T]he legislative purpose behind section 265 is abundantly clear: Congress sought to prevent taxpayers from reaping a double tax benefit by using expenses attributable to tax-exempt income to offset other sources of taxable income. This is precisely what [Manocchio] is attempting to do here, and in our judgment, the application of section 265(1) to disallow the reimbursed portion of the flight-training expense deduction is both reasonable and equitable.”
Mr. Leer agrees with many experts that the Tax Court got this wrong. His excellent email with respect to this is as follows:
I have always believed the Tax Court decision in Manocchio to be wrong. Of course, what attorney who loses his case does not think the court erred?
You are correct to point out that the sum at stake in John Manocchio’s case was relatively small. However, what you do not know is that John was one of over 200 pilots who joined in the fight. We filed petitions for all of them. There is no provision in the Tax Court rules of procedure for a class action so counsel for the Commissioner, Constance Courts, and I agreed to select one of the petitions for trial (in fact the matter was submitted on briefs only without trial) and stipulated that all of the other cases would be governed by the decision in John’s case. We selected John’s case because the Commissioner insisted that the lead case be “clean”, i.e., have no issues other than the deduction for flight training. The notices of deficiency in many of the other cases raised various other issues.
I did indeed research the legislative history of section 265 and recited evidence identical to that Professor Beck cites, including extracts from the committee hearings wherein the state school land leases, etc., were discussed. As I recall, the history of the Veterans’ exemption – which, by the way, antedates section 3101 which has its origins in post-World War I legislation – provided no useful ammunition.
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Of course, the Supreme Court is now moving away from reliance upon legislative history. For example, writing for the Court in Tanzin v. Tanvir, 2020 WL 7250100 (Dec. 10, 2020), Justice Thomas writes “[o]ur task is simply to interpret the law as an ordinary person would.” And in Bostock v. Clayton County, Georgia, 140 S. Ct. 1731, 1738 (2020), Justice Gorsuch writing for the Court explained that “[t]his Court normally interprets a statute in accord with the ordinary public meaning of its terms at the time of enactment.”
I would say even under this standard, the meaning of “allocable to one or more classes of income” would not bar John Manocchio’s deduction. John’s expenditure was for flight training, a form of continuing education required of pilots if they wished to maintain their licensure. John’s employer did not reimburse that expense and John took the deduction as an unreimbursed employee business expense. The expense was directly related to his trade or business as a pilot. It was “allocable”, then, if anything to the income he earned as a pilot. The money he received from the VA was, if anything, “allocable” to his service as a pilot during the Viet Nam War.
In truth, I felt the estoppel element the most important. The retroactive revocation of a Rev. Rul. – and instructions in Pub. 17 in the year my clients took their deductions – troubled me and outraged my clients. The Service revoked its prior decision with respect to all deductions claimed by veterans who used VA benefits to pay for education but made that revocation retroactive only for pilots which to me raised a constitutional issue. I didn’t expect to prevail on that but a group of pilots did in the Fifth Circuit. Section 265 was to me additional ammunition but not so important as the other two grounds. Oh well, one of many battles I’ve lost over the years.
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Your article is excellent. Let me know when it is published. I feel vindicated after all these years. I’m not just another sore loser!
I thank Mr. Leer for this commentary, and for his hard work and dedication, which resulted in “full disclosure” by the Tax Court of the primary weakness in its IRC section 265(a)(1) decision, which the Ninth Circuit Court of Appeals did not uphold.
Mr. Leer’s full email is as follows: dleer3@comcast.com.
Hats off to tax litigators, who must often navigate not so well-charted waters, and often find passages to enable the rest of us to find safe harbors not before known or understood.