As a general principle, employees may only deduct expenses as itemized deductions on Schedule A (“unreimbursed employee expenses”). This treatment causes several disadvantages. A more advantageous deduction occurs “above-the-line” which is not generally available to employees. Above-the-line deductions reduce a taxpayer’s adjusted gross income. An employee may deduct unreimbursed employee business expenses below the line, provided these expenses exceed 2% of the employee’s adjusted gross income. This 2% threshold makes the first 2% of an employee’s income non-deductible.
An exception exists for certain categories of individuals, “fee-basis government officials”. The U.S. Tax Court recently issued a precedential opinion, Jones v. Commissioner, 146 T.C. No. 3 (2016) (Link to written opinion in Jones v Commissioner), addressing this exception for the first time. The Tax Court specifically addressed a judge’s ability to deduct his expenses above-the-line as a fee-basis government official.
The Tax Court held that, in ordinary circumstances, an Arizona judge may not deduct the expenses incurred in the performance of his or her duties as a judge. The Court found that the salary and retirement contributions received by judges do not constitute fee-basis compensation. In interpreting the statute, the Court determined that fees must be received directly from the payor rather than court fees paid by litigants and received through an intermediary like the state.[1] The Court did suggest one exception available to Maricopa County judges – fees received from conducting weddings.
In Maricopa County, Arizona, judges perform marriages as part of their position. The State of Arizona requires the following three elements for legal recognition of a marriage: 1) a marriage license issued by the State; 2) “the marriage is solemnized by a person authorized by law to solemnize marriages or by a person purporting to act in such capacity and believed in good faith by at least one of the parties to be so authorized”; and 3) the marriage is solemnized before the expiration of the marriage license. Arizona Revised Statute (“A.R.S.”) 25-111 B.
The laws further provide the following individuals may solemnize a marriage: clergymen, judges of courts of record, municipal court judges, justices of the peace and certain Federal judges. A.R.S. 25-124 A. The laws of Arizona, therefore, specifically authorize Superior Court judges in Maricopa County to conduct marriages.
The Tax Court ruled that Judge Jones did not qualify as a fee-basis government official because he did not charge to conduct weddings. Despite the ruling against Judge Jones, the Court found other judges who charged to conduct weddings may deduct expenses.
The Court suggested judges may need to segregate their costs between expenses for the conduct of weddings and expenses for the performance of their primary judicial duties. The Court, however, did not address this issue but left this question for another day.[2] Thus, while Arizona judges may deduct some expenses, the open question is the extent to which judges may deduct the expenses incurred in their role.
[1] This holding creates an interesting academic question regarding a judge’s ability to become a fee-basis government official by accepting bribes.
[2] “Maybe the right way to read section 62(a)(2)(C) is that it allows a segregation of expenses for public officials compensated in part on a fee basis – allowing them to deduct above the line those expenses incurred to produce fee income, but treating them like all other employees when it comes to any other employee business expenses.” Jones v. Commissioner, at 18.Jones v Commissioner