Individuals may not deduct fees for credit cards used to pay personal income tax.

Temp. Regs. Sec. 301.6311-2T(a) provides that taxes may be paid by debit or credit card as authorized under these regulations. Temp. Regs. Sec. 301.6311-2T(e) provides that the government may not impose any fee or charge on persons making payment of taxes by debit or credit card. This does not prohibit the imposition of fees or charges by the cards' issuers or by any other financial institution or person participating in the transaction.

Sec. 212(3) provides that, for an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the tax year in connection with the determination, collection or refund of any tax. Regs. Sec. 1.212-1(1) states that expenses paid or incurred by an individual in connection with the determination, collection or refund of any tax, whether the taxing authority be Federal, state or municipal, and whether the tax be income, estate, gift, property or any other tax, are deductible. Thus, expenses paid or incurred by a taxpayer for tax counsel or expenses paid or incurred in connection with the preparation of the taxpayer's tax returns, or in connection with any proceedings involved in determining the extent of the taxpayer's tax liability or in contesting the taxpayer's tax liability, are deductible.

Although the legislative history on Set:. 212(3) is brief, S. Rep. No. 1622 provides that Sec, 212(3) is designed to permit an individual's deduction of legal and other expenses paid or incurred in connection with a contested tax liability, whether the contest be Federal, state or municipal taxes or whether the tax be income, estate, gift, property and so forth. Any expenses incurred in contesting any liability collected as a tax or as a part of the tax will be deductible.

Sec. 262 provides that, except as otherwise provided, no deduction shall be allowed for personal, living or family expenses. Regs. Sec. 1.262-1(b) further provides some examples of personal, living and family expenses, such as (1) premiums paid for life insurance by the insured, (2) cost of insuring a dwelling owned and occupied by the taxpayer as a personal residence and (3) expenses of maintaining a household.

In Rev. Rul. 89-68, the Service concluded that fees paid for the preparation and submission of a ruling request on the deductibility of a medical care expense, and the user fee paid in connection with the ruling request, were paid in connection with determining the extent of the individual's tax liability deductible under Sec. 212(3). Although not discussed, this ruling made clear that the deduction of an expense under Sec. 212(3) for determining the extent of the taxpayer's personal liability for income tax was allowed, even if the liability did not arise in connection with any trade or business or income-producing activity of the taxpayer.

The analysis in Rev. Rul. 58-180 is instructive. That ruling considered whether Sec. 212(3) permitted a deduction of a fee for an appraisal to establish a casualty loss sustained by residential property as a result of subsoil shrinkage due to a prolonged drought. The ruling first noted that a prior revenue ruling established that such a loss was a casualty loss, but that the taxpayer had to prove both that the loss resulted from subsoil shrinkage and the amount of the resulting loss. The ruling concluded that an appraisal fee to establish the deductible casualty loss was deductible under Sec. 212(3).

Luman, 79 TC 846 (1982), is also instructive. The taxpayers sought to deduct $20,000 paid for documents used to create a family trust to ensure the orderly transfer of assets to their children. Although the payment entitled the taxpayers to advice from a lawyer and a CPA, no legal or accounting advice was sought in the year of payment. Further, they conceded that tax considerations did not influence the decision to create the family trust. Because no part of the fee was shown to be related to determining the extent of any tax liability, the Tax Court found no basis for allowing a deduction under Sec. 212(3).

Based on the foregoing authority, Congress intended to allow a deduction to an individual in connection with determining the extent of tax liability or in contesting tax liability. However, this authority does not support a broader interpretation of Sec. 212 to allow a deduction for the expenses involved in paying that liability after its extent has been determined.

Once the full extent of the taxpayer's liability is determined, the obligation to pay that liability does not depend on the nature of the income giving rise to it. Further, the taxpayer may discharge that liability using any assets the taxpayer personally controls, again without regard to the nature of the income giving rise to the liability.

The payment of the liability cannot affect further the determination of the extent of the taxpayer's liability. Consequently, the approach in Rev. Rul. 58-180, that of first finding a necessary component of determining liability and then allowing deduction of a fee paid in connection with resolving that necessary component of liability, does not support deductibility of the credit card fee. Like the fee in Luman, the credit card fee should be viewed as incurred in a transaction unrelated to determining the extent of the taxpayer's liability.

The expenses of paying one's liability fall outside the scope of Sec. 212(3). Thus, the payment of a credit card fee should be considered as the payment of a nondeductible personal expense, similar to personal expenses not deductible by reason of Sec. 262:

IRS LETTER, RULING (SCA) 200115032 (2/12/01)