Then why the IRS disallowance and 3+ yr
court fight?
Because they can...they have deep pockets: YOURS.
Well, many possible reasons. For example, it sounds like she went to the examination herself. Maybe she said, "It wasn't really required, but I thought this would be fun because I'm bored in my job." Boom. Gone. Then she gets serious about her words when it goes to court.
Maybe, she added a bunch of other non-education related stuff in there to begin with (lunches, driving to unrelated classes, phys. ed. classes like "golf", etc.) Lots of folks push the edge on this category.
Maybe, she lost all of the proof of payment and ignored the requests for substantiation. Then, she got concerned during the court case and dug it up.
Again, there are other reasons that the IRS would argue this and without seeing the court transcripts, I just don't think we should always jump to conclusions. I know a number of examiners and they are quite reasonable folks. And, I know a few taxpayers that are total flakes, cheats, and liars.