My understanding of the Deason rule is that one is required to modify one's deductible work expenses to account for the fact that some of the compensation for work performed is not subject to income tax. That is, if you have a $100 expense but only 50% of your income is taxable, only 50% of the expense is deductible against taxable income. I don't see the rationale for requiring the work expenses to be modified based on a non-taxable pension.
(Although not a great example, there are states where retirement income is not taxable, or is partially taxable. I am not aware that if you have a schedule C side gig while collecting a non-taxable pension, you must adjust your work expenses.)
However, since it is called the "Deason" rule, there is probably a court case somewhere involving a person named Deason, and the decision in that case sets the rules going forward. Someone would have to analyze the decision, and try and determine if the IRS, and various experts who write books, are correctly applying the decision. I'm not going to be doing that, and even if I did, I'm not your hired expert who will stand behind you at audit or whatever. Good luck.
