Tuition waiver benefit related to past employment includible in income

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Tax Court held that the value of a tuition waiver a taxpayer's daughter received in 2013 as part of the taxpayer's severance package that he was given when he was laid off in 1991 was includible in his gross income in 2013.

Background

John Voigt worked in the computer information services department of Tulane University from Feb. 8, 1985, to June 7, 1991, when he was laid off as part of a reduction of approximately 100 administrative personnel on the recommendation of a cost-cutting committee that had been set up by the university.

Voigt received a severance package from Tulane. As a part of the package, he or his dependents would receive "a total number of annual tuition waivers equal to the number of years of service." The use of these waivers was limited by several requirements, including that the student applying to Tulane satisfy the university's admission requirements.

Fast forward to 2012, when Voigt's daughter Gabrielle applied to and was accepted by Tulane. She attended the school from the fall of 2012 through the spring of 2015. Voigt applied for tuition waivers for his daughter for the spring and fall semesters of 2013 and received a waiver in August 2013 for tuition for the fall semester in the amount of $21,575. In 2014, Tulane issued Voigt a 2013 Form W-2, Wage and Tax Statement, reflecting wages of $21,575, Social Security tax withheld of $1,338, and Medicare tax withheld of $313. The school also billed Voigt for $1,650 for the employment taxes it paid. Voigt did not report the $21,575 on his 2013 Form 1040, U.S. Individual Income Tax Return.

The IRS later issued Voigt a notice of deficiency in which it determined, among other things, that he should have included the tuition waiver benefit in income. Voigt challenged this determination in Tax Court, claiming that the benefit was either taxable in 1991 rather than 2013 or that it was excludable from income under Sec. 117.

The Tax Court's decision

The Tax Court held that the tuition waiver benefit was includible in Voigt's income for 2013. It found that the benefit was not includible in income in 1991 because he had not constructively received it in that year, and it was not excludable from income under Sec. 117 because Voigt was not an employee or someone treated as an employee of ­Tulane in 2013.

Current-year inclusion in income: In his Tax Court trial, Voigt claimed that including the tuition waiver benefit in income in 2013 was improper because it represented income that he earned 20 years earlier when he worked for Tulane. The Tax Court interpreted this to mean that Voigt was claiming that the benefit should have been included in income in 1991 under the constructive-receipt doctrine.Constructive receipt of income occurs when the income is set apart and available for withdrawal by the taxpayer, but not when receipt is subject to substantial limitations or restrictions.

The Tax Court explained that while Tulane made six years of tuition waivers available for Voigt or his dependents in 1991 as part of his severance package, Voigt could not receive a tuition waiver benefit until he or his dependent satisfied Tulane's admission guidelines and enrolled at the university. This, according to the court, was a substantial limitation on his receipt of a tuition waiver benefit and precluded him from having constructively received the benefit before he used a tuition waiver to offset tuition that the university actually charged. Thus, the court found that the IRS had properly determined that the tuition waiver benefit was includible in his income in 2013 unless it was excludable for another reason.

Sec. 117 exclusion: Although under Sec. 61(a), gross income generally includes "all income from whatever source derived," Sec. 117(d)(1) provides that gross income does not include a qualified tuition reduction. A qualified tuition reduction is a tuition reduction that is provided to an employee of a qualified educational institution for the undergraduate education at a qualified education institution of either an employee or someone treated as an employee under Sec. 132(h). Individuals treated as employees under Sec. 132(h) include former employees who separated from service "by reason of retirement or disability" and the dependents of employees.

Voigt and the IRS agreed that his daughter was a dependent and was an undergraduate student at Tulane, which is a qualified educational institution. They also agreed that Voigt was not terminated due to disability, so the tuition waiver could only be a qualified tuition reduction if Voigt was an employee of Tulane in 2013 or was a retired employee of the school in 2013.

Voigt first argued that he was an employee of Tulane in 2013 because he received a Form W-2 from the school. The Tax Court found that under its own precedent, the issuance of a Form W-2 does not create an employment relationship, and whether such a relationship exists is a question of fact. Because Voigt conceded he had not worked for Tulane in any capacity since 1991 and the only evidence before the court related to the issue indicated the same (an email from a payroll employee at Tulane that stated his employment dates were Feb. 8, 1985, to June 7, 1991), the court concluded that Voigt was not an employee in 2013.

In the alternative, Voigt asserted that since the term "retired" as used in Sec. 132(h) is not defined, being laid off from a job is "just early retirement." Thus, for purposes of Sec. 117, he was someone treated as an employee under Sec. 132(h) and therefore qualified for the qualified tuition reduction exclusion in Sec. 117(d)(1).

Because the term "by reason of retirement" is not defined in the statute, the court found that it was required to follow the plain meaning of the statute. It also found that it was required to apply the rule of statutory construction that a statute must be interpreted so that no part of it is rendered superfluous or insignificant. For the meaning of the word "retirement" the court looked to Black's Law Dictionary, which defines it as "[t]ermination of one's own employment or career, esp. upon reaching a certain age or for health reasons; retirement may be voluntary or involuntary," and the Supreme Court's decision in Clark v. Rameker, 134 S. Ct. 2242 (2014), in which the Court found that the ordinary meaning of the term "retirement" refers to a time after an individual stops working.

Based on these sources, with respect to the rule of statutory construction, the court determined that to give meaning to the inclusion of the term "retirement" in the statute, it was required to "recognize that retirement is different from other methods by which an employee may separate from service, including being laid off." Otherwise, the term "retirement," as used in Sec. 132(h), would be rendered superfluous or insignificant.

Further, the court found, after looking at the facts and testimony in the record, that Voigt's termination from Tulane was not contingent on age, years of service, or health considerations. Also, he had continued to work for a variety of employers and himself after he was laid off. Thus, the court concluded that Voigt's separation from Tulane did not fit within the ordinary meaning of the term "retirement," and Voigt could not exclude the tuition waiver benefit from income as a qualified tuition reduction under Sec. 117(d)(1).

Reflections

While he took an unexpected tax hit for work that he did over 20 years ago, Voigt still came out way ahead. According to a footnote to the case, Voigt's daughter also received a tuition waiver for the spring semester of 2013 in December 2012, but, for whatever reason, the IRS did not challenge Voigt's failure to include the tuition waiver benefits in income for 2012 and the Tax Court only considered the fall 2013 semester tuition waiver in its opinion. Thus, Voigt got to exclude at least one semester's worth of tuition at Tulane, and the amount he was out of pocket for his daughter to attend the fall 2013 semester was the $6,903 amount of his tax deficiency, rather than the $21,575 cost of tuition.

Voigt, T.C. Summ. 2018-25   

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