ISSUE

An employee received a tuition waiver benefit as part of a severance package several years ago. Tuition waivers to employees are generally exempt from income under I.R.C. Section 117. However, in this case the benefit was income to the former employee.

 

SITUATION

Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii). They are required to file Form 990 annually.

The Accounting Team at DCC calls to ask about the treatment of a tuition waiver benefit that was provided to a laid off employee for their dependents. The employee separated from service at DCC seven years previous. The employee – terminated under a reduction in force – received a severance package which generally included: (1) payment of accrued vacation time, (2) severance pay dependent on length of service, (3) six months of health plan coverage, (4) assistance in seeking employment, and (5) an extended tuition waiver (extended waiver) policy.

One of the former employee’s dependents is currently enrolled at DCC and the tuition waiver benefit is being utilized. DCC wants to know whether this benefit would be excludable from taxable income under Internal Revenue Code Section 117(d).

We answer that, based upon a recent Tax Court ruling, that the value of the tuition waiver (utilized by a dependent of the former employee) is taxable income to the former employee in the year(s) that the tuition waiver is utilized.

 

RULES

From I.R.C. Section 117(d):
Qualified tuition reduction. (1) In general. Gross income shall not include any qualified tuition reduction. (2) Qualified tuition reduction. For purposes of this subsection , the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in section 170(b)(1)(A)(ii) ) of-
(A) such employee, or

(B) any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h).

From Tax Court Summary Opinion 2018-25:
The determination of whether a taxpayer has constructively received income ordinarily requires factual analysis. 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.

Section 117(d)(1) provides that “[g]ross income shall not include any qualified tuition reduction.” To be a “qualified tuition reduction” the reduction in tuition must be provided to an employee of a qualified education institution for the education, below a graduate level, at a qualified education institution of either the employee or someone treated as an employee under section 132(h). Those treated as employees include former employees who separated from service “by reason of retirement or disability” and the dependents of employees.

Conclusion. For the reasons stated above, we conclude that petitioner was not an employee of Tulane in 2013 as contemplated by section 117(d)(2)(A) or section 132(h). Thus, the tuition waiver benefit received in 2013 is not excludable from petitioners’ gross income under section 117(d).

 

BOTTOM LINE

• I.R.C. Section 117(d) provides an exclusion from taxable income for “qualified tuition reductions” for an “employee” or “any person treated as an employee” (including some family members).
• Occasionally we see tuition waiver/reductions benefits included in severance packages.
• Schools should be thorough and diligent in assessing the taxability of these types of severance benefits.
• A recent Tax Court ruling deems the utilization of a tuition waiver benefit of a former employee who was laid off to be taxable income to the former employee.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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