Former University Employee Can't Exclude Tuition Waiver from Income

(Parker Tax Publishing June 2018)

The Tax Court held that a taxpayer who received a tuition waiver as part of a severance package when his employment at a university was terminated, and who later applied the waiver to his dependent child's tuition, was not entitled to exclude the value of the waiver from income because he was not either a current or retired employee of the university. The Tax Court rejected the taxpayer's argument that he was an employee for the year at issue because he received a Form W-2 reporting the value of the waiver, and found that the university's elimination of his position in a workforce reorganization did not constitute separation from the university by retirement. Voigt v. Comm'r, T.C. Summary 2018-25.

John Voigt worked in Tulane University's computer information sciences department from 1985 to 1991. His position was eliminated in June 1991 along with about 100 others as part of Tulane's plan to streamline and reorganize its workforce. The reason given on Voigt's separation notice was "elimination of position." After leaving Tulane, Voigt worked at several other jobs and later became self-employed. He did not work for Tulane in any capacity after 1991.

Voigt's severance package included payment of accrued vacation time, severance pay, six months of health plan coverage, and an extended tuition waiver. Under the tuition waiver policy, an employee with five or more years of full time service would receive a total number of annual tuition waivers equal to the number of years of service. The use of the waivers was limited by certain requirements, including that the applying student satisfy Tulane's admission guidelines.

Voigt's daughter, Gabrielle, attended Tulane as a full time undergraduate student from 2012 through 2015. Voigt filed applications for Gabrielle to receive tuition waivers as his dependent for the spring and fall semesters of 2013, the year at issue. Tulane credited Gabrielle's account $21,575 based on her father's eligibility for the waiver.

In 2014, Tulane issued to Voigt a 2013 Form W-2 reflecting wages of $21,575 along with withheld amounts for Social Security and Medicare. Voigt also received a bill from Tulane for 2013 FICA taxes of $1,650. Voigt emailed Tulane to inquire about the Form W-2. A payroll department employee replied that, because Voigt received the tuition waiver benefit and was not an employee, the waiver was considered income. Voigt asked for confirmation of his dates of employment with Tulane and the employee responded back showing Voigt was employed from February 1985 to June 1991. Voigt did not report the $21,575 on his 2013 tax return.

The IRS sent a notice of deficiency in 2016 stating that Voigt had failed to report the waiver amount as income for 2013, resulting in a deficiency of approximately $6,900. Voigt challenged the notice in the Tax Court.

Under Code Sec. 117(d), gross income does not include a qualified tuition reduction. To qualify, the reduction must be provided to an employee of a qualified educational institution for undergraduate education of either the employee or someone treated as an employee under Code Sec. 132(h). Code Sec. 132(h) provides that a former employee who separated from service due to retirement, and the dependents of an employee, are treated as employees for purposes of Code Sec. 117(d).

Voigt argued that he was an employee of Tulane in 2013 because he received a Form W-2, which contained references to employer and employee. Voigt concluded that, based on the Form W-2, Tulane thought he worked there sometime in 2013. In the alternative, Voigt asserted that he qualified as retired under Code Sec. 132(h). He argued that the term is not defined in the statute and that being laid off is a type of early retirement. Voigt also challenged the IRS's position that he received the waiver benefit in 2013, arguing that it represented money that he earned some 20 years earlier. The Tax Court inferred that Voigt felt the income should have been taxed in 1991 under a theory of constructive receipt.

The Tax Court held that Voigt was required to include the waiver in income in 2013 because he was not a current or retired employee of Tulane and he received the income in that year. The court reasoned that the issuance of a Form W-2 does not create an employment relationship and found that Voigt presented no other evidence to prove that he was employed by Tulane in 2013. Voigt had conceded he did not work for the university in any capacity after his termination in 1991, the court noted. Tulane's records and communications with Voigt also showed that he had not been an employee since 1991.

The Tax Court found that Voigt was not treated as an employee as a result of having separated from service with Tulane by retirement. The court explained that the plain meaning of retirement involves termination of a career due to age or health. In the court's view, the record did not support Voigt's assertion that he retired under that definition. The notice of separation issued by Tulane stated the reason for termination as "elimination of position," even though retirement was a preprinted option. Voigt's severance package included assistance in finding other employment, and it included a letter from Tulane's president explaining that the terminations were necessary due to rising costs. Additionally, Voigt continued working for other employers after leaving Tulane. For these reasons, the court found that Voigt's termination was not the result of age, years of service or health considerations.

The Tax Court also rejected Voigt's argument that the waiver was not taxable as income in 2013. The court found that although the waiver was made available to Voigt in 1991, he could not receive the benefit until he or his dependent satisfied Tulane's admission guidelines and enrolled in the university. As such, there were substantial limitations that precluded Voigt from having constructively received the waiver before it was redeemed against tuition actually charged. Therefore, the court concluded that the benefit was properly included in income for 2013, the year it was actually received.

For a discussion of the exclusion for qualified tuition reductions, see Parker Tax ¶77,310.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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