Knapp v. Commissioner

90 T.C. No. 30, 90 T.C. 430, 1988 U.S. Tax Ct. LEXIS 30

Opinions

PARR, Judge:

Respondent determined a deficiency in petitioners’ 1979 Federal income tax in the amount of $5,218.50, and an addition to their 1979 Federal income tax in the amount of $260.93 pursuant to section 6653(a).¹ After concessions, the issue for decision is whether Charles L. Knapp (petitioner) received taxable compensation from his employer, New York University School of Law (the law school), in the form of tuition payments made by the law school’s Law Center Foundation (LCF) on behalf of petitioner’s daughters directly to the educational institutions they attended. In support of their position that these tuition payments did not constitute taxable income, petitioners argue that (1) the tuition payments made by LCF to the other educational institutions were scholarships within the meaning of section 117; and (2) even if they were not scholarships under the statute, respondent was required to treat the tuition payments as scholarships pursuant to the “fringe benefit moratorium” enacted by Congress in 1978 (Pub. L. 95-427, as extended).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and related exhibits are incorporated herein by this reference.

Petitioners, husband and wife, resided in New York, N.Y., at the time they filed the petition in this case. Their joint Federal income tax return for 1979 was timely filed with the Internal Revenue Service Center in Holtsville, N.Y.

Petitioner is a full-time faculty member of New York University School of Law. Petitioner began his employment at the law school in 1964. In 1979, his rank was professor of law (with permanent tenure) and associate dean.

No negotiated employment contract existed between petitioner and the law school. Prior to each academic year, he received a letter informing him of his rank and salary for the coming year. Petitioner’s compensation for the 1978-79 academic year was $49,200, and for 1979-80 was $52,650.

The law school is part of New York University (NYU), an educational institution described in section 170(b)(l)(A)(ii) which is exempt from taxation under section 501(c)(3), and was so in 1979.

The Law Center Foundation, also part of NYU, is a section 501(c)(3) exempt organization which is also a section 509(a)(3) organization, and was so in 1979. LCF operates solely for the benefit of and in connection with NYU. It is not a private foundation for tax purposes.

In 1976, NYU adopted a statement of policy wherein LCF would provide tuition assistance to the children of faculty members of the law school. The program began in 1977.² In 1979, all children of full-time faculty members and of administrators of the law school with the titles of director, assistant dean, or associate dean were eligible to receive these tuition assistance awards. To apply for the award, the child had to be enrolled in a private elementary or secondary school, or college. In addition, under certain circumstances, the children of faculty members who were on leave of absence to teach at another school, or on unpaid leave for public interest work or Government service, could also be eligible for LCF tuition assistance.

During the fiscal year ended August 31, 1979, LCF awarded tuition assistance in the amount of $155,667. During the fiscal year ended August 31, 1980, such awards totaled $197,857. The children of approximately one-third of all full-time faculty members and top-level administrators received these awards.

The availability of tuition assistance for dependents was viewed as a benefit available to faculty and administrators, and was a way to compete with other area law schools in attracting faculty to NYU. Faculty members and administrators who did not have children receiving tuition assistance did not receive any additional remuneration in lieu of such award, and those whose children did receive tuition awards did not have their salaries adjusted or their responsibilities increased to reflect that fact. Salaries were based on rank and, to some extent, age and number of years out of law school. The number of children in the family was not a factor in determining salary.

The LCF tuition assistance awards were paid directly to the educational institution attended by the faculty member’s child, on his or her behalf. The awards were made on an academic year basis, but the payments sent on a semester or quarterly basis. The awards were for tuition alone, not room and board or fees. The amount of the award could not exceed the amount of tuition charged by the school, less any other tuition assistance the child was receiving.

In order to receive the award, the child was required only to submit a one-page application to LCF. The LCF scholarship committee did not consider the child’s academic record, the school he or she was attending, or the family’s financial resources. Awards were automatic as long as the child met the eligibility requirements. The amount of tuition awarded was determined without regard to the tenure or rate of compensation of the parent.

Petitioner’s daughters, Jennifer and Liza, received LCF tuition awards in 1979. The payments were made directly to Swarthmore College (Swarthmore) on behalf of Jennifer, and the Brearley School (Brearley), on behalf of Liza, as follows:

Date School Amount

1/04/79 Swarthmore $2,200

1/04/79 Brearley 1,420

8/14/79 Swarthmore 2,350

8/14/79 Brearley 2,280

Total 8,250

Both Swarthmore and Brearley are educational institutions described in section 170(b)(l)(A)(ii), and were so in 1979. Jennifer and Liza were both candidates for a degree at their respective schools in 1979, within the meaning of section 117(b). Neither of them rendered any services to NYU in exchange for the tuition assistance awards.

In 1979, neither Swarthmore nor Brearley maintained any tuition plan or arrangement with the law school whereby one school would waive the tuition charges for a child of the other school’s faculty.

On their 1979 tax return, petitioners did not report as income the $8,250 paid on behalf of their daughters. Jennifer and Liza also did not report these tuition awards as income. Respondent issued a notice of deficiency to petitioners, determining that the $8,250 was additional compensation to petitioner.

OPINION

Petitioners first contend that the LCF tuition assistance awards are excludable from gross income as scholarships under section 117(a) and section 1.117-3(a), Income Tax Regs.

Section 117(a)(1)(A) provides that:

In the case of an individual, gross income does not include—

(1) any amount received—

(A) as a scholarship at an educational organization described in section 170(b)(l)(A)(ii),

Congress did not define the term “scholarship” in section 117. The regulations under section 117 define a “scholarship” as:

an amount paid or allowed to, or for the benefit of, a student, whether an undergraduate or a graduate, to aid such individual in pursuing his studies. The term includes the value of contributed services and accommodations (see paragraph (d) of this section) and the amount of tuition, matriculation, and other fees which are furnished or remitted to a student to aid him in pursuing his studies. * * * If an educational institution maintains or participates in a plan whereby the tuition of a child of a faculty member of such institution is remitted by any other participating educational institution attended by such child, the amount of the tuition so remitted shall be considered to be an amount received as a scholarship. [Sec. 1.117-3(a), Income Tax Regs.; emphasis supplied.]

Petitioners rely on this last sentence of section 1.117-3(a), Income Tax Regs., to support their position that the tuition assistance awards are excludable scholarships.

The parties differ as to the correct interpretation of the words “remitted” and “participating” which appear in this sentence of the regulations. Respondent contends that, as used here, “remit” means “waive,” and that both the institution employing the faculty member and the institution educating the child must be participating in a single plan. Respondent maintains that the regulation was directed at reciprocal arrangements between institutions through which each waives tuition for children of the other’s faculty.

Petitioners assert that “participating” means “receiving or partaking of” and that “remit” means “send” or “transmit” as well as “waive.” Petitioners note that the last sentence of section 1.117-3, Income Tax Regs., follows language explaining section 117 in the committee reports accompanying the Internal Revenue Code of 1954, but that the committee reports use the words “remitted at” rather than “remitted by.” Petitioners contend that this language allows “remit” to be interpreted as either “waive” or “transmit,” and that Congress could have no basis for distinguishing between bilateral waivers of tuition between institutions and direct payments by one institution to another institution.

The Secretary of the Treasury is responsible for administering the tax laws, and his regulations must be upheld if they implement congressional intent. United States v. Cartwright, 411 U.S. 546, 550 (1973). We must consider the legislative history of section 117 for evidence of legislative purpose.

Section 117 was enacted to set “forth rules for determining the extent to which scholarships and fellowship grants * * * [were] to be included in gross income and [to] * * * [eliminate] the existing confusion as to whether such payments * * * [were] to be treated as income or as gifts.” H. Rept. 1337, 83d Cong., 2d Sess. 16 (1954). The term “scholarship” is not defined in the committee reports, but tuition remission plans are specifically described:

If an educational institution (as defined in sec. 151(e)(4)) maintains or participates in a plan whereby the tuition of a child of a faculty member of any such institution is remitted at any other participating educational institution (as defined in sec. 151(e)(4)) attended by such child, the amount of tuition so remitted shall be considered to be an amount received as a scholarship under this section. [H. Rept. 1337, 83d Cong., 2d Sess. A37 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 188 (1954).]

The policy which Congress intended to implement by including tuition remission plans as scholarships is not stated in the legislative history.

In Wheeler v. United States, 768 F.2d 1333, 1337 (Fed. Cir. 1985), the Circuit Court concluded that:

Congress could have reasonably decided to exempt tuition remissions for children of college faculty members as a way of promoting higher education by encouraging qualified people to enter and to remain in the academic teaching profession despite low earnings.

If that is indeed the case, it may be that any tuition assistance plan maintained by a university for its faculty’s children satisfies the legislative purpose. We cannot, however, speculate that Congress intended something other than what was specifically stated in the legislative history. Our reading of the committee report’s statement on tuition remission plans leads us to conclude that Congress was referring to reciprocal tuition waiver arrangements involving two or more educational institutions which participate in a plan. The language “remitted at” means “waived by.” Section 1.117-3(a), Income Tax Regs., adopts this sentence almost verbatim except for using the phrase “remitted by” instead of “remitted at.” The different preposition does not change the meaning of the sentence. We therefore find that the regulation implements congressional intent and that respondent’s interpretation of the regulation is correct.

The LCF tuition assistance awards were not tuition waivers under a plan between NYU or the law school and the schools attended by petitioner’s daughters. They were cash payments made by an educational institution which maintains its own program of tuition assistance in order to benefit its faculty members and administrators and their families. This is not a tuition remission plan described in section 1.117-3(a), Income Tax Regs.

Our holding on this issue agrees with the holding of the District Court in Western Reserve Academy v. United States, 619 F. Supp. 394, 401 (N.D. Ohio 1985), affd. per curiam 801 F.2d 250 (6th Cir. 1986). In that case, the court considered whether cash tuition assistance awards paid to faculty members for use in defraying the undergraduate college expenses of their children were compensation for withholding and FICA tax purposes. The court determined that these tuition assistance awards did not qualify as scholarships under section 1.117-3(a), Income Tax Regs.

Moreover, section 1.117-4, Income Tax Regs., provides that amounts paid as compensation for services are not scholarships under section 117. We view these tuition assistance awards as compensatory in nature. A child’s eligibility to apply for and receive an award is linked to the employment of his or her parent by the law school. The awards thus do not meet the generally accepted definition of scholarships as set forth in Bingler v. Johnson, 394 U.S. 741, 751 (1969):

the ordinary understanding of “scholarships” and “fellowships” [are] relatively disinterested, “no strings” educational grants, with no requirement of any substantial quid pro quo from the recipients.

Our holding that these awards are compensation to petitioner rather than scholarships is supported by the fact that the school considers neither the academic merit nor the financial need of the student in making the award. Moreover, the LCF program was viewed as a way to remain competitive with other law schools in attracting faculty members. As such, it was considered one of the benefits available to faculty members.

This Court and others have previously considered the nature of payments made under educational benefit plans for employee’s dependents, and have determined that they constitute additional compensation to the employee. See Wheeler v. United States, supra; Greensboro Pathology Associates, P.A. v. United States, 698 F.2d 1196 (Fed. Cir. 1982); Grant-Jacoby, Inc. v. Commissioner, 73 T.C. 700 (1980); Armantrout v. Commissioner, 67 T.C. 996 (1976), affd. 570 F.2d 210 (7th Cir. 1978). We find these cases to be controlling. We hold that the tuition payments made by LCF on behalf of petitioner’s children are compensation to him, and not tax-free scholarships.

Petitioner argues that whether or not the LCF tuition assistance awards constitute scholarships under section 117, respondent was required to treat them as scholarships because of the “fringe benefit moratorium” enacted by Congress in 1978, which was in effect at the time the notice of deficiency was issued in this case.

The “fringe benefit moratorium,” enacted by Congress in 1978, was effective for the period October 1, 1977, through December 31, 1983. Pub. L. 95-427, as extended.³ The purpose of the moratorium was to prevent administrative action by the Internal Revenue Service that was inconsistent with its substantive position as of October 1, 1977 regarding the taxation of fringe benefits. During the period of the moratorium, Congress intended to review the tax treatment of fringe benefits and ultimately to legislate tax policy in that area. See H. Rept. 95-1232, at 5 (1978), 1978-2 C.B. 365; S. Rept. 96-433, at 4 (1979), 1980-1 C.B. 487.

The moratorium specifically precluded only the issuance of regulations relating to fringe benefits.⁴ The legislative history, however, referred to other significant departures by the Treasury Department from its historical treatment of fringe benefits “through the issuance of revenue rulings or revenue procedures, etc.” H. Rept. 95-1232 supra at 5, 1978-2 C.B. at 366, S. Rept. 96-433, supra at 5, 1980-1 C.B. at 488.

Petitioner maintains that respondent was directed by the moratorium to “freeze” the substantive law to be applied to the taxation of fringe benefits. During the period of the freeze, respondent was bound to continue to apply the substantive rules of law as reflected in his administrative position as of October 1, 1977. At trial, petitioner offered in evidence numerous private letter rulings and technical advice memoranda issued by respondent in order to prove that, as of October 1, 1977, respondent’s position was to treat tuition assistance programs such as LCF’s as tuition remission plans qualifying as scholarships.⁵ Petitioner argues that by now taking a position that the LCF tuition assistance awards were not tax-free scholarships, respondent has deviated from prior administrative practice and violated the fringe benefit moratorium, and thus we should hold for petitioner on the substantive issue.⁶

Respondent does not deny that the fringe benefit moratorium was in effect at the time he issued the notice of deficiency in this case, but argues (1) this is a new issue not raised by petitioner in his petition, and thus cannot be considered by this Court; (2) this Court has no jurisdiction over this matter; (3) this Court cannot redress a violation of the fringe benefit moratorium; (4) the issuance of a notice of deficiency is not a violation of the moratorium; and (5) respondent’s administrative position on this issue as of October 1, 1977, was not to treat these payments as scholarships.

We disagree that this issue was raised by petitioner untimely. Respondent maintains that since petitioner only raised the issue of the fringe benefit moratorium in his trial memorandum, Rules 34 and 39 preclude our consideration of this issue. Petitioner responds by stating that respondent had ample notice of the issue, and was thus at no disadvantage; in fact, respondent submitted a supplemental trial memorandum relating to the fringe benefit moratorium issue at trial. We agree with petitioner that respondent knew of and prepared for this issue, and was neither surprised nor disadvantaged by it. Stewart v. Commissioner, 714 F.2d 977 (9th Cir. 1983), affg. a Memorandum Opinion of this Court; Laney v. Commissioner, 674 F.2d 342 (5th Cir. 1982). Although the fringe benefit moratorium issue was not included in the pleadings, we deem it tried by consent under Rule 41(b)(1).

We do, however, agree with respondent that the Tax Court has no jurisdiction over this matter. Petitioner would have us nullify respondent’s determination of an otherwise valid deficiency because of the moratorium. While we can consider any matter bearing on a tax deficiency, we have no power to enforce this particular prohibition. It relates to the administrative procedures of an executive agency, which we have no power to control.

The fringe benefit moratorium, as enacted by Congress, is an instruction to respondent. It does not purport to change existing law nor to bind this Court in interpreting the statute. It includes no authorization for its enforcement and no remedy for its violation.

Petitioner argues that the proper remedy lies in the courts:

That remedy quite plainly is that the courts will not enforce a determination by the Service that violates the mortorium and, in egregious situations, the courts may award court costs and fees to the aggrieved taxpayer under I.R.C. section 7430. [Brief for petitioners at 23.]

Petitioner does not cite any direct authority for this statement.

The Tax Court is a court of limited jurisdiction. See generally secs. 6213, 7442, and Dudley v. Commissioner, 258 F.2d 182 (3d Cir. 1958), affg. 28 T.C. 992 (1957). We have only the powers expressly conferred on us by Congress, and may not apply equitable principles to expand our jurisdiction beyond the limits of section 7442. See Commissioner v. Gooch Milling Co., 320 U.S. 418 (1943); Lorain Avenue Clinic v. Commissioner, 31 T.C. 141, 164 (1958). We have no jurisdiction to exercise the broad common law concept of judicial power invested in courts of general jurisdiction by article III of the Constitution. Estate of Rosenberg v. Commissioner, 73 T.C. 1014, 1017 (1980); cf. Berkery v. Commissioner, 90 T.C. 259 (1988) (Hamblen, J., concurring). The fringe benefit moratorium does not specify a remedy for its violation and does not expressly confer jurisdiction upon this Court to enforce the moratorium. In the absence of express statutory authority we will not consider the moratorium as having any bearing on the outcome of this case.

The remedy petitioner seeks is one which is generally unavailable in this Court. On brief, petitioner argues that respondent was prohibited from determining these tuition payments were income because of the moratorium. The remedy he specifically requests, however, is merely that we evaluate respondent’s claims in light of respondent’s administrative position on October 1, 1977, and hold accordingly on the substantive issue (although petitioner concedes, in his next breath, that this Court is not limited by the moratorium in our holding on the substantive issue). See brief for petitioners, at 20-21. As we see it, what petitioner is seeking here is to enjoin respondent from asserting a position in his statutory notice which is in violation of the moratorium. This Court has no power to grant injunctions. Secs. 7442, 7402. We cannot prevent the issuance of a notice of deficiency, nor will we look behind a valid notice of deficiency at respondent’s motives, policies, and procedures. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 326 (1974). Moreover, the moratorium did not purport to prohibit respondent from issuing statutory notices. Our authority allows us only to consider and determine the correctness of respondent’s determination of deficiency. We have done so in this case, and we have found that determination to be correct.

Since the LCF tuition payments were not tax-free scholarships, but were compensation, petitioner must include these amounts in his gross income pursuant to section 61, and respondent’s deficiency determination is sustained.

Due to respondent’s concession on the negligence issue,

Decision will be entered under Rule 155.

Reviewed by the Court.

Sterrett, Parker, Cohen, Gerber, and Wright, JJ., agree with the majority opinion. KDRNER, J., concurs in the result only. RUWE, J., did not participate in the consideration of this case.

1 All section references are to the Internal Revenue Code of 1954 as in effect during the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 This LCF tuition assistance program was a continuation of a program previously administered by the C.F. Mueller Scholarship Foundation. LCF adopted the program after NYU sold the C.F. Mueller Co.

3 The moratorium as originally enacted was to cover the period May 1, 1978, through Dec. 31, 1979, and was later extended. See Act of October 7, 1978, Pub. L. 95-427, sec. 1, 92 Stat. 996 (1978); Tax Treatment Extension Act of 1977, Pub. L. 95-615, sec. 3, 92 Stat. 3097 (1978); Act of December 29, 1979, Pub. L. 96-167, sec. 1, 93 Stat. 1275 (1979); and Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 801, 95 Stat. 172, 349 (1981).

4 Pub. L. 95-427, sec. 1, 92 Stat. 996 (1978) provided as follows:

(a) In General. — No fringe benefit regulation shall be issued—

(1) in final form on or after May 1, 1978, and on or before December 31, 1979, or

(2) in proposed or final form on or after May 1, 1978, if such regulation has an effective date on or before December 31, 1979.

(b) Definition of Fringe Benefit Regulation. — For purposes of subsection (a), the term “fringe benefit regulation” means a regulation providing for the inclusion of any fringe benefit in gross income by reason of section 61 of the Internal Revenue Code of 1954.

5 At trial, respondent objected to the admission of these documents (petitioner’s exhibits 27, 28, 29, 30, 31, 38 and 39) into evidence, but offered additional private letter rulings and technical advice memoranda (respondent’s exhibits AA and AB) in the event the Court received petitioner’s offered exhibits. Respondent’s objection was based on hearsay, authenticity, and relevancy grounds. We overruled his authenticity and hearsay objections but reserved ruling on the relevancy question. We now rule that the offered documents are not relevant and sustain respondent’s objection to their admission.

Private letter rulings and technical advice memoranda are not authority in deciding questions of substantive law. See sec. 6110(j)(3). The documents thus can have no relevance to our determination of the first issue in this case, namely whether or not the LCF tuition assistance payments constitute scholarships under sec. 117. As for the second issue, the documents could have relevance to the determination of respondent’s administrative position as of Oct. 1, 1977. However, since we are today deciding that we have no jurisdiction to consider the fringe benefit moratorium in deciding this case, respondent’s administrative position as of Oct. 1, 1977, is irrelevant. Petitioner’s exhibits 27, 28, 29, 30, 31, 38 and 39 and respondent’s exhibits AA and AB are thus not received in evidence.

6 Petitioner’s logic on this point is somewhat flawed. On one hand, petitioner states that respondent is prohibited from determining that the LCF tuition awards are not scholarships, but then concedes that respondent was not prohibited from issuing the notice of deficiency. Petitioner admits that this Court is not limited by the moratorium in resolving the substantive legal issue as we see fit, but then states that we cannot enforce a determination by respondent which is in violation of the moratorium, and must decide the issue in accordance with respondent’s administrative interpretation of sec. 117 as of Oct. 1, 1977.