John Voigt worked for Tulane University in 1991, at which time he was laid off as part of a staff reduction. As part of his severance package, John was entitled to a tuition waiver for himself or his dependents in the future if certain conditions were met.
In 2013, John’s daughter enrolled at Tulane and received the benefit of the tuition waiver for the spring and fall semesters. In the case of Voight v. Commissioner, TC Summary Opinion 2018-25, the Tax Court had to decide if the value of that tuition waiver represented taxable income to John.
IRC §117(d) provides an exclusion from income for a qualified tuition reduction. Subsections (1) and (2) provide the following details:
(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).
IRC §132(h)(1) provides that an “employee” for this purpose would include a person who separated from service due to retirement and disability. Under §132(h)(2) the employee treatment would also extend to a spouse or dependent child of an employee.
Tulane University issued John a Form W-2 for the value of the tuition waiver for 2013. John, protesting that he had performed no services for Tulane that year, disputed that Form W-2 should have been issued for a benefit he had been issued back in 1991.
The Tax Court first looked at whether the value of this benefit was properly taxable in 1991 and determined that it wasn’t. Under Reg. §1.451-1(a) the value of such is taxed to the employee in the year in which it is either actually or constructively received by the taxpayer, regardless of when the related services were performed. The actual benefit was received in 2013 when the tuition was waived, so the only issue would be whether the benefit had been constructively received in 1991.
The Tax Court concluded there had been no constructive receipt in 1991:
Tulane made six annual tuition waivers available to petitioner when he was laid off in 1991, but petitioner could not receive a tuition waiver benefit until he or his dependent satisfied Tulane’s admission guidelines and enrolled in the university. This is a substantial limitation on his receipt of the tuition waiver benefit and precludes him from having constructively received it before it was redeemed against tuition actually charged. Thus, the tuition waiver benefit is properly included in gross income for 2013, the year in which the benefit was actually received, unless excludable from taxable income under another provision.
Next the Court looked to see if the exclusion under IRC §117(d), discussed above, would apply to this tuition payment. The parties agreed that John had not been terminated due to disability, so the next question was whether John was either a current employee or had left employment due to retirement.
John argued that since Tulane had issued him a W-2, he was an employee in 2013. The Tax Court did not agree, noting:
The issuance of a Form W-2 does not create an employment relationship.6 See Weber v. Commissioner, 103 T.C. 378, 386-387 (1994), aff’d per curiam, 60 F.3d 1104 (4th Cir. 1995). “Whether the employer-employee relationship exists in a particular situation is a factual question. Common law rules are applied to determine whether an individual is an employee.” Id. at 386 (citations omitted)
Aside from the W-2, the Court found John had presented no evidence was an employee of Tulane University in 2013. Thus, he could not have qualified for an exclusion from income due to being an employee of Tulane.
John also claimed that he should be treated as having separated from service due to retirement. He noted that “retired” as found in IRC §132(h)(1) is not defined by the section, so “laid off” should be treated as a form of early retirement for these purposes.
The Tax Court did not agree that the lack of an explicit definition of retirement meant that being laid off or simply no longer working for the employer was equivalent to retirement. Rather, when a term is not explicitly defined, the Court looks to the common meaning of the term. The Court looked to Black’s Law Dictionary’s definition of “retired” which was “[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.” The Court notes that this meaning emphasizes factors not involved with simply being laid off from a position. Giving it the meaning that the taxpayer suggests would, effectively, render the term superfluous in the IRC. One key tenant of statutory construction is that, if at all possible, a statute should be construed in such a way that renders no term superfluous—and one the court applied here.
As the opinion concludes:
Petitioner’s assertion that he should be considered retired is not supported by the record: (1) Tulane identified “Elimination of Position” as the reason for leaving on his separation notice, even though retirement was a preprinted option; (2) petitioner’s severance package included assistance in finding further employment, and a letter from the president of the Tulane explained that the terminations were a necessary response to “rapidly rising costs”; and (3) petitioner testified that he was laid off because Tulane was having “money troubles”. For these reasons we conclude that petitioner’s termination was not contingent on age, years of service, or health considerations. Additionally, petitioner continued to work for a variety of other employers and himself after he was laid off by Tulane. Thus, petitioner’s separation from Tulane does not fit within the ordinary meaning of the term “retirement”. See King, 576 U.S. at ___, 135 S. Ct. at 2489; Black’s Law Dictionary 1510 (10th ed. 2014).
Thus, the Court agreed with the IRS that John must pay tax on the value of the tuition waiver his daughter received in 2013.