PLR 200029051: Undergraduate tuition benefits qualify for income exclusion

Plain-English summary

A state university system offered tuition waivers and reimbursements to employees of its colleges and universities. The IRS concluded that the system was itself an educational organization and that qualifying benefits for education below the graduate level were excluded from employees' income under section 117(d). Those benefits were not wages or subject to the listed withholding and reporting requirements. The program also covered some benefits outside that exclusion, including graduate tuition; those amounts would be included in employees' income unless another rule applied. The IRS declined to rule on a requested working-condition-fringe exclusion, and the taxpayer withdrew a separate request concerning educational assistance programs.

Ruling snapshot

• Question: Are the system's tuition benefits excluded from income and related wage reporting?
• Outcome: Mixed: qualifying undergraduate benefits excluded; other benefits did not qualify under section 117(d), and one requested ruling was declined.
• Key authorities: IRC §§ 117(d), 132, 170(b)(1)(A)(ii), 3401, and 3402.

Full text (IRS public release)

INTERNAL REVENUE SERVICE

UIL Index No.: 0117.06-00
               0117.05-05
Number: 200029051
Release Date: 7/21/2000




                                                      CC:DOM:IT&A:06//PLR-103031-00

                                                      April 26, 2000


Legend:

       X (Taxpayer)     =
                             EIN No. =

      B   (Plan)        =

      M (State)         =


Dear Sir or Madam:

        This is in response to your authorized representative’s letter and submissions of
November 3, 1999, and other, previous and subsequent correspondence, in which he
requested on your behalf certain rulings regarding the proper federal income tax
treatment, including any reporting and/or withholding obligations, for certain tuition
reduction (remission) and reimbursement benefits paid by you, X (the Taxpayer), to
employees of X and its operated institutions under the B tuition reduction plan, as
briefly described below. We are pleased to address your concerns.

       The information provided indicates that the Taxpayer, X, was created under the
Constitution of State M, and has exclusive authority under state law to manage the
public colleges, junior colleges, and universities of the state of M. Taxpayer consists of
one member from each congressional district in the state and certain additional
members from the state at large, who are appointed by the Governor and confirmed by
the State Senate. Taxpayer receives a lump sum appropriation from the M General
Assembly, and determines the amounts to be allocated and distributed among the
various education facilities operated by the Taxpayer.

      Taxpayer’s tuition reduction plan, B, allows full-time faculty, staff, and
administrators to participate in development activities and studies by remitting or

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reimbursing tuition for those activities that have been authorized by the employee’s
institution and that are related to the employee’s job or improve opportunities for career
advancement. Courses that are not directly related to a specific job, but are career
related, also qualify for the benefit. Full-time employees may register without tuition or
fees for up to three academic credit courses per term on a space available basis. The
employee may register for courses at his or her own institution or, with appropriate
approval, another university system institution or private institution. The Policy is
applicable both to employees working directly for the Taxpayer, as well as employees
employed at the Taxpayers’ member institutions, and may cover undergraduate as well
as graduate level studies. Courses are normally expected to be taken outside regularly
scheduled working hours.

       The B tuition reduction program is governed by certain implementation
guidelines and policies, copies of which were provided for our review. The guidelines
provide generally that any full-time employee of X or any of its operated institutions
who has been employed for at least six months (12 months for certain graduate
courses) may be eligible to participate in the tuition reduction program with the approval
of the employee’s supervisor or other appropriate school official.

       Generally, amounts paid to or for the benefit of employees are presumptively
compensatory in nature, and ordinarily includible in gross income as wages. Section
117(d)(1) of the Internal Revenue Code, however, provides a special rule in the case of
a “qualified tuition reduction.”

        Section 117(d)(1) provides that gross income shall not include any “qualified
tuition reduction”. Section 117(d)(2) defines a “qualified tuition reduction” as the
amount of any reduction in tuition provided to any employee of a section 170(b)(1)(A)(ii)
educational organization for the education (below the graduate level) at such an
educational organization, 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). Section 132(h) refers, generally, to spouses and dependent children of
employees.

       Section 170(b)(1)(A)(ii) describes an educational organization as one which
normally maintains a regular faculty and curriculum and normally has a regular body of
pupils or students in attendance at the place where its education activities are regularly
carried on.

        An entity described in sections 170(c)(1) or (2) of the Code, or an institution that
is operated as an activity or function of such an entity, may qualify as an “educational
organization” described in section 170(b)(1)(A)(ii) for purposes of section 117(d). For
example, an unincorporated school operated by a church, a museum school, or the
school system of a diocese, may constitute an educational organization described in
section 170(b)(1)(A)(ii) of the Code. Additionally, the exclusion provided by section
117(d) is not limited solely to individuals providing teaching services for the educational
institution, but extends to the employees generally, including secretarial, managerial,

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administrative, and support function employees.

       Section 117(d)(2) specifically provides that the “qualified tuition reduction”
provided to the employee need not be provided at the employer educational institution,
but may occur at any educational institution described in section 170(b)(1)(A)(ii).

       Except for the case or certain graduate teaching and research assistants, the
exclusion from income provided by section 117(d) is limited to education “below the
graduate level.” Section 117(d)(5)[4] provides an exception for individuals who are
graduate students at the employing institution and who are engaged in providing
teaching or research activities for that educational institution.

        “Education below the graduate level” generally refers to any course which is not
part of a course of study requiring a bachelor’s or equivalent undergraduate degree for
admission into the degree program, and which leads to a graduating degree. A course
which is part of a course of study leading to a graduate level degree is generally not
considered education below the graduate level, even if the course is not taken to fulfill
requirements for a graduate level degree, unless such course is taken for credit toward
a degree below the graduate level.

        The Taxpayer in the present case is not a mere association of educational
institutions, but itself meets the functional definition of an “educational organization”
described in section 170(b)(1)(A)(ii). The Taxpayer and its member institutions
constitute one legal entity, and Taxpayer’s sole duty and primary activity is to operate,
manage, control, and oversee the public educational institutions of a state, each of
which also constitutes an “educational organization.”

       Based on the information provided and representations furnished, we have
determined that the described tuition reductions, waivers, remissions and
reimbursements provided under the Taxpayer’s B tuition plan, or Policy, to employees
of the Taxpayer or any of its controlled member institutions, for the education below the
graduate level of such employees at any educational institution described in section
170(b)(1)(A)(ii), is excludable from the gross incomes of such employees under section
117(d)(1) of the Internal Revenue Code, as “qualified tuition reductions.” Additionally,
we have determined that the reductions do not discriminate in favor of highly
compensated employees; thus the plan/Policy satisfies the prohibition against
discrimination in favor of highly compensated employees as described in section
117(d)(3) of the Code.

       We note that X's tuition reduction program provides benefits that do not
constitute "qualified tuition reductions" as described in section 117(d)(2). The statutory
scheme of section 117(d), however, does not contemplate that the providing of
nonexcludable benefits by the employing educational institution shall defeat the
excludability of benefits satisfying the requirements of the section. The exclusion
provided under section 117(d) is available to any individual satisfying the requirements
of the section, regardless of whether similar benefits are provided to persons outside

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the class of individuals for whom the exclusion is available. Thus, the extension of
benefits by a qualified educational institution to parties other than those described in
sections 117(d)(2) and 132(h), or the extension of nonexcludable benefits to described
individuals (e.g., the provision of graduate level tuition reductions), simply requires the
inclusion of the value of such amounts in the gross incomes of those employees to or
for whose benefit such amounts are paid. The exclusion available to individuals
meeting the requirements of section 117(d) is not conditioned upon the employer’s
denial of benefits to persons not meeting the requirements for exclusion.

       Accordingly, tuition reimbursement and remission benefits paid under the B plan
to employees of X and its member institutions for education below the graduate level do
not constitute "wages" for purposes of section 3401(a). Additionally, such amounts are
not subject to section 3402 (relating to withholding for income taxes at source), section
3102 (relating to withholding under the Federal Insurance Contribution Act (FICA)), or
section 3301 (relating to the Federal Unemployment Tax Act (FUTA)). Neither X nor
its member institutions are required to file Forms W-2, or any returns of information
under section 6041, with respect to such payments or remissions.

        Certain other rulings respecting the tax treatment of amounts paid under the B
plan were also requested. You requested a ruling relating to the exclusion of such
amounts under section 132(d) of the Code, as working condition fringe benefits.
However, because of the inherently factual nature of such determinations, we are
unable to provide the requested ruling. See section 7.01 of Rev. Proc. 2000-1, 2000-1
I.R.B. 4, at 21, and sections 2.01 and 4.02 (1) of Rev. Proc. 2000-3, 2000-1 I.R.B. 103,
at 103 and 111. Although we are not providing a ruling on this issue, please note that
in testing whether graduate tuition benefits qualify as a working condition fringe, under
section 1.132-5(a)(2) of the Income Tax Regulations it is not sufficient that the tuition, if
paid by the employee, would be deductible as a trade or business expense. The tuition
benefits must relate to the employee’s trade or business as an employee of the
employer providing such benefits. You also requested a ruling regarding the exclusion
of such amounts under section 127 of the Code, relating to amounts paid under
qualified educational assistance programs. However, in a letter dated January 6, 2000,
you withdrew that request.

       This letter ruling is based on the facts and representations provided by X, and is
limited to the matters specifically addressed. No opinion is expressed as to the tax
treatment of the transactions considered herein under the provisions of any other
sections of the Code or regulations which may be applicable thereto, or the tax
treatment of any conditions existing at the time of, or effects resulting from, such
transactions which are not specifically addressed herein.

       Temporary or Final regulations pertaining to one or more of the issues
addressed in this ruling have not yet been adopted. Therefore, this ruling may be
modified or revoked by adoption of final regulations, to the extent the regulations are
inconsistent with any conclusions in this ruling. See section 12.04 of Rev. Proc.
2000-1, 2000-1 I.R.B. 4, at 46. However, when the criteria in section 12.05 of Rev.

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Proc. 2000-1 are satisfied, a ruling is not revoked or modified retroactively, except in
rare or unusual circumstances.

      Because it could help resolve federal tax issues, a copy of this letter ruling
should be maintained with X’s permanent records.

         Pursuant to a power of attorney currently on file with this office, a copy of this
letter is being sent to X’s designated authorized representative.

        This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Internal Revenue Code provides that it may not be used or cited as precedent.


                                                   Sincerely yours,

                                                   Assistant Chief Counsel
                                                   (Income Tax & Accounting)

                                                       /s/ William A. Jackson

                                                   By
                                                   William A. Jackson
                                                   Chief, Branch 6


Enclosures:
 Copy of this letter
 Copy for section 6110 purposes