New York Advisory Opinion TSB-A-87 (4)I: May amounts in a Tax Law § 612(k) qualified higher education fund be used, tax-free, to fund a college's prepaid alumni tuition plan, and does the section 612(c)(17) tuition deduction apply to such payments?

Plain-English summary

Clarence and Barbara Tobin had contributed money in prior years to a "qualified higher education fund" under Tax Law § 612(k) for their sons, who were eligible (in 1990 and 1993, respectively) to enroll in the Canisius College Alumni Tuition Plan - a program letting parents prepay a child's full four-year tuition in advance to lock in current rates, with the college refunding the prepayment if the student isn't admitted or chooses not to attend. The Tobins asked whether they could use their existing fund money for this prepayment, and separately, whether the section 612(c)(17) tuition deduction would apply to the payments.

On the first question, the Department explained that § 612(k) had historically been paired with taxing provisions (§ 601-D and § 612(l)(1)) that taxed certain "terminations" of a higher education fund, and a separate provision (§ 612(l)(2)) that could require adding distributed amounts back to federal adjusted gross income. But all three of those taxing provisions were repealed effective April 20, 1987. The Department determined that establishing an alumni tuition plan like this one does not itself count as a taxable "termination" of the fund in the first place - and in any event, since the repeals took effect before the relevant events here, using the fund money for the alumni plan would not trigger tax under those (now-defunct) provisions, so long as no termination or distribution incident happened before the April 20, 1987 repeal date.

On the second question, the Department drew a clean line against double-dipping into a different tax break. Section 612(c)(17) allows a tuition deduction, but only for tuition actually paid for a dependent's full-time attendance at an in-state institution of higher education (capped at the lesser of half the tuition net of TAP awards, or $1,000), and expressly does not apply to anyone who received a fund distribution that year. The Canisius alumni plan doesn't require full-time attendance - a student might never attend Canisius at all, or might attend a school outside New York - so payments into the plan don't qualify for this separate deduction, regardless of the favorable tax-free treatment on the fund side.

What this means for you

Parents with existing qualified higher education funds considering a prepaid tuition plan

You can generally redirect money already sitting in a Tax Law § 612(k) qualified higher education fund into a college's prepaid alumni tuition plan without triggering New York tax on that move, since the provisions that once taxed fund "terminations" were repealed in 1987 and establishing such a plan isn't itself treated as a termination. But don't expect an additional tuition deduction on top of that tax-free treatment.

Families weighing prepaid tuition plans against the ordinary tuition deduction

Recognize that the section 612(c)(17) tuition deduction requires actual tuition paid for full-time in-state attendance in the year of payment - a feature that prepaid, multi-year-ahead alumni tuition plans typically can't satisfy, since the student may not even be admitted or may attend elsewhere. Don't plan around stacking both the fund's tax-free treatment and this separate deduction for the same prepayment.

Tax preparers handling older higher-education-fund clients from the pre-1987 era

Be aware that the entire taxing framework around qualified higher education funds (§ 601-D, § 612(l)(1), § 612(l)(2)) was repealed effective April 20, 1987 - so timing matters. A termination or distribution incident that happened before that date could still be taxable under the old rules, while the same event after the repeal date generally would not be.

Common questions

Q: Can I use money in my existing qualified higher education fund to prepay tuition through a college's alumni tuition plan without triggering New York tax?
A: Yes, according to this opinion, as long as the plan was established (or the relevant use occurs) after the April 20, 1987 repeal of the fund-termination taxing provisions, and as long as no taxable termination or distribution incident occurred before that date.

Q: Does establishing an alumni tuition plan count as a "termination" of my higher education fund?
A: No. The Department specifically found that establishing an alumni tuition plan like the Canisius plan is not deemed a termination of the fund for purposes of the (now-repealed) sections 601-D or 612(l)(1).

Q: Can I also claim the section 612(c)(17) tuition deduction for payments into the alumni tuition plan?
A: No. That deduction requires tuition actually paid for a dependent's full-time attendance at an in-state institution of higher education in the year of payment - a requirement the alumni plan doesn't satisfy, since the student might not attend Canisius at all or might attend elsewhere.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a87_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (4) I
Income Tax
June 1, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I861218A

On December 18, 1986, a Petition for Advisory Opinion was received from Clarence J. and
Barbara L. Tobin, 80 Rosary Avenue, Lackwanna, New York 14218.
The issue raised is whether, for purposes of the personal income tax imposed under Article
22 of the Tax Law, amounts contained in a qualified higher education fund under section 612(k) of
the Tax Law may be used to fund an alumni tuition plan for Petitioners' sons. Additionally
Petitioners inquire regarding the applicability of the tuition deduction provided under section
612(c)(17) of the Tax Law to such alumni tuition plans.
Petitioner's inquiry pertains to the Canisius College Alumni Tuition Plan. Under this plan,
parents or relatives are permitted to pre-pay a child's full tuition before the child enters Canisius
College. This pre-payment entitles a student, subject to restrictions, to a four-year undergraduate
education, or 120 credit hours of study. The pre-payment of tuition is intended to preclude potential
increases in the cost of college tuition. Students planning to begin college between the years 1987
and 2004 will be eligible to enroll in the program. Petitioner's sons are eligible to enroll, if accepted,
in the years 1990 and 1993.
Under this plan, students enrolled in this program will be required to meet the same
admission requirements as those established for other freshman applicants. If a student enrolled in
the program does not meet the College's admission requirements, the College will return the original
amount paid for the tuition plan. If a student enrolled in the program chooses not to attend Canisius
College, the college will return the original amount paid for the tuition plan on the date the student
would have enrolled.
Issue (1)
Section 612(k) of the Tax Law provides a subtraction from federal adjusted gross income in
computing New York adjusted gross income for specified amounts contributed to a qualified higher
education fund before April 20, 1987. Petitioners have contributed amounts to a qualified higher
education fund for their sons in previous years. They inquire whether they may use the money
contained in their qualified higher education fund now for pre-payment of their sons' tuition.
A qualified higher education fund is a fund established solely for the purpose of defraying
costs associated with attendance by an eligible beneficiary subsequent to graduation or separation
from secondary school at an institution of higher education, such costs to include applicable tuition
and fees.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-87 (4) I
Income Tax
June 1, 1987

Amounts distributed from a higher education fund have been subject to personal income tax,
depending upon the date and manner of use of the amounts distributed. Sections 601-D, 612(1)(1)
and 612(1)(2) of the Tax Law set forth the manner and timing of taxation of such funds. However,
sections 601-D and 612(1)(1) of the Tax Law were repealed effective April 20, 1987. Accordingly,
terminations falling within the provisions of section 601-D or section 612(1)(1) which occur on or
after April 20, 1987 are no longer subject to tax.
The establishment of an alumni tuition plan as described above will not be deemed a
termination of the fund for purposes of section 601-D or 612(1)(1) of the Tax Law under
circumstances where such plan is established prior to April 20, 1987.
Section 612(1)(2) of the Tax Law was repealed effective April 20, 1987. Amounts required
to be added to the federal adjusted gross income of eligible beneficiaries under section 612(1)(2)
need not be added to federal adjusted gross income for taxable years ending on or after April 20,
1987.
Accordingly, if Petitioners have used or will use amounts contained in their higher education
fund to establish an alumni tuition plan at Canisius College for an eligible beneficiary, neither
Petitioners nor the eligible beneficiary will be subject to tax on such amounts unless the eligible
beneficiary ceased to be a student or an incident of termination took place before the relevant
effective dates of repeal as described above.
Issue (2)
Section 612(c)(17) of the Tax Law allows a deduction from federal adjusted gross income
in computing New York adjusted gross income for:
The amount of tuition paid during the taxable year on behalf of each
dependent for full-time attendance at an institution of higher education. . .
located in this state which amount shall not exceed (i) one-half of such tuition
minus tuition assistance program awards made pursuant to article fourteen of
the education law; or (ii) one thousand dollars, whichever is less; the
provisions of this paragraph shall not apply if such tuition is paid on behalf
of any person who received a distribution during such taxable year from a
qualified higher education fund as defined in paragraph three of subsection
(k) of this section.
The tuition deduction allowed under section 612(c)(17) of the Tax Law is limited to amounts
paid as tuition during the taxable year for full-time attendance at an institution of higher education
located in this state. Payments to the Canisius College alumni tuition plan fail to qualify for this
deduction since the plan does not require full time attendance at the college. In fact, under the plan
it is possible that the student will not attend any institution of higher education or that the student
will attend an institution of higher education outside of the state. Furthermore, no deduction is
allowed in the taxable year in which a student receives a distribution from a higher education fund.

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TSB-A-87 (4) I
Income Tax
June 1, 1987

Accordingly, it is determined that amounts contained in a qualified higher education fund
may be used to establish a Canisius College alumni tuition plan, as described above, but no tuition
deduction is available for amounts contributed to such a plan.

DATED: June 1, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.