Rev. Rul. 86-69

1986-1 C.B. 78, 1986-20 I.R.B. 4.

QUALIFIED TUITION REDUCTIONS

Published: May 19, 1986

Section 117.-Scholarships and Fellowship Grants

(Also Section 127.)

  Qualified tuition reductions. Amounts excludable from gross income as a qualified tuition reduction under section 117(d)(1) are not subject to the

$5,000 limitation of section 127(a)(2).

ISSUE

  In the case of the graduate student engaged in teaching or research activities at a university described in section 170(b)(1)(A)(ii) of the Internal Revenue Code, is the $5,000 limit of section 127(a)(2) of the Code applicable to a qualified tuition reduction that is excluded from gross income under section 117(d)(1) of the Code?

FACTS

  A is a graduate student and a candidate for a Ph.D. degree at U, a university described in section 170(b)(1)(A)(ii) of the Code. A also is engaged in teaching or research activities for U. In 1985, U reduced A's tuition by

$6,000. U does not maintain for its employees an educational assistance program described in section 127(b).

LAW AND ANALYSIS

  Section 117(d)(1) of the Code provides that gross income does not include any qualified tuition reduction.

  Section 117(d)(2) of the Code provides that 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 such employee, or any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(f).

  Section 127(a)(1) of the Code provides gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the assistance is furnished pursuant to a program that meets the requirements of section 127(b).

  Section 127(a)(2) of the Code provides that if section 127 would otherwise exclude from gross income more than $5,00 of educational assistance furnished to an individual during a calendar year, section 127(a) will apply only to the first $5,000 of such assistance so furnished.

  Section 127(c)(6) of the Code provides that section 127 will not be construed to affect the deduction or inclusion in income of amounts (not within the exclusion under section 127) that are paid or incurred, or received as reimbursement, for educational expenses under section 117, 162 or 212.

  Section 127(c)(8) of the Code provides that, in the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, section 117(d)(2) will be applied as if it did not contain the phrase '(below the graduate level).'

  Pursuant to section 127(d), section 127 will not apply to taxable years beginning after December 31, 1985.

  Section 127(c)(8) was added to the Internal Revenue Code of section 1(c) of Pub. L. 98-611, 1985-1 C.B. 413. Section 127(c)(8) is effective for taxable years beginning after December 31, 1983, and, in the case of education described in section 127(c)(8), section 117(d) is treated as being in effect on and after January 1, 1984. Sections 1(g)(1) and 1(g)(5) of Pub. L. 98-611,

1985-1 C.b. 413, 414. The legislative history states with reference to section

127(c)(8):

  Under the bill, the exclusion from gross income for income and employment taxes for qualified tuition reductions (sec. 117(d)) is extended to apply to education furnished to graduate students who are employees of certain educational institutions and who perform teaching or research activities for the educational institutions.

  H.R. Rep. No. 98-1049, 98th Cong., 2d Sess. 8, 1985-1 C.B. 414, 416.

  In the present situation, section 127(c)(8) extends section 117(d) to U's reduction of A's tuition. As indicated in section 127(c)(6) of the Code, the provisions of sections 117(d)(1) and 127(a) are independent of each other, and amounts that would not be excluded from gross income under section 127(a) may, nonetheless, be excluded under section 117(d)(1). Thus, the $5,000 limitations on the annual exclusion for amounts furnished under an educational assistance program (section 127(a)(2)) does not apply to a qualified tuition reduction under section 117(d)(1).

HOLDING

  Whether A may exclude the $6,000 of tuition reduction received in 1985 from gross income under section 117(d)(1) is determined without regard to the $5,000 limitation under section 127(a)(2). Any amount of tuition reduction received by A in taxable years beginning after December 31, 1985, may not be excluded from A's gross income under 117(d)(1) or 127.

Rev. Rul. 86-69, 1986-1 C.B. 78, 1986-20 I.R.B. 4.