LEWIS v. COMMISSIONER

T.C. Summary Opinion 2003-78

UNITED STATES TAX COURT

ROLAND E. LEWIS, JR., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10106-02S. Filed June 19, 2003.

Roland E. Lewis, pro se.

Jeanne Gramling, for respondent.

DINAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority. Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.

- 2 -

Respondent determined a deficiency in petitioner’s Federal

income tax of $3,210 for the taxable year 1999. The sole issue

for decision is whether an $8,000 payment petitioner received in

1999 is includable in petitioner’s gross income.

Some of the facts have been stipulated and are so found.

The stipulations of fact and the attached exhibits are

incorporated herein by this reference. Petitioner resided in

Morrisville, North Carolina, on the date the petition was filed

in this case.

From 1992 through July 1998, petitioner was employed by the

National Society of Black Engineers (NSBE) of Alexandria,

Virginia. Petitioner was a corporate fund-raiser and handled

national convention career fairs for NSBE. Throughout his

employment with NSBE, petitioner was enrolled at Howard

University earning an undergraduate degree in engineering.

Petitioner finished his degree shortly after leaving NSBE.

Petitioner had a verbal agreement with NSBE that he would be

reimbursed for certain educational expenses he incurred at

Howard. NSBE later instituted a formal tuition assistance

program, but petitioner was not a participant in this program.

In discussions with employees of NSBE, petitioner was told that

they were “not able to find an exact document that details” such

an agreement. Although admitting that petitioner was to be

- 3 -

reimbursed to some extent, petitioner was told that they did not

“know what degree * * * whether 60 or 70 percent.”

NSBE’s records show that petitioner received two payments

during 1998 and 1999. The first, a $6,000 payment dated October

23, 1998, was labeled as a payment for “Commissions”. The

second, an $8,000 payment dated February 18, 1999, was labeled as

a payment for “Commission 97-98". The latter payment is the

payment at issue in this case. NSBE issued a Form 1099-MISC,

Miscellaneous Income, to petitioner for taxable year 1999. This

form reflected nonemployee compensation of $8,000.

Petitioner filed an individual Federal income tax return for

taxable year 1999. Petitioner did not report as income any

portion of the $8,000 payment which he received from NSBE,

despite his assertion at trial that a portion of this payment was

for nonemployee compensation rather than a reimbursement of

educational expenses. In the statutory notice of deficiency,

respondent determined that the entire $8,000 was includable in

petitioner’s gross income and subject to self-employment income

tax.

Petitioner argues that, while a portion of the $8,000 was

indeed nonemployee compensation, the bulk of the payment was a

reimbursement of his educational expenses--which he refers to as

- 4 -

an “educational grant”--that should not be includable in his

income.1

The record in this case does not clearly indicate whether

the payment petitioner received was related to the expenses he

incurred in connection with his undergraduate education at

Howard. However, even assuming that the payments were made in

connection therewith, as explained in detail below they would

nonetheless be includable in petitioner’s gross income.

Gross income generally includes all income from whatever

source derived, including “Compensation for services, including

fees, commissions, fringe benefits, and similar items”, unless

excluded by statute. Sec. 61(a)(1). There are several statutory

exclusions which arguably could be applicable to the case at

hand.

First, section 117(a) excludes from gross income “any amount

received as a qualified scholarship by an individual who is a

candidate for a degree” at certain educational institutions. A

“qualified scholarship” does not include any amount received by a

student which represents payment for services required as a

condition for receiving such amount. Sec. 117(c). As is

relevant to the case at hand, the regulations state that the

1

At trial, petitioner argued that the amount of the

reimbursement was $7,614. In his petition, petitioner stated

that the amount of the reimbursement was $6,800.

- 5 -

following type of payment is not excludable from income under

section 117:

any amount paid or allowed to, or on behalf of, an

individual to enable him to pursue studies or research, if

such amount represents either compensation for past,

present, or future employment services or represents payment

for services which are subject to the direction or

supervision of the grantor.

Sec. 1.117-4(c)(1), Income Tax Regs. The Supreme Court has held

that:

The thrust of the provision [in the section 117 regulations]

dealing with compensation is that bargained-for payments,

given only as a “quo” in return for the quid of services

rendered--whether past, present, or future--should not be

excludable from income as “scholarship” funds.

Bingler v. Johnson, 394 U.S. 741, 757-758 (1969). Based on

petitioner’s testimony, we conclude that any payments by NSBE for

petitioner’s education were not in the form of a “qualified

scholarship” within the meaning of section 117. Any such

payments were made in accordance with the terms of the employment

relationship. If they were in fact made, they were a form of

compensation and not the result of disinterested generosity.

Thus, the section 117(a) exclusion does not apply in this case.

Second, section 127(a)(1) excludes from gross income

“amounts paid or expenses incurred by the employer for

educational assistance to the employee”, but only if the

assistance is furnished pursuant to a qualifying “educational

assistance program”. An “educational assistance program” is a

“separate written plan of an employer” which meets certain

- 6 -

statutory requirements. Sec. 127(b)(1). We need not address

these requirements, however, because petitioner admits that the

amounts at issue were not provided pursuant to a written plan

maintained by NSBE, as required by the statute. Id.; Maranto v.

Commissioner, T.C. Memo. 1997-122. Thus, the section 127(a)(1)

exclusion does not apply in this case.

Finally, section 132(a)(3) excludes from income “any fringe

benefit which qualifies as a * * * working condition fringe”. As

applicable to the case at hand, a “working condition fringe” is

any property or services provided to an employee to the extent

that, if the employee had paid for the property or services, the

payment would be deductible under section 162. Sec. 132(d); see

also sec. 132(j)(8). Alternatively, pursuant to section

62(a)(2)(A) and section 1.62-2, Income Tax Regs., certain

reimbursements or expense allowances paid to employees by

employers may be excludable from an employee’s income. Sec.

1.62-2(c)(4), Income Tax Regs. To be excludable from income

under these provisions, the payments must be made pursuant to an

“accountable plan” which, among other requirements, provides

advances, allowances, or reimbursements only for business

expenses that otherwise are allowable as deductions under section

162(a). Sec. 62(a)(2)(A); Biehl v. Commissioner, 118 T.C. 467,

477 (2002); sec. 1.62-2(c)(4), (d)(1), Income Tax Regs.

- 7 -

Section 162 generally allows a deduction for expenses which

are ordinary and necessary in carrying on a trade or business.

Sec. 162(a). Such expenses may include educational expenses paid

in carrying on the trade or business of being an employee. Sec.

1.162-5, Income Tax Regs. To be deductible, such expenses must

be for education which (1) maintains or improves skills required

by the taxpayer in his employment or other trade or business, or

(2) meets the express requirements of the taxpayer’s employer, or

of applicable law or regulations, imposed as a condition to the

retention by the taxpayer of an established employment

relationship, status, or rate or compensation. Sec. 1.162-5(a),

Income Tax Regs. There is nothing in the record which indicates

that petitioner’s engineering education fell within one of these

two categories: There is no suggestion that the education

maintained or improved skills which petitioner used in his duties

at NSBE--fundraising and handling career fairs--or that it was

required in the context of his established employment

relationship, status, or rate of compensation.

Furthermore, expenses which fall into either of the above

two categories nevertheless are not deductible if the education

(1) is required in order to meet the minimum educational

requirements for qualification in the taxpayer’s employment or

other trade or business, or (2) qualifies the taxpayer for a new

trade or business. Sec. 1.162-5(b), Income Tax Regs. The

- 8 -

undergraduate engineering education which petitioner obtained in

this case clearly qualified him for a new trade or business.

See, e.g., Cristea v. Commissioner, T.C. Memo. 1985-533; Josephs

v. Commissioner, T.C. Memo. 1979-371; Warfsman v. Commissioner,

T.C. Memo. 1972-137.

Because the education expenses do not meet the requirements

of section 1.162-5, Income Tax Regs., the expenses would not be

deductible under section 162. Consequently, any amounts

petitioner received as reimbursement therefor would not be

excludable under section 132, and such amounts could not be part

of an accountable plan and would not be excludable under section

1.62-2(c)(4), Income Tax Regs. Sec. 132(d); Biehl v.

Commissioner, supra.

We conclude that the $8,000 petitioner received in 1999 from

NSBE is compensation for services and is includable in his income

under section 61(a)(1).2

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for respondent.

2

Respondent determined that petitioner was liable for self-

employment tax with respect to the $8,000 payment. Petitioner

has not specifically disputed this determination, and nothing in

the record indicates that this amount was other than “self-

employment income” within the meaning of sec. 1401.