McCarville, TC Summary Opinion 2016-14
In a summary opinion, the Tax Court has held that a cash-basis, calendar-year taxpayer who prepaid college tuition expenses for a semester that began during the first three months of the following year could not claim the American Opportunity Tax Credit (AOTC) for the year in which the semester began. Code Sec. 25A(g)(4) clearly provided that he could claim the AOTC only in the year he paid the expenses.
Background. Individuals may elect to claim a personal, partially refundable AOTC equal to 100% of up to $2,000 of qualified higher education tuition and related (QT&R) expenses plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period. So, the maximum AOTC is $2,500 a year for each eligible student. (Code Sec. 25A(a)(1), Code Sec. 25A(i)(1)) The credit phases out ratably for taxpayers with modified adjusted gross income (MAGI) exceeding certain levels. (Code Sec. 25A(i)(4))
In general, the AOTC (as well as the companion Lifetime Learning credit) is allowed only for payments of QT&R expenses paid by the taxpayer during the tax year for education furnished to the eligible student during any academic period beginning in that tax year (i.e., for payments of QT&R expenses for an academic period beginning in the same tax year as the year the payment is made). (Code Sec. 25A(b)(1), Code Sec. 25A(c)(1), Code Sec. 25A(i)(1)) However, if QT&R expenses are paid during one tax year for an academic period that begins during the first three months of the next tax year, the academic period is treated for AOTC purposes as beginning in the earlier year. (Code Sec. 25A(g)(4)) The credit is allowed only in the tax year in which the expenses are paid. (Reg. § 1.25A-5(e)(2)(i))
Facts. Lucas McCarville, a cash-basis, calendar-year taxpayer, graduated from Arizona State University (ASU). As with many colleges and universities, the academic year at ASU consists of the fall semester and the spring semester. The fall semester at ASU begins in August and ends in December and the spring semester begins in January and ends in May. McCarville paid his tuition for the fall semester 2011 — $4,895 — on Aug. 6, 2011. He paid his tuition for the spring semester 2012 — again, $4,895 — on Dec. 18, 2011, even though ASU did not require payment for that semester until Jan. 25, 2012.
McCarville timely filed a Form 1040A, U.S. Individual Income Tax Return, for 2012. On his return he claimed an AOTC of $2,500. In support of that credit, McCarville attached to his return Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). ASU did not issue McCarville a Form 1098-T, Tuition Statement, for 2012. This led IRS to examine his 2012 tax return and, ultimately, to issue a notice of deficiency disallowing the $2,500 AOTC that McCarville claimed.
Tax Court denies the credit. The Tax Court pointed out that under Reg. § 1.25A-5(e)(1), the AOTC generally is allowed only for payments of QT&R expenses for an academic period beginning in the same tax year as the year the payment is made. For a taxpayer such as McCarville who uses the cash — rather than the accrual — method of accounting, such QT&R expenses are treated as paid in the year in which the expenses are actually paid.
There is a limited exception in Code Sec. 25A(g)(4) for certain prepayments, but it didn’t apply to McCarville. Reg. § 1.25A-5(e)(2)(i) clearly states that where QT&R expenses are paid during one tax year for an academic period that begins during the first three months of the taxpayer’s next tax year (i.e., in January, February, or March of the next tax year for calendar year taxpayers), an education tax credit is allowed for the QT&R expenses only in the tax year in which the expenses are paid.
Neither the Code nor the regs permit a cash-basis taxpayer to claim an AOTC for a year other than the tax year in which the payment was actually made. As a result, the Tax Court ruled that McCarville was not entitled to the AOTC for 2012 for his Dec. 18, 2011 payment of $4,895.
The Tax Court acknowledged that the statutory requirements regarding the timing of the credit may very well seem to work a harsh result in a case such as this, when a mere 2-week delay would have occasioned a different outcome. Unfortunately, however, the Court was bound to apply the Code’s rules.