Wolpaw v. C.I.R.

• Decision Date: 17 February 1995
• Docket Number: No. 93-2175,93-2175
• Citation: 47 F.3d 787
• Parties: -1110, 95-1 USTC P 50,104, 97 Ed. Law Rep. 1016 Daniel R. WOLPAW; Theresa M. Wolpaw, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 787

47 F.3d 787

75 A.F.T.R.2d 95-1110, 95-1 USTC P 50,104,

97 Ed. Law Rep. 1016

Daniel R. WOLPAW; Theresa M. Wolpaw, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 93-2175.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 20, 1994.

Decided Feb. 17, 1995.

Frederick N. Widen (argued and briefed), Kahn, Kleinman, Yanowitz & Arnson, Cleveland, OH, for petitioners-appellants.

Teresa McLaughlin, Marion E.M. Erickson (argued and briefed), Gary R. Allen, Acting Chief (briefed), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, DC, for respondent-appellee.

Before: MARTIN, KRUPANSKY and BOGGS, Circuit Judges.

BOYCE F. MARTIN, Jr., Circuit Judge.

Daniel and Theresa Wolpaw appeal a Tax Court decision requiring them to include in gross income the value of tuition waivers for Theresa Wolpaw's medical school education at Case Western Reserve University. 66 T.C.M. (CCH) p 49,164(M) (No.1993-322). The Tax Court reached its decision by interpreting Section 1853(f)(3)(A) of the Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat. 2085, 2872 (Oct. 22, 1986) (codified at 26 U.S.C. Sec. 117 (note) (1988)). Section 1853(f)(3) allows a taxpayer to exclude the value of a tuition waiver for graduate-level study if such waiver would have been excludable under the tax regulations in existence on July 18, 1984, the effective date of the Deficit Reduction Act of 1984, Pub.L. No. 98-369, 98 Stat. 494 (July 18, 1984). We believe that the tuition waivers benefiting Theresa Wolpaw were excludable from gross income as "scholarships" under the relevant tax statute and regulations in effect on July 18, 1984. Therefore, we REVERSE the decision of the Tax Court and REMAND the case for recomputation of the taxes due.

The facts in this matter have been stipulated by the parties. During the relevant period for purposes of our analysis, Daniel Wolpaw, M.D., was a faculty member at Case Western Reserve University's medical school. As a faculty member, he and his dependents were eligible to receive a tuition reduction or waiver for classes taken at any college at the University, including its medical school. From August 1983 until May 1988, Theresa Wolpaw, Dr. Wolpaw's wife, was a full-time, graduate-level student at the University's medical school. During the years in question, the University and its medical school qualified as educational organizations described in Section 170(b)(1)(A)(ii) of the Internal Revenue Code for purposes of determining whether the tuition waivers were excludable under 26 U.S.C. Sec. 117. While studying, Mrs. Wolpaw was not considered an employee of the University, nor was she required to teach or perform other duties in order to qualify for the tuition waivers from the University.

During the years 1987 and 1988, the Wolpaws received tuition waivers of $13,400.00 and $6,950.00, respectively. The University issued W-2 forms containing these amounts to Dr. Wolpaw, identifying them as fringe benefits. The Wolpaws did not include these amounts on their 1987 or 1988 joint federal income tax returns. After audit, the Commissioner issued a deficiency statement to the Wolpaws for $4,815.55 and $1,984.98 for the years 1987 and 1988, respectively, because the Commissioner considered the tuition waivers to be includable in gross income as compensation. The Wolpaws contend that the tuition waivers are excludable from gross income as "scholarships" under the transitional relief provided by Section 1853(f)(3) of the Tax Reform Act. They argue that although Section 117(d), added to the Code by the Deficit Reduction Act of 1984, eliminated the exclusion for graduate students receiving tuition waivers, Congress enacted Section 1853(f)(3) in 1986 as a transitional rule to provide relief to graduate students who began their studies before June 30, 1985 (the date after which tuition reductions were to be included in gross income by graduate students).

The Wolpaws filed a petition with the Tax Court for relief from these assessed deficiencies. The Tax Court held that the tuition waivers must be included in the Wolpaws' gross income for 1987 and 1988 because they had not satisfied the requirements for excluding these waivers under Section 1853(f)(3)(A). The Tax Court reasoned that for the Wolpaws to be eligible to exclude the tuition waivers, the waivers must have been excludable in 1984. The Tax Court determined that the tuition waivers here would have been includable in gross income under the tax regulations in 1984 for two reasons.

First, the Tax Court believed that the waivers were awarded to Dr. Wolpaw, not Mrs. Wolpaw, and constituted compensation paid to him by the University. The Tax Court observed that the University had included the amounts of these waivers in Dr. Wolpaw's W-2 statements. At the time, 26 U.S.C. Sec. 117 provided that "certain payments or allowances ... are not to be considered scholarships ... for purposes of the exclusion under Section 117." Treasury Regulation 1.117-4(c) (1984) defined these "certain payments" as:

(c) Amounts paid as compensation for services or primarily for the benefit of the grantor. (1) ... 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.

The Tax Court believed that this regulation applied to the Wolpaws' situation, that the tuition waivers were compensation to Dr. Wolpaw, and that they were therefore includable in gross income. The Tax Court reasoned that, because the allowances were made to Dr. Wolpaw "in his capacity of and because he was, an employee, and [because he] was not the person who pursued the studies or research" the amounts were compensation. As we discuss below, we believe that the Tax Court's view is not consistent with a plain reading of this regulation.

Second, the Tax Court believed the tuition waivers should have been included in the Wolpaws' gross income because Dr. Wolpaw had to be the person receiving the tuition waivers in order to exclude them pursuant to subsections 117(a)-(c), the only subsections enacted before July 18, 1984. The Tax Court believed that, unlike subsection 117(d), subsections 117(a)-(c) did not permit a waiver benefitting the spouse or dependent children of an employee to be treated as a waiver received by the employee. Subsection 117(d)(2)(B) permits a qualified tuition reduction benefitting "any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(f)" to be excluded. 26 U.S.C. Sec. 117 (as amended in 1984). Under Section 132(f)(2), use by a spouse or dependent child would be treated as an employee use. This language was not included in subsections 117(a)-(c), and so, the Tax Court reasoned, Mrs. Wolpaw could not stand in Dr. Wolpaw's shoes for purposes of excluding the waivers from income. As the Tax Court stated:

There is no such provision [as section 132(f) ] in either section 117(a), (b), or (c) to allow the spouse of the employee to be treated as the employee for purposes of the exclusion from income. In other words, Mrs. Wolpaw cannot stand in the shoes of Dr. Wolpaw for purposes of section 117(b). However, had Mrs. Wolpaw received the same tuition reductions or waivers as a student below the graduate level, Mrs. Wolpaw would stand in the shoes of Dr. Wolpaw for purposes of the exclusion from income, but only because of section 117(d)(2)(B) [of the Deficit Reduction Act]. Such a provision simply is not there with respect to graduate tuition waivers.

The Wolpaws disagreed with these conclusions and timely appealed the Tax Court's decision. We note that, contrary to the Tax Court's reasoning, according to the Private Letter Ruling discussed below, the Internal Revenue Service had allowed children and spouses to exclude qualified tuition reductions under subsections 117(a)-(c). Also, under Treasury Regulation 1.117-3(a), tuition remissions received by the children of faculty members in bilateral remission arrangements were excludable as scholarships. Therefore, the lack of a reference in subsections 117(a)-(c) to subsection 132(f) does not determine whether, prior to July 18, 1984, the Commissioner had permitted exclusion, under subsections 117(a)-(c), for tuition waivers benefitting dependents.

We review decisions of the Tax Court "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." Threlkeld v. Commissioner, 848 F.2d 81, 83 (6th Cir.1988) (quoting 26 U.S.C. Sec. 7482(a) (1988)). The Tax Court in this case interpreted Internal Revenue Code provisions and related Treasury Regulations. Therefore, its decision on questions of statutory interpretation is subject to de novo review. United States v. Hans, 921 F.2d 81, 82 (6th Cir.1990). Further, as to questions of statutory interpretation initially arising in a judicial proceeding, we will not defer to the Commissioner's position, but will give the same weight and consideration to the positions of both the petitioners and the respondent in this matter. Johnson City Medical Ctr. v. United States, 999 F.2d 973, 975 (6th Cir.1993). Here, for example, the Commissioner's view that the tuition waivers are not scholarships is not a contemporaneous construction of a statute by the agency, but a position taken in litigation. Nevertheless, Treasury Regulations interpreting the tax law as of 1984 may be entitled to some degree of deference.

The degree of deference to be accorded an agency's interpretation of a statute Congress has charged it with administering varies, depending on several factors, including the existence of a statute mandating a standard of review, the form and formality of the interpretation, and the consistency of the agency's interpretation...