How to Calculate the Basis For an Education Expense Tax Credit

William Delaney, EA
Westwood, MA

Take a look at Angela A. Terrell v. Comm., TC Memo 2016-85 (5/2/16), for an interesting read on what to do when the Form 1098-T (Tuition Statement) conflicts with reality.

In Terrell, the taxpayer financed her education largely with student loans (sound familiar?).  The University billed her account $2,460 for tuition on 11/23/10 (for the Spring 2011 semester).  Another billing for $1,230 was rendered on 1/10/11 (final Spring semester billing).  Taxpayer’s account was credited (student loan disbursements) on 1/20/11, and these billings were paid in full.

The University issued a Form 1098-T (tax year 2011).  There was no entry in box #1 (payments received for qualified tuition and related expenses).  Why does that not surprise you, dear reader?  Box #2 (amounts billed for qualified tuition and related expenses) had an entry for $1,180.  This consisted of $1,230 (billed on 1/10/11---see above); plus a $50 mandatory fee; minus a tuition credit of $100.

Taxpayer claimed an American Opportunity Credit of $2,500 on her 2011 tax return.  The IRS disallowed the credit and issued a CP3219A which stated:  “Your eligible educational institution did not verify the amount claimed on your tax return, in box 1 of Form 1098-T, Tuition Statement.  Please provide a signed explanation of the amounts paid to support the amount(s) claimed.”  Is there anyone reading this who has not had to deal with this issue?

The taxpayer petitioned the Tax Court and the Court said, in part…”A taxpayer may claim a credit for qualified tuition and related expenses defrayed with proceeds of a student loan, even if those proceeds are paid by the lender directly to the educational institution on the student’s behalf (emphasis added).  See Sec, 1.25A-5(b)(1), Income Tax Regs.  Loan proceeds disbursed directly to an educational institution are treated as being paid by the student on the date the institution credits the proceeds to the student’s account.”  [Sec. 1.25A-5(e)(3)].



The Court reviewed an account statement from the University, which verified the $2,460 and $1,230 charges (plus other items) and which also verified a credit for student loan proceeds.  Upon review, the Court stated “Although the university charged a portion of petitioner’s spring 2011 semester tuition to her account in November 2010…She is therefore treated as having paid those expenses on 2011.  Since she is a cash basis taxpayer, this was the proper year for which to claim a credit for the tuition that she paid in 2011.  Sec. 1.25A-5(e)(3), Income Tax Regs.”  Furthermore, the Court countered the IRS position that Box #2 (amounts billed) controls the allowable tax credit.  “The amount billed to petitioner during 2011 does not control the size of her credit; the relevant number is the qualified tuition tjhat she actually paid during 2011.”

What passed through your editor’s mind when reading the case is that this is a common sense decision, substance over form, which would not have been necessary if the IRS were not so obsessed with numbers which appear on a form.  The taxpayer’s documentation was not accepted by the IRS, but the Court had no problem reviewing the University’s statement and arriving at a factual interpretation of what was there.  The case is silent as to why the IRS could not “see” what the Court was able to see.