Couple Fails to Prove Entitlement to Education Credits

Jeremy J. Eggerth and John C. Schmittdiel, for respondent.

In a notice of deficiency dated June 13, 2013, respondent determined a Federal income tax deficiency of $3,662 for petitioners' 2011 taxable year after they filed an amended return. After concessions by respondent,² the only issue remaining is whether petitioners are entitled to an American opportunity credit in an amount greater than that allowed by respondent.

Petitioner wife's daughter, H.A., graduated from high school in June 2010 and subsequently enrolled in North Hennepin Community College. She began classes in the fall 2010 semester. For the spring 2011 semester, which began in early January, H.A.'s account statement from the college shows charges for the following:

      Item                                              Amount

Petitioners, who are cash method taxpayers, timely filed a joint Form 1040, U.S. Individual Income Tax Return, for taxable year 2011. On April 1, 2013, respondent received from petitioners a Form 1040X, Amended U.S. Individual Income Tax Return, for the 2011 taxable year, reflecting adjustments made as a result of respondent's examination. On their Form 1040X petitioners claimed an American opportunity credit of $2,107³ for H.A.'s education expenses.⁴

On June 13, 2013, respondent sent petitioners a notice of deficiency disallowing the American opportunity credit for lack of payment verification. On August 19, 2013, petitioners timely filed a petition in this Court disputing respondent's disallowance of the credit. At trial respondent conceded $157 of the claimed credit. The remaining amount is in dispute.

Petitioners do not contend that section 7491(a)(1) applies, and the record does not permit us to conclude that they satisfied the section 7491(a)(2) requirements. Accordingly, the burden of proof does not shift to respondent.

Although petitioners have provided sufficient evidence to show that they paid the charges from North Hennepin Community College for H.A.'s benefit, respondent disallowed all but $157 of the claimed credit associated with these expenses. Respondent contends that (1) petitioners paid $2,150.85 of the charges in the 2010 taxable year, and (2) not all of the charges were "qualified tuition and related expenses".

Generally, the American opportunity credit is allowed only when payment is made in the same year that the academic period begins. Sec. 1.25A-5(e)(1), Income Tax Regs. For cash method taxpayers, such as petitioners, qualified education expenses are treated as paid in the year in which the expenses are actually paid. Id. Section 25A(g)(4) contemplates the scenario where, as here, a taxpayer prepays qualified tuition and related expenses during one taxable year for an academic period that begins during the first three months of the following taxable year. In that instance, section 25A(g)(4) provides that the academic period is treated as beginning during the taxable year in which payment was made. This provision therefore requires taxpayers to claim the credit with respect to the taxable year that the expenses were paid when the academic period begins in January, February, or March of the following year.⁷See secs. 1.25A-3(e), 1.25A-5(e)(2)(i), Income Tax Regs.

The regulations provide an example of this principle: "In December 1998, Taxpayer A, a calendar year taxpayer, pays College Z $1,000 in qualified tuition and related expenses to attend classes during the 1999 Spring semester, which begins in January 1999. Taxpayer A may claim an education tax credit only in 1998 for payments made in 1998 for the 1999 Spring semester." Sec. 1.25A-5(e)(2)(ii), Income Tax Regs. (emphasis added); see also sec. 1.25A-3(e), Income Tax Regs. Respondent does not dispute that petitioners paid qualified tuition and related expenses on December 28, 2010, for the academic period beginning January 2011. Petitioners were therefore entitled to an American opportunity credit with respect to this payment, if at all, for taxable year 2010. See sec. 25A(g)(4); sec. 1.25A-5(e)(2)(ii), Income Tax Regs. Neither the statute nor the regulations permit a cash method taxpayer an American opportunity credit with respect to a year other than the taxable year in which the payment was actually made. Accordingly, petitioners are not entitled to a credit for taxable year 2011 with respect to the December 28, 2010, payment of $2,150.85.

Petitioners made two payments in taxable year 2011: a payment of $50 received on January 3, 2011, and a payment of $165.45 received on May 6, 2011. Respondent concedes that petitioners are entitled to a credit of $157 with respect to these payments. The remaining $58.45 is in dispute.

Respondent disallowed this amount as purportedly not paid toward qualified tuition and related expenses. The account statement from North Hennepin Community College shows charges for parking, a student life fee, a technology fee, "MSCSA", and "Professional Development Occ/Professional Course Fees"⁸ as well as tuition charges. Petitioners' payments were not allocated among the charges. Petitioners have not shown that those fees were necessary for enrollment or attendance at North Hennepin Community College or that the 2011 payments were applied solely to qualified tuition and related expenses. See sec. 25A(f)(1); sec. 1.25A-2(d)(2) and (3), Income Tax Regs.; see also Rule 142(a); Welch v. Helvering, 290 U.S. at 115. Accordingly, petitioners are not entitled to an American opportunity credit for the 2011 taxable year in an amount greater than the amount respondent allowed.

We realize that the statutory requirements may seem to work a harsh result in a case such as this where a four-day delay in making the December 28, 2010, payment would have engendered a different result. However, the Court must apply the statute as written and follow the accompanying regulations when consistent therewith. Michaels v. Commissioner, 87 T.C. 1412, 1417 (1986). We have considered the parties' remaining arguments, and to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.

To reflect respondent's concessions and the foregoing,

Decision will be entered under Rule 155.

² The notice of deficiency disallowed a dependency exemption deduction for petitioner husband's minor child E.F. After trial respondent conceded this issue in his status report. The notice of deficiency also disallowed petitioners' claimed child tax credit as a computational adjustment on the basis of respondent's disallowance of the dependency exemption deduction. Although respondent's status report does not mention the child tax credit, the Court assumes that respondent no longer disputes the credit as a result of respondent's concession of the dependency exemption deduction.

³ Of the $2,107, $843 was claimed as a refundable credit and $1,264 was claimed as a nonrefundable credit. See sec. 25A(i)(6).

⁴ On the original return, petitioners claimed education credits associated with petitioner husband's child J.F. Petitioners then amended their return, removing the dependency exemption deduction and the education credits associated with J.F. as a result of respondent's examination. The remaining American opportunity credit is attributable solely to H.A.'s education expenses.

⁵ "'Credible evidence is the quality of evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness).'" Higbee v. Commissioner, 116 T.C. 438, 442 (2001) (quoting H.R. Conf. Rept. No. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995).

⁶ The American opportunity credit is a modified version of the Hope Scholarship Credit in effect for taxable years 2009 to 2012. See sec. 25A(i). The credit is available only to taxpayers who paid qualified expenses related to education furnished to eligible students. See sec. 25A(f), (i). Eligible students, in addition to other requirements, should have been enrolled at an eligible educational institution in a program leading toward a postsecondary degree, certificate, or other recognized postsecondary educational credential. See sec. 1.25A-3(d), Income Tax Regs. Further, the credit is limited to taxpayers whose modified adjusted gross income falls below a certain threshold. See sec. 25A(i)(4). Respondent does not dispute that H.A. is an eligible student or that petitioners meet the income threshold.

⁷ This assumes the taxable year follows the calendar year. See sec. 1.25A-5(e)(2)(i), Income Tax Regs.

⁸ The record does not indicate what "MSCSA" or "Professional Development Occ" stands for.