Employee Tuition Reduction Not Excludible Fringe Benefit

University M, a Sec. 170(b)(1)(A)(ii) organization, provided reduced tuition to its employees taking its undergraduate- and graduate-level courses. For the graduate-level courses, is the tuition reduction excludible as a working-condition fringe benefit?

Analysis

Sec. 61(a) states generally that gross income includes compensation for services, including fringe benefits. Sec. 117(d) provides that a taxpayer can exclude from gross income a qualified tuition reduction, defined as "any reduction in tuition provided to an employee of an organization...[such as M] for education below the graduate level at such organization...for the employee or any person treated as one under Sec. 132(h)."

Sec. 132(a)(3) allows an employee to exclude working-condition fringe benefits from gross income, defined by Sec. 132(d) as property or services provided to an employee to the extent that if the employee paid for such property or services, the payment would be deductible under Sec. 162 or 167. However, according to Sec. 132(l), Sec. 132 generally does not apply to any fringe benefit of a type for which the tax treatment is expressly provided for in any other section of Code Chapter 1. Under Sec. 132(j)(8), amounts paid (or expenses incurred) by an employer for education or training provided to an employee and excludible from gross income under Sec. 127 are excluded under Sec. 132 only if such amounts or expenses are working-condition fringe benefits.

According to Regs. Sec. 1.132-1(f)(1), because Sec. 117(d) applies to tuition reductions, the Sec. 132 exclusions do not apply to free or discounted tuition provided to an employee by an organization operated by the employer, whether the tuition is for study at or below the graduate level. Of course, if amounts paid for education relate to an employee's trade or business of being an employee, such that the employee could deduct the education under Sec. 162 if he or she paid for it, the costs might be excludible as a working-condition fringe benefit.

According to Sec. 132(f)'s legislative history, a benefit is not excludible under Sec. 132 (unless a de minimis benefit) if another Code section provides rules for the tax treatment of the general type of benefit. The Sec. 132(j)(8) legislative history states that, to the extent employer-provided educational assistance is not excludible under Sec. 127 because it exceeds the maximum dollar limit or because of the limit on graduate-level courses, it may be excludible from income as a Sec. 132(d)(2) working-condition fringe benefit, provided that section's requirements are otherwise met (e.g., the education is job-related as defined under Sec. 162). Educational assistance may not be excluded under any other Sec. 132 provision.

Thus, tuition reduction is not excludible as a working-condition fringe benefit. Tuition reduction is provided for under Sec. 117; thus, Sec. 132(l) bars application of Sec. 132 to exclude tuition reductions from gross income, other than as a de minimis fringe benefit. In addition, the regulations seem to clearly distinguish between tuition reduction under Sec. 117 and amounts paid by an employer for an employee's education under Sec. 127. Further, the legislative history speaks of "the general type of benefit" that may not be excludible under Sec. 132 if another Code section provides a tax treatment for such benefit. Consequently, tuition reduction for graduate courses is the general type of benefit related to Sec. 117 tax treatment and, thus, is not excludible under Sec. 132.

Field Service Advice (FSA) 200231016 (8/2/02)