Education Credit Based on Amount Paid, Not Amount Billed

Post Date: 6/1/16
Last Updated: 5/31/16


Cross References
- Terrell, T.C. Memo. 2016-85, May 2, 2016

During 2011, the taxpayer was enrolled as a full-time student at Hampton University. During the fall of 2010, she registered for courses for the upcoming spring 2011 semester. On November 23, 2010, the university billed to her account tuition of $2,460 on the basis of her preliminary selection of spring 2011 semester courses. On January 10, 2011, the university billed to her account additional tuition of $1,230 on the basis of her final course selections for that semester.

The taxpayer financed her education largely with student loans. Although the university billed some of the tuition charges to her account in 2010 for the spring 2011 semester, her student loans were not disbursed until January 20, 2011. The loan proceeds were disbursed directly to the university.

The university filed with the IRS and sent to the taxpayer Form 1098-T, Tuition Statement, for 2011. The form had no entry in box 1 for tuition payments received. Box 2 had $1,180 for amounts billed for qualified tuition and related expenses. Box 2 represented the $1,230 that was billed to the taxpayer on January 10, 2011, plus mandatory fees of $50, minus a tuition credit of $100 ($1,230 + $50 – $100 = $1,180).

The taxpayer is a cash basis taxpayer. On her 2011 return, she claimed the American opportunity Credit of $2,500. The IRS disallowed the credit in its entirety, stating: "Your eligible educational institution did not verify the amount claimed on your tax return, in box 1 of Form 1098-T, Tuition Statement."

In court, the taxpayer provided statements from Hampton University on official letterhead showing an itemized schedule of the taxpayer's tuition charges for the spring 2011 semester. This schedule showed a tuition charge of $2,460 on November 23, 2010, another tuition charge of $1,230 on January 10, 2011, a $50 degree fee on January 25, 2011, and a $100 tuition credit on February 9, 2011, for a total net tuition and related charges of $3,640 for the spring 2011 semester. The schedule further showed that the student loan proceeds paid the above tuition charges on January 20, 2011 when the loan proceeds were disbursed directly to the university.

The court said that since the taxpayer is a cash basis taxpayer, she is treated as having paid $3,640 of tuition on January 20, 2011, the date that the loan proceeds were disbursed. Under Regulation section 1.25A-5(e)(3), the 2011 tax year is the proper year to claim the education credit. Contrary to the IRS assertion, the Form 1098-T supplied by the university does not point to a different conclusion. The amount billed to the taxpayer during 2011 does not control the size of her credit. The credit is based upon the amount paid, not the amount billed.

On the basis of this evidence, the taxpayer's credit for 2011 should be $2,410 (100% of $2,000 plus 25% of $1,640).
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