AOTC inconsistency

Technical topics regarding tax preparation.
#1
Chay  
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The Tax Court recently denied the American Opportunity Credit on a petitioner's 2013 tax return in respect of tools and equipment purchased to attend a workshop because the money was not paid directly to the educational institution. See Ochoa v. Commissioner.

The decision was based on 26 CFR 1.25A-2(d)(2)(ii), which provides that "[q]ualified tuition and related expenses include fees for books, supplies, and equipment used in a course of study only if the fees must be paid to the eligible educational institution for the enrollment or attendance of the student at the institution."

The instructions for Form 8863 for tax year 2013 indicate that the AOTC can be claimed for "course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance." The IRS web page "Qualified Education Expenses" confirms that "[f]or AOTC only, expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school."

What is going on here? Is the IRS just making stuff up in their literature, or do the IRS staff who write it know something that the Commissioner of Internal Revenue, his counsel, and the Tax Court have all overlooked?
 

#2
ATSMAN  
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I have not reviewed the case but it may have to do with auto trade schools where students are given discount coupons to buy their tools from Snap-On or similar wholesalers. My nephew attended one of those schools. I believe books and tuition would qualify but the tools are not a requirement to attend. It is nice to have category.
 

#3
mariaku  
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This is the difference between Lifetime Learning Credit (only those materials, supplies & books that are bought from the institution) versus no such requirement for American Opportunity Credit (bought anywhere as long as they are required for the course of study).
 

#4
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What is going on here? Is the IRS just making stuff up in their literature, or do the IRS staff who write it know something that the Commissioner of Internal Revenue, his counsel, and the Tax Court have all overlooked?


Context matters. Old rule was that the stuff had to be purchased directly from the institution. Proposed Regs were issued on 8/2/16 which changed that. So, these regs were issued when the case was ongoing (petition filed 8/25/15; trial held 10/3/16). If the taxpayer brought this new Reg up to the IRS, or the court, the taxpayer “may” have won on that issue. Note that he went pro se. In fact, there was a similar case (Mameri) where the same thing happened to that guy, who bought a computer…and he lost on the issue…but, when the IRS went to make the 155 computation, the IRS learned that proposed regs had been issued. So the IRS gave the guy the credit, even though the judge said the taxpayer lost. This was very generous by the IRS, IMO, not only because the IRS did it, but since the concession was based on a proposed reg that would only come into effect once finalized…and I don’t think it’s ever been finalized, but you can check me on that.
 

#5
makbo  
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Chay wrote:What is going on here? Is the IRS just making stuff up in their literature, or do the IRS staff who write it know something that the Commissioner of Internal Revenue, his counsel, and the Tax Court have all overlooked?

Here is some of the actual history, maybe it will help resolve your question.

"The American Opportunity Tax Credit (AOC) is actually an enhanced Hope credit, effective for 2009 and 2010. [later extended and made permanent] The enhanced Hope credit was passed into law as part of the American Recovery and Reinvestment Act of 2009 (ARRA).
[...]
The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” For this purpose, the term “course materials” means books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. For complete information re: “qualified tuition and related expenses”, please see Chapter 2 of IRS Publication 970, Tax Benefits for Education."
[archive CE material - tax update TY2009]

Clearly at the time the new credit was created, IRS' position was that the payment to the institution was no longer required.

I believe this change was embodied here: §25A(f)(1)(D) states "For purposes of determining the American Opportunity Tax Credit, subparagraph (A) shall be applied by substituting "tuition, fees, and course materials" for "tuition and fees"."

The Hope Credit is still in effect, I believe, although no one would ever choose it over AOC as far as I know. The reg you indicated for the court case refers only to the Hope Credit. The court acknowledges the change in qualified expenses for AOC, but then insists on applying a reg for the Hope Credit to the result. I don't think this is correct, but I don't know. Must the IRS explicitly add new regs for the AOC, in order to override the older regs for an older but related credit? Shouldn't the court have noted that there was no comparable reg for the AOC, and just used the statute itself as the basis for the decision? Here the court is basically saying the change to the statute didn't really count for anything, that the old reg for "fees" somehow automatically applies to the newly added "course materials".
 

#6
Nilodop  
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Prop. reg. 1.25A-2(d)
(3) Course materials for the American Opportunity Tax Credit for taxable years beginning after December 31, 2008 . For taxable years beginning after December 31, 2008, the term “qualified tuition and related expenses” for purposes of the American Opportunity Tax Credit under section 25A(i) includes the amount paid for course materials (such as books, supplies, and equipment) required for enrollment or attendance at an eligible educational institution. For this purpose, “required for enrollment or attendance” means that the course materials are needed for meaningful attendance or enrollment in a course of study, regardless of whether the course materials are purchased from the institution.


***

1.25A-2(d)
(7) Example 2 . First-year students attending College W during 2008 are required to obtain books and other materials used in its mandatory first-year curriculum. The books and other reading materials are not required to be purchased from College W and may be borrowed from other students or purchased from off-campus bookstores, as well as from College W’s bookstore. College W bills students for any books and materials purchased from College W’s bookstore. The expenses paid for the first-year books and materials purchased at College W’s bookstore are not qualified tuition and related expenses because under § 1.25A–2(d)(2)(ii) the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. In addition, expenses paid for the first-year books and materials borrowed from other students or purchased from vendors other than College W’s bookstore are also not qualified tuition and related expenses because under § 1.25A–2(d)(2)(ii) the books and materials are not required to be purchased from College W for enrollment or attendance at the institution.

Example 3 . Assume the same facts as Example 2 , except that the books and materials are required for first-year students attending College W during 2009. Because the expenses are paid with respect to enrollment or attendance after 2008, § 1.25A–1(d)(3) applies rather than § 1.25A–1(d)(2)(ii), if the taxpayer claims the American Opportunity Tax Credit under section 25A(i). Under § 1.25A–1(d)(3), expenses for books and other course materials are qualified tuition and related expenses for purposes of the American Opportunity Tax Credit if they are needed for meaningful attendance in the student’s course of study at College W. Accordingly, if the taxpayer claims the American Opportunity Tax Credit for 2009, the expenses paid for the first-year books and materials are qualified tuition and related expenses. However, if the taxpayer claims the Lifetime Learning Credit for 2009 under section 25A(c), § 1.25A–2(d)(2)(ii) applies rather than § 1.25A–1(d)(3). Accordingly, if the taxpayer claims the Lifetime Learning Credit, the expenses paid for the first-year books and materials purchased at College W’s bookstore are not qualified tuition and related expenses because under § 1.25A–2(d)(2)(ii) the books and materials are not required to be purchased from College W for enrollment or attendance at the institution.
 

#7
Chay  
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makbo wrote:Must the IRS explicitly add new regs for the AOC, in order to override the older regs for an older but related credit? Shouldn't the court have noted that there was no comparable reg for the AOC, and just used the statute itself as the basis for the decision? Here the court is basically saying the change to the statute didn't really count for anything, that the old reg for "fees" somehow automatically applies to the newly added "course materials".

The problem with the old reg for "fees" is that it was issued with regard to the entirety of section 25A and not in respect of a particular credit or group of credits - so, when the Hope Scholarship Credit morphed into the American Opportunity Credit, it continued to apply with equal force.

I think what we have here is a case of administrative sloth overpowering legislative intent - the IRS never got around to converting their proposed Regs into something permanent, so although it may well have been the intent of both Congress (with the addition of § 25A(f)(D)) and the IRS (with the issuance of the proposed Regs and the instructions to Form 8863) to allow taxpayers like Ochoa to claim all of their required course materials, the literal text of the applicable section and Regs was never fashioned in the right way to make that happen, unless you count the proposed Regs.

Jeff-Ohio wrote:Proposed Regs were issued on 8/2/16 which changed that. So, these regs were issued when the case was ongoing (petition filed 8/25/15; trial held 10/3/16). If the taxpayer brought this new Reg up to the IRS, or the court, the taxpayer “may” have won on that issue. Note that he went pro se.

As proposed Regs aren't legally binding, I wonder if they would have any weight in court or if Ochoa would have had to argue from another angle that the prior Regs for section 25A did not apply to the AOTC?
 


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