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Knapp v. Commissioner of Internal Revenue

decided: February 6, 1989.

CHARLES L. KNAPP AND BEVERLEY E. KNAPP, PETITIONERS-APPELLANTS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT-APPELLEE



Appeal from a decision of the United States Tax Court determining a deficiency in the appellants' federal income tax for the year 1979. We hold that the tuition assistance payments made by New York University to educational institutions attended by appellants' daughters constituted taxable income to the appellants. We also hold that the Tax Court has jurisdiction to consider the "Fringe Benefit Moratorium" in exercising its authority to determine the appellants' deficiency but that the Moratorium is not applicable in the instant case. Affirmed.

Lumbard, Winter and Mahoney, Circuit Judges.

Author: Winter

WINTER, Circuit Judge:

Appellants Charles and Beverly Knapp appeal from a decision of the Tax Court determining a deficiency in their federal income tax for the year 1979. The dispute concerns the taxability of payments made by Mr. Knapp's employer, the New York University School of Law ("N.Y.U."), to educational institutions attended by the Knapps's children pursuant to a program in which N.Y.U. provided tuition assistance to the children of its faculty members. We hold that these payments did not fall within the scope of the exemption for scholarships provided in Section 117 of the Internal Revenue Code, 26 U.S.C. § 117 (as that section read in 1979). We also hold that the Tax Court's authority to redetermine deficiencies empowers that court to consider the provisions of the "Fringe Benefit Moratorium" ("Moratorium") enacted by Congress on October 7, 1978, Pub. L. No. 95-427, 92 Stat. 996 (1978). The Moratorium does not, however, affect the deficiency in question.

BACKGROUND

The relevant facts are not in dispute. N.Y.U. qualifies as an educational institution under I.R.C. § 170(b)(1)(A)(ii) and is exempt from taxation under I.R.C. § 501(c)(3). In 1976, its law school adopted a policy of providing tuition assistance to the children of its faculty members. This program was administered by the Law Center Foundation ("LCF"), an organization established by N.Y.U. and also exempt from taxation under I.R.C. § 501(c)(3).

In 1979 the LCF program was available to all children of full-time faculty members and administrators with the rank of director, assistant dean or associate dean. To qualify for assistance the child had to be enrolled in a private elementary school, a private secondary school or a college. Neither the child's academic record nor the family's financial resources were considered in providing assistance. The payments were made by LCF directly to the school attended by the child.

In 1979, Knapp was both a tenured professor and an associate dean of the N.Y.U. Law School. By virtue of his positions, his two daughters, Jennifer and Liza, were eligible for, and received, tuition assistance from the LCF. Jennifer attended Swarthmore College while Liza attended the Brearley School. As a result, LCF made the following tuition payments directly to the respective schools:

Date School Amount

January 4, 1979 Swarthmore $2,200

January 4, 1979 Brearley $1,420

August 14, 1979 Swarthmore $2,350

August 14, 1979 Brearley $2,280

Total $8,250

The Knapps did not report this $8,250 as income on their joint tax return filed for the year 1979. The Commissioner, however, determined that the tuition assistance constituted taxable income and issued a notice of deficiency to the Knapps. The Knapps then petitioned the Tax Court for a redetermination of the asserted deficiency. They claimed that: (i) the tuition assistance grants constituted non-taxable scholarships pursuant to I.R.C. § 117 and 26 C.F.R. § 1.117-3(a) (1979); and (ii) because taxes appear never to have been imposed on such payments, the Tax Commissioner was barred from taxing the tuition assistance grants by the "Fringe Benefit Moratorium" enacted by Congress, Act of October 7, 1978, Pub. L. No. 95-427, 92 Stat. 996 (1978), ...


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