DocketNumber: Docket No. 1457-75
Citation Numbers: 67 T.C. 630, 1977 U.S. Tax Ct. LEXIS 167
Judges: Dawson
Filed Date: 1/10/1977
Status: Precedential
Modified Date: 1/13/2023
1977 U.S. Tax Ct. LEXIS 167">*167
67 T.C. 630">*630 OPINION
Respondent determined a deficiency of $ 344.59 in petitioner's Federal income tax for the year 67 T.C. 630">*631 1969. Petitioner concedes that he is not entitled to a dependency exemption for his son. The only issue for decision is whether petitioner provided at least one-half his support during the taxable years 1965 to 1968, inclusive, thus entitling him to compute his 1969 Federal income tax liability according to the income averaging provisions of
This case was submitted for our decision under1977 U.S. Tax Ct. LEXIS 167">*169
Petitioner Richard Sharvy was a legal resident of Eugene, Oreg., at the time of filing the petition herein. He filed a 1969 Federal income tax return and an amended return for that year with the Internal Revenue Service at Philadelphia, Pa., utilizing the income averaging provisions of
In 1965 petitioner was 23 years old and a full-time student, a status he held from 1963 through June of 1968. He did not file a Federal income tax return in 1965.
Petitioner received no support from his family during the years 1965 through 1968, and he was not claimed as a dependency exemption by his parents for those years.
Petitioner was married, but lived apart from his wife, during the taxable years 1965 and 1966. He obtained a divorce during 1967.
In 1966 petitioner and his wife filed a joint Federal income tax return. All of the income reported on that tax return was earned by his wife, Victoria Sharvy.
Petitioner attended Wayne State University (hereinafter1977 U.S. Tax Ct. LEXIS 167">*170 W.S.U.) in Detroit, Mich., from the fall of 1964 through June of 1968. During this period he received National Defense 67 T.C. 630">*632 Education Act (NDEA) fellowship funds in approximately the following amounts:
1964-65 | school year | $ 3,400 |
1965-66 | school year | 3,600 |
1966-67 | school year | 3,800 |
One thousand dollars of the NDEA fellowship received each school year represented stipends paid as dependency allowances for petitioner's wife, Victoria, and son, Peter Sharvy. Petitioner forwarded to his wife the $ 1,000 received during each of the 3 school years to help support her and their son, Peter.
From September 1967 through June 1968 petitioner was employed as a teaching assistant at W.S.U. During this period he received $ 1,000 per quarter for teaching. He also obtained student loans of $ 1,500 and $ 400 in June 1966 and December 1967, respectively. During a portion of 1968 petitioner served as an assistant professor at W.S.U. and received a salary of $ 2,833 for services rendered.
In summary, the total amounts received by petitioner during the years 1965 through 1968 were as follows:
*4*Calendar years | ||||
1965 | 1966 | 1967 | 1968 | |
Student loans | $ 1,500 | $ 400 | ||
NDEA fellowship: | ||||
1964-65 school year | $ 2,267 | |||
1965-66 school year | 1,200 | 2,400 | ||
1966-67 school year | 1,267 | 2,533 | ||
W.S.U. -- teaching assistant | 1,000 | $ 2,000 | ||
W.S.U. -- assistant professor | 2,833 | |||
Interest income | 54 | |||
Totals | 3,467 | 5,167 | 3,933 | 4,887 |
Less amounts disbursed to wife and | ||||
son for support | 1,000 | 1,000 | 500 | -- |
Net amount received | 2,467 | 4,167 | 3,433 | 4,887 |
1977 U.S. Tax Ct. LEXIS 167">*171 Petitioner treated all amounts received from his NDEA fellowships and all amounts received from his 1968 teaching assistantship as nontaxable income. As a result these amounts were excluded by petitioner in computing his gross income and, thus, were omitted on his income tax returns. The assistantship funds were treated as nontaxable income under
For the taxable years 1965 through 1968, petitioner filed returns and reported taxable income as follows:
1965 -- No return filed.
1966 -- Taxable income of $ 1,925.92 reported on joint return filed with wife. All reported taxable income attributable to petitioner's wife.
1967 -- Return filed, no taxable income reported.
1968 -- Return filed reporting taxable income of $ 1,987, computed as follows:
Gross: | ||
W.S.U. teaching | $ 2,833 | |
Interest income | 54 | |
Total | 2,887 | |
Less: | ||
Exemption (1) | (600) | |
Minimum standard | ||
deduction | (300) | |
Taxable income | 1,987 |
The Internal Revenue Service did not audit petitioner's 1966, 1967, and 1968 Federal income tax returns. No adjustments1977 U.S. Tax Ct. LEXIS 167">*172 were made and no statutory notices of deficiency were issued by the Internal Revenue Service for these years.
On his 1969 income tax return, petitioner reported $ 8,833.32 as income from wages. This amount was received as compensation for teaching during the calendar year 1969 at W.S.U. and at Swarthmore College, Swarthmore, Pa.
Petitioner and respondent are in agreement, for purposes of this case, (1) that the net amounts set forth in this case were expended for and constitute petitioner's total support during each of the base period years; (2) that, based on petitioner's 1968 wage income, he provided at least one-half of his own support for that year; and (3) that the fellowship and teaching assistantship were properly excluded from gross income.
Petitioner contends that when a "no-strings," tax-exempt fellowship is provided by a grantor to an individual, these fund become the property of the grantee to do with what he wishes. When these funds are later expended for support items, they constitute support furnished by the recipient, and not by the grantor, since the funds were originally unrestricted. Applying this standard, petitioner concludes that 67 T.C. 630">*634 the NDEA fellowships1977 U.S. Tax Ct. LEXIS 167">*173 he received during 1965, 1966, and 1967 were not specifically provided for his support. Thus, petitioner argues that the support items acquired with these funds do not constitute support provided by the grantor, but instead represent support which petitioner provided himself.
Respondent rejects that contention and asserts that because the fellowship amounts were properly excluded from gross income, they represent disinterested, "no strings" educational grants within the rationale of
1977 U.S. Tax Ct. LEXIS 167">*174 We agree with respondent. Our holding is based on the legislative history underlying the income averaging provisions, the nature of the NDEA grant, and the application of those funds in this case.
A taxpayer cannot avail himself of these provisions merely by meeting the taxable income requirements of the base period years and computation year.
A general averaging provision is needed to accord those whose incomes which fluctuate widely from year to year the same treatment accorded those with relatively stable incomes. Because the individual income tax rates are progressive, over a period of years those whose incomes vary widely from year to year pay substantially more in income taxes than others with a comparable amount of total income but spread evenly over the years involved. This1977 U.S. Tax Ct. LEXIS 167">*176 occurs because the progressive rates take a much larger proportion of the income in taxes from those whose incomes in some years are relatively high. The absence of any general averaging device has worked particular hardships on professions or types of work where incomes tend to fluctuate. This is true, for example, in the case of authors, professional artists, actors, and athletes as well as farmers, fishermen, attorneys, architects, and others. [H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 234; S. Rept. No. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 644.]
Committees of both the Senate and the House of Representatives stressed that, to be eligible for income averaging, a major concern is that the individual's income must have been subject to Federal income tax throughout the 4 base period years as well as the computation year. House Ways and Means Committee, H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125; Senate Finance Committee, S. Rept. No. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505.1977 U.S. Tax Ct. LEXIS 167">*177
67 T.C. 630">*636 Congress recognized the harshness of an objective standard which has the effect of limiting the averaging treatment to the labor force, and it approximated this result in some cases:
The general rule provides that the individual and his spouse must have furnished one-half or more of his own support in each of the base period years. However, it was not intended to exclude from the benefits of the averaging provision an individual who, although in the labor force, was unemployed in part or all of the base period years. * * * [H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 125, 238; S. Rept. No. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 648.]
Congress then proceeded to carve out three exceptions, now codified in
We note the declared intent of Congress to limit the income averaging benefits only to those individuals who, because of the nature of their business, trade, or profession have incomes which fluctuate widely from year to year. This income must have been subject to tax throughout the base period as well as the computation year. Contrary to this declared intent we find petitioner, as a full-time student, received substantially all of his income in 3 of the base years in the form of tax-exempt fellowships under
We also note that Congress set forth specifically only three exceptions to this restriction. Petitioner in this case was a full-time student for all but one of the taxable years beginning after he attained age 21 and ending with the 1969 computation year, performed work in the computation year which was applicable to taxable income for that year, and filed a separate return for 1969 -- all characteristics which preclude him from the stated exceptions in 1977 U.S. Tax Ct. LEXIS 167">*179
Thus, in view of this legislative history, the specific exemptions in the Code, and the determinations of fact in this case, we hold that petitioner is not within the intended scope of an individual for whom the legislative grant of relief was intended.
Notwithstanding this underlying theory, however, the support test is not synonymous with an "entering-the-labor-force" test. In fact, there is no all-encompassing definition of the word "support" in the Code. The regulations consider various items as support, including food, shelter, clothing, medical and dental care, and education,
Moreover, support does not bear upon earned or taxable income; it pertains only to the amount of expenses incurred.
To determine if an individual has furnished more than half of his support during a base year, "the rules of
Because the regulations specifically recognize that a taxpayer can furnish his own support out of excludable income, petitioner equates his NDEA fellowships to a general category of excludable income by an individual which is attributable to support furnished by him -- for1977 U.S. Tax Ct. LEXIS 167">*181 example, veteran's educational benefits, interest on State and municipal bonds, unemployment 67 T.C. 630">*638 compensation, and social security. He reasons that his fellowship funds, as the exempt benefits mentioned above, are also not Government support payments or welfare benefits, and are not funds based on need or required to be spent on support.
We find this argument unpersuasive on three grounds. First,
Secondly, the NDEA fellowship grants themselves do not sustain petitioner's position that these funds are unrestricted and are not provided for support. The National1977 U.S. Tax Ct. LEXIS 167">*183 Education Act of 1958 provides for fellowships "to be used for study in graduate programs at institutes of higher education." 5 The recipient must devote full time to and maintain satisfactory progress in the field for which the grant was awarded. He may not accept gainful employment other than occasional part-time employment by his institution to teach or do research. 667 T.C. 630">*639 Practically speaking, therefore, these fellowship funds and accompanying restrictions afford the recipient the opportunity of concentrated study in a chosen academic field by alleviating some of the accompanying economic stress inherent in producing funds for scholarly pursuits. Thus, in our judgment, the purpose of these fellowship grants is to provide financial encouragement for those who fall within the educational requirements of the Act.
Thirdly, petitioner attempts to transmute funds given by a 1977 U.S. Tax Ct. LEXIS 167">*184 grantor into support he provided by and for himself. We find the initial characterization of the funds -- a grant -- to be controlling. Inasmuch as the grants (and in 1967, the teaching assistantship) constitute petitioner's total support during the 1965, 1966, and 1967 base years, there is no question that petitioner spent those NDEA stipends in a manner consistent with the intention of the grants. Consequently, the NDEA fellowships were not support provided to petitioner by himself.
On brief petitioner lists a series of examples to demonstrate a two-step process in determining support. After designating support as either direct (food, clothing, shelter) or indirect (money), he further subdivides indirect support into two nontaxable categories. The first indirect category requires that the payment be expressly used by an individual as support for another person, usually in parent-child situations, such as welfare payments. The second indirect category includes payments for which no requirement is made to account for amounts spent, such as unemployment compensation.
Petitioner points out that under the first indirect category, funds given by a grantor and received by an individual1977 U.S. Tax Ct. LEXIS 167">*185 for the benefit of a third person constitute support by the grantor. Thus, benefits received by a mother from the State as Aid to Families with Dependent Children (AFDC) and medical assistance were held to constitute support furnished by the State and not the mother.
Petitioner argues that under the second indirect category, however, an amount given to an individual without any requirement that the amount be spent on support (for any third person) is considered support furnished by the individual 67 T.C. 630">*640 recipient. Thus, social security payments received as old age and disability insurance benefits and used by the recipient for support constitute support furnished by the recipient. 7 Using the above logic petitioner concludes that his fellowships were unrestricted, indirect support payment of the second category attributable to support furnished by himself.
1977 U.S. Tax Ct. LEXIS 167">*186 We find petitioner's dichotomization of support to be specious. Petitioner confuses the support issue by avoiding the question of who is the intended beneficiary of the grant. In the AFDC situation, for example, the children are the intended beneficiaries of the State's payments, even though the payments are given to the parent. Here the two-step analysis is permissible: State to parent, parent to child. In the NDEA situation, however, the scholar is the intended beneficiary of the grant. Here a two-step approach is not logically appropriate. Petitioner argues that he supports himself, in effect, by transferring the money received from the NDEA fellowship grant in his left pocket to his right pocket. Such a transmutation would vitiate the support rule under
Were we to accept such a contention, we would make nugatory the support rule limitations; i.e., anyone could become eligible for income averaging merely by claiming he "supported" himself by using "unrestricted" gifts from family, friends, or institutions.
A major case involving the support test for income averaging is
67 T.C. 630">*641 The Court stated that Heidel "cannot have it both ways"; that is, he "was on the horns of a dilemma" because he could not exclude a grant-in-aid from gross income as a bona fide scholarship in one year and then, in a later year, claim he earned it in return for his services in order to include it in support furnished by Heidel for himself. In deciding that the funds were not attributable to work performed by Heidel, the Court held that the value of the scholarship did not constitute support furnished by Heidel1977 U.S. Tax Ct. LEXIS 167">*188 for himself within the meaning of
While there are differences between the
if the value of the grant-in-aid is to qualify as a scholarship and excludable from income, it must be considered as having been furnished by the university as a "no-strings education grant" and could not be considered support furnished by petitioner for himself.
Petitioner cannot have it both ways. We believe that * * * it1977 U.S. Tax Ct. LEXIS 167">*189 is more consistent with the ordinary understanding of athletic scholarships and the spirit and intent of Congress in requiring generally that an individual provide at least 50 percent of his support in the base period years to qualify for income averaging to conclude that the value of the grant-in-aid afforded to petitioner in 1961 cannot be included in the amount of support furnished by petitioner for himself within the meaning of
We reach the same conclusion in this case since petitioner and respondent both agree that the fellowships and teaching assistantship were properly excludable from income under
Petitioner seeks to distinguish
These are distinctions without a difference. In both cases the grants were made for the purpose of providing support, so it is irrelevant that the support was provided in kind or in cash. The fact that Heidel's parents provided him with support or claimed him as a dependency exemption in the base period is immaterial since this circumstance goes to the mathematics of the support rule and, therefore, has little bearing on the issue for decision -- whether an individual employing income averaging can attribute tax-exempt education funds given to him as support furnished by himself.
Furthermore, scholarships and fellowships are treated in a like manner for purposes of
We conclude that the amounts received by petitioner from NDEA fellowships and a teaching assistantship, which were excludable from gross income, do not constitute support which he furnished himself. Since these funds were expended for and constitute petitioner's total support during 1965, 1966, 67 T.C. 630">*643 and 1967, he did not provide over half his support in those base years. Consequently, petitioner is not an eligible individual within the meaning of
1. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable years involved, unless otherwise indicated.↩
2. A different result would follow if the fellowship funds had been paid to petitioner as compensation for services. Because compensatory proceeds represent amounts earned by petitioner, his expenditure of such amounts on support items would constitute support which he provided for himself.↩
3.
4. See
5.
6.
7. See
8. Heidel also made an unsuccessful attempt to come within the major accomplishment rule exception to the support test.↩