Payment of tuition in reference to gift tax

Question

I am looking to make a career change from a software engineer to become a commercial pilot. Becoming a pilot requires a lot of specialized training and therefore is very expensive.

A few years ago my mother died very suddenly and, to cut a long story short, my father has some money in savings from her life insurance plan. He would like to use some of this money to pay for the majority of my flight training.

To complicate it one step further, I now live in the United Kingdom and he lives where I am from in the United States.

I am aware there is a gift tax in the United States. I see there are some exemptions to this rule, notably the payment of tuition. Here is where I would like to receive some clarity.

1. What is the definition of tuition in the eyes of the Internal Revenue Service?
2. Are flight schools considered an educational organization?
3. Is there any restriction on the payment of tuition to an education organization in a foreign country?

I have had a read through Section 2503 of the US Tax Code and it seems very generic. It states there is an

Exclusion for certain transfers for educational expenses ... as tuition to an educational organization described in section 170(b)(1)(A)(ii) for the education or training of such individual".

The referenced section goes on to define an educational organization as

an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on

To which I believe an argument could be made that a flight school meets that definition.

There is no mention in the tax code about foreign organizations so I would take that to mean there is no exclusion.

I would love to know the particulars for the points above if anyone has any specific knowledge.

Answer 1

The exception is for tuition paid directly to the school on your behalf. So room/board/fees/books/etc. don't count. However, he can gift the annual $15,000 (2018) in addition to any amount paid directly for tuition.

There is gray area, for example if a boarding school doesn't separate tuition from room/board the IRS has historically accepted the full amount as qualifying for the exception but they do not explicitly state this is acceptable. It might be easiest to get a sample of the institutions bill to see how things are broken out, if all the 'included' items aren't itemized then based on precedent and lack of IRS guidance you'd probably be fine considering them all tuition.

If that all seems like a hassle, exceeding the $15,000 exclusion doesn't mean he'll owe gift tax, it just triggers a filing requirement to document the gift and it will count against the much larger lifetime exemption ($5.6M currently). Only when exceeding the lifetime exemption would he be required to pay gift tax. The amounts are doubled if you are married.