The Catholic University of America

TAX

 

Qualification as Scholarship/Fellowship?

Q. School rewarded a student from a donor gift fund at time of graduation. All bills had been paid by student, so amount of "scholarship" was given in cash. Does this still qualify as a "tax free scholarship" given the timing?

A. To be nontaxable, the scholarship must meet the three requirements of section 117 and it seems that this payment fails to meet two of the three requirements.  Specifically, the payment is not for "Tuition and fees required for enrollment or attendance at the university," since the individual, at graduation or after, is no longer enrolled in or attending the university.  Also, the individual is not a "candidate for a degree" since the individual is receiving his/her degree at the same time as being awarded the scholarship. 

Moreover, the amount given to the student/graduate is not to assist the individual in pursuing his/her studies, it is more in the nature of an award.  If there is no requirement that the individual use the "scholarship" to pursue additional classes in a degree granting program, I would suggest that this be treated as an award, not a scholarship.  

I researched "117 and retroactive scholarship" in private letter rulings and nothing came up.  My sense is that, possibly, a scholarship could be nontaxable when awarded retroactively only while the individual is enrolled, attending the university and is a candidate for a degree, but not after.

Answer to this question courtesy of Thomas Arden Roha, Esquire, law firm of Roha and Flaherty and outside tax counsel to CUA.

Status of the University under the Tax Code 

Q. Is the University also qualfied under Section 509(a)(1) of the Tax Code?


A. CUA is 501(c)(3) and 509(a)(1). The reason is that 501(a)(1) incorporates the subsections of section 170(b)(1)(A), and subsection 170(b)(1)(A)(ii) defines, "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. . ."

That in essence defines a private college or university and is the language that allows private colleges and universities to qualify as public charities rather than private foundations.

Virtually every private college of which I am aware considers itself to be 501(c)(3) and 509(a)(1) by reason of 26 U.S.Code 170(b)(1)(A)(ii).

 
Answer to this question couresy of Thomas Arden Roha, Esquire, law firm of Roha and Flaherty and outside tax counsel to CUA. 
 

Taxability of housing provided for a graduate student doing research for her PhD while working on a grant

Q. The University plans to rent an apartment for a graduate student who is doing research for her PhD. The research is in part funded by an NSF grant, and the student is a participant on the project. The student needs to do this research to obtain her PhD and needs to be in a remote location away from home so that she can be at a particular facility.  When an employee travels for work, the university does not treat lodging as taxable income. Is it different for the student in this situation?

A. The value of the rent paid by the University for the apartment for the student is taxable to her. This is so regardless of whether the apartment is in the name of the University or in the student's name. For the rent not to be taxable, it would have to qualify as a scholarship or fellowship. The scholarship or fellowship taxability rules were changed significantly in 1986. Under the post-1986 rules, a scholarship or fellowship is nontaxable only to the extent it applies to tuition, fees, books, supplies and equipment. The value of free or reduced fare travel and lodging no longer qualifies as a scholarship or fellowship and is thus taxable to the recipient. See IRS Publication 970 entitled Tax Benefit for Education. In this situation, the primary purpose of the travel is for the student to pursue her degree. The University does not have to withhold tax in this situation.

Answer to this question courtesy of Thomas Arden Roha, Esquire, law firm of Roha and Flaherty and outside tax counsel to CUA.

Obligation to Withhold state income Taxes outside the jurisdiction in which the Employer is located

 Q. Must CUA withhold West Virginia income taxes on the wages of a CUA employee residing in West Virginia? 

A. You asked whether CUA must withhold W. Va. income tax on the wages of a CUA employee residing in West Virginia. You asked us to review, also, the laws of Pennsylvania and Delaware in anticipation of the possibility that a resident of those states, too, may work at, and receive wages from, CUA in DC.

There is no obligation imposed on a DC employer to withhold state income tax on employees in DC who reside outside of DC if CUA does not have a place of business in the other jurisdiction(s). You indicated that the practice of the University has been to withhold Md. and Va. income tax on CUA employees who reside in those states. This could be a voluntary practice of CUA, or it could be because CUA has places of business in those states. Nonetheless, even without a place of business in those states, it is legally permissible, although not legally mandatory, for CUA to withhold Md. or Va. income tax on the wages of employees who reside in those states. Many employees appreciate the University doing so since, without the University withholding state income tax, the employee would have to pay state estimated tax to those states where he/she resides.

Since the only legal obligation of the University is to withhold income tax for those states in which it does business, and since CUA does not have a facility in West Virginia, Pennsylvania or Delaware, CUA does not have to withhold West Virginia, Pennsylvania or Delaware income tax on the wages of CUA employees who reside in those states. It may do so voluntarily, but it has no obligation to do so.

For CUA employees residing in those states, CUA should have them prepare a DC Certification of Nonresidency; the form for them to so is DC Form D-4A. This form need not be filed with DC, but rather should be maintained by the University to justify the University not withholding DC income tax on the wages of that employee.

As a service to those employees, the University could advise them that they must pay estimated income tax to W. Va., Pa., an Del. Those vouchers are filed quarterly and the forms can be secured from the West Virginia, Pennsylvania or Delaware income tax office or online. Here are the vouchers for West Virginia. Here are the vouchers for Pennsylvania. Delaware requires that individuals call for vouchers, the number being 302-577-8588 or 1-800-292-7826 (Delaware only). It is possible in Delaware for an individual to file and pay estimated tax online.

Answer to this question courtesy of Thomas Arden Roha, Esquire, law firm of Roha and Flaherty and outside tax counsel to CUA.

 

 

Failure to Timely Enroll Employee in Pension Plan

Q. An employee became eligible to participate in the retirement plan and signed up for the plan. Due to an innocent mistake, the university failed to enroll her for some months. How should the University correct this?

 

A. Both the Department of Labor and the Internal Revenue Service have programs in place where an employer can self-correct administrative errors without giving either governmental agency notice if certain conditions are met. Since this is an administrative error, and not a breach of fiduciary duty (i.e., pay withheld but not paid over to plan), so long as the error is corrected in accordance with the IRS program, DOL will be satisfied. See the IRS self correction program set forth in Revenue Rrocedures 2006-27 and 2008-50. In essence, the University must:

1. Make the employer contribution retroactively to the date the employee was mistakenly excluded.

2. The University too must make the employee's contribution over that time period. The self correction program gives the University the option of making only 50% of the employee's contribution if it wishes to do so. The theory is that the employee actually received the money and did not notice it was not being contributed to the plan. Even if the University contributes only 50% of the employee's contribution, no additional amount would be contributed by the employee.

3. The University must increase its contribution to reflect investment gains, if any, that would have been earned had the contributions been made in a timely manner. The University may, if it wishes to do so, reduce its contributions to reflect losses in the plan from the error date to the date of contribution. In either case, the University must keep careful records to show the accuracy of the calculation of the contribution.

4. The University should, of course, initiate regular contribution as of the employee's next paycheck.

5. No reporting, or disclosure, of this error and the correction to the IRS is required.

Answer to this question courtesy of Thomas Arden Roha, Esquire, law firm of Roha and Flaherty and outside tax counsel to CUA.
 

 

Providing Information to Political Candidates

Q. Can a school or charity provide information to a candidate if asked by the candidate without violating the IRS rules on political activity?

A. Yes, if a candidate requests information on a specific issue from a school or other organization, such information may be provided without being treated as proscribed political activity. Generally, providing information to political candidates will not violate rules prohibiting participation in political campaigns. However, if the organization provides the information to the candidate at its own initiative, then the organization should review factors listed in Rev. Rul. 2007-41.

This information was provided at a recent IRS presentation. The answer to this question is posted courtesy of Bertrand M. Harding, Jr. of the Law Offices of Bertrand M. Harding, Jr.

Charitable Deductions for Volunteer Services

 

Q. Occasionally an alumnus or other friend of the university will ask whether they can expect to be able to take a charitable deduction on their income tax return for the value of their services donated to the university.

 

A. Federal tax law does not permit such a deduction, although the donor may be entitled to a deduction for unreimbursed expenditures made incident to the provision of such services. For example, reasonable expenditures for meals and lodging necessarily incurred while away from home in the course of rendering donated services are deductible. (see 26 CFR 1.170-2)

 

Q. Would the answer change if instead of being a volunteer, it was a University employee who incurs expenses in the context of his or her work, which expenses are reimburseable but are not reimbursed by the University? May the employee deduct those expenses as a charitable contribution to the university? Assume the question arises in the context of an employee who travels for the University and incurs expenses for that travel that the University would reimburse if he/she submitted them, but which were not reimbursed because the employee elected not to submit them.

A. Treasury Regulation section 1.170-2(a)(2) provides for the deduction of certain expenses incurred in rendering charitable services. The section provides in part: "No deduction is allowable for contribution of services. However, unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution.... [O]ut of pocket transportation expenses necessarily incurred in rendering donated services are deductible." [emphasis added].
To be deductible, the expenses must be incurred in the context of providing volunteer, i.e., donated, services. There is no authority allowing for the charitable deduction of expenses incurred incident to the performing of services for a charitable entity as an employee (other than as discussed below).

All employees are entitled to deduct "unreimbursed employee business expenses" on Schedule A of the Form 1040. To deduct those expenses, the employee must prepare and file Form 2106 with his or her income tax return. The Form 2106 and this explanation discuss requirements for qualifying for the deduction. The disadvantage of this treatment is that employee business expenses along with other miscellaneous deductible expenses are deductible only to the extent they exceed 2% of the taxpayer's adjusted gross income.
The reason for the distinction between charitable expenses and employee business expenses is that for employees of charitable entities like the university, the expenses are incurred in the context of the employee's business of being an employee, not in the context of charitable service.

In the future, the employee could seek reimbursement from the University for such expenses and then contribute the amount reimbursed as an actual charitable contribution.
Answers to these questions regarding charitable deductions for volunteers courtesy of Thomas Arden Roha, Esquire, law firm of Roha and Flaherty and outside tax counsel to CUA.

President Attending Candidate Debate

Q. We are a private college. Our president has been invited to sit in the audience for the next CNN debates (both parties). There will not be any opportunity to state "this is not an endorsement." Any problems with the IRS regulations?

A. Not if the president is a passive attendee/audience member. Here is an excerpt from the most recent IRS posted pronouncement pertaining to political involvement by leaders of tax-exempt organizations:

Individual Activity by Organization Leaders
The political campaign intervention prohibition is not intended to restrict free expression on political matters by leaders of organizations speaking for themselves, as individuals. Nor are leaders prohibited from speaking about important issues of public policy. However, for their organizations to remain tax exempt under section 501(c)(3), leaders cannot make partisan comments in official organization publications or at official functions of the organization.

To avoid potential attribution of their comments outside of organization functions and publications, organization leaders who speak or write in their individual capacity are encouraged to clearly indicate that their comments are personal and not intended to represent the views of the organization.

There are examples and other info available from the IRS Fact Sheet (FS-2006-17, February 2006). See, also, the IRS webpage dedicated to political activity or involvement by tax-exempt entities, along with links to helpful information. Answer courtesy of Sean P. Scally University Counsel and Tax Attorney Vanderbilt University

Congressional Research Service Publication: FAQs about Tax Exempt Organizations

Updated March 2003: Covers such issues as how to set up a tax-exempt organization, how to obtain information about a tax-exempt organization, and the limits on lobbying and political activities.

 

Taxation: Use of Bond Funded Dormitories

Q: An outside organization with the purpose of creating educational programs for high schoolers wants to rent dorm space on our campus this summer. Can these students be housed in facilities built with money from tax exempt revenue bonds?

 

A: Because of the high risk in this area, the rule I have adopted is that there must be a Rev. Rul. or a Private Letter Ruling supporting a particular use of the bond-funded dormitories. I have not found authority for leasing bond-funded college dormitories to high school students without University participation in the educational program. In my view, it might be legally permissible, and the school might be able to get a ruling on it, but I have not found support for it in existence right now, so under my rule, its out. I have found authority for leasing facilities to high school students where there is University participation in the educational program. Thus, I would think that if the University actively participates in the educational component of the program, income from the lease of the dormitories would be related.

Second, there must be a university educational purpose advanced by the lease. That is clearest where the University puts on all or part of the educational program. One PLR suggests, however, that the university does not have to participate in the educational programming so much as the university must actively monitor the educational activity and reasonably conclude that it advances the university's educational purpose. See, e.g., PLR 9014069 wherein leasing dormitories to summer interns and to for-profit entities was related where the educational activity is consistent with the university's educational purposes. Even though the ruling sanctioned leasing to for-profits, doing so is beyond my comfort level at this point.

Answer courtesty of Thomas Arden Roha, Esquire, Roha and Flaherty


 

Taxation: UBIT
Q: Does the sale of exclusive broadcasting rights to a collegiate sporting events constitute UBIT?

A. No, the broadcasting of these events promotes amateur sports, and contributes importantly to the organization's exempt purpose. An athetlic program is considered an integral part of the educational process of a university. See IRS Publication 598, Tax on Unrelated Business of Income of Exempt Organizations, page 4.

 

Taxation: Donation receipts from student organizations

Q. Several of our student organizations have asked if the university can issue donation receipts for gifts given directly to them. Some are "independent" organizations, others are chapters of national 501(c)(3)'s (but the national organizations are refusing to issue donation receipts unless they handle the money). Does anyone have a policy on this? I'm sure that it would be acceptable for the University to accept the donation and then transfer the money to the student organization, but it would be easier to cut out the middleman on small gifts. (I assume this is coming up now because, as of 2007, ALL donations have to be receipted in order to be claimed on a tax return.)

A. You are correct about the receipt requirement to substantiate any claimed charitable contribution deduction for the 2007 federal income tax return per the recordkeeping obligation in IRC 170(f)(17), as amended by the Pension Protection Act of 2006. But for the charitable institution to issue such a gift receipt, it has to be (not surprisingly) in receipt of the donation. In other words, the charity cannot give a gift receipt for a donation received by another charity. No way to "cut out the middleman" on such an arrangement; the "middleman" is what provides the basis for the charity's authority to issue the receipt.
Answer courtesy of Sean P. Scally University Counsel and Tax Attorney Vanderbilt University

Charitable Deductions for Donations to Student Organizations

Q: We have a student organization (which is not a separately incorporated entity). The members of this student organization raise money so they can go on service trips to developing countries. If a donor contributes to a student to pay for the expenses of the service trip, can the University issue a charitable acknowledgment for the contribution? If the donor contributes to the student group as a whole (and not to one particular student member), can the University issue a charitable acknowledgment for the contribution?

 

A. Under the factual scenario described by the poster, all such contributions are deductible under IRC 170(a) for which a gift receipt should be issued. The same answer applies for either a private school (recognized as a nonprofit public charity under IRC 501(c)(3); see, also, IRC 170(c)(2)(B)) or for a state institution (exempt under IRC 115; see, also, IRC 170(c)(1)). Note: According to the poster's facts, the student group is part of the University; such an institution exists, and qualifies for, its federal exempt status as a public charity because of the educational services it provides the students. Thus, a charitable contribution to the exempt University which is used, in turn, to further the educational experience of the students meets the "use" test needed for a contribution to qualify as tax-deductible. You will find the specific language in the referenced federal Tax Code citations.

If the donor makes the gift directly to the student for the purpose of paying for the trip, the gift would not be considered a charitable donation for tax purposes. A requisite condition/element of a deductible charitable contribution is that it be made "to or for the use of" the public charity (IRC 170(c)(2)(B)) or a state institution (IRC 170(c)(1))

Answer courtesy of Sean P. Scally University Counsel and Tax Attorney Vanderbilt University

 

Taxation: Reporting Obligations with Respect to Foreign Bank Accounts

Q:Our school just opened a bank account in another country in connection with a study abroad program. What reporting obligations might this trigger?

 

A. First, for those entities submitting IRS Form 990-T, the organization must identify the country where it has an interest in or signature or other authority over a financial account (including a bank account, securities account "or other financial account"). Part V, Line 1.

Second, any person who has signatory authority over a financial account in a foreign country with an aggregate value of $10k or more must prepare and submit TD F 90-22.1, Report of Foreign Bank and Financial Accounts, on or before June 30 in the succeeding year that the account was created and reaches the minimum value threshold. The form is to be submitted independent of any tax return to the US Dept. of the Treasury's office in Detroit, Michigan (the address and other information can be found on the form and the related instructions). Failure to file is subject to a penalty up to $10k. The form and instructions are available from the IRS website (in PDF).

Third, while Form TD F 90-22.1 is submitted independent and separate from any other tax return, the individual's IRS Form 1040 contains a line requesting disclosure of the existence of such a foreign account.

Specifically, Line 7a of Part III of Schedule B (titled "Foreign Accounts and Trusts") to the IRS Form 1040 for 2005 provides: "At any time during 2005, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?" If so, the filer is required to check the "yes" box and then, on Line 7b, identify the name of the foreign country. Note: if anyone is required to make this disclosure, the filer cannot use Form 1040EZ or 1040A but must, instead, file a full-blown Form 1040 because (at a minimum) this portion of Schedule B must be prepared and submitted; the shorter Forms 1040 (EZ and A) do not allow for the filing of Schedule B.

Note that some groups or associations, including NACUBO, are trying to add an exception to the reporting requirement for employees of tax-exempt entities (similar to the exception extended to officers/employees of US corporations that have either securities listed on a national exchange or those corps. with assets exceeding $10m and at least 500 shareholders), but that effort has, as yet, been unfruitful.

Answer courtesy of Sean P. Scally University Counsel and Tax Attorney Vanderbilt University

Taxation: Substantiating Unreimbursed Expenses

 

Q: How should university should go about substantiating a gift to the university of payment of unreimbursed expenses, in this case payment of a catered event?

A. When a donor makes a single contribution of $250 or more in the form of unreimbursed expenses and wishes to take a deduction for this expenditure, the donor must obtain a written acknowledgment from the organization. The acknowledgment should contain the following:
A description of the services provided by the donor;
A statement as to whether or not the organization provided goods or services in return for the contribution;
A description and good faith estimate of the value of the goods or services, if any, that an organization provided in return for the contribution;
A statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

The donor must maintain adequate records of the unreimbursed expense, which for a contribution of $250 or more is simply the letter from the organization as described above. The timing is that the letter must be obtained by the earlier of the date the tax return for the applicable year is filed, or the due date, including extensions, for filing the return. The records to be kept if the contribution is less that $250 are described in IRS publication 526, Charitable Contributions. The source of this information was an IRS publication entitled Charitable Contributions. For more on substantion and disclosure provisions, as amended by the Pension Protection Act of 2006, see here.

Q: The music school is traveling to Europe for concerts and has asked some members of a private chorus group to travel and assist with the chorus. The private non-student individuals will pay all of their own expenses, directly to the travel agency. One of these private individuals has asked the university to give him a letter indicating that his services on the concert tour are a contribution in kind. Can we do that?

A. If all of the trip is being devoted to University business, i.e., singing, travel, meeting people as representatives of the University, and the like, then the non-university individuals from the private outside chorus group who are assisting the University should be given a charitable gift receipt stating that (1) they contributed $ [their cost for the travel] to the University, or (2) incurred $ [their cost for the travel] in expenses in serving the University (if they paid the travel agent directly), and received no goods or services in return.

If a portion of the trip will not be related to University business, i.e., a portion being sight-seeing or personal recreation, then the non-university people will have to be told on the receipt the value of the good or services they received in return, which would be the value of the portion of the trip that was sight-seeing, personal recreation, or otherwise not related to University business.
 
Taxation: Resident Assistant Room & Board and Stipend

Q: An institution hires an R.A. and provides free room and board and a stipend to be used for tuition. Are these benefits income to the student and thus taxable?

A:Assuming the institution treats the RA as an employee, the poster should take a gander at IRC 119(a) to determine if the lodging meets the gross taxable income exclusion under the "convenience of the employer" test (lodging furnished on the business premises, for the convenience of the employer, and required as a condition of employment. Treas. Reg. 1.119-1(b)) or, if not, if the arrangement could meet the "qualified campus lodging" test under IRC 119(d) (so long as employee pays rent that equals/exceeds 5% of the appraised value; if not, taxable income is the difference between the rent paid (if any) and the lesser of (1) 5% of the fair market value of the lodging or (2) the average rent paid by individuals not affiliated with the institution for lodging provided by the institution that is comparable to the lodging provided to the employee). I am suspecting that the poster will go for door number one.

The convenience of the employer standard can also apply to meals (eating places near the work are scarce, other valid business reasons can be shown as to why employee must remain on premises, etc). Treas. Reg. 1.119-1(a)(2). To the extent a stipend is compensation for any services, the payment is subject to withholding/reported on IRS Form W-2 (but probably exempt from FICA under IRC 3121). As for whether the stipend is taxable income to the recipient, that will depend on whether it is excludable under some provision of the Tax Code (e.g. a qualified scholarship under IRC 117(a) but note the limit in IRC 117(c) if any "service is required as a condition for receiving the qualified scholarship").

Answer courtesy of Sean P. Scally University Counsel and Tax Attorney Vanderbilt University

CUA addition to Sean Scally's answer: As to meals, see also Bob Jones University v. U.S. (1982) 229 Ct Cl 340, 670 F2d 167, holding that free meals for dormitory counselors are for convenience of employer where counselors are required to be on duty 24 hours per day and could not perform their duties if they were to reside off campus. For more on taxability of scholarships and fellowships in general see the CUA fedlaw page on Scholarships and Fellowships.

Taxation: Contribution for Right to Purchase Athletic Event Tickets

Q:A question regarding IRC 170(l), which appears to state that a charitable contribution can be required by a tax exempt as a condition for the right to purchase athletic game tickets at the tax exempt's home facility, though the donor will only get 80% credit for the contribution. My threshold question: is this as straight forward as it appears? Are there pitfalls that may need to be avoided in creating a system that takes advantage of this section? If such a requirement is put into place, would there be a problem for the tax exempt to "waive" the mandatory contribution for certain donors who have made other, unrelated significant contributions to the institution? Would this possibly cause the donor problems with the "full" deductibility of his "other" contribution?

A:The accurate response would be that IRC 170(l) is, indeed, as straightforward as it looks. This provision was added by the Technical and Miscellaneous Revenue Act of 1988 to relieve colleges and universities of the burden of trying to value the right to purchase such tickets; now, if any charitable contribution contains a right to purchase seating at an athletic event in an institution's facility, 80% of the payment is treated as a deductible charitable contribution while the remaining 20% is, automatically, the non-deductible value of the right (the ticket purchase itself is not, of course, a deductible charitable contribution). According to the Congressional Conference Report describing the reason for the provision, the rule applies whether or not the tickets are, in fact, purchased or if the tickets would have been readily available to the taxpayer without making the payment. Cong. Record, p. S12356 (9/12/1988). If the "right to purchase" is not provided to the donor, then no reduction in the value of the charitable contribution is required.
Note that the statute clarifies in applicability by stating that if the donor receives the purchasing right "directly or indirectly," then the charitable contribution is subject to the 20% haircut. IRC 170(l)(2)(B). For this reason, the institution must take care to be clear with the donor that the gift does not provide the donor with any right to purchase the tickets in order to avoid the gift's reduction in value.
Answer courtesy of Sean P. Scally, University Counsel and Tax Attorney, Vanderbilt University

 

Donation in Lieu of Salary?

 

Q: We pay emeritus faculty $7,500 per course to teach for us. One such retired professor wants to teach two courses, but only wants to receive $6,000 total ($3,000 per course), for purposes of Social Security. He wants the University to give the remaining $9,000 that he would have received to our foundation's alumni scholarship fund. Any problems here with the 501(c)(3) status of our foundation or with the IRS generally?

 

A: It is taxable income to the recipient (and reportable on the faculty member's IRS Form W-2 and subject to income/employment tax withholding) by this exercise of control and dominion over the payment. This assignment of income to the foundation/charity does not work to avoid the recipient's tax liability on it; the good news is that he may be entitled to a charitable contribution deduction (depending upon the status of the foundation).

To avoid incurring the taxable income, an individual must disclaim any right to the income BEFORE any services are performed and the person vests and otherwise has a right to receive payment. Also, if the person would like the money to go to some pet charity or a particular purpose, the disclaimer should not make the payment contractually binding. For example, the individual could say he hereby irrevocably and forever disclaims any right, title or interest in the payment and, the person respectfully requests, but does not require, that the payment be made instead to XYZ charity.

Answer courtesy of Sean P. Scally, University Counsel and Tax Attorney, Vanderbilt University

 

Gift with Pretax Dollars

Q:Can an employee make gifts to the university with pretax dollars, and only be taxed on the net amount received as income?

 

A: The concept is that an employee earning, say, $10,000 form the University could reduce his/her salary to, say, $9,000, and the difference of $1,000 be a gift to the University. If legally permissible, those advocating this arrangement note that the employee would be taxed only on $9,000, but would not be entitled to a charitable contribution deduction for the gift amount, i.e., $1,000. You asked if this arrangement is legally permissible.
After undertaking such research and analysis as is necessary, we have concluded that the arrangement is not legally permissible, but rather is a legally impermissible assignment of income. As a general income tax principle, income is taxed to the person who earns it. I cannot, for example, assign a portion of my income to my son or daughter to take advantage of their being taxed at a lower bracket. I cannot assign a portion of my income to a needy relative or friend who may not otherwise have income. And, similar to what you have asked, I cannot assign a portion of my income to my church to take advantage of its tax exemption.

In the example above, the individual employee earned $10,000 and even though he/she assigned $1,000 of that to the University, the employee earned, and is taxable on, the full $10,000. The individual would be entitled to a charitable contribution deduction of $1,000. Certain assignments are specifically authorized by statute, i.e., the authorization for employees to assign a portion of their income, pretax as salary reductions, to the University's pension plan as an employee contribution. There is no statutory or other authorization to allow pretax assignments for charitable gift purposes. The arrangement being proposed would be strongly resisted by the IRS and, if implemented, could cause the University to be subject to penalties and fines.

Answer courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty, Washington, D.C. Attorney Roha serves as tax counsel for The Catholic University of America.

Reporting of Donated Awards or Prizes

 

Q: As a general rule, awards or prizes, such as gift certificates or TVs, distributed by a university to its employees are taxable and must be declared on a W-2. Does it make a difference if the award or prize is donated by a third party? Does it make a further difference if the university selects the recipients of the award or prize, or if the recipient is chosen at random, such as by a raffle.

 

A:If the "prize" or "award" is made by the third-party (that is, the employer has no ownership interest in what is being awarded), then the third-party would have the reporting obligation to the recipient typically on IRS Form 1099-MISC. IRC 74. Generally, if the prize is owned by the employer and awarded to the employee, the fair market value of the property/services received is reported as noncash comp includible in taxable gross income to the employee/recipient on IRS Form W-2. IRC 61; Treas. Reg. 1.61-2(d). It matters not for federal income tax purposes whether the employee is provided the prize/noncash compensation randomly or intentionally but the "random" aspect of the selection process may be prohibited or regulated by the poster's state law as gambling activity. This response presumes the "prize" is not otherwise excludible from gross income as a de minimus/no-additional-cost or employment fringe benefit under IRC 132 or a qualified employee achievement award under IRC 74(c).

Answer courtesy of Sean P. Scally, University Counsel and Tax Attorney, Vanderbilt University

Date of receipt of year-end credit card gifts.

Q: The Development Office solicited gifts from potential donors via mail in November. In December, the office was closed and some donor mail was not opened until January. Some donors send back their solicitation forms with a credit card number authorizing a gifts of a particular amount, and the envelopes with the instructions were postmarked in mid-December. The actual transfer of funds into the university's accounts did not occur until January, when the Development Office re-opened, made the credit card number entry online and the transfer of funds was authorized by the credit card company. When should the gift be considered to have been received?

A: CUA takes a conservative approach of having the donor receipts reflect a processed date of January, 2009, when the university actually authorize the card numbers that were received. The IRS regulations do not address this issue and a general principle of gift law is that a gift is not complete so long as a donor retains control and in this case could "undo" the gift after the postmark date but before the credit card transaction actually occured. The gift is not considered final until the funds are completely under the control of the university.

Prizes awarded by university at a student raffle.

Q. A university held a raffle with students and the winner received a new laptop computer that had been purchased by the college for the purpose. Are there tax consequences?
A. [This answer is provided courtesy of Sean Scally, University Counsel and Tax Attorney at Vanderbilt University.] As for federal income tax issues, such prizes and awards are, indeed, taxable to the recipient and reportable to the recipient and the IRS under IRC 74. The value of a noncash in-kind gift is includable in the recipient's gross taxable income. The entity awarding a prize/award with a value of $600 or more must report it by issuing an information return, the IRS Form 1099-MISC. IRC 6041.

Q: How does the University handle the tax consequences of a cash drawing at a University event?

A. By "cash drawing" I assume this means that some employee of the University attending a University event will be randomly selected to receive a cash prize. If my assumption is correct, then the cash will be taxable to the employee. Generally, all payments by an employer to an employee are taxable. What excludes, say, the Christmas turkey from being taxable is the so-called de minimis fringe benefit rules. Employer "transfers of value" to an employee are not taxable if de minimis in value, i.e., coffee, doughnuts, soft drinks, typing personal letters on Univeristy computers, personal copying on University copy machines, lunch at employer meetings, the summer picnic, etc. BUT, cash is never de minimis. Regardless of the amount, cash paid by an employer to an employee is taxable. The reason is that the de minimis fringe benefit rules were put in place because accounting for the value of such things would be difficult and not worth it. But cash can always be valued and can easily be valued. Thus, the University would have to withhold, or gross up the amout to give the employee the advertised net amount.
 
Answer courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty, Washington, D.C. Attorney Roha serves as tax counsel for The Catholic University of America.
 

Qualifed Plans and 403(b) Plans

403(b) Plans and Tax Qualified or Non-Qualified?

Q:Our defined contribution plan document states that for purposes of eligibility of participation under the definition of "Years of Service" that years of service with an eligible employer during the period immediately preceding the eligible employee's date of employment with the institution will be counted. "Eligible Employer" means any organization that maintains a tax qualified defined contribution retirement plan. The TIAA CREF web page on 403 (b) plans seems to distinguish between qualified plans and 403(b) plans. What is the distinction?

 

A:TIAA is drawing a distinction between a "qualified plan" which is a term of art (i.e., defined in sections 401 and 403(a)), and "tax qualified plan" which means that it is a plan that qualifies for tax benefits, which 403(b) plans do.

 

It is the intention of TIAA and virtually all universities to allow a kind of portability, such that service for one university is counted as service when the employee moves to another university. If the term is not construed in this manner, service for an institution that has a 403(b) plan would not count when the employee moves to another institution. So, the answer: a 403(b) plan is a "tax qualified defined contribution retirement plan." If the new employee worked for an entity that maintained a "nonqualified 403(b) retirement plan," he or she worked for an employer that maintains a "tax qualified defined contribution retirement plan."

 

Answer courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty, Washington, D.C. Attorney Roha serves as tax counsel for The Catholic University of America.

 

Correcting Withholding on a resident alien employee?

 

Q:How should a University correct incorrect FICA withholding for a resident alien employee?

A: Taxes and withholding on a resident alien is the same as for natural U.S. citizens. After the end of a calendar year, it is not possible to correct Federal Income Tax withholding. You must correct the Social Security and Medicare taxes paid to the IRS, however. The corrections will occur on the Form 941C, and are carried to your 941 for the quarter you discovered the error. The 941C is attached to that 941. You may also need to correct the W2 for 2003 by using a Form W2C and W3C with the Social Security Administration.If you will be collecting the employee's share of this from the employee, the correction is straightforward.If you will be paying the employee's half of the Social Security and Medicare tax ion addition the employer's half, then that employee's half is additional income to the employee. To keep from having to pay additional tax on the additional amount you pay on behalf of the employee, there is a formula you will use with the "stated pay." You divide the stated pay by .9235. See the full details on this procedure on page 19-20 of Publication 15A.

 

 

Correcting for Incorrect FICA withholding

 

Q: How should a University correct incorrect FICA withholding for an employee?

 

A: For Social Security (FICA and Medicare), an amended return W-2C and W-3C should be filed grossing up Social Security wages to the correct amount and the University would have to pay the additional amount due. The University can enter into an agreement with the employee to withhold the additional amount of Social Security that will have to be paid. Since that is simply an agreement between the employee and the employer, no reporting need be made of those amounts withheld from the employee. Since the University is not paying any of the employee's taxes, no grossing up of his wages is needed.

 

Answer courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty, Washington, D.C. Attorney Roha serves as tax counsel for The Catholic University of America.

 

Obligation of private university to publish annual notice of nondiscrimination.

 

Q: Is a private college required by IRS regulations to publish an annual notice of its racially nondiscriminatory policy in the same way as a private secondary school?

A: This was the subject of a NACUANet exchange in December 2004. CUA attorney Peg O'Donnell answered as follows:

"I am not aware of any exemption for colleges from IRS Revenue Procedure 75-50 Section 7. See the online EO chart and specifically, in lower left hand corner, a link to an embedded chart about these requirements. See also the actual IRS document, IRS Rev. Proc. 75-50.

Sean Scally, University Counsel and Tax Attorney for Vanderbilt University also noted as follows:

"Yes, if the "private school" meets the definition contained in IRC 170(b)(1)(A)(ii) ("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"). The publicity requirement is derived from IRS Rev. Proc. 75-50, 1975-2 C.B. 586, Sec. 4.03. See, also, Bob Jones University v. U.S., 461 US 574 (1983)."

 

Working Families Tax Relief Act--Impact of Definition of Dependent

 

Q. My client institution currently provides health and educational benefits for dependent children of employees. Some of these children do not reside with the parent and may reside with a former spouse. The question is whether or not the health insurance benefit (85% of the premium paid for by the college) is now considered taxable income. Also, whether or not the tuition benefit plan is also taxable to the parent if the child does not have the same abode as the tax payer for more than one-half the year.If the answer is "yes", they would also like to know if the divorce decree supercedes the IRS regulations ie. if the divorce decree requires the employee to cover the children for health and tuition benefits.

A. The WFTRA did, indeed, rewrite the definition of "dependent" for Federal income tax purposes creating two new categories of folks: a "qualifying child" and a "qualifying relative." IRC 152. The poster's question, I gather, pertains to divorced parents and, notwithstanding the other definitional changes, there is a special rule which applies to children of noncustodial divorced/separated parents. See IRC 152(e) (and, in particular, 152(e)(2)).

Among other things, a decree of divorce or separate maintenance or written separation agreement must provide that the noncustodial parent be entitled to the IRC 151 personal exemption for the dependent or that the custodial parent agrees to sign a written declaration (in a form approved by the IRS) that such parent will not claim such child as a dependent for such tax year. There are various other requirements but the provision is designed for situaions described by the poster.

The Tax Code allows the exclusion from an employee's gross income for employer-provided reimbursements of employee, spouse and dependent medical care expenses (IRC 105(b)) and a parallel exclusion for employer-provided coverage under an accident or health plan (IRC 106(a)). As for the dependent tuition benefit, it is excluded from an employee's gross income under IRC 117(d). The foregoing exclusions all refer to the definitional provisions in IRC 152. Thus, If the child of a divorced/separated employee who is a noncustodial parent meets the criteria set forth in the "special rule for divorced parents" (IRC 152(e)), then there is no tax consequences to the recipient for the aforementioned benefits.
Answer courtesy of Sean P. Scally, University Counsel and Tax Attorney, Vanderbilt University

 

Political Endorsements/Activities by Recognized Student Organizations

 

Q. How can a tax-exempt 501(c)(3) college balance the general rule for tax-exempt organizations that prohibit the college from supporting or intervening in any campaign for political office with the desire and need for college student groups that are affiliated with the major political parties and therefore actively endorse and support candidates for political office? Can the college support its College Democrats and College Republicans with allocations from student activity fees in the same manner it does other student groups? Does it make a difference if the allocations are made exclusively by students.

A. So long as it is not the IRC 501(c)(3) entity providing the support (using the institution's dollars), there is no prohibited political activity by the entity. The students fund it, organize it and conduct the activities - not the tax-exempt institution. The Tax Code, and the associated regulations, provide that the political prohibition extends to the institution's involvement in supporting or opposing a candidate for public office. Treas. Reg. 1.501(c)(3)-1(c)(3). The IRS has concluded that the campaign activities of individual students and student groups are not attributable to an IRC 501(c)(3) university. Rev. Rul. 72-512, 1972-2 CB 246, cited with approval in the 2002 IRS CPE text in an article titled "Election Year Issues." The Ruling is available on Westlaw at 1972 WL 29517 and the CPE text is at 2002 WL 32593934.

ACE publishes a very good yearly memo (prepared by the DC law firm of Hogan & Hartson) setting forth the list of permitted, prohibited and "questionable" political activities by tax-exempt colleges/universities. In the most recent version (September 2006) under "permitted activities," the firm recognizes the use of institutional facilities by established student groups for partisan political activities so long as uniform fees for such usage (if any) is charged to all groups without showing any favoritism (Q. Y14 ); as the memo observes, "special care" should be taken "to avoid the appearance of institutional endorsement" - which would logically extend to any institutional funding of such groups; thus the need to only permit student (noninstitutional) funds for such groups (and, thereby, avoid any purported political expenditures subject to the excise tax under IRC 4955).

Answer courtesy of Sean P. Scally, University Counsel and Tax Attorney, Vanderbilt University

Student groups and Tax ID numbers

 

Q. Can a registered student groups use the university's Federal Tax ID number to solicit donations to the group?

A. This depends upon whether the student group is a separate legal entity or part of the university. If the group is not part of the university, it should not be using the university's tax exempt status to get tax deductions for what otherwise might not be charitable contributions, depending upon the status of the student organization. If the student group is "registered" or in some way recognized and authorized to act by the exempt organization, it could use the ID but the organization must be mindful that it is ultimately responsible for how it is used and for proper documentation/disclosure, e.g., gift receipts under IRC 6115(a), from and on behalf of the organization.

For more info on the Tax ID number, what it is for, how it is used, etc., take a look at IRS Pub. 1635, Understanding Your EIN.

Also helpful may be IRS Pub. 557, Tax-Exempt Status for Your Organization, particularly pp. 6-7, relating to subordinate organizations (a chapter, local, post or unit of the central organization).
Answer courtesy of Sean P. Scally, University Counsel and Tax Attorney, Vanderbilt University, and Joseph R. Irvine, Tax Counsel and Associate Legal Counsel, The Ohio State University. October 2004.

 

Contributions by a 501(c)(3) to another charitable organization

 

Q. May a university organized as a 501(c) (3) organization make a donation to another 501(c)(3) organization?

A. Yes, however, there are procedures that should be followed.


1. The donor university must exercise due diligence in determining that the entity to which the donation is made is in fact covered by 501(c)3. IRS Publication 78 is a list of these organizations and and can be searched online.
2. There should be an articulable mission of the university achieved or advanced by giving to another entity.

 

Answer courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty, Washington, D.C. Attorney Roha serves as tax counsel for The Catholic University of America.

 

Charitable Contributions of Intellectual Property

 

Q. Are there specific guidelines that need to be followed when donating patents or other intellectual property to a 501(c)(3)?

A. Yes, the IRS has released guidance on this issue. On December 23, 2003 the IRS released Notice 2004-07 (published Jan. 20, 2004) on Charitable Contributions of Patents and other Intellectual Property. This notice advises taxpayers that, in appropriate cases, the Service intends to disallow improper charitable contribution deductions claimed by taxpayers in connection with the transfer of patents or other intellectual property to charitable organizations.In particular, the IRS has become aware of purported charitable contributions of intellectual property in which one or more of the following issues (which may affect the availability or amount of a deduction) are present: 1) transfer of a nondeductible partial interest in intellectual property; 2) the taxpayer's expectation or receipt of a benefit in exchange for the transfer; 3) inadequate substantiation of the contribution; and 4) overvaluation of the intellectual property transferred.

 

The Internal Revenue Service (IRS) is aware that some taxpayers that transfer patents or other intellectual property to charitable organizations are claiming charitable contribution deductions in excess of the amounts to which they are entitled under § 170 of the Internal Revenue Code. The purpose of this notice is to advise taxpayers that, in appropriate cases, the IRS intends to disallow all or part of these improper deductions and may impose penalties under § 6662. In addition, this notice advises promoters and appraisers that the IRS intends to review promotions of transactions involving these improper deductions, and that the promoters and appraisers of the intellectual property may be subject to penalties under §§ 6700, 6701, and 6694.

 

Bonds: Sale of Naming Rights in a Bond Funded Facility

 

Q. Can the sale of naming rights in a bond funded facility constitute private business use with respect to the facility?

A. Yes a decision issued by the IRS in PLR 200323006 found that this sale of rights, even though it did not exceed the 10% threshold set forth in 26 U.S.C. 141(b) (the private business use test) will constitute private business use to the facility. See Bert Harding's write up in the April issue of the College and University Tax Report for more information on this.

 

IRS reporting requirements on gifts of art.

 

Q. When the university accepts artwork or furniture, books, etc. as gifts to the university that we intend to sell, we have to wait 3 years (for contributions after Sept. 1, 2006) before we can flip them. So if a donor gives the university a painting appraised at $20,000 with the idea that the university will have an art auction house sell it, we have to store it for 3 years before we can do that. Is that so?

A. [This answer is provided courtesy of Joseph Irvine, Tax Counsel at The Ohio State University.]

 

You do not have wait 3 years to sell the property. You can sell it immediately. The 3 year rule refers to the reporting requirement to the IRS. When a donee receives a gift of property valued at more than $5,000 it signs a Form 8283. The following is from the Form 8283:

 

"Furthermore, this organization affirms that in the event it sells, exchanges, or otherwise disposes of the property described in Section B, Part I (or any portion thereof) within 3 years after the date of receipt, it will file Form 8282, Donee Information Return, with the IRS and give the donor a copy of that form. This acknowledgment does not represent agreement with the claimed fair market value."

 

editor's note: Changes made by the Pension Protection Act of 2006: Under this new law, (see pages 300-301 of the Joint Committee on Taxation Report ) if the charitable organization does dispose of donated tangible personal property with a claimed value of $5,000 or more within three years of the donation, there will be no adjustment to the tax basis if the donee organization makes a certification to the Secretary, by written statement signed under penalties of perjury by an officer of the organization, which certifies that the use of the property by the donee was related to the purpose or function constituting the basis for the donee's exemption under section 501, and "(II) describes how the property was used and how such use furthered such purpose or function, or "(ii) which-- "(I) states the intended use of the property by the donee at the time of the contribution, and "(II) certifies that such intended use has become impossible or infeasible to implement." This provision applies to contributions made after September 1st, 2006.

 
403(b) Pension Plan Hardship Withdrawal Provision.
 
Q: Where Catholic University's Defined Contribution plan and Tax Deferred Annuity Plan have a provision permitting hardship withdrawal for certain purposes (certain medical expenses, purchase of a principal residence, payment of certain tuition and payments to prevent eviction from or foreclosure on principal residence) and in "such other circumstances as may be specified in Regulation Section 1.401(k)-1(d)(2)(iii)(B).", what are the other purposes permitted by the regulations?
A: The regulation doesn't list any additional purposes, so CUA's interpretation is that the only purposes permitted are those listed in the Plan documents.
 
Use of University Automobiles and Taxability
Q: What are the tax consequences of a CUA employee using a CUA automobile to drive from his/her home to a "temporary job location, " like an early morning meeting?
 
A: If a CUA employee uses a CUA automobile to commute from his/her home to the University, that personal use would be taxable to the employee. If, however, the CUA employee uses a CUA automobile to commute from his/her home to a meeting, that would not be personal use and that commute would not be taxable to the employee.
 
Answer courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty, Washington, D.C. Attorney Roha serves as tax counsel for The Catholic University of America.
 
Reporting Operations in Boycotting Countries?
Q. Has anyone considered whether colleges and universities must file a Form 5713 with the IRS to report "operations" in boycotting countries? Entities who are carrying on "business or commercial activities or transactions" in or with governments, companies or nationals of boycotting countries are required to report. There is precious little guidance on interpreting this definition.
 
A. It is not at all surprising that there is little guidance, particularly on the IRS website, for this relatively obscure reporting requirement (e.g., according to the IRS news release from last summer (NR 2007-119, June 18, 2007) in which tax statistics are published per IRC 6108, for FY04, the latest for which figures are available, only 1,343 Form 5713s were filed, mostly by large multinational corporations with operations in countries on the published boycott list (Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, UAE and Yemen) and, of those, only 46, or about 3% of filers, suffered an adverse experience in the loss of tax benefits derived from foreign activity, such as the loss of the deductibility of foreign tax credits or similar tax benefits. See:http://www.irs.gov/instructions/i5713/ch01.html#d0e196
The federal Tax Code provision that triggers the IRS Form 5713 filing, IRC 999, was added to the Code via the Tax Reform Act of 1976. There was some early administrative guidance published by the IRS which continues to be relied upon for clarification on when/if to file the disclosure form. Rev. Proc. 77-9, 1977-1 CB 542, also released as IRS Notice IR 1752 (Feb. 3, 1977). This release contains Q&As and sets forth definitions of particular terms. If this info is not helpful, and all else fails, the IRS has announced a program whereby a request may be submitted for a determination, based upon a potential filer's situation, as to whether there exists an obligation to file Form 5713. The request can be made either before the transaction/operations occur or in the year in which such activity takes place. Per the IRS ruling, and instructions contained in IRS Pub. 514 (2007), Foreign Tax Credits, requests should be addressed:

Internal Revenue Service
International Section
P.O. Box 920
Bensalem, PA 19020-8518

At least by making this effort, a taxpayer will establish that there is no "willful" disregard of the filing obligation and, thereby, avoid that penalty. But the overall penalty for a simple failure to file appears to be limited to the loss of certain specified tax benefits (credits/deductions).

Answer courtesy of Sean P. Scally, University Counsel and Tax Attorney, Vanderbilt University





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