Tax Management Portfolio, Tax Issues of Educational Organizations, No. 482-2nd, analyzes various topics regarding taxation and legal issues that confront educational organizations. These issues include the effect of public policy on educational organizations, scholarship and fellowship grants, the unrelated business income tax (including the issue of corporate sponsorships), charitable contributions, and nondiscriminatory racial policies for private schools. To
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Tax Management Portfolio, Tax Issues of Educational Organizations, No. 482-2nd, analyzes various topics regarding taxation and legal issues that confront educational organizations. These issues include the effect of public policy on educational organizations, scholarship and fellowship grants, the unrelated business income tax (including the issue of corporate sponsorships), charitable contributions, and nondiscriminatory racial policies for private schools. Also included is a look at the implementation of intermediate sanctions for exempt organizations violating private inurement rules. The Portfolio also addresses the numerous tax incentives for education, some of which impose reporting requirements on educational institutions.
The Detailed Analysis provides a discussion of the issues mentioned above as well as other issues affecting educational organizations. Several helpful items have been included in the Worksheets to assist in explaining topics mentioned in the Portfolio.
Some issues involving educational organizations are discussed in greater detail in other portfolios and reference to them has been made where appropriate.
This Portfolio may be cited as Gorsline and Kirksey, 482-2nd T.M., Tax Issues of Educational Organizations.
Ronald D. Gorsline, Esq.
Ronald D. Gorsline, B.S. in Secondary Education, Bob Jones University (1982); J.D., cum laude,Indiana University (1988); Associate Editor, Indiana Law Review; author of Section 170(j) of the : A Conflict in Analysis Regarding the Deductibility of Gifts to an Individual for the Use of a Charity, in Tax Law Journal (Summer 1987); admitted, Tennessee Bar (1988), State Bar of Georgia (1989), and United States District Court, Eastern District of Tennessee.
Bryson M. Kirksey, Esq., LL.M.
Bryson M. Kirksey, B.S. in Accounting, Carson-Newman College (2005); J.D., Cumberland School of Law, Samford University (2008); LL.M. in Taxation, Georgetown University Law Center (2009); admitted, Tennessee Bar (2009).
Table of Contents
Detailed Analysis I. Introduction; General Principles A. Scope of Portfolio B. Formation and Exempt Status C. Factors Determining Tax-Exempt Status D. Private Inurement E. Effect of Public Policy F. Other Sources About Exempt Status 1. Nontraditional “Educational Organizations” a. Examples of Organizations that Qualify b. Commercial Overtones Can Prevent Qualification 2. A Wholly Owned Government Instrumentality G. Other Public Policy Issues 1. The GLASS Ruling 2. Public Policy on Religious Activity H. Obtaining Recognition of Exemption 1. Filing Form 1023 2. Churches and Church-Related Educational Organizations I. University Endowments 1. General 2. Excise Tax on Private Colleges and Universities Investment Income II. Racial Discrimination A. Guidelines B. Court Decisions C. Church-Related Schools D. Nondiscriminatory Policy for Private Schools 1. Scholarships 2. Publication Required 3. Publicity Not Required 4. Recordkeeping E. Nondiscriminatory Policy for Public Schools F. Affirmative Action G. Current Status III. Sexual and Gender-Based Discrimination A. Sexual Orientation B. Gender-Based Discrimination 1. State Action Doctrine 2. Level of Scrutiny 3. Position of the IRS 4. Conclusion IV. Unrelated Business Income Tax — §511, §512, and §513 A. Scope of Discussion B. Applicability to Educational Organizations C. What Is Taxable? 1. Unrelated Business Taxable Income 2. Trade or Business 3. Regularly Carried On 4. Substantially Unrelated to Tax-Exempt Purposes D. Sections 512 and 513 Exclusions E. Examples 1. College or University Bookstores 2. Affinity Credit Cards 3. Travel Tours 4. Parking Lots 5. Ski Facilities 6. Campus Golf Courses 7. Electrical Power Production 8. Sports Camps and Clinics 9. Exclusive Marketing Arrangements 10. Corporate Sponsorships a. Before the Enactment of §513(i) b. Section 513(i) Safe Harbor c. Final Regulations Under §513 11. Advertising Income a. Generally b. Student Newspaper Advertising c. Yearbook Advertising 12. Hotel and Restaurant Operations, Entertainment Activities 13. Partnerships 14. Concession Sales 15. School Handicraft Shops 16. School Facilities 17. Broadcasting Rights F. Avoiding or Minimizing UBIT G. Public Inspection of Form 990-T H. UBIT Findings in the 2013 Colleges and Universities Compliance Project Final Report by the IRS Exempt Organizations Division V. Audit Guidelines VI. Tax Incentives for Education A. Tax Treatment of Scholarships 1. In General 2. Scholarship/Fellowship Grant 3. Qualified Scholarship 4. Qualified Tuition and Related Expenses 5. Tax Consequences for Scholarship Amounts Includible in Gross Income 6. Candidate for a Degree 7. Educational Organization 8. Recordkeeping 9. Compensation for Services a. Services as a Condition for Funds b. Primarily for the Grantor's Benefit c. Exceptions B. Education Tax Credits 1. The Hope Scholarship Credit and American Opportunity Tax Credit 2. The Lifetime Learning Credit 3. Information Reporting for Education Tax Credits a. Who Must File b. Information Required c. When to File d. Manner of Filing e. Statements to Be Provided to Students f. Collecting Information g. Penalties C. Coverdell Education Savings Accounts D. Qualified Tuition Programs (§529 plans) E. Interest on Education Loans F. Deduction for Tuition and Related Expenses G. Qualified Tuition Reduction 1. Generally 2. Domestic Partners Other than Spouses 3. Example of Tuition Reduction Program a. State Employees b. State College and University Employees c. Terms and Conditions d. Retirees e. Education Tuition Reduction for Children of State Employees 4. Exclusion of Employer-Provided Educational Expenses 5. Nondiscrimination Among Employees a. Generally b. Two-Part Test (1) Reasonableness (2) Objective Criteria 6. Special Rules for Teaching Assistants and Research Assistants H. Withholding and Reporting Requirements 1. U.S. Citizens and Residents a. Information Returns and Payroll Taxes b. Allocation for Compensation for Services c. Responsibility for Determining Qualification of Grant Use 2. Nonresident Aliens I. Treatment of Royalty Payments to Faculty/Inventor by a College or University Employer J. Tax Issues Relating to Tenured Faculty and Early Retirement Plans K. Student Exception to FICA Taxes 1. Generally 2. Final Regulations a. School, College, or University b. Enrolled and Regularly Attending Classes c. Student Status d. Full-Time Employee and Hours Worked e. Professional Employee f. Licensure g. Employment Benefits h. Safe Harbor VII. Tax on Excess Executive Compensation VIII. Fringe Benefits A. Introduction B. Various Benefits Applicable to Educational Organizations 1. Free or Subsidized Housing a. Exclusion b. Convenience of the Employer and Condition of Employment c. On Employer's Business Premises 2. Alternative Exclusion Available Under §119(d) 3. No-Additional-Cost Services — §132(b)(1) a. Definition b. Applicability to Educational Organizations c. Line of Business Requirement 4. Nonapplicability of §132 C. Educational Assistance Programs 1. Generally 2. Requirements IX. Charitable Contributions A. Introduction 1. Section 170 in General 2. Limitation of Discussion 3. Requirements for Donor Deductibility a. Qualified Donee b. Section 170(c)(2) Organizations (1) Inurement (2) Political Activities (3) Political Campaigns (4) Racial Discrimination by Private or Church- Related Schools c. Requirement of Gift — What Is a Contribution? 4. Tuition Payments as Contributions 5. Requirements for Nonprofits to Follow Other Statutes 6. Right to Purchase Seating at College or University Athletic Event 7. Contributions to a College or University for Reconstructing and Remodeling Fraternity Housing 8. Contributions Benefiting the Donor 9. To or for the Use of B. Contributions of Property 1. Generally 2. Deductions for Ordinary Income Property 3. Deductions for Tangible Personal Property 4. Deductions for Inventory Contributions 5. Bargain Sales 6. Computers by C Corporations to Schools Before 2012 — Former §170(e)(6) 7. Deduction Limitations for Individuals 8. Required Acknowledgment and Appraisal of Contributions Received a. Cash Contributions Generally b. Cash Contributions of $250 or More c. Noncash Contributions (1) Valued at Less than $250 (2) Valued from $250 but Not More than $500 (3) Valued in Excess of $500 but Not More than $5,000 (4) Valued in Excess of $5,000 9. Expenses Paid for Student Living in Taxpayer's Household 10. Audit Guidelines Relative to Contributions Received X. Employment Tax Obligations XI. Retirement Plans XII. Tax-Exempt Bonds XIII. Intermediate Sanctions A. History B. Excess Benefits 1. Definition 2. Excessive Versus Reasonable Compensation 3. Other Exchange Transactions 4. Special Rules and Exemptions a. Certain Nontaxable Benefits b. De Minimis Fringes c. Reimbursement of Expenses 5. Indication of Intention to Treat as Compensation 6. Revenue Sharing C. Disqualified Persons 1. Definition 2. Five-Year Lookback D. Organization Managers and Officers E. Presumption of Reasonableness of Compensation and Valuation of Property 1. General 2. Burden and Overcoming Presumption F. Penalties; Excise Taxes (Sanctions) 1. First-Tier Taxes a. Tax on Disqualified Persons b. Tax on Organization Managers 2. Second-Tier Taxes a. 200% Excise Tax b. Correcting a Transaction 3. Abatement a. First-Tier Taxes b. Second-Tier Taxes XIV. Electronic Filing XV. Public Inspection of Exemption Applications and Annual Returns A. Annual Return B. Exemption Application C. Time, Place, and Manner Restrictions D. Furnishing Copies E. Penalties
Table of Worksheets Worksheet 1 Examination Guidelines for Educational Organizations Worksheet 2 IRS Continuing Professional Education (CPE) Technical Instruction Program Worksheet 3 Internal Revenue Manual 4.76.8, Private and Charter Schools Worksheet 4 Internal Revenue Manual 220.127.116.11.1 to 18.104.22.168.11.3, Religious, Charitable, Educational, Etc.: Schools Worksheet 5 IRS Memorandum, Exempt Organizations: Exclusive Provider Arrangements and UBIT Worksheet 6 Reference Guide to IRS Frequently Asked Questions Worksheet 7 Summary of Form 14018 (Compliance Questionnaire, Colleges and Universities)
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