1. TAX ISSUES IN HIGHER EDUCATION #Fin 2238
College Business Management Institute
University of Kentucky, Lexington, KY
August 1, 2008
Isabel Smidy, CPA, MST
Assistant Controller for Tax Compliance
Middlebury College, Middlebury, VT 05753
Tel Fax

2. WELCOME

3. KEY ELEMENTS Preserving tax exempt status
loss of contributions, federal aid
Minimizing tax liability:
Institution
Employees
Donors/donor relationships

4. Topics for Discussion Payroll and Employment Tax Issues
Nonresident Aliens
Employee vs Independent Consultant
Fringe Benefits
Accountable Plans
Unrelated Business Income Tax (UBIT)
Intermediate Sanctions

5. Topics for Discussion Tax Exempt Bonds Charitable Contributions
Lobbying and Political Activity
Other Resources
IRS Priorities for Nonprofit Review & Other Legislative Agenda
Risk Management Issues

6. Payroll and Employment Tax Issues
Employment Tax Responsibilities Reference: IRS Pub 15 Circular E
an employer-employee relationship (not independent contractor)
the payment of wages (settlements, N.Dakota case)
the payment must be made with respect to employment

7. Payroll and Employment Tax Issues
Payment and Reporting Obligations
Electronically remit payments withheld
“If you accumulate $100,000 or more of taxes on any day during a deposit period, you must deposit the tax by the next banking day, whether you are a monthly or semiweekly schedule depositor”
Report covered wages paid on Form 941
Employers Quarterly Federal Tax Return – does not include wages of non resident aliens which are treaty exempt.

8. Payroll and Employment Tax Issues
IRS Penalties
Filing late or incorrect information returns
If no $ is due have an additional 10 days
Filing late or incorrect payee statements
$50 per statement
Depositing tax withholding after the deadline
1-5 days = 2% Greater 15 days 15%
Not filing or depositing at all
Max penalty is 25% of taxes due
ER STILL RESPONSIBLE IF USING PAYROLL SERVICE. ESTABLISH “REASONABLE CAUSE” INTEREST & PENALTIES.

9. Payroll and Employment Tax Issues
Income Tax Withholding
On wages, salaries, and bonuses, unless a specific exemption exists – not on treaty wages of non resident aliens, or foreign earned income exclusion
Fringe benefits not excluded by the IRC, such as season tickets and personal use of automobiles, spousal travel, and club dues
Employers Tax Guide to Fringe Benefits Pub 15B

10. Payroll and Employment Tax Issues
Graduate Student Stipends
As payment for services rendered
As a grant, scholarship or fellowship
Need to allocate between the service component and the scholarship component. How much does your institution pay for similar services to regular staff?

11. Payroll and Employment Tax Issues
Settlement Payments – Prior to Aug 1996 most settlements were tax free
Non-Reportable
Payment based on tort or tort-type rights (injury or wrongful act)
Personal physical injuries or physical sickness - IRC 104 (a) (2)
Reportable
Emotional distress
Attorneys’ fees
Prior to Comm. vs Bonds, 543 U.S. 426 the courts were divided, the Supreme Court settled the issue, attorneys fee payment represents taxable income to the plaintiff thereby imposing the withholding requirement.
Twist: Newhouse vs McCormick, 157 F 3rd 582 (8th Cir 1998) Ind. brought an age discrimination case against a Prospective Employer, “rejected for the position.” The court held that since the ind. was a job applicant and not an employee, was not subject to taxes.

12. Payroll and Employment Tax Issues
FICA Exclusions
Certain nonresident aliens
individuals in the US on F-1, J-1, M-1, or Q-1 visas qualify under section 3121(b)(19) of the IRC
- Services performed for certain churches or church-controlled organizations
Student FICA exception
While regularly attending
classes

13. Payroll and Employment Tax Issues
Student FICA Exception
Primary Function of Institution
School, College, or University § (b)(10)-2 (2005)
formal instruction, regular faculty & curriculum, regularly enrolled student body
Career Employees/Professional Employees - not eligible
Work >=40 hours per week regularly
Participate in Retirement
Required to be Licensed
Work requires advanced knowledge
Work requires discretion and judgment
Work is intellectual and varied

14. Payroll and Employment Tax Issues
Student FICA Exception
Medical Residents

15. Payroll and Employment Tax Issues
Worker Classification
Originally IRS relied on the twenty common law factors (Rev. Rul )
Behavioral Control
Instructions
Training
Financial Control
Significant Investment
Expenses
Opportunity for Profit or Loss

16. Payroll and Employment Tax Issues (cont.)
Worker Classification (cont.)
Relationship of the Parties
Employee Benefits
Written Contracts
Services are a key aspect (Faculty, Coaches)
Permanency of the position
Penalties for misclassification, including payment of taxes that should have been withheld
Relief under Section 530 of the Revenue Act of Reasonableness, Case law.
Audit alert: The IRS is once again investing resources in this area. The tax gap has been a driving force. Examiners will review for persons receiving both a W2 and The good news is that the IRM will be updated with the details.

17. Nonresident Aliens
Laws date back to the early 1960’s. Tax Reform Act of 1986 made the most significant changes in terms of redefining the “sourcing” rules of scholarships.
Who are Nonresident Aliens
Students, faculty, performers, lecturers
Tax residency status IRC 7701(b)
Green card test (Permanent Res. Treat Like a US person)
Substantial presence test (determines if you are an NRA or a RA) current yr at least 31 days, previous 1/3 days, second preceding 1/6 if sum is equal to or greater than 183=RA

18. Nonresident Aliens When is Tax Withholding Not Required
Foreign-sourced income IRC
NRA students who are abroad on scholarships, Web and course design outside of the US, work performed outside the US, scholarships from outside US.
Internal revenue code exemption
Mostly qualified scholarships under IRC 117.
Exempt under an income tax treaty
Currently there are about 60 tax treaties.

19. Nonresident Aliens Systems that Process Payments Taxable to NRAs
Student Accounts - Scholarships
Accounts Payable – Honorariums, Prizes, Performers, Lecturers (Never on a Form 1099)
Payroll – Students and faculty
Gathering data: FNIF
Audit activity: focused exams – open door program. VCP.

20. Fringe Benefits § 132 Enacted 1984 (DEFRA ’84) “Deficit Reduction Act” included the term “fringe benefit”
Any property or service (or cash under certain circumstances) that an employee receives from an employer, in lieu of or in addition to regular taxable wages, is a fringe benefit that may be subject to taxation.
A statutory exclusion must exist in order for the benefit to not be taxable..

21. Fringe Benefits Employee benefits handbook Reporting requirements
Penalties
Recordkeeping requirements – no records-taxable income
IRS audit activity
Employee benefits handbook
Union Agreements
Employment contracts (especially those of executives)
Corporate minutes
Chart of accounts
Written policies and procedures regarding fringe benefits
A/P Journal, G/L Accts that include ee benefits
Payroll Journal
Examiners will look at expense categories that are less obvious but may include fringe benefits such as misc expenses, auto expense, ins & travel reimbursements.
IRM 4,23, 5,11.5 ( )

22. Fringe Benefits
Examples of benefits that may be entirely or partially excluded from the taxable income of an employee:
qualified undergraduate tuition reduction for dependents §117
certain insurance, up to a certain level
health and disability insurance; IRC 105
group-term or other life insurance ($50,000 limit) IRC 79
personal liability insurance

23. Fringe Benefits Dependent care assistance (IRC § 129)
Use of athletic facilities, subject to certain conditions
Automobile allowances or use of an employer’s automobile for business purposes
Travel benefits, including recruiting, fundraising, attending conferences
Awards for length of service and safety achievement
The length of service and safety achievement awards must be awarded as part of a “meaningful presentation”, Regs (3)
Less than $1,600 (cannot be cash) if written plan – no management or executives

24. Fringe Benefits Employer-paid transportation($115) or parking($220)
Free or discounted admission to university sponsored events
Cafeteria plan benefits §125 Flexible spending accts
medical/dental/vision expenses
group term life insurance §79 greater $50k taxable
dependent care assistance
adoption assistance
Moving and relocation expenses §217
IRS Pub 521 Form 3903 (meals, real estate, house hunting & temp living expenses are taxable)

25. Fringe Benefits Qualified Employee Discounts §132 ( c )
No Additional Cost Services §132(b)
Working Condition Fringe Benefits §132(d)
May be provided on a discriminatory basis. Employee can deduct on return. Related to the employee’s work.
Di minimis Fringe Benefits §132(e)
Bookkeeping is a burden. The free turkey. Certificate is taxable, turkey not taxable.
Qualified Moving Expense Reimbursements §132(g)
Qualified transportation fringe benefit §132(f)
Gifts (less than $15), Free Stuff (expensive door prizes),

26. Fringe Benefits Employer-Provided Cars (listed property)
Employer-Provided Cell Phones (listed property). Current IRS position, absent detailed substantiation, it will be 100% taxable to the ee. If legs passes they will be treated like all other fringe benefits including the desk phone. For latest developments check H.R
Lodging & Meals Provided for the Convenience of the Employer
§ 119
Educational Assistance §127 Max $5,250
Employee Business Expense Reimbursements (Accountable Plans)
IRC 274(d)
-must be a business expense
-verify and substantiate
-return any unused portion

27. Accountable Plans Business Connection IRC 162
The amount must be paid for business expenses paid or incurred by the ee in connection with the performance of services on behalf of the er.
Substantiation
Amount
Time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift,

28. Accountable Plans Substantiation
Business purpose of the expense or other item
the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift
Expense advance must be reasonably calculated to cover expenses
Employee must substantiate within 60 days
Must return unspent allowance within 120 days

29. Unrelated Business Income Tax
A little history…
Prior to 1950 tax exempt organizations could engage in unrelated business activities. Then along came NYU School of Law with it’s subsidiary the Mueller Macaroni Company. Mueller Co. v. Commissioner, 190 F.2d 120 (1951).
Income is from a trade or business “production of income”
The trade or business is regularly carried on by the organization (frequency, continuity, and how it is carried on)
The trade or business is not substantially related to the institution’s tax-exempt functions “mission”

30. Unrelated Business Income Tax
Exceptions
Convenience businesses (laundry operated for students)
Research (for the public interest-inc tech transfer to private sector for testing)
Corporate Sponsorships (no substantial return benefit other than the use or acknowledgment of the name or logo – cannot say that coke is better than pepsi)
Certain types of income (received in a passive manner)

31. Unrelated Business Income Tax (cont.)
Income Exceptions
Investment income IRC § 512(b)(1) (interest, dividends and annuity income)
Rent IRC § 512 (b) (2) (no not provide cleaning services)
Royalty income (trademark, copyright)
Capital gains IRC § 512 (b)(5) (excludes all gains or losses from the sale, exchange, or other disposition of property)

32. Unrelated Business Income Tax
Unrelated Debt Finance Income
property held to produce income to which there is acquisition indebtedness

33. Unrelated Business Income Tax
Corporate Sponsorships
Qualified Sponsorship Payments (money, transfer of property, performance of service)
Substantial Return Benefit (exclusive provider arrangement, goods, facilities, services, rights to intangible assets)
Use or Acknowledgement (value neutral descriptions)

34. Unrelated Business Income Tax
Corporate Sponsorships
Advertising not per se a return benefit
Messages containing qualitative or comparative language
Price information or other indications of savings or value
An endorsement or an inducement to purchase, sell, or use the products or services

35. Unrelated Business Income Tax
Corporate Sponsorships
Exclusive Arrangements
Exclusive sponsorship
Exclusive provider of goods and services
Internet Sponsorships (hyperlink with no other information)
Periodicals (student run newspapers)

36. Unrelated Business Income Tax
Travel Tours – (if structured as an -educational activity no UBIT (Rev Rul )
Rental of Facilities (if provide meals and maintenance will be UBIT)
Fitness Facilities (who is being served & how much is being charged)

37. Unrelated Business Income Tax
Reporting
Form 990-T
New public disclosure requirements
IRS Notice
Quarterly payments
IRS Publication 598 UBIT

38. Intermediate Sanctions
An excess benefit transaction
is any transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any “disqualified person,”
if the value of that economic benefit exceeds the value of the services provided by the disqualified person.

39. Intermediate Sanctions
Applicable tax exempt organization
501(c)(3) or 501(c)(4) tax exempt public charity
Includes higher education
Does not apply to for profits

40. Intermediate Sanctions
Disqualified persons
Substantial influence
Family members
Entities in which any of the above own more than a 35% interest
Facts and circumstances test

41. Intermediate Sanctions
Organization Managers
trustee, director, or officer, has similar powers to trustees
Rebuttable Presumption of Reasonableness
IRS notice
arrangement approved by an independent body - board
board obtained & relied on appropriate comparable data
Basis for determination was adequately documented
Tax Penalties to insiders and possible loss of tax exemption
IRS Publication 557 Tax Exempt Status

42. Tax Exempt Bonds
Arbitrage – the act of making money w/ money. Borrow at a low rate at the taxpayer’s expense. With a few exceptions money must be rebated to the gov.
Private Use Issues
501(c)(3) threshold - §145, 5% of net proceeds for unrelated use including issuance costs
Governmental entity threshold -10% unrelated use
Issuance costs – capped at 2% counts twds private use

43. Tax Exempt Bonds Private Use Issues (cont.)
Research agreements – original investigation for the enhancement of scientific knowledge – no commercial objective
Rental income
Naming rights
Record retention requirements – for as the long as the bonds are o/s & three yrs after the final redemption
Audit alert: TEB division of the IRS has increased staff by 20%. Cliff Gannett the Director states this will increase significantly, the number of audits. The twenty page FY2008 TEB work plan can be found at IRS.gov. Some of the areas under scrutiny include: yield burning, tax and revenue anticipation loans, 501 ( c) 3 charities.

44. Charitable Contributions
Qualifying donations
Qualifying donees § 170 ( c )-must be a US entity
state & local, religious, charitable, educatioal, veterans org, non profit cemetery companies
Determining the amount and limitations on deductions -based on donor A.G.I. & Donee, & type of property
Recordkeeping and substantiation requirements.

45. Charitable Contributions
Elements of a Charitable Donation
Charitable intent detached, disinterested generosity (Comm vs. Duberstein 363 US 278 (1960))
No substantial benefit to the donor, complete, voluntary and unconditional
Delivery org must have full control
Acceptance by the donee
Quid pro quo gifts part gift and part consideration for good or service

46. Charitable Contributions
Types of Contributions
Cash – check, credit card, prom note, IRA’s, mailed though not recd on 12/31 is deductible § 1.170A-1b
Stocks and bonds – fmv at date of gift
Real estate – Conservation easements – a lot more scrutiny
Tangible personal property – anything you can touch other than lands or bldgs.; full fmv if inst does not dispose in yr given – does not apply to vehicles
Intangible personal property - i.e. life ins contracts, oil and gas interest (very complex subject to UBIT)

47. Charitable Contributions
Types of Contributions (cont.)
Services and out-of-pocket expenses – no deduction for the value of the service
Prizes and awards as gifts
Recipient does not take into income if certain conditions apply: r’cd because of charitable purpose or civic engagement (Nobel prize), no action performed, does not have to perform service and gives the prize to a charity
IRS Publication 526, Charitable Contributions
IRS Publication 561, Determining the Value of
Donated Property

48. Lobbying and Political Activity
Restrictions on Lobbying Activities
Definitions of lobbying-retained for financial or other compensation; makes at least two lobbying contacts; 20% of time in a three month period engaged in lobbying
Lobbying election- pros & cons
Lobbying Disclosure Act- 1995
applies 1.) one ee that is a lobbyist 2.) spends at least $10k per calendar quarter
Lobbying expenditures
Reporting requirements
–electing & non electing must rpt on Form 990 Sch. A as well as to maintain records that will enable them to calculate and report expenditures

49. Lobbying and Political Activity
Definition of Candidate
§1.501 ( c ) (3)-1( c )(3)(iii) “an individual who offers himself, or is proposed by others, as a contestant for an for an elective public office, whether such office be national, state, or local”
Public Office no IRS definition
Intervention in a Political Campaign
Rev. Rul Lists 21 Examples of what is allowed and not allowed

50. Political Activity Permissible Political Activities
Candidate debates and forums
equal opportunity, no fundraising, explicit statement indicating that the inst does not endorse a candidate
Student newspaper endorsements
may publish editorials Rev. Rul
Use of institutional facilities – no problem
needs to state that inst does not endorse and no fundraising

51. Permissible Political Activities
Voter registration on campus
higher ed amendment 1998 required to make forms widely available to students
Other voter education
voter guides must not be biased in favor of a candidate
Course credit for participation in political campaigns
Rev. Rul cannot indicate for which party -
must be an elective course

52. Resources Tax Department Internal Audit External Auditors
Payroll, Human Resources & Other Dpts.

53. Resources NACUBO’s Taxlist mary.bachinger@nacubo.org ALIEN’s listserv 53 53

54. Resources (cont.) http://www.windstar.com/ NRA assistance
NRA tax preparation
EO Tax Updates
Send a blank to

55. Resources (cont.) Mr. Lowell G. Hancock Internal Revenue Service
LMSB International
Foreign Payments
International Information Reporting
SE:LM:IN:C:FP
Tel Fax:
Internal Revenue Service
Federal Bldg / U.S. Courthouse
2 South Main Street., Room 395
Akron, OH

56. Resources (cont.)
Guide to Federal Tax Issues for Colleges and Universities
Loose-Leaf Binder
CD-Rom Updated Quarterly
Federal Tax News for Colleges and Universities
Click on Subscription Services in the left hand column
The Tax Law of Colleges and Universities, 2nd Ed.
Bertrand M. Harding, Jr.
Employee Benefit Plans: Audit and Accounting Guide
Publisher: AICPA
NACUBO Guide to IRS Audits Laura Kalick, Peter K. Scott

57. RESOURCES
Taxation of Charities and Other Exempt Organizations (West Publishing Co, 2003 Moran, Brennen, Jones and Willis).
A Federal Income tax Guide for College and University Presidents
American Council on Education
(free download)

58. Resources (cont.) Income Tax Treaties (A-Z) Revenue Rulings Online
Publication 901, U.S. Tax Treaties
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
Publication 519 , U.S. Tax Guide for Aliens
Revenue Rulings Online

59. Resources (cont.) Internal Revenue Code Revenue Rulings Online
Revenue Rulings Online
IRS Website for Students

60. Resources (cont.) NACUBO Tax Forum October 6 -7, 2008 Chicago, IL
Tax Workshops and Presentations
Tax Institute for Colleges and Universities (TIFCU)
May 17-19, 2009
Indianapolis, IN
NACUBO Tax Forum
October 6 -7, 2008
Chicago, IL

61. IRS Priorities for Nonprofit Review & Other Legislative Agendas
A. IRS Sets Priorities for Nonprofit Review in 2008
Interview with Lois Lerner – Director IRS Exempt- organization Division (12/20/07)
B. United States Senate Committee on Finance
(Baucus, Grassley) Write to 136 Colleges, Seek Details of Endowment Pay-outs, Student Aid (1/24/08)
C. Tax-Exempt Bond Financings Compliance Check Questionnaire Form 13907
(TEB Work plan FY 2008)
D. Exempt Organization Executive Compensation Compliance Initiative
E. CEP and other examinations in higher education
F. Governance Concerns
G. Form 990 Redesign
H. Form 990T Public Disclosure Requirements

62. Risk Management Issues
Strategic Risk – Not supporting institutional goals
Financial Risk – Penalties, interest & fees
Compliance Risk -
Operations Risk – Not effective & efficient
Public Relations Risk- Reputation

63. WITH APPRECIATION Associate Vice Chancellor of Finance
Susan Brooks
Associate Vice Chancellor of Finance
UNC Charlotte 414 Reese Financial Services Charlotte, NC
Beverly I. Moran Professor of Law and Sociology Vanderbilt University Law School st Avenue South Nashville, TN 37203
College Business Management Institute & The University of Kentucky