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This second edition of the book is being released approximately four years after the first edition. During this period of time, there have been a number of significant developments in the college and university tax area, resulting in the addition of substantial new material to this second edition as well as the deletion of a fair amount of superseded and outdated text from the first.
The college and university tax area continues to evolve rapidly and, in some areas, quite dramatically. It is worth remembering that up until the early 1990s the IRS took almost no notice of colleges and universities, and not coincidentally, most schools had little knowledge of or interest in tax issues. During this time period, it was quite common for a school with hundreds of millions of dollars (or even a few billion) in gross receipts to have no employees with any federal tax expertise, and virtually no schools had a "tax manager" position. Over the past 10 years or so, that has changed quite dramatically, in large part because of the comprehensive audit program directed at colleges and universities instituted by the IRS in the early 1990s. Now, virtually all colleges and universities have at least one employee who is responsible for federal tax issues; many schools have a tax manager who has his or her own tax department; most college and university financial and legal conferences have at least one session devoted to tax issues; and there are at least two large groups of colleges and universities that get together for a few days each year to discuss tax issues.
The issues that arose in the early to mid-1990s were fairly basic (for example, will royalties paid by a university to employee-inventors be treated as a true royalty or as additional employee wages?); however, resolution of the basic issue often led to more subtle and difficult issues (what will be the impact if the royalty is paid to the employee-inventor in stock of the licensed company instead of in cash?). As has been the case in other areas of the tax law, as these more complex issues are resolved, they, in turn, raise more complex issues still (if the royalty can be paid in the form of stock, when is the employee-inventor treated as in receipt of the stock for tax purposes and how is the stock to be valued?). Unfortunately for colleges and universities, and fortunately for the IRS, this peeling away of the onion skin of issues is a never-ending process, and colleges and universities have now entered the tax world that the for-profit corporations have lived in for decades.
I have retained the same overall approach to the second edition that I followed in the first--I have attempted to cover all of the different tax issues that a college and university might face, but at the same time I realized that some of these topics (403(b) plans and tax-exempt bonds, to name the most obvious examples) each deserved a book of their own. Therefore, I have covered these areas in fairly cursory form and have tried to direct readers to sources where they may be able to find a more in-depth treatment of the topic. One of the most significant changes in the second edition is a more comprehensive treatment of nonresident alien withholding and reporting issues. I thought it important to give this area broader treatment because it continues to be so confusing, and more importantly, because nonresident alien tax issues are a prime focus of the IRS in its audits of colleges and universities.
Chapter One provides a historical overview of how the IRS has dealt with colleges and universities over the years and discusses some of the reasons why the IRS decided in the early 1990s to focus its compliance efforts on institutions of higher education. This chapter also provides some recommendations as to resource material that a college or university tax administrator might obtain to assist in identifying and resolving tax issues as they arise and, in addition, to stay current on new developments. And it contains a discussion of the various legal authorities, such as revenue rulings, court cases, etc.
Chapter Two contains a general treatment of the unrelated business income tax rules, including the definition of "unrelated business income," the specific statutory exceptions to the application of this tax, and other related topics, such as income from controlled organizations, foreign insurance income, debt-financed income, and deductions that can be claimed in computing unrelated business income.
Chapter Three identifies and discusses those peculiar college and university activities that raise potential unrelated business income tax concerns. These include some of the obvious activities, such as bookstores, affinity credit cards, travel tours, and corporate sponsorships, as well as some that are less obvious, such as parking lots, summer sports camps, and catering activities.
Chapter Four looks at the employment tax obligations imposed on a college or university in its capacity as an employer and as an entity that retains independent consulting services. This chapter devotes considerable attention to the problem of classifying workers as employees or independent contractors, and also discusses whether student and nonresident alien employees are subject to the FICA tax.
Chapter Five focuses on fringe benefits. After a general discussion of the basic fringe benefit rules, this chapter looks at the treatment of those particular fringe benefits typically provided by colleges and universities to their employees, such as cafeterias and dining rooms, athletic facilities, free or discounted athletic tickets, free or subsidized housing, and section 127 educational assistance programs.
Chapter Six deals with the rules regarding charitable contributions and includes a general discussion of these rules together with an analysis of those provisions of special interest to colleges and universities, such as the distinction between making a gift and paying an individual's tuition, and payments made for the right to purchase seating at athletic events.
Chapter Seven deals with the taxation of scholarships and fellowships, both from the standpoint of the student-recipients (whether and to what extent the grant is taxable to the student) and from the institution's standpoint (that is, the school's tax withholding and reporting obligations on making scholarship and fellowship payments). This chapter also contains a discussion of two major issues currently being raised in IRS audits--distinguishing between compensation and a scholarship/fellowship, and the withholding and reporting requirements imposed on an institution making scholarship/fellowship payments to nonresident aliens.
Chapter Eight includes an expanded discussion and analysis of nonresident alien tax issues, such as what constitutes taxable income to the nonresident alien, how tax is to be withheld and reported, and the impact of tax treaties.
Chapter Nine contains a discussion of a number of different issues, many of which would require an entire book to treat comprehensively. The chapter covers the rules relating to (1) maintaining tax-exempt status and avoiding problems involving potential private inurement and the intermediate sanctions rules, (2) organizing and operating related entities, (3) 403(b) and other retirement plans typically adopted by colleges and universities, (4) tax-exempt bonds, and (5) filing the Form 990. Many educational institutions have begun to expand their activities overseas, and this chapter also contains a discussion of the legal issues and potential pitfalls that can arise in conducting activities abroad.
Finally, Chapter Ten covers IRS audits. It describes how most audits of colleges and universities are conducted and offers some tips on how to handle the audit, including a discussion of the attorney-client privilege and how to ensure that the privilege is maintained. The chapter also discusses how a tax case moves beyond the audit stage to the IRS Appeals Office and on to court.
It is important to note that at the end of many chapters there is a discussion of how the particular topic is treated in the IRS College and University Examination Guidelines.
In the Preface to the first edition, I expressed my frustration with not having the time to be able to provide a more in-depth analysis of the different topics and issues discussed, and to some extent, that frustration carries over to the second edition, although there are a number of areas where I have included a deeper analysis of the issue in question. It is, however, simply not possible within the constraints of conducting my private practice to write essays on each different issue. There is another limiting factor that stems from the fact that much of my practice involves representing clients before the Internal Revenue Service. In discussing and analyzing the pros and cons of various issues, I have to be careful that I do not assert an opinion that may be contrary to one that I previously asserted on behalf of a client, or one that I may want to assert in the future. This is a problem that is not faced by, say, a law professor or other academic, and readers should be aware of this limitation since it applies to virtually all private practitioner authors.
Finally, I would like to express special thanks to people who have been of assistance over the four years since the first edition was published. These include my secretary, Jo Ann Mead, who has labored through all of the annual updates and this new edition with her usual good humor and skill; the many individuals in the college and university business and general counsel offices with whom I work on a daily basis and who are kind enough to contact me for advice when, in many instances, they know as much as I do about the issue; and my wife, Linda, who continues to be my biggest cheerleader and my best friend.Bertrand M. Harding, Jr.
Chapter One. Overview of College and University Taxation.
Chapter Two. Unrelated Business Income.
Chapter Three. Common Activities Conducted by Colleges and Universities that Raise Unrelated Business Income tax Concerns.
Chapter Four. Employment Taxes.
Chapter Five. Fringe Benefits.
Chapter Six. Charitable Contribution Deductions.
Chapter Seven. Scholarships and Fellowships.
Chapter Eight. Income Tax Withholding and Reporting on Payments to nonresident Aliens.
Chapter Nine. Special Issues and Problems.
Chapter Ten. IRS Audits of Colleges and Universities.