ISSUE

Form 990, Schedule E (Form 990) – Schools contains some potential traps to be aware of.

 
 

SITUATION

Marathon Bible College (MBC) is a public charity and a school under I.R.C. sections 501(c)(3) and 170(b)(1)(A)(ii). Per requirements, MBC has a racially nondiscriminatory policy. As we are finalizing their Form 990 for the year ended June 30, they have some questions about Schedule E (Form 990), Lines 3 and 4.

Schedule E, Line 3 states, “Has the organization publicized its racially nondiscriminatory policy through newspaper or broadcast media during the period of solicitation for students, or during the registration period if it has no solicitation program, in a way that makes the policy known to all parts of the general community it serves? If “Yes,” please describe. If “No,” please explain. If you need more space, use Part II.”

Schedule E, Lines 4a – 4d specifically ask questions about whether the filing institution complies with rules related to maintaining various required records and copies.

Yes answers to these line items are important.

The rules governing the questions asked on Schedule E (Form 990) are set forth in Rev. Proc. 75-50. The revenue procedure gives guidelines and recordkeeping requirements for determining whether private schools that are recognized as exempt from tax have racially nondiscriminatory policies toward their students. Your accounting team should be familiar with the revenue procedure.

The Schedule E instructions contain sample language for publicizing your racially nondescriminatory policy as follows:

The (name) school admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.

NOTE: Institutions not required to file Form 990 should review “Tax Tips” from 2/10/16 regarding the potential for filing Form 5578.

 

RULES

From the Schedule E (Form 990) instructions (referencing Rev. Proc. 75-50):
[Line 3]
4.01 Organizational requirements. A school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and therefore doesn’t discriminate against applicants and students on the basis of race, color, and national or ethnic origin.

4.02 Statement of policy. Every school must include a statement of its racially nondiscriminatory policy as to students in all its brochures and catalogues dealing with student admissions, programs, and scholarships. A statement substantially similar to the Notice described in paragraph (a), subsection 1, section 4.03, below, will be acceptable for this purpose. Further, every school must include a reference to its racially nondiscriminatory policy in other written advertising that it uses as a means of informing prospective students of its programs. The following references will be acceptable. The (name) school admits students of any race, color, and national or ethnic origin.

4.03 Publicity. The school must make its racially nondiscriminatory policy known to all segments of the general community served by the school. 1. The school must use one of the following two methods to satisfy this requirement.

a. The school may publish a notice of its racially nondiscriminatory policy in a newspaper of general circulation that serves all racial segments of the community.
b. The school may use the broadcast media to publicize its racially nondiscriminatory policy if this use makes such nondiscriminatory policy known to all segments of the general community the school serves.
(*Note that there are some “codicils” and “exclusions” here that may need to be navigated by your institution.)

[Line 4a – 4d]
7.01 Specific records. Except as provided in section 7.03, each exempt private school must maintain for a minimum period of 3 years, beginning with the year after the year of compilation or acquisition, the following records for the use of the IRS on proper request.

1. Records indicating the racial composition of the student body, faculty, and administrative staff for each academic year.
2. Records sufficient to document that scholarship and other financial assistance is awarded on a racially nondiscriminatory basis.
3. Copies of all brochures, catalogues, and advertising dealing with student admissions, programs, and scholarships. Schools advertising nationally or in a large geographic segment or segments of the United States need only maintain a record sufficient to indicate when and in which publications their advertisements were placed.
4. Copies of all materials used by or on behalf of the school to solicit contributions.

 

BOTTOM LINE

• Schools (under I.R.C. Section 170(b)(1)(A)(ii) who file Form 990 are required to file Schedule E (Form 990).
• With the IRS’ “data-driven decision making” query protocol operating, please review your institution’s Schedule E prior to your next IRS filing.
• Rev. Proc. 75-50 and/or the Schedule E instructions are a good source of information on this issue.
• Those institutions that do not file Form 990 should consider whether they should be filing Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.