Issue
We continue the “mini-series” on board member payments/benefits this week. What is the taxability (if any) of scholarships that may be offered to board of trustees members and/or their families?
Situation
Denali Christian College (DCC), a public charity under I.R.C. section 501(c)(3) (and I.R.C. section 170(b)(1)(A)(ii)), calls to ask us about providing “tuition remission” for a board member’s granddaughter because of the board member’s position and service. They reason that their “Section 117 plan” allows this benefit to employees of the college and their dependents, so it should extend to board members. They say that they understand that the value of this “benefit” would need to be reported on Schedule L (Form 990) Part III.
We reply that their interpretation appears to be incorrect. A board member would generally not be covered under their “Section 117 Qualified Tuition Reduction plan” and that the value of the “tuition remission” would need to be reported to the board member on Form 1099-MISC in box 7. Also, it would be reported in Form 990, Part VII, Section A, Column D for the board member. It would not, then, be reported on Schedule L (Form 990), Part III.
There may also be some public relations and/or legal issues around the “compensation” of one (some) board member(s) and not others.
This may result in a different answer if the board member was also an employee of the college (e.g. a professor, etc.).
Rules
From Internal Revenue Code section 117(d):
(d) Qualified tuition reduction.
(1) In general.
Gross income shall not include any qualified tuition reduction.
(2) Qualified tuition reduction.
For purposes of this subsection , the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in section 170(b)(1)(A)(ii) ) of- (Underline added.)
(A) such employee, or
(B) any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h) .
(3) Reduction must not discriminate in favor of highly compensated, etc.
Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).
From Treasury Regulation 31.3401(c)-1(f):
All classes or grades of employees are included within the relationship of employer and employee. Thus, superintendents, managers, and other supervisory personnel are employees. Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is not considered to be an employee of the corporation. A director of a corporation in his capacity as such is not an employee of the corporation. (Underline added.)
From Form 1099-MISC instructions:
Directors’ fees. You must report directors’ fees and other remuneration, including payments made after retirement, on Form 1099-MISC in the year paid. Report them in box 7.
Finally, if you were required to report a “non-taxable” scholarship on Schedule L, note the following:
From Schedule L (Form 990), Part III instructions:
Schools. Colleges, universities, and primary and secondary schools are not required to identify interested persons to whom they provided scholarships, fellowships, and similar financial assistance. Instead, these organizations must, in Part III, group each type of financial assistance (for example, need-based scholarships, merit scholarships, discounted tuition) provided to interested persons in separate lines. For each line, the school should report in column (c) the aggregate dollar amount of each type of assistance, the type of assistance in column (d), and the purpose of the assistance in column (e), unless such reporting would be an unauthorized disclosure of student education records under the Family Educational Rights and Privacy Act (FERPA). Columns (a) and (b) should be left blank for these lines.
Bottom Line
Again this week, there is a lot going on with this situation. Any benefits that you provide to board members/trustees should be carefully documented and researched to ensure that they will not result in taxable compensation. It always makes sense to consult with your qualified, knowledgeable tax advocates to document your reasonable positions with regard to these issues – given “all facts and circumstances.”
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.