Issue
Questions have been posed regarding whether a college/seminary that does not file Form 990 would be required to file Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax.
Situation
Sheila, the CFO at Idaho Bible College & Seminary (IBCS), calls us with a question. She states, “we have a letter from the IRS that says were are not required to file Form 990. In that letter, we are classified as an “integrated auxiliary of a Church as described in section 1.6033-2(h) of the Treasury Regulations”. We are also classified as 170(b)(1)(A)(ii). Do we need to file Form 5578?
We tell Sheila that IBCS should file Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax each year by the 15th day of the fifth month following the end of their tax year because they are “classified” as “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on” (school) by the IRS under I.R.C. section 170(b)(1)(A)(ii).
Rules
The short answer is that schools who file Form 990 report/handle this information on Schedule E of Form 990. Form 5578 is generally filed by schools that do not file Form 990.
From the Form 5578 instructions:
“Who Must File
Every organization that claims exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code and that operates, supervises, or controls a private school(s) must file a certification of racial nondiscrimination. If an organization is required to file Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, either as a separate return or as part of a group return, the certification must be made on Schedule E (Form 990 or 990-EZ), Schools, rather than on this form.
An authorized official of a central organization may file one form to certify for the school activities of subordinate organizations that would otherwise be required to file on an individual basis, but only if the central organization has enough control over the schools listed on the form to ensure that the schools maintain a racially nondiscriminatory policy as to students.”
The “driving force” behind the racial non-discrimination reporting is Rev. Proc. 75-50. This Revenue Procedure does not include a specific exclusion from filing for “churches”.
From IRS Publication 1828, Tax Guide for Churches and Religious Organizations, page 28:
“Note: It is not considered racially discriminatory for a parochial school to select students on the basis of membership in a religious denomination if membership in the denomination is open to all on a racially nondiscriminatory basis. Further, a seminary, or other purely religious school, that primarily teaches religious subjects usually with the purpose of training students for the ministry, is not subject to the racially nondiscriminatory requirements because it is considered to be a religious rather than an educational organization.”
Thus, it would appear that the “continental divide” on this issue comes with whether a college/seminary/university is organized under Internal Revenue Code section 170(b)(1)(A)(i) as “a church or a convention or association of churches” or under Internal Revenue Code section 170(b)(1)(A)(ii) as “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on” (school). Pursuant to the information in IRS Publication 1828 (above) a church would not be required to file Form 5578 (nor, as a church, Form 990) annually. Generally, if you are organized as a “school” (under I.R.C. 170(b)(1)(A)(ii)) you would file Form 990 – if not, Form 5578 would be required.
Note: If you are organized under Internal Revenue Code section 170(b)(1)(A)(ii) as “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on” as a “school” rather than a “church”, and are not filing Form 990, be very careful about documenting your reasons for not filing Form 990. Failure to file may result in penalties of up to $50,000 per year and possible revocation of your exempt status.
Bottom Line
As an accounting team member, you should know whether your institution is classified by the IRS as a “school” or as a “church”. This should be enumerated on your IRS “determination letter”. The classification could have a bearing on whether or not your institution is required to file certain forms – or may be subject to penalties, or worse. If you still have questions regarding the filing of Form 5578, Form 990, or other filings, ask your qualified tax advisor about these items. He or she will be able to help you navigate the rules that can prove difficult to decipher
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.