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Jesse Handel
Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 262
Experience:  7 years tax preparation. IRS Registered Tax Preparer.
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If we bring foreign graduate students to the US using federal

Customer Question

If we bring foreign graduate students to the US using federal research grants for the following
purposes:

1. Attend a scientific conference
2. Collaborate on a scientific research project
3. Attend a scientific workshop
4. Attend a short training program for interdisciplinary research
5. To give a scientific talk

If we pay for the travel expenses for the student - either by directly paying for an
electronic ticket and directly paying for the hotel and food expenses - or if these
are documented by receipts - is the travel expense considered reportable and taxable
by the IRS? The University of Hawaii is insisting that any such student travel must
be considered as a scholarship and thus taxable, and this will cripple many of our outreach programs.
Submitted: 3 years ago.
Category: Tax
Expert:  Jesse Handel replied 3 years ago.
Hello and thank you for coming to Just Answer to allow us to help you with your tax question.

The IRS defines a scholarship as "generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate." "A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research."

"A scholarship or fellowship is tax free only if:
You are a candidate for a degree at an eligible educational institution, and
You use the scholarship or fellowship to pay qualified education expenses.

Qualified education expenses do not include the cost of:
Room and board,
Travel,
Research,
Clerical help, or
Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable."

Please note that travel expenses are specifically not a qualified expense. These definitions and quotes are from IRS Publication 970, "Tax Benefits for Education", 2009 edition. The entire publication can be found at www.irs.gov.

In addition, the IRS considers any scholarship, fellowship, and grant money paid to students for past, present, or future teaching, research or other services is taxable to the student. The description that you provide of the reasons for the travel expenses all seem to imply that the student is providing services of some kind.

These requirements are the bases that the University of Hawaii is using for their decision that student travel paid by the outreach program is taxable. Note that the travel expenses will be considered taxable income to the student, not to the outreach program or the university. Many of the students will be in low tax brackets and they will have education expenses which will help offset the tax. You may find that the problem of the travel expenses being taxable to the students is not as severe as you think.

You can contact the IRS directly, explain your specific program and circumstances and request that they provide you a ruling in writing on your specific program in advance. If they consider your situation and determine that your program expenses are not taxable to the students, then the students will be able to file their tax returns based on that ruling. If they confirm the University of Hawaii's decision, then you have a definitive answer.

I hope this answer helps you. Please let me know if you need more information or if I can clarify anything.

Edited by Jesse Hand on 9/1/2010 at 5:32 AM EST
Customer: replied 3 years ago.
Thank you for your answer. I too have carefully ready IRS publication 515 on taxability of scholarships.
However, is there never an occasion by which a graduate student may be considered to be a scientist
and attend a conference, present a talk or collaborate on a project, etc just as a scientist would and thus be allowed to be reimbursed for their travel expenses without the travel being classified as a scholarship or fellowship? In a formal capacity, they are often more valuable scientists than a senior scientist - because they often are more expert in a specific area than a senior person who is farther from their training and
who has broadened their perspective. Is there no leeway in the classification of the student based on
the purpose of the visit? Why must every trip be classified as a scholarship. Why is a student being treated differently than a scientist? I get a huge benefit out of going to a meeting and it is not required by my employment (just expected if I want to further my careeer). Why must there be a distinction.

How would I proceed with approaching the IRS to get a ruling? Is this something I would hire a local lawyer to pursue?

Kind regards,
Karen
Expert:  Jesse Handel replied 3 years ago.
Hello again, Karen. You have a very good point with respect to the money not having to be considered a scholarship, but unfortunately, you end up at the same point either way with respect to taxes. If you bring a professional in for a conference and pay his or her travel expenses, then you are still providing taxable compensation to that person, regardless of what you call the money. Travel expenses paid to a non-student are considered to be taxable income. If the recipient of the money is self-employed, then the travel reimbursement would be reported as gross income and the actual expenses paid would be considered business expenses. If the scholarship or travel expense money is given to the student, then the actual travel expenses could be deducted on Schedule A employee expenses if a student were in a financial position to itemize deductions. As an employee, you are paid wages and if your company pays for travel that isn't considered a separate benefit because you are being paid by your employer. If your employer doesn't pay for your travel expenses or your wages while you are at a conference, then you can deduct those expenses as unreimbursed employee expenses on Schedule A.

There really isn't a difference in the handling of a student and a non-student. When it comes to taxable scholarship money, that money is treated just like wages and other compensation being paid to a worker. The student has an advantage in that much of the scholarship income (those parts being used for qualified education expenses) are tax-free and many education expenses that are non-qualified education expenses for the purposes of determining the taxability of scholarship money may still be considered allowed education expenses for the purposes of education tax credits. The specific determination of which expenses are allowed for education tax credits depends on the specific expense, the type of program the student is enrolled in, the number of years the student has attended college, and what education tax credits they have used in previous years and so I can't give any general rules as to whether these travel expenses will be allowed for the purposes of qualifying for tax credits. Some students will be able to use them for tax credits and some won't.

A very unusual but maybe possible way that your foundation could transfer money tax-free to the students (at least, the student wouldn't pay any taxes) would be if you could arrange for the money to be a gift to the student and the IRS may well have already closed that loophole, since a gift given to a student for educational purposes is the definition of a grant. Grants are covered by the same tax rules as scholarships and fellowships. The IRS may consider any gift of money given to a student by an organization to be a grant covered by the same tax rules as a scholarship or a fellowship, rather than a gift covered by the normal gift tax rules. A gift is not taxable to the recipient, but it can be taxable to the giver. An individual can give up to $13,000 (in 2009) to a recipient in a year without the gift being taxable to the giver. A gift is defined as something given for no value in return or for less than full consideration (an equivalent amount of goods or service) in return. The IRS could consider that the presence of the student at the conference and the contributions of the student would be equivalent value to the travel expenses. There is also an education exclusion for taxability of a gift if the gifter pays tuition for the giftee. However, your organization is not paying tuition, so the educational exclusion wouldn't apply. Usually, the gift rules are used for giving money to relatives or heirs. Gifts and gift taxes are covered in Publication 950, Introduction to Estate and Gift Taxes. I've never heard of gifting being used in a situation such as we are discussing, so I don't know whether it is even a reasonable possibility.

You can follow up these issues with the IRS by either hiring a local CPA or tax lawyer to deal with the IRS on your behalf if you don't want to take the time personally (if your outreach program hires the CPA or tax lawyer, it would be a deductible expense), you can talk to an IRS agent personally by calling 1-800-829-1040, or you can find your local Taxpayer Assistance Center (local IRS office) by looking in the phone book under the US Government pages, Internal Revenue Service and make an appointment to talk to an IRS agent in person.

I hope this answers your questions. Please let me know if you need more information.
Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 262
Experience: 7 years tax preparation. IRS Registered Tax Preparer.
Jesse Handel and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Thanks. It looks like the issue will need a detailed legal ruling. I have already paid $1500 to a tax CPA firm in downtown Honolulu that shows that travel expenses are NOT taxable if they are substantiated reimbursements for travel (or paid directly to the vendors) for conferences, collaboration, etc. The sticking point now is the University's insistance that we must label this a scholarship if it is a student. If we can call a student a "scientist" and avoid the scholarship label, then the tax finding I have would cover things.

This whole thing is very very frustrating, given that these students (1) do not earn enough money to have to pay taxes and (2) foreign students don't have a clue how to pay taxes. UH is ONLY requiring the
witholding for students who are foreign, and 1099 reporting for US students (who then have to decide on their own if they have to pay or not later).›››
Expert:  Jesse Handel replied 3 years ago.
Unfortunately, unless you can get a specific ruling from the IRS, no matter what you call the students or what you call the travel expenses that you pay for the students, I can't see any way that you can avoid the travel expenses being considered taxable compensation to the students.

The University of Hawaii is making things more difficult than they need to be in how they want to handle the reporting, however. If the University considers the travel expenses to be scholarships, then the expenses paid can be reported as scholarship money on the 1098-T form the University already fills out and sends to their students, only sending the forms to all of the students involved. If the University requires your program to fill out 1099 forms, they are treating the students as independent contractors providing services and this will make it much more difficult for the students to deal with the IRS. Scholarship funds reported on a 1098-T can be offset by education expenses. Income reported on a 1099 is considered nonemployee compensation and it will call attention to the student by the IRS and make it harder for the student to prove that the travel expense was for educational purposes. That will make it harder, if not impossible, for the students to claim offsetting expenses for education credits.

If the University is insisting on withholding taxes for foreign students, then the foreign students will only have to file a US tax return to get the money withheld back from the IRS, they will not have to file a US tax return because they owe taxes (unless the travel expenses are greater than $9350).

You are probably better off to call the money "scholarship" money and try to get the University of Hawaii to either report the money or allow you to report the money on a 1098-T form. I don't see any reason why withholding would be required for scholarship money provided to foreign students, but that isn't in my area of expertise and you would need a separate opinion on that issue.

Good luck and I'm glad that I could help you.

Edited by Jesse Hand on 9/3/2010 at 5:33 AM EST

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