What CPAs Should Know about School Tuition Organizations

By Mohrweis, Lawrence C. | Journal of Accountancy, February 2000 | Go to article overview

What CPAs Should Know about School Tuition Organizations


Mohrweis, Lawrence C., Journal of Accountancy


On October 4, 1999, the U.S. Supreme Court let stand a ruling by the Arizona Supreme Court that supports the constitutionality of school tuition organizations--tax-exempt entities that provide scholarships to students. The ruling, which answered the question of whether these organizations violate the separation between church and state, silenced critics. Supporters say the Court's action will spur the formation of such organizations in other states.

That predicted boom would give CPAs opportunities to provide audit and attest services to the organizations. Taxpayers, parents and scholarship recipients would gain valuable assurance if CPAs provided independent audits of these privately run nonprofit entities. In addition, CPAs would be able to give tax advice to individual clients who make donations to school tuition organizations.

Requirements

Since 1098 Arizona taxpayers have been allowed a dollar-for-dollar state tax credit up to $500 for donations to school tuition organizations. Under IRC section 501 (c)(3), these organizations are required to

* Provide scholarships to students in amounts up to but not exceeding the cost of tuition at a qualified private school.

* Allocate at least 90% of their annual revenue for scholarships.

* Not limit the availability of scholarships to students from only one school.

* Allow scholarship recipients to attend any qualified school of their parents' choice.

Arizona legislators defined a "qualified school" as a private school that doesn't discriminate on the basis of race, color, sex, handicap, family status or national origin. However, section 501 (c)(3) does permit private schools to discriminate on the basis of religion. Therefore, parochial schools would meet the requirements.

Taxpayers can use the $500 tax credit to reduce their state tax liability. If a taxpayer does not owe any state taxes, however, contributing to school tuition organizations will not result in a refund.

A carryover provision allows unused credits to be carried forward for five consecutive taxable years to offset future income tax liability. In addition, contributions to school tuition organizations qualify as charitable deductions for federal income tax purposes.

Separation of church and state

Whether education assistance programs that include parochial schools violate the principle of separation of church and state has long been a subject of debate. As recent court decisions show, neutrality is the key in determining the constitutionality of such programs.

The statement "Congress shall make no law respecting an establishment of religion" in the U.S. Constitution is known as the "establishment clause" and forms the basis for separation of church and state.

A statute does not violate the Constitution if (1) it serves a secular purpose, (2) its principal or primary effect neither advances nor inhibits religion and (3) it does not foster an excessive government entanglement with religion. Therefore, the support of private schools, in itself, is not unconstitutional. The Supreme Court has tried to steer a course of "constitutional neutrality."

The clearest tenet of the establishment clause is that the state cannot give preference to one religious denomination over another. This emphasis on neutrality is apparent in a recent line of Supreme Court cases upholding a variety of educational assistance programs. For example, the Court ruled that it was legal for public school teachers to provide remedial education to disadvantaged children in parochial schools.

In another case, the Court ruled it was legal for Washington state to provide financial assistance to a blind student attending a private Christian college. …

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