IRS Letter Ruling 9821053
Background. Many churches operate schools and offer "tuition discounts" to some employees whose children attend the school. Consider the following example:
$$ Example. A church operates a private school. The annual tuition is $2,500. However, the school allows the children of its two pastors to attend the school for free. Both pastors are full-time church employees, but they do have some involvement with the school. One of them serves as "president" of the school as part of his job description as senior pastor of the church, and the other teaches a course each semester at the school (and is paid $500 each semester). The school allows the children of its employees to attend at "half" tuition. The same rate applies to the children of church employees.
Are there tax consequences to the tuition discounts described in this example? Do the tuition "reductions" represent taxable income to the parents, or are they nontaxable? If they are nontaxable, what conditions apply? These are important questions, and church treasurers should have some familiarity with them.