Background. Many churches operate schools and offer "tuition discounts" to employees of both the school and church whose children attend the school. For example, a church operates a private school (K-12). The annual tuition is $2,500. The school allows the children of its employees to attend at "half" tuition. The same rate applies to the children of church employees. For 2002, tuition reductions are provided to the children of 5 school employees, and 4 church employees. Are there tax consequences to these tuition discounts? Do the tuition "reductions" represent taxable income to the parents, or are they nontaxable? If they are nontaxable, what conditions apply?
Section 117(d) of the tax code specifies that "qualified tuition reductions" are not taxable. To be "qualified," however, certain conditions must be met. These include the following:
(1) The tuition reduction is provided to an employee of an "organization described in section 170(b)(1)(A)(ii)" of the tax code. This section refers to "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."