Work Colleges Tax Provision Included in the ‘Protecting American From Tax Hikes (PATH) Act of 2015’

Former Ways and Means Member and Arent Fox Co-Chair of Government Relations Philip English had this to say about the potential impact: “This reform is an important victory for a group of educational institutions that were suffering from aggressive and expansive audits from the Internal Revenue Service, adversely affecting their programs. By restoring clarity to the Work Colleges tax status, Congress is taking needed action to protect the schools and position them to build on their extraordinary history of affordability and academic excellence. In a limited and narrow tax negotiation, it is a tribute to lawmakers that they made this tax correction a priority. This is a real win for the Work Colleges Consortium and the higher education community.”

“With the passing of this legislation, the Work Colleges can now proceed in our mission without the threat of a destructive tax hanging over our heads,“ said Robin Taffler, Executive Director of the Work Colleges Consortium. “This is a huge win for our students and our institutions, and a clear sign that Congress is sensitive to the concerns of higher education.”

The Work Colleges’ model differs from those institutions that participate in the traditional Federal Work Study (FWS) program. Each college independently administers a “work-learning-service” program that requires all students who reside on campus to participate in integrated learning and work (on average 10-15 per week) as an essential and core element of each institution’s academic program and graduation requirement. Three of the seven colleges cover the full cost of tuition through work and scholarship. The others work to greatly reduce the reliance on grants and loans and have graduates with some of the lowest student debt in the nation. All work college students are highly engaged in community service and report having better career preparation than their counterparts at other institutions.

Prior to enactment of the Tax Reform Act of 1986, the Internal Revenue Code included a specific tax protection for scholarships awarded by the work colleges. The 1986 Act deleted section 117(b)(1)(A)(ii) which had exempted these programs from taxation. Though Congress repealed this section, the IRS has not altered (and has recently applied) its underlying regulatory implementation ruling Rev. Rul. 64-54, 1964-1 C.B. 81 also reflected in an August 19, 1963 IRS National Policy Memorandum. The continuing validity and applicability of Rule 64-54 to Work Colleges was upheld most recently in November 2006 during a 990 IRS Audit Report of one of the seven Work Colleges.

Legislation introduced by Senator Mark Kirk (R-IL), Representative Jason Smith (R-MO), and Representative Danny Davis (D-IL) was included in the larger extender package. In addition, S. 2525 was included in a larger non-controversial tax package passed by the Senate Finance Committee last February. The provision treats credits and payments for students like scholarship aid, rather than taxing it as wages. It also provides tax certainty to the existing Work Colleges.