School officials and law firm claim Henry Scholarships are taxable, IRS disagrees

By Patrick B. McGuigan

Published 25-Jan-2011

Some local public school officials who are opposed to implementation of the Lindsey Nicole Henry Scholarships for special needs children have told parents seeking to access the historic new program that benefits are subject to federal taxation.

Attorneys for some parents have told CapitolBeatOK that in a few cases have been issued 1099s and told they must report the value of the scholarship as income.

The assertion about taxation of the benefits appears contrary to public policy, and has apparently been made at the direction of a controversial law firm that represents the majority of Oklahoma’s public school districts.

In a recent commentary on the blog of state Rep. Jason Nelson, the Oklahoma City Republican who sponsored Lindsey’s Law and carried it to passage last year, reflected:

“This effort to confuse and raise doubts about the program in the minds of parents is not new. This specter was raised during the debate on House Bill 3393 during the 2010 legislative session.

“It seems parents were led to believe that the Lindsey Nicole Henry Scholarship Program is a Qualified State Tuition Program – which are 529 college savings accounts. Lindsey’s Law is not a 529 college savings account.

“To my knowledge the IRS has not considered any scholarships from programs similar to Lindsey’s Law to be taxable. And there are currently a number of scholarship programs around the country – some have been in place for more than a decade. Oklahoma was the sixth state to pass a special-needs scholarship program into law.”

Rep. Nelson has been sending constituents and other interested Oklahomans to official Internal Revenue Service information, saying, “I’m passing it along as general information – not as tax advice.”

CapitolBeatOK has independently reviewed information on similar programs, posted online by the federal government. It reads as follows: 

“Tax-Free Scholarships and Fellowships

“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.

“Candidate for a degree.   You are a candidate for a degree if you:

1.  Attend a primary or secondary school or are pursuing a degree at a college or university, or

2.  Attend an accredited educational institution that is authorized to provide:

a.  A program that is acceptable for full credit toward a bachelor’s or higher degree, or

b.  A program of training to prepare students for gainful employment in a recognized occupation.

“Eligible educational institution.  An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

“Qualified education expenses.   For purposes of tax-free scholarships and fellowships, these are expenses for:

·    Tuition and fees required to enroll at or attend an eligible educational institution, and
·    Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.”

This and related information can be viewed in full context here. For further information, visit here.