IN THIS ISSUE

	Stipends
	Register for NRA Tax Training December 9th – 12th
	Free SEVIS Navigator Web Demonstration
	Free Web Demonstration on Tax Navigator
	Windstar Publishing 2008 Tax Guide Updates
	Nonresident Alien Payment and Taxation Seminars
	Upcoming Trade Shows

Stipends

by Paula N. Singer, Esq. 

“Stipend” is not a tax term. Stipends are payments typically given to individuals to help defray living or other costs, often under the assumption that they are not taxable. Frequently, stipends are not taxed, not because they are not subject to tax, but because they are not reported by payers to the recipient or the IRS on an information return or by the taxpayers on their tax returns.

Under U.S. tax law, the substance of a transaction determines how a payment is taxed, not the name or form of a payment. Therefore, the first task of payers is to classify the income character of a stipend based on the tax rules.

Character of the Income
Section 117 of the Internal Revenue Code (the “Code”) provides rules for determining whether a stipend amount is a compensatory or noncompensatory grant. Section 74 of the Code provides rules for determining whether a stipend amount is a prize or award. IRS Publication 970, Tax Benefits for Education, explains the tax rules for determining 1) when a payment is a scholarship or fellowship grant, 2) the various types of payments typically treated as noncompensatory grants, and 3) when a noncompensatory grant can be excluded from income.

Payers making payments to foreign nationals can also use a recipient’s immigration documents to assist with determining the likely income character of a payment. For example, a recipient in H-1B immigration status is a “Temporary Worker in a Specialty Occupation” for whom the sponsoring organization has certified as to the job and “prevailing wage” in immigration filings and accompanying letters. (The immigration regulations for H-1Bs even address payroll taxes.) Therefore, payments to H-1B recipients are wages. A recipient who has an Employment Authorization Document (EAD), such as an F-1 Student engaged in Optional Practical Training, receives payments that can be either wages or self-employment income. (This is one of the few situations in which a foreign national is authorized to be an independent contractor.)

1. Scholarship or Fellowship Grant
IRS Publication 970 provides the following definitions:

• A scholarship is an amount paid or allowed to, or for the benefit of, a student, whether an undergraduate or graduate, to aid such individual in pursuing his studies.
• A fellowship is an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research.

Section 117 of the Code provides rules for when a scholarship or fellowship is a “qualified” grant (and nontaxable) or a “nonqualified” grant (and taxable). For example, “Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization.” IRS Publication 970 provides a liberal definition of “candidate for a degree.” (Since post-docs are not candidates for a degree, their noncompensatory fellowships are taxable.)

Qualified scholarships are amounts expended for “qualified tuition and related expenses” defined by Section 117(b)(2) to include:

• Tuition and fees required for enrollment or attendance at an educational organization
• Fees, books, supplies, and equipment required for courses of instruction at the educational organization

Cash is nonqualified because of the lack of evidence of how the cash is expended.

2. Compensation for Services
Section 117(c) specifically provides that “a scholarship or fellowship grant does not apply to that portion of the amount received that represents payment for teaching, research, or other services by the student as a condition of receiving the grant.” However, amounts received under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance (Armed Forces) Program are tax-free without regard to any requirement to perform services.

If only a portion of a scholarship or fellowship grant relates to services, the payer must determine the amount of the grant allocable to the services. Generally, grants must be allocated to services based on the fair market value of the services. IRS Notice 87-31 explains how to allocate such grants between services and scholarship or fellowship grants.

3. Prizes and Awards
IRS regulations under Section 74 of the Code define “prizes and awards” as amounts intended to award or recognize special achievement, skill, knowledge, or renown in certain areas. A prize or award may also be won in a contest or paid to a figure of world renown for outstanding achievement in an area of research or politics. In these situations, grantors do not intend that the amount be used for any specific purpose. Recipients of prizes and awards may use the amounts as they see fit.

Prizes and awards are generally taxable with exceptions being very narrowly defined by the Code.

Stipend Payments to Foreign Nationals
Payers making payments to foreign nationals have the additional task of determining if a stipend recipient is a nonresident alien, in which case special tax withholding and reporting rules apply depending upon the character of income and the source of that income (as defined by the Code). The withholding and reporting rules for payments to resident aliens are the same as those for U.S. citizens. Although noncompensatory fellowships are not reportable to U.S. citizens and residents, these recipients have an obligation to record the taxable fellowship on their Form 1040 tax return.

The character of income of a payment is also important in determining whether a treaty exemption from tax applies to  a payment made to a foreign national, since treaty benefits differ depending on income type.

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 5, Number 6, for a discussion on "Source of Income and Why It Matters."

Q: Our organization is hosting a J-1 research scholar.  The head of the department he is associated with will be submitting a Fellowship Request Form to Accounts Payable every month for the year that the researcher will be here.  The form specifically says that it is for fellowships, so I don’t have to question anything, do I?

A: The manner in which a payment is requested is not necessarily indicative of its true nature. You still need to perform due diligence to determine the true character of the income. If services are required in return for the money, at least a portion of it is compensation.

Registration Now Available for Windstar’s Year-end Nonresident Alien Tax Training Workshop December 9th – 12th

Windstar’s next comprehensive Nonresident Alien Tax Training will take place December 10th – 12th at the Hilton Boston/Dedham in Dedham, Massachusetts.  A half-day pre-conference on December 9th is available for new users to Tax Navigator and those new to immigration and nonresident alien taxation or individuals who would like refreshers in both areas.

The three-day seminar prepares attendees for handling year-end processing with confidence.  In addition to sessions focused on year-end processing, the seminar will also feature in-depth instruction on nonresident alien tax and compliance issues along with hands-on training on the International Tax Navigator®.

The registration cost is $1,350 for the first attendee from an organization and $1,200 for each additional attendee if registered by October 31st.  After October 31st the registration cost is $1,450 for the first attendee from an organization and $1,300 for each additional attendee.  There is also an additional $350 fee to attend the “Introduction to Tax Navigator” half-day pre-conference on December 9th. 

A discounted hotel rate of $119 per night for a single or double room is available at the Hilton Boston/Dedham for seminar attendees.

Register today!

Learn How To Reduce International Tax Navigator® Manual Data Entry with a Free SEVIS Navigator™ Web Demonstration

Join Windstar Technologies on October 15th from 1:00 – 2:00 PM ET, for a free web demonstration on our newest product, SEVIS Navigator™.

SEVIS Navigator is a web-based software application that allows International Tax Navigator® users to download the current biographical, immigration, and income type data for F, J, & M status individuals from the SEVIS RTI (Real Time Interactive) Web Processing website, allowing analysis and comparison of data for populating Tax Navigator.

Register online today

Attend a Free Web Demonstration On Tax Navigator and Start on Your Way to Improving NRA Tax Processing

Learn how International Tax Navigator® can help improve your nonresident alien tax processing by attending a free web demonstration on November 5th from 1:00 – 2:00 PM ET.  The demonstration will educate you on the ease of use of Tax Navigator, explain the benefits of using this powerful software tool, and give you an overview on how to enter data into the system. 

Click here to register

Windstar Publishing’s "U.S. Tax Guides for Foreign Persons and Those Who Pay Them" Series 2008 Updates

Windstar’s comprehensive "U.S. Tax Guides for Foreign Persons and Those Who Pay Them™"series has been extensively updated with revised forms and content for 2008.  New versions of the following books are available at shopping.windstar.com:

• U.S. Taxation of B-1 Business Visitor
• J-1 Nonstudent Exchange Visitors Performing U.S. Services
• L-1 Intracompany Transferees on U.S. Assignment
• U.S. Taxation of H-1B Specialty Workers
• A Guide for Filing IRS Forms 1042 and 1042-S (for Tax Year 2007)

The following revised versions of Windstar Publishing titles will be available for sale online within the next few weeks:

• Tax Treaty Benefits For Foreign Nationals Performing U.S. Services
• A Guide for Filing IRS Forms 1042 and 1042-S (for Tax Year 2008)
• U.S. Taxation of Foreign Students.
• International Aspects of Individual U.S. Tax Returns (a 2007 Axiom Business Book Awards Bronze Medal winner)

Visit shopping.windstar.com for more information or to purchase a tax guide.

Windstar Experts Present Nonresident Alien Payment and Taxation Seminars at Various Conferences This Fall

Windstar’s experts will present seminars on nonresident alien payment and taxation issues at several conferences this fall season.  Paula N. Singer, Esq., Linda Dodd-Major, and Terri Crowl will present sessions at the following conferences:

• American Payroll Association’s Educational Institutions Payroll Conference
• St. Norbert College International Tax Summit
• COKALA Nonresident Alien Payment Training

Paula will also present a seminar on paying foreign nationals at the 12th Annual Maine Tax Forum in November.

Windstar Will Dock at These Upcoming Trade Shows

COKALA Nonresident Alien Payment Training
Courtyard by Marriott Huntington Beach/Fountain Valley
Fountain Valley, CA
October 7- 8, 2008

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American Payroll Association’s 22nd Annual Educational Institutions Payroll Conference (EIPC)
Francis Marion Hotel
Charleston, SC
October 19-22, 2008

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12th Annual Maine Tax Forum
Augusta Civic Center
Augusta, ME
November 5-6, 2008

* * * * * * * * * * * * *

Windstar Pre-Conference at the St. Norbert College 13th Annual International Tax Compliance Workshop for Academic Institutions
St. Norbert College
De Pere, WI
November 17, 2008

* * * * * * * * * * * * *

St. Norbert College 13th Annual International Tax Compliance Workshop for Academic Institutions
St. Norbert College
De Pere, WI
November 18-20, 2008

* * * * * * * * * * * * *

Check in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in trade show information and speaking engagements..

©Copyright 2008 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties.  When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting.  Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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