What CPAs Should Know About School Tuition Organizations


On October 4, 1999, the U.S. Supreme Court let stand a ruling by the Arizona Supreme Court that supports the constitutionality of school tuition organizations—tax-exempt entities that provide scholarships to students. The ruling, which answered the question of whether these organizations violate the separation between church and state, silenced critics. Supporters say the Court’s action will spur the formation of such organizations in other states.

That predicted boom would give CPAs opportunities to provide audit and attest services to the organizations. Taxpayers, parents and scholarship recipients would gain valuable assurance if CPAs provided independent audits of these privately run nonprofit entities. In addition, CPAs would be able to give tax advice to individual clients who make donations to school tuition organizations.


Since 1998 Arizona taxpayers have been allowed a dollar-for-dollar state tax credit up to $500 for donations to school tuition organizations. Under IRC section 501(c)(3), these organizations are required to

  • Provide scholarships to students in amounts up to but not exceeding the cost of tuition at a qualified private school.
  • Allocate at least 90% of their annual revenue for scholarships.
  • Not limit the availability of scholarships to students from only one school.
  • Allow scholarship recipients to attend any qualified school of their parents’ choice.

Arizona legislators defined a “qualified school” as a private school that doesn’t discriminate on the basis of race, color, sex, handicap, family status or national origin. However, section 501(c)(3) does permit private schools to discriminate on the basis of religion. Therefore, parochial schools would meet the requirements.

Taxpayers can use the $500 tax credit to reduce their state tax liability. If a taxpayer does not owe any state taxes, however, contributing to school tuition organizations will not result in a refund.

A carryover provision allows unused credits to be carried forward for five consecutive taxable years to offset future income tax liability. In addition, contributions to school tuition organizations qualify as charitable deductions for federal income tax purposes.

Separation of church and state

Whether education assistance programs that include parochial schools violate the principle of separation of church and state has long been a subject of debate. As recent court decisions show, neutrality is the key in determining the constitutionality of such programs.

The statement “Congress shall make no law respecting an establishment of religion” in the U.S. Constitution is known as the “establishment clause” and forms the basis for separation of church and state.

A statute does not violate the Constitution if (1) it serves a secular purpose, (2) its principal or primary effect neither advances nor inhibits religion and (3) it does not foster an excessive government entanglement with religion. Therefore, the support of private schools, in itself, is not unconstitutional. The Supreme Court has tried to steer a course of “constitutional neutrality.”

The clearest tenet of the establishment clause is that the state cannot give preference to one religious denomination over another. This emphasis on neutrality is apparent in a recent line of Supreme Court cases upholding a variety of educational assistance programs. For example, the Court ruled that it was legal for public school teachers to provide remedial education to disadvantaged children in parochial schools.

In another case, the Court ruled it was legal for Washington state to provide financial assistance to a blind student attending a private Christian college. In the upcoming term, the justices have agreed to hear a case to decide whether Louisiana can continue to use taxpayer money from a federal block grant to provide computers, software and library books to religious schools.


Scholarship grants from school tuition organizations and school vouchers are similar in that parents can choose which private schools they wish their children to attend. Although Florida, Ohio and Wisconsin all currently are experimenting with vouchers, confusion over their use in Cleveland captured national attention.

On the first day of school, Solomon Oliver, Jr., a U.S. district court judge in Ohio, issued an injunction halting the voucher program until a trial could determine whether vouchers violated the constitutional separation of church and state. The Ohio program covered up to $2,500 in tuition costs per child for poor families. The judge subsequently allowed more than 3,000 students to re-enroll in the pilot school voucher program in Cleveland, but refused to permit a new group of nearly 600 children to enter the program. In December, the federal district court in Cleveland ruled the city’s school voucher program was unconstitutional; however, the program will continue pending the state’s appeal of the decision.

Florida’s program also is controversial in that it grades public schools and provides vouchers only to students from schools that don’t make the grade. Under Governor Jeb Bush’s A-Plus Plan for Education, students in failing public schools—schools graded “F” two times in a four-year period—can apply for scholarships to the private school of their choice. A public school gets an “F” if the majority of its students fail to meet minimum performance standards on the state’s reading, math and writing exams.

Wisconsin’s program requires the state to pay the education costs of low-income Milwaukee parents who want to send their children to private schools. Under the Milwaukee Parent Choice Program, parents can select a private school and receive a state voucher for up to $5,000 a year per child to cover the expenses.

Explosive growth

Why should CPAs be interested in school tuition organizations? In Arizona in 1998, these organizations received $1,815,799 from 4,246 contributors. With the U.S. Supreme Court decision last fall that upheld the constitutionality of school tuition programs, challenges to them have been exhausted. As a result, the Arizona Department of Revenue estimates the tax-credit school tuition program could provide private schools with $75 million a year.

In addition, nearly half the states are considering providing similar public financial support for religious and other private schools. Proponents and opponents agree it may be only a matter of time before the Supreme Court hears a case that directly focuses on the issue of private school funding.

Independence is crucial

CPAs should be in the forefront, providing much-needed expertise to this new and expanding program. School tuition organizations must be autonomous: CPAs can and should play an important role in assuring their continued autonomy by providing a level of assurance that only an independent audit can give. In addition, CPAs need to know about the tax implications of school tuition organizations so they can advise their clients about them.

—Lawrence C. Mohrweis, CPA, PhD, associate professor of accounting at Northern Arizona University, Flagstaff.

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