oversight

Federal Research Grants: Compensation Paid to Graduate Students at the University of California

Published by the Government Accountability Office on 1999-06-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to the Chairman
               Committee on Commerce
               House of Representatives


June 1999
               FEDERAL
               RESEARCH GRANTS

               Compensation Paid to
               Graduate Students at
               the University of
               California




GAO/OSI-99-8
United States General Accounting Office                                                        Office of Special Investigations
Washington, D.C. 20548



                                    B-282325                                                                                        Letter

                                    June 22, 1999

                                    The Honorable Thomas J. Bliley, Jr.,
                                    Chairman, Committee on Commerce
                                    House of Representatives

                                    Dear Mr. Chairman:

                                    This letter responds to your May 1, 1998, request and subsequent
                                    discussions with your office that we investigate the use of federal research
                                    and development grant funds by the University of California system in its
                                    payments to graduate student researchers (GSRs). The University of
                                    California is one of the leading research universities in the United States.
                                    In fiscal years 1996, 1997, and 1998, the university charged approximately
                                    $201 million against federal research grants for GSR compensation. You
                                    asked that we determine if

                                    • the compensation paid to GSRs was in accordance with the guidelines
                                      set forth in the Office of Management and Budget’s (OMB) Circular No.
                                      A-21, “Principles for Determining Costs Applicable to Grants, Contracts,
                                      and Other Agreements With Educational Institutions”;
                                    • foreign students were receiving a larger share of federal research funds
                                      than resident students as compensation for performing as GSRs; and
                                    • the university’s treatment of GSR compensation for federal income tax
                                      purposes was consistent with its actions in charging such moneys to the
                                      federal grants under OMB Circular No. A-21.

                                    In addition, you asked us to review the adequacy of the oversight provided
                                    by the Department of Health and Human Services (HHS) in safeguarding
                                    against the diversion of funds from federal research grant awards.



Results in Brief                    OMB Circular No. A-21 (July 1993)1 establishes the principles to be applied
                                    in determining allowable costs for research and development, training, and
                                    other sponsored work performed by colleges and universities under grants,


                                    1
                                     The version of OMB Circular No. A-21 issued in July 1993 is applicable for the period we investigated.
                                    The circular was revised in Oct. 1998, but no substantive changes regarding the issues discussed in this
                                    report were made.




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contracts, and other agreements with the federal government. It allows
universities and colleges to charge to federally sponsored programs
“… tuition remission and other forms of compensation paid as, or in lieu of,
wages …” to GSRs on those programs, provided that (1) there is a bona fide
employer-employee relationship and (2) the tuition remission or other
payments are reasonable compensation for the work performed and
conditioned explicitly upon the performance of necessary work. It must
also be a university’s practice to similarly compensate students in
nonsponsored activities.

GSRs receive a salary and tuition and/or fee remission from the University
of California as compensation for their work on federally sponsored
research projects. According to the university, its practice of charging the
salary and remissions against federally funded research grants complies
with OMB Circular No. A-21. However, based on our review of the
compensation paid to GSRs for services charged to federal research grants,
we found that these payments sometimes exceeded the allowable costs
that could be charged to such grants.

We compared the compensation paid to individual GSRs assigned to
federally sponsored research projects against (1) the National Institutes of
Health (NIH) guideline that establishes an award level of $23,000 per GSR
and (2) the salary of a first-level postdoctoral researcher at the university
performing comparable work at an equivalent level of effort. Of the
$201 million charged by the university to federally sponsored research
during school years 1995-96 through 1997-98, $4.4 million was charged in
excess of the NIH maximum award in what we believe to have been
unreasonable compensation. The university also charged federally
sponsored grants approximately $19. 3million for GSR compensation that
exceeded the salary of a first-level postdoctoral researcher during the same
period.

Although all GSRs receive substantially the same salary for work
performed on federal research grants, foreign students receive a
proportionally larger share of fee and tuition payments charged to the
grants because they pay a higher nonresident student tuition. While
representing 21 to 24 percent of the GSRs at the university in school years
1995-96, 1996-97, and 1997-98, foreign students received 34 to 38 percent,
for a total of $13.9 million, of the $38.6 million charged to federal research
grants for tuition and fee remission.




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Although the university treats GSRs’ salary and tuition and/or fee remission
as compensation for purposes of the OMB circular, traditionally it has
treated only the salaries as part of the GSRs’ gross income for federal
income taxes. The university excludes all tuition and fee remission from
gross income as qualified remission, asserting that this practice is in
accordance with Internal Revenue Code section 117(d). When we asked
the Internal Revenue Service (IRS) for its views of this practice, IRS
informed us that, as a general principle, reasonable tuition remission
provided as a result of an employer-employee relationship can properly be
considered a fringe benefit and excludable from the employee’s gross
income for tax purposes. IRS explained that the treatment of the
compensation by the employer under OMB Circular No. A-21 is not relevant
to its determination of the tax consequences of the compensation under the
Internal Revenue Code. Similarly, HHS and NIH officials told us that in
determining whether tuition remission is allowed under the grant, they pay
no attention to the taxability issue. A district court case is pending against
the University of California in which the relator 2 has asserted False Claims
Act violations by the university for its treatment of the tuition remission
paid to GSRs under the OMB circular. In view of this pending case and the
HHS and NIH opinions, we do not address in this report whether the tuition
remission provided to GSRs should have been taxed or whether the
university’s treatment of the tuition remission for tax purposes is
consistent with the OMB circular.

As the cognizant audit agency for the University of California, HHS does
not routinely conduct preaward or postaward audits. When audits are
conducted in response to specific requests for awarding agencies other
than NIH, HHS determines only whether line-item amounts exceed the
amounts approved by the awarding agencies. When auditing NIH awards,
HHS follows the same action except with respect to the specific costs
involving GSR compensation. For these costs, it ensures that the
institution has not requested GSR compensation that would exceed the
NIH cap of $23,000 (now $26,000) per GSR identified in the request. HHS
relies on the respective universities to ensure that compensation paid to
GSRs is reasonable and does not exceed the established guidelines.




2
    A relator is the person on whose complaint, or at whose instance, certain writs are issued.




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Background   Since World War II, the federal government has been a key supporter of
             research activities at universities and is the leading source of funding for
             academic research and development in the United States. Its involvement
             has been generally viewed as beneficial to the university community as well
             as to the nation as a whole. Each year, the Department of Defense, the
             National Science Foundation, NIH, and other departments and agencies of
             the federal government provide universities with billions of dollars for
             basic and applied research under federal grants. The universities in turn
             use these funds to pay the costs of the research, including the salaries of
             professors and GSRs.

             OMB Circular No. A-21 (July 1993) establishes the principles to be applied
             in determining allowable costs for research and development, training, and
             other sponsored work performed by colleges and universities under grants,
             contracts, and other agreements with the federal government. It applies to
             compensation provided by colleges and universities to graduate students
             who work on federally sponsored research projects at those institutions.

             The OMB circular states that tuition remission and other forms of
             compensation, paid as or in lieu of wages, to students performing
             necessary work are allowable provided that (1) a bona fide employer-
             employee relationship exists between the student and the institution for
             the work performed, (2) the tuition or other payments are reasonable
             compensation for the work performed and conditioned explicitly upon the
             performance of necessary work, and (3) it is the university’s practice to
             similarly compensate students in nonsponsored, as well as sponsored,
             activities.3

             OMB Circular No. A-21 applies a “prudent person” test in determining
             whether the compensation is reasonable. It provides that in determining
             reasonableness, major considerations are (1) whether or not the cost is of a
             type generally recognized as necessary for the operation of the institution
             or the performance of the sponsored agreement; (2) the restraints imposed
             by such factors as arm’s length bargaining; (3) whether or not concerned
             individuals acted with due prudence in the circumstances, considering
             their responsibilities to the institution, its employees, its students, the




             3
                 Id. ¶ J.41.a.




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government, and the public at large; and (4) the extent to which the actions
taken are consistent with established institutional policies and practices. 4

In an October 1994 audit report of GSR compensation charged to NIH
awards at four selected (non-California) universities, the HHS Office of
Inspector General (OIG) noted that the OMB circular did not provide clear
guidance on reasonable compensation to graduate students. The OIG
recommended that the HHS Assistant Secretary for Management and
Budget work with OMB to provide guidance on the standard of
reasonableness for graduate student compensation.5 To date, the HHS
Assistant Secretary has not made a formal request to OMB concerning this
issue, and OMB has not issued additional guidance on the reasonableness
standard.

However, following the HHS OIG report, NIH issued new guidelines in May
1995 that related to the determination of reasonable compensation for
GSRs employed on NIH research grants. As in the past, the guidelines
provided that NIH would continue to consider compensation for personal
services of GSRs rendered on an NIH research project to be allowable so
long as the compensation (1) is reasonable, (2) conforms to the established
consistently applied salary and wage policies of the institution, and (3)
reflects the percentage of time actually devoted to the funded project.
However, according to the guidelines, reasonable compensation for GSRs
could not exceed the amount allowable for a first-level postdoctoral
researcher performing comparable work at the same institution.

On January 26, 1996, NIH amended its guidance. It reiterated that NIH
would continue to consider compensation for personal services of GSRs as
employees on NIH research projects to be allowable so long as the
compensation is reasonable. The guidance also stated that in no case
should the total compensation package for GSRs exceed that of a first-level
postdoctoral researcher at the same institution. NIH noted that its National
Institute of General Medical Sciences generally provides total
compensation of $20,000 to $23,000 to GSRs employed on research grants.
In March 1996, NIH issued additional guidance, stating that, if reasonable, it


4Id. ¶   C.3.

5
 The OIG utilized the starting salary of a first-level postdoctoral researcher at each university as a
measure of reasonableness for that university. The OIG estimated that three of the four universities it
studied had charged federally sponsored research about $5. 7million in unreasonable GSR
compensation.




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                   would award the actual amount requested for GSR compensation, up to a
                   maximum of $23,000. The guidance further provided that recipients could
                   rebudget funds to charge more than $23,000 to the grant award, provided
                   that it was in accordance with OMB Circular No. A-21. NIH explained,
                   however, that the amount could not exceed the amount paid to a first-year
                   postdoctoral researcher doing comparable work at the same institution.
                   On December 4, 1998, NIH raised the cap to $26,000. As with the earlier
                   guidance, it permitted institutions to rebudget funds to charge more than
                   $26,000 to the grant award, provided the amount does not exceed the
                   amount paid to a first-year postdoctoral researcher performing comparable
                   work at the same institution.



Compensation for   As one of the leading research universities in the United States, the
                   University of California receives funding controlled by individual
GSRs               agreements between federal award agencies and representatives of the
                   university.6 Annually, approximately 38,000 graduate students are at the
                   university, about 7,000 (18 percent) of whom are doctoral degree
                   candidates. With few exceptions, it is the 7,000 doctoral candidates who
                   receive funding as GSRs through research grants. Of these, approximately
                   6,000 work on federal research grants. The work performed by GSRs on
                   these grants is conducted under the direction of faculty members at one of
                   the nine campuses in the university system.7 In order to earn a doctoral
                   degree, GSRs must conduct research activities related to their degree
                   subject and prepare a written dissertation.

                   University officials told us that university policy limits GSRs to a maximum
                   appointment level of 50 percent (20 hours per week) during the academic
                   year (9 months) and 100 percent (40 hours per week) during the
                   nonacademic periods (3 months). GSR appointments are limited by the
                   availability of funds, and most appointments are for less than the maximum
                   level. For their work, GSRs receive a salary and tuition and/or fee
                   remission from the university. In the fiscal years 1996 through 1998, the
                   university charged approximately $20 1million to federal research grants
                   for GSR compensation.


                   6The  University of California also receives research grant funds from the state and private and
                   corporate donors. In fiscal year 1997, the university received $284 million in state funds and $314
                   million from private and corporate donors for university research.

                   7
                    The University of California has campuses at Berkeley, Davis, Irvine, Los Angeles, Riverside, San
                   Diego, San Francisco, Santa Barbara, and Santa Cruz.




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The salary GSRs receive depends upon the number of hours they work and
the course of study. According to university officials, most GSRs are
appointed to federal research grants after completing the first year of a
doctoral program; and most of these are compensated at the step II or
higher GSR salary level, which ranges from $13.40 per hour to $18.65 per
hour.

The tuition and fee remission portion of the compensation paid to GSRs is
based on the residency status of the student and the level of appointment.
GSRs who are foreign, nonresident aliens receive up to $14,500 per year in
tuition and fee remission—the amount of tuition and fees charged
nonresident citizens at the university. GSRs who are California residents,
on the other hand, receive up to $4,400 per year in fee remission, which is
the fee charged residents.8 GSRs having an appointment level of less than
25 percent receive no fee and/or tuition remission benefits. GSRs who are
working on a part-time basis—25 to 44 percent of the time—receive up to
50-percent remissions; and those who are on appointments of 45 to 50
percent receive up to 100-percent remissions.

We reviewed the compensation paid to GSRs assigned to federally funded
grants at the university to determine if the compensation was reasonable.
Because OMB Circular No. A-21 does not provide clear guidance regarding
reasonable compensation for graduate students, we therefore compared
the total compensation paid to individual GSRs against the NIH guideline
establishing an award level of $23,000 per GSR and the salary paid to a first-
level postdoctoral researcher at the university performing comparable
work at an equivalent level of effort.9

Using the NIH standard of $23,000 per GSR, we reviewed the compensation
paid to GSRs assigned to federally funded grants for 3 school years—1995-
96, 1996-97, and 1997-98—for all campuses of the university. We found that
6.5 percent, or 1,194 GSRs out of 18,389, received compensation in excess
of $23,000 per GSR for those years. Furthermore, out of a total of
$201 million charged by the university to federally sponsored research,




8California residents are not charged tuition. Depending upon the appointment level, non-California
residents are charged both fees and tuition. The fees include educational fees, registration fees, and
other charges depending on the campus and program of enrollment.

9
 For a brief period of our review, the fall semester of 1995, the $23,000 figure had not been established
by NIH.




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$4.4 million was charged in what we believe to be unreasonable
compensation. Table 1 details our findings.



Table 1: Compensation Above NIH Standard in Federal Dollars for School Years
1995-96, 1996-97, and 1997-98
                             1995-96        1996-97        1997-98           Totals
GSRs working on
federal research
projects                        6,213          6,108          6,068         18,389
GSRs exceeding
$23,000                           369            370            455          1,194
Total compensation in
federal dollars           $67 million    $67 million    $67 million    $201 million
GSR compensation
that exceeded $23,000     $1.4 million   $1.4 million   $1.6 million   $4.4 million

We also reviewed a May 1997 GSR compensation report that the university
prepared for the HHS Inspector General, covering approximately 2,556
GSRs working on federally funded research grants at three of its
campuses—Berkeley, Davis, and Los Angeles—for the 1995-96 academic
year. The report showed that 202 GSRs had received compensation in
excess of the $23,000 NIH standard. This represented approximately
8 percent of the total GSRs for the covered period. The three campuses
received over $625,000 in reimbursements that exceeded the NIH
guidelines for these students’ compensation.

In addition, we reviewed individual student compensation for calendar
year 1997 NIH-approved grants at the Berkeley campus and found that 14 of
the 408 GSRs, or 3.4 percent, had exceeded the NIH standard of $23,000.
The university charged federally sponsored research $43,126 in excess of
the NIH standard for these students’ compensation. The total
reimbursement at the Berkeley campus for calendar year 1997 was
$3,384,580. In one case, a GSR received over $35,000 in compensation that
was charged to federal grants.

We also compared the compensation paid to GSRs assigned to federally
sponsored research projects to the salary received by a first-level
postdoctoral researcher performing comparable work at the same level of
effort at the university. We found that during school years 1995-96 through
1997-98, the hourly rate for GSRs at the first level ranged from $12.45 to
$12.95 per hour. However, most GSRs were compensated above the first



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                                            level and received a salary from $13.40 to $18.65 per hour for the same
                                            period. The hourly rate for a first-level postdoctoral researcher was $12.98
                                            to $13.72 for the same period. Furthermore, while most GSRs received
                                            either fee or fee and tuition remission, which could range between $4,400
                                            and $14,500 per GSR, postdoctoral researchers received no remissions.

                                            Table 2 sets forth the compensation that a GSR at the step II salary level
                                            would have earned at the university, assuming the maximum level of effort,
                                            i.e., a 50-percent level of effort during the academic period and a
                                            100-percent level of effort during the nonacademic period. The
                                            compensation paid to a first-level postdoctoral researcher performing
                                            comparable work at the same level of effort is also set forth below.



Table 2: Compensation for Step II GSRs and First-Level Postdoctoral Researchers
Academic                                     GSR step II salary with fee GSR step II salary with fee First-level postdoctoral
school year       GSR step II salary only                     remission      and tuition remission researcher compensation
1995-96                          $17,490                           $22,123                          $29,822                         $17,138
1996-97                          $17,843                           $22,508                          $30,857                         $17,483
1997-98                          $18,203                           $22,925                          $31,909                         $17,835

                                            Based on our analysis of University of California data, we found that during
                                            the 3 school years 1995-96, 1996-97, and 1997-98, 4,386 GSRs out of 18,389,
                                            about 24 percent, received compensation that exceeded the compensation
                                            paid to a first-level postdoctoral researcher performing comparable work
                                            at the same level of effort.10 The university charged federally sponsored
                                            research $19.3 million for these students’ compensation in excess of what it
                                            paid first-level postdoctoral researchers at a comparable level of work and
                                            effort.

                                            The university asserts that it complied with OMB requirements because the
                                            salary and tuition and/or fee remission constituted reasonable
                                            compensation for the work performed and was conditional upon the
                                            performance of necessary work. However, in a February 22, 1995, internal
                                            memorandum to the university’s Senior Vice President for Business and
                                            Finance, the Director of Resources and Administration made the following



                                            10
                                             Sufficient data were not available to compute the proper compensation amounts for those GSRs who
                                            had less than maximum appointments.




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                    comments on the 1994 HHS audit report concerning the allowability of fee
                    and tuition payments as costs chargeable to federal research grants.

                    “Had the audit taken place at UCLA [University of California at Los Angeles], the auditors
                    may well have questioned the reasonableness of our policies and procedures. In most if not
                    all instances the total compensation paid to UC [University of California] graduate students
                    employed on research projects will substantially exceed the published salary for entry-level
                    postdoctoral researchers working at the same level of effort. The current salary scale for
                    graduate students, depending on the specific job title used, is either slightly below or
                    identical with the salary scale for postdoctoral researchers. Graduate students working in
                    research are also eligible for tuition and/or fee remission, not available to postdoctoral
                    researchers, with an equivalent value ranging from $1,866 to $12,089 annually.

                    “Paragraph J.41 of Circular A-21 states that ‘tuition remission and other forms of
                    compensation paid as or in lieu of wages to students performing necessary work are
                    allowable…(emphasis added).’ The underlined language raises two additional issues about
                    UC’s tuition and fee remission programs. First, for the six campuses with a tuition
                    remission program, non-residency status increases the graduate student researcher’s total
                    compensation by $7,699 above that paid to residents in the same job title and step. This may
                    support a finding that tuition remission at UC is paid as a fringe benefit or as student aid,
                    rather than paid ‘as, or in lieu of,’ salaries and wages. Second the University does not
                    withhold income tax on the value of tuition and fee remission. This accounting treatment
                    may further support a finding that such charges are not being paid as, or in lieu of, wages.”




Foreign GSRs and    While the salary was proportionally the same for resident and foreign GSRs
                    during school years 1995-96 through 1997-98, foreign GSRs received a
Tuition Remission   larger proportionate share of the total tuition and fee remission costs
Funds               charged against federal grants than did resident GSRs. This resulted
                    because of the university’s policy to provide nonresident tuition remission
                    to foreign students and include the amounts as part of the GSR
                    compensation charged to the federal grants for nonresident GSRs.

                    Neither OMB nor HHS provides educational institutions with clear
                    guidance on whether out-of-state tuition costs should be passed on to the
                    federal government. However, in reviewing an internal university
                    document prepared in 1996, we noted that the university had found that no
                    other public universities charged the cost of out-of-state tuition to federal
                    grants. We also noted that the state of California does not allow the
                    university to charge state grant awards for nonresident tuition remission.
                    Similar policies have been established by several major private research
                    foundations.

                    Although foreign GSRs comprised 21 to 24 percent of the total GSRs at the
                    university for the school years 1995-96 through 1997-98, they received 34 to



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                                        38 percent of the tuition and fee remission moneys in those years. Foreign
                                        student GSRs were compensated at a higher level because their
                                        nonresident status made their tuition and fee remission approximately
                                        $7,700 higher than that of resident GSRs performing the same work in 1995-
                                        96, approximately $8,400 higher in 1996-97, and $9,000 higher in 1997-98.
                                        The tuition remission awards to resident and foreign GSRs assigned to
                                        federally funded grants were distributed as illustrated in table 3.



Table 3: Tuition Remission Received by GSRs Assigned to Federally Funded Grants

                                   Residenta                                                          Foreign
                                                      Fee                                                    Tuition and fee
                              Percent of       remission                                      Percent of           remission
               Number of           GSR          funds (in   Percent of Number of                   GSR              funds (in Percent of
School year        GSRs       population        millions)        funds     GSRs               population            millions)     funds
1995-96              3,402            79            $7.9              65            887                 21                $4.3              35
1996-97              3,278            79            $8.4              66            868                 21                $4.4              34
1997-98              3,366            76            $8.4              62          1,090                 24                $5.2              38
                                        a “Resident” includes 4 percent of GSRs who are U.S. citizens and/or resident aliens but are not
                                        California state residents. University policy precludes these GSRs from receiving nonresident tuition
                                        benefits beyond 1 year’s attendance.




GSR Compensation                        Although the university treats GSRs’ salary and tuition and/or fee remission
                                        as compensation for purposes of the OMB circular, traditionally the
and the Internal                        university has treated only the salaries as part of the GSRs’ gross income
Revenue Code                            subject to federal income tax. Therefore, the university has not treated the
                                        tuition and/or fee remissions as part of the GSRs’ gross income subject to
                                        federal income tax. The university cites section 117 of the Internal
                                        Revenue Code (26 U.S.C. section 117) as its authority for not considering
                                        the tuition and fee remission as part of the GSRs’ gross income.

                                        Section 117(a) of the Code excludes from certain individuals’ gross income
                                        qualified scholarships and tuition remission. Subsections 117(d)(2) and
                                        (d)(5)[4] indicate that a qualified tuition remission or reduction is the
                                        amount of any reduction in tuition provided to an employee of an
                                        organization, such as the university, for the education of the individual at
                                        the undergraduate level or at the graduate level if the employee is engaged
                                        in teaching or research activities. The exclusion from gross income for
                                        scholarships and tuition remission is limited, however, by subsection
                                        117(c), which provides that the exclusion does not apply to that portion of



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any amount received by a student that represents payment for teaching,
research, or other services by the student required as a condition for
receiving the scholarship or tuition remission.

On July 13, 1998, we wrote IRS and requested its views on whether the
university could exclude tuition remission from gross income even though
the remission is treated as reasonable compensation for purposes of OMB
Circular No. A-21. IRS replied to our request on January 6, 1999. (See
app. I.)

In its letter, IRS recognized that under reimbursement guidelines set forth
in OMB Circular No. A-21, universities are allowed to recover the costs of
compensation for personal services incurred in carrying out sponsored
research programs, including amounts expended for wages and fringe
benefits, provided such amounts represent reasonable compensation. It
also recognized that expenses for tuition or tuition remission are allowed in
certain circumstances. On the other hand, IRS noted that for tax purposes,
the grantors may not treat the scholarship amounts as includable in the
recipients’ gross incomes or otherwise regard the payments as
compensatory scholarships. IRS did not, however, view these positions as
necessarily inconsistent. It explained, “[C]ircular A-21 has no effect on the
proper federal income tax treatment of any amount paid an employee or
student, nor would an employer’s claim for reimbursement from the
government for amounts paid to students have any effect on a particular
student’s tax liability.” Instead, IRS stated that the “tax consequences of
any amount paid a student or employee are determined by the particular
facts and circumstances attendant to the particular grant or payments to
the student, and not by any employer reimbursement claims.”

To ensure that we fully understood IRS’s position, we spoke with a Senior
Attorney in IRS’s Office of Chief Counsel. He informed us that a reasonable
tuition remission provided as a result of an employer-employee relationship
could properly be considered as an employee fringe benefit and excludable
from the employee’s gross income for tax purposes. The information
provided by the Senior Attorney and in the IRS letter was general in nature
and did not apply to any particular individual or university.

In view of IRS comments on this matter, it would be difficult for us to reach
any conclusion as to the proper tax treatment of the tuition remission
provided to GSRs by the University of California. Similarly, we refrain from
taking any position with respect to whether the exclusion of GSRs’ tuition
remission from gross income is inconsistent with the treatment accorded



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                       such remissions under OMB Circular No. A-21. In this regard, we note that
                       both HHS and NIH officials told us that in determining whether tuition
                       remission is allowable under a grant, they pay no attention to the taxability
                       issue. Insofar as the university’s treatment of tuition remission as
                       nontaxable compensation for income tax purposes, HHS and NIH stated
                       that they believe this is an IRS issue, which has no bearing on whether
                       GSRs’ compensation is reasonable under the OMB circular. HHS and NIH
                       officials added that since the number of paid hours worked is controlled by
                       the university and students report spending many additional hours on the
                       grant’s work, tuition remission could be considered compensation for these
                       added hours.

                       Furthermore, in a qui tam case pending in the United States District Court
                       of California, the relator has alleged that the University of California
                       violated the False Claims Act by, among other things, knowingly charging
                       to government-sponsored research projects numerous payments to
                       graduate students that were unallowable under OMB Circular No. A-21. In
                       support of this allegation, the relator has alleged that the university
                       knowingly failed to disclose to the government that it had excluded from
                       gross income, under 26 U.S.C. section 117, tuition remission received by its
                       graduate students for work on federally sponsored research grants. The
                       decision in this case may have a bearing on whether the university’s
                       treatment of the tuition remission for tax purposes is inconsistent with the
                       OMB circular. This constitutes an additional reason why we do not believe
                       it would be appropriate for us to address this issue.



Grant Management and   HHS is the cognizant audit agency for the University of California.
                       Routinely, HHS does not conduct preaward or postaward audits. When
HHS Oversight Issues   requested to conduct audits for awarding agencies other than NIH, it
                       examines the total aggregate amounts for each line item to ensure that the
                       institution has not exceeded the amounts approved by the awarding
                       agency. With respect to NIH awards, it follows the same action except with
                       regard to the specific costs involving GSR compensation. For these costs,
                       it ensures that the institution has not requested GSR compensation that
                       would exceed the NIH cap of $23,000 (currently $26,000) per GSR identified
                       in the request. HHS officials rely on the Sponsored Projects Office at the
                       institution to ensure that the compensation is reasonable and has not
                       exceeded what the institution would have paid a first-year postdoctoral
                       researcher working at the same level of effort as the GSR.




                       Page 13                                     GAO/OSI-99-8 Federal Research Grants
              B-282325




Scope and     We conducted our investigation from May 1998 to May 1999. We reviewed
              University of California administrative and GSR records and interviewed
Methodology   administrative staff, faculty, and GSRs at five campus locations—Berkeley,
              Irvine, Los Angeles, San Diego, and San Francisco. We also reviewed
              documents at OMB, HHS, NIH, and the IRS and interviewed cognizant
              officials at these agencies. We did not conduct an audit of GSRs or
              independently verify information provided to us by the University of
              California.


              As agreed with your office, unless you announce its contents earlier, we
              plan no further distribution of this report until 30 days after the date of this
              letter. At that time we will send copies of the report to the Honorable
              Donna E. Shalala, Secretary of Health and Human Services and to the
              Regents of the University of California. We will also make copies available
              to others upon request. If you have any questions concerning this report,
              please contact me or Assistant Director Stephen Iannucci at (202) 512-6722.

              Sincerely yours,




              Robert H. Hast
              Acting Assistant Comptroller General
               for Special Investigations




              Page 14                                       GAO/OSI-99-8 Federal Research Grants
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January 6, 1999, IRS Letter                                      AppeIx
                                                                      ndi




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Page 22                       GAO/OSI-99-8 Federal Research Grants
                   Appendix I
                   January 6, 1999, IRS Letter




(600477)   L
           ertet   Page 23                       GAO/OSI-99-8 Federal Research Grants
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