Federal Research Grants: Compensation Paid to Graduate Students at the
University of California (Letter Report, 06/22/99, GAO/OSI-99-8).

Pursuant to a congressional request, GAO investigated the use of federal
research and development grant funds by the University of California
system in its payments to graduate student researchers (GSR), focusing
on whether: (1) the compensation paid to GSRs was in accordance with the
guidelines set forth in the Office of Management and Budget's (OMB)
Circular A-21; (2) foreign students were receiving a larger share of
federal research funds than resident students as compensation for
performing as GSRs; (3) 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 A-21; and
(4) the Department of Health and Human Services (HHS) provided adequate
oversight in safeguarding against the diversion of funds from federal
research grant awards.

GAO noted that: (1) GSRs receive a salary and tuition or fee remission
from the University of California as compensation for their work on
federally sponsored research projects; (2) according to the university,
its practice of charging the salary and remissions against federally
funded research grants complies with OMB Circular A-21; (3) however,
based on GAO's review of the compensation paid to GSRs for services
charged to federal research grants, GAO found that these payments
sometimes exceeded the allowable costs that could be charged to such
grants; (4) GAO compared the compensation paid to individual GSRs
assigned to federally sponsored research projects against: (a) the
National Institutes of Health (NIH) guideline that establishes an award
level of $23,000 per GSR; and (b) the salary of a first-level
postdoctoral researcher at the university performing comparable work at
an equivalent level of effort; (5) of the $201 million charged by the
university to federally sponsored research during school years 1995-1996
through 1997-1998, $4.4 million was charged in excess of the NIH maximum
award in what GAO believes to have been unreasonable compensation; (6)
the university also charged federally sponsored grants approximately
$19.3 million for GSR compensation that exceeded the salary of a
first-level postdoctoral researcher during the same period; (7) 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; (8) although the
university treats GSRs' salary and tuition 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; (9) the Internal Revenue Service informed GAO 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; and (10) 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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  OSI-99-8
     TITLE:  Federal Research Grants: Compensation Paid to Graduate
	     Students at the University of California
      DATE:  06/22/99
   SUBJECT:  Income taxes
	     Research grants
	     Federal grants
	     Colleges and universities
	     Internal controls
	     Education or training costs
	     Compensation
	     College students
	     Graduate education
	     Foreign students

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OS99008 GAO United States General Accounting Office

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

  GAO/OSI-99-8

Page 1 GAO/OSI-99-8 Federal Research Grants United States General
Accounting Office

Washington, D. C. 20548 Office of Special Investigations

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.

B-282325 Page 2 GAO/OSI-99-8 Federal Research Grants

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.

B-282325 Page 3 GAO/OSI-99-8 Federal Research Grants

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.

B-282325 Page 4 GAO/OSI-99-8 Federal Research Grants

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
employeremployee

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.

B-282325 Page 5 GAO/OSI-99-8 Federal Research Grants

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 4 Id.  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.

B-282325 Page 6 GAO/OSI-99-8 Federal Research Grants

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 GSRs

As one of the leading research universities in the United States,
the University of California receives funding controlled by
individual 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.

6 The 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.

B-282325 Page 7 GAO/OSI-99-8 Federal Research Grants

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 firstlevel 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, 8 California 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.

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

$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

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 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

B-282325 Page 9 GAO/OSI-99-8 Federal Research Grants

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

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 Academic school year GSR step II salary only
GSR step II salary with fee

remission GSR step II salary with fee and tuition remission First-
level postdoctoral

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

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

B-282325 Page 10 GAO/OSI-99-8 Federal Research Grants

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 Tuition Remission Funds While the salary was
proportionally the same for resident and foreign GSRs

during school years 1995- 96 through 1997- 98, foreign GSRs
received a larger proportionate share of the total tuition and fee
remission costs 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

B-282325 Page 11 GAO/OSI-99-8 Federal Research Grants

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 199596,

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

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 and the Internal Revenue Code

Although the university treats GSRs' salary and tuition and/ or
fee remission as compensation for purposes of the OMB circular,
traditionally the university has treated only the salaries as part
of the GSRs' gross income 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 Resident a Foreign School year Number of

GSRs Percent of

GSR population

Fee remission

funds (in millions) Percent of

funds Number of GSRs

Percent of GSR population

Tuition and fee remission

funds (in millions) Percent of

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

B-282325 Page 12 GAO/OSI-99-8 Federal Research Grants

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

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

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 Oversight Issues

HHS is the cognizant audit agency for the University of
California. Routinely, HHS does not conduct preaward or postaward
audits. When 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.

B-282325 Page 14 GAO/OSI-99-8 Federal Research Grants

Scope and Methodology We conducted our investigation from May 1998
to May 1999. We reviewed

University of California administrative and GSR records and
interviewed 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 15 GAO/OSI-99-8 Federal Research Grants

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Appendix I January 6, 1999, IRS Letter Appendi x I

Appendix I January 6, 1999, IRS Letter

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Appendix I January 6, 1999, IRS Letter

Page 18 GAO/OSI-99-8 Federal Research Grants

Appendix I January 6, 1999, IRS Letter

Page 19 GAO/OSI-99-8 Federal Research Grants

Appendix I January 6, 1999, IRS Letter

Page 20 GAO/OSI-99-8 Federal Research Grants

Appendix I January 6, 1999, IRS Letter

Page 21 GAO/OSI-99-8 Federal Research Grants

Appendix I January 6, 1999, IRS Letter

Page 22 GAO/OSI-99-8 Federal Research Grants

Appendix I January 6, 1999, IRS Letter

Page 23 GAO/OSI-99-8 Federal Research Grants (600477) Let t er

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