The disclosure that certain favored employees of the University of California have received home loans at non—market rates struck my accountant's eye.  Two items:
 
1) The article stated that UC officials argue the loans do not cost the university any money because it generally recoups interest and fees from the loans equal to the amount of money it would otherwise earn from short—term investments.

Mortgage loans tie up UC's capital for much, much longer periods and entail greater risk, therefore the Board of Regents have a fiduciary duty to require a higher interest rate than that earned on UC's short term investments.

2) The article also reported Schwartz said university officials generally do not consider low—interest home loans to be compensation. Compensation expert Fred Whittlesey, a principal of the Compensation Venture Group in Seattle, disagreed.

Congress and the Internal Revenue Service also hold such amounts to be taxable compensation. The difference between the applicable federal rate and the rate on the loan is usually treated as compensation is requited to be reported on the employee's W—2 unless two limited exceptions apply related to new employees who have to relocate and would be eligible to deduct or exclude moving expenses.  (See IRC Section 7872,  Reg. Sec. 1.7872—5T and IRS Publication 535.)

Rosslyn S. Smith, CPA    7 16 06