The IRS 2008 fiscal year workplan for the Exempt Organization Division
indicated a renewed focus on examinations and projects related to tax-exempt
colleges and universities. One special area of interest to the Democratic Senate
Finance Chairman Max Baucus and the ranking Republican member of the committee,
Charles Grassley, is university endowments and their use (or lack thereof),
especially in light of the rising cost of higher education, a cost that has
continued to rise more quickly than the general inflation rate.
After months of speeches and threats, Senators Baucus and Grassley have
finally decided to take action. On January 24, 2008, the
Finance Committee sent a letter to the 136 wealthiest colleges and
universities in the United States, requesting information on tuition increases,
financial aid, endowment spending, and bonuses paid to college presidents and
endowment managers from endowment funds for the last ten years.
Concerned with recent pressure by the Senate Finance Committee to use more of
their endowments for financial aid and threats by the Senate Finance Committee
to require them to spend a minimum amount of their endowment assets each year,
colleges and universities have been scrambling to avoid further federal
regulation. In December, 2007, Harvard University, with an endowment of
approximately $35 billion, the nation’s largest, agreed to spend more of its
endowment on financial aid for those students it deemed to be middle class.
Weeks later, Yale University, with an endowment of approximately $23 billion,
the nation’s second largest, announced it would follow course.
While the announcements from Harvard and Yale brought appreciative comments
from the Senate Finance Committee and the higher educational community
throughout the country, it also brought further criticism. The Senate Finance
Committee, although pleased with the universities’ decisions, raised concerns
that Harvard and Yale did not go far enough and that other colleges and
universities would not follow. Others raised concerns that the definition of
middle class used by Harvard and Yale would help families with substantial
assets, in some cases approaching annual incomes of $200,000 per year, at the
expense of poorer applicants. In addition, the higher educational community
worried that other colleges and universities would either feel pressure to
follow course, be unable to do so, and run into financial difficulties, or would
simply announce they could not follow the lead of Harvard and Yale, resulting in
the trickle down of poorer students from elite universities to less prestigious
Notwithstanding the actions of Harvard and Yale, however, the recent letter
sent to colleges and universities by the Senate Finance Committee clearly
indicates that a mandatory spending requirement for college and university
endowments for tuition and other student related expenses may be unavoidable.
Concerned that 76 colleges and universities have endowments of at least $1
billion, some with annual returns far in excess of the average return in the
stock markets, Senator Grassley said that the information gathered in the next
30 days “will help Congress make informed decisions about a potential pay-out
requirement and allow universities to show what they can accomplish on their own
Although the request for information from the Senate Finance Committee is not
a subpoena and recipients are not required to respond, tax-exempt universities
generally comply with Congressional requests for information. In the absence of
cooperation, however, the Senate Finance Committee does have the authority to
issue subpoenas requiring information, or even testimony, from universities.