On May 7, 2010, the IRS released an Interim Report on the tax law compliance activities of nearly 350 colleges and universities across the country. The report summarizes responses to a questionnaire sent by the IRS in October 2008. In that questionnaire, 400 colleges and universities were asked to submit information in a number of areas based on their tax years ending in 2006. See Goin’ Fishin’ with the IRS: Observations on the Compliance Questionnaire for Colleges and Universities.
Based on the questionnaire responses, the IRS has opened examinations of more than 30 colleges and universities that are expected to focus on unrelated business taxable income, executive compensation issues, controlled entity issues, and governance practices and procedures. See IRS Starts University Audits. A recent report issued by the Congressional Budget Office on April 30, 2010, on indirect tax arbitrage conducted by colleges and universities through the use of tax-exempt bond financing, may indicate an additional area of future IRS inquiry.
The Interim Report summarizes the data received in response to the questionnaire from 344 colleges and universities – 177 of them private and 167 of them public. For purposes of the report, the IRS divided them into three groups based on population (small: fewer than 5,000 students; medium: 5,000-14,999 students; large: 15,000 or more students).
The institutions reported on their demographics, including composition of students, faculty, and staff; financial statements; tuition rates and discounts; and related organizations and international activities. Many reported having related organizations, with the most common type being tax-exempt organizations and controlled organizations.
With respect to questions on unrelated business activities, the report offers information on whether the institutions reported engaging in activities that might be unrelated business activities, including advertising, corporate sponsorship, and facility rentals, and whether such activities were reported on Form 990-T.
Generally, a larger number of the institutions reported engaging in such activities than reported including the activity on Form 990-T. The report recognizes that this discrepancy is expected where an activity is conducted exclusively for the exempt purposes of the organization or where exceptions to the unrelated business income rules may apply. For small institutions, 48% reported never filing a Form 990-T, compared to 29% for medium and 4% for large institutions. The Interim Report recognizes that this discrepancy between conducting activities and reporting them is expected where an activity is conducted exclusively for the exempt purposes of the organization or where exceptions to the unrelated business income tax rules may apply. For further discussion of the unrelated business income tax rules see Overview of the Unrelated Business Income Tax and Unrelated Business Income: IRS New Emphasis.
Nearly all institutions reported maintaining endowment funds, and a majority also had charitable gift annuities and charitable remainder trusts. They reported consistent target and actual spending rates of approximately 5% of endowment assets across all size categories. The majority of them reported making foreign investments through their endowments.
The report included a section on compensation amounts, executive loans and extensions of credit, and use of the rebuttable presumption process and initial contract exception under the excess benefit transaction rules. In most cases, the highest paid executive was the chancellor/president. More than half of the institutions reported using the rebuttable presumption to establish the reasonableness of compensation, and comparability data was less frequently relied upon than the other rebuttable presumption factors of approval by an independent governing body and contemporaneous documentation.
A majority of the institutions reported having governance policies in place, including a conflict of interest policy and an investment policy for endowment funds, and made their financial statements publicly available.
The IRS anticipates it will issue a final report that will also include information from the examinations and allow for extrapolation of its findings to the sector as a whole. The IRS expects this study will identify areas warranting additional guidance or further scrutiny.
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