Exempt Organizations Group
October 7, 2008
IRS Scrutinizing College and University Finances
The Internal Revenue Service recently announced that approximately 400 colleges and universities will
receive compliance questionnaires as part of the agency’s increased scrutiny of key areas in the taxexempt community.
This new compliance questionnaire focuses on three issues:
•
Unrelated business income and taxable activities
•
Endowments
•
Executive compensation.
Taxable Activities. The questionnaire gathers information about how an organization reports
revenues and expenses from their trade or business activities, classifies their activities as exempt or
taxable activities and calculates and reports their income or losses on taxable activities. The
questionnaire isolates a variety of different activities including advertising, sponsorships, rentals of
facilities and other activities or revenue relating to travel tours, broadcast rights, affinity cards,
commercial research, patents, copyrights and trade names and trade secrets. The questionnaire
requires a college or university which has incurred losses from any activity in at least three out of the
last five years to provide the predominant reason for the losses and to provide an indication of whether
the organization has future plans for making a profit. This information is to be provided whether it is
conducted directly or through related organizations or joint ventures.
Endowments. The questionnaire requires a college or university which has an endowment to respond
to a variety of questions regarding the investment policies of the organization, its investment committee
and the value of its endowment(s). The questionnaire also requires an organization to break down its
endowment assets by investment class, including by alternative asset classes such as hedge funds,
private equity, venture capital and natural resources.
The Senate Finance Committee recently has focused on colleges and universities, their endowment
funds and rising tuition costs. The Senate Finance Committee sent letters in early 2008 to those
universities with endowments exceeding $500 million, conducted hearings in October 2007 and
recently held a roundtable on endowments. The questionnaire addresses these concerns by asking for
the average amount of endowment funds per full-time equivalent student and information regarding the
distribution and use of endowment funds.
Executive Compensation. The questionnaire requires a college or university to provide detailed
compensation information for the six highest paid officers, directors and key employees. For non-public
colleges and universities, the questionnaire requires an organization to provide information regarding its
compensation policies and the processes to approve the compensation of its officers, directors and key
CHICAGO ● SAN DIEGO● WASHINGTON
employees, including the factors and sources used in establishing compensation levels and the
percentile of the comparability data used to determine an individual’s compensation.
Other Issues. The questionnaire also requests additional information regarding each of the following:
•
Written conflict of interest policies for the organization’s ruling body or board, top management
officials and full-time faculty.
•
Published full-time tuition rate and average tuition discount rate used to calculate net average
tuition.
•
Compensation information for five highest paid employees, including sports coaches and NCAA
athletic-related income.
•
Five highest gross revenue generating organizations related to the college or university.
•
Written policies regarding transactions with non-501(c)(3) organizations, such as licensing
arrangements, and written policies with controlled entities to establish arm’s length
arrangements.
Summary and Possible Impact. In its news release, the IRS states that the questionnaire was being
sent to a cross-section of small, mid-sized and large private and public four-year colleges and
universities. The Commissioner of the IRS stated that the “information gathered will help us identify
issues and areas that may need more outreach and education or further scrutiny.”
The college and university questionnaire is a follow-up to the questionnaire sent to hospitals in 2006.
The information gathered in 2006 was used by the IRS to refine and develop a new schedule to Form
990 and to focus its examination and enforcement activities. In fact an IRS official has stated that the
college and university questionnaire is likely to lead to a separate schedule in Form 990 for colleges
and universities. The questionnaire therefore is likely to have an impact on future reporting by colleges
and universities and will have an impact beyond those colleges and universities which will be receiving
the questionnaire.
The IRS has stated that it expects to receive most of its responses within the next several months. The
IRS also stated that it will analyze the results, conduct examinations of a sample of organizations and
issue a report sometime in 2009.
To view the release announcing the IRS’ plan, please go to
http://www.irs.gov/irs/article/0,,id=187328,00.html.
For further information, please contact Richard L. Sevcik 312-807-4332 of Bell Boyd’s Exempt Organizations Group or visit our
Web site at www.bellboyd.com.
This publication has been prepared by the Exempt Organizations Group of Bell, Boyd & Lloyd LLP for clients and friends of the
firm and is for information only. It is not a substitute for legal advice or individual analysis of a particular legal matter. Readers
should not act without seeking professional legal counsel. Transmission and receipt of this publication does not create an
attorney-client relationship.
This publication contains advice with respect to a Federal tax matter. In accordance with the Treasury Department's Circular
230 such advice is not intended or written to be used, and cannot be used, for the purpose of avoiding any Federal tax
penalties.
© 2008 Bell, Boyd & Lloyd LLP All Rights Reserved
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