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VOICES FROM THE INDUSTRY: Congress, IRS taking aim at college tax practices

January 15, 2007

Congress and the IRS have taken a number of significant steps recently to increase their scrutiny of colleges, universities and related organizations.

What's the next step?

The IRS has already tipped its hand and indicated that it intends to design and initiate

unrelated business income tax-or UBIT-inquiries directed toward colleges during 2007 and 2008.

This upcoming year will likely usher in a new tax climate focused upon enforcement initiatives and public transparency.

The Pension Protection Act of 2006 included several important provisions effecting colleges. Notably, form 990-T, the "Exempt Organization Business Income Tax Return," will now be subject to public disclosure. This move will likely invite public scrutiny of the magnitude, profitability, and expenses associated with a college's auxiliary businesses.

Likely targets for IRS scrutiny include research activities, licensing and technology transfers; athletics, sponsorships and advertisements; and alternative investments.

On Nov. 7, the IRS issued its 2007 Work Plan. It specifically focuses on the UBIT positions of colleges and universities. The project will analyze the industry's treatment and allocation of income and expenses.

The IRS is specifically interested in collecting data regarding the accounting by and between affiliates within college systems. It intends to design the compliance project in 2007 and implement it (presumably through compliance checks or audits) in 2008.

This approach mirrors an initiative the IRS directed toward hospitals recently, which ultimately resulted in the IRS selecting 500 hospitals for participation in an extensive compliance check.

Time for review

Therefore, this upcoming year provides an opportunity for colleges to meaningfully review and consider their UBIT positions and disclosures. In addition, colleges should reflect on how they present information on their federal tax returns and how this presentation is interpreted by the public and regulators.

Also during 2006, congressional dialogue intensified regarding whether higher education is meeting its public responsibility to ensure affordability and access to education.

The conversation was largely driven by Sen. Grassley, the outgoing chairman of the Senate Finance Committee. In a memorandum to Sen. Grassley on Dec. 1, the Congressional Research Service presented several legislative proposals directed toward colleges, including the following:

imposing a new requirement that colleges serve some measurable number of low-income households by the establishment of a quantitative threshold for admissions or financial aid based upon income;

requiring university foundations to distribute a certain amount of their endowments each year for educational purposes, similar to the requirements currently imposed on private foundations;

analyzing whether non-educational activities, such as commercialization of technology, athletics or alternative investments, are diverting resources away from colleges' core educational missions or placing their assets at risk.

Concurrent with the CRS memorandum, the Joint Committee on Taxation released a detailed report echoing many of the concerns of the memorandum.

Within days, the Senate Finance Committee conducted a hearing devoted to the consideration of tax benefits for higher education and whether additional restraints should be placed upon colleges that receive the benefits of tax exemption.

Many questions

Sen. Grassley set the tone for the hearing by echoing the issues and proposals outlined by CRS and the Joint Committee on Taxation. He summarized the policy concerns on the minds of the committee with numerous questions:

Should we expect better information and transparency regarding what colleges are doing to control costs, who they are admitting and other important information?

Should colleges with big endowments be required to pay out funds and dedicate some of those funds to keep tuition costs in check for working families?

Should some tax breaks for colleges be dependent on their keeping tuition inflation under control?

Are tax breaks such as tax-exempt bonds actually encouraging behavior such as increasing tuition and reducing the number of students accepted from working families?

These are ambitious questions with sweeping implications, however, the question on everyone's mind is whether Sen. Max Baucus, incoming chairman of the Senate Finance Committee, will continue these inquiries with the same vigor as Sen. Grassley has demonstrated?

Sen. Baucus has, however, informally indicated that he intends to continue many of Grassley's initiatives on not-for-profit accountability and oversight.

If the events of 2006 are any indicator, 2007 has the potential to be a pivotal year for higher education. While the congressional dialogue is strictly talk at this point, there is an opportunity for the higher education community to positively effect the dialogue through data, research, and industry groups.

When the stakes are this high, investment in these issues is imperative.



Springer is senior counsel at Indianapolis-based law firm Ice Miller LLP and concentrates her practice on the representation of tax-exempt organizations, including colleges and universities. Views expressed here are the writer's.
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