Brother, Can You Spare an Endowment?

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The Internal Revenue Service (IRS) has issued a new questionnaire which asks some tough questions of college leaders. The new “compliance questionnaire,” labeled the “first stage” of the “Colleges and Universities Compliance Project” by the IRS, was sent to 400 American universities and colleges on the first of this month.

It delves into schools’ financial information with considerable depth. “Among other things, the questionnaire will gather information from the schools about how they report revenues and expenses from their trade or business activities, classify their activities as exempt or taxable activities, and calculate and report income or losses on taxable activities,” states the IRS press release. “The questionnaire also will gather information regarding how the organization invests and uses its endowment funds and determines compensation of certain highly paid individuals.”

And questions provided on the sample form range from those of executive compensation (for the top six highest-paid employees) to whether colleges monitor their use of endowment funds to ensure that donors’ wishes are kept.

According to Eric Keldermann with the Chronicle of Higher Education, “The questionnaire is meant to take an in-depth look at potential discrepancies between the way institutions operate and how they report their activities to the IRS.”

“While the IRS will not publicly report the data from individual institutions, the information could trigger audits and even penalties for the colleges, as well as more-minor actions alerting the institutions to their errors.”

Considering that the IRS will also issue a report on its findings, the new data might be used by senators such as Sen. Chuck Grassley (R-Iowa) to push for more regulation of college’s endowments and financial reporting. Senator Grassley sent an inquiry letter to 146 colleges and universities questioning their endowment policies earlier this year; he also champions legislation requiring schools to spend a minimum of 5% of their endowment annually in order to preserve their tax-free status.

Endowment questions on the IRS sample form (pdf) include:

• “How many individuals were on staff whose primary responsibility was investment management of your endowments?”

• “How did your organization compensate its internal investment managers?” external investment managers?

• “What was the average amount of your endowment assets per full-time equivalent student?”

• “Did your investment committee or board adopt a target spending rate for all endowments?”

Other questions, such as the following, hint at recent controversies about conflicts of interest and executive compensation.

• “Do you currently have a written conflict of interest policy in place” for full-time faculty or one “that governs members of the organization’s ruling body and its top management officials”?

(In the past, issues of conflicts of interest within academic medical research have raised eyebrows towards some Harvard and Stanford employees).

• “Of the unrelated business income activities included on your Form 990-T for the tax year ending in 2006, list in column ‘a’ the five that resulted in the largest losses included on line 30 of your Form 990-T, and complete columns ‘b’ through ‘f’ for each activity.”

According to Ronald J. Schultz of the IRS, as quoted by the Chronicle, colleges routinely lose money or break even on as much as half of their for-profit enterprises, thereby avoiding taxes on non-exempt commercial activities.

The following IRS questions, however answered, may have deep implications for discussions on college affordability:

“Enter the information requested in the table below for the six (6) highest paid officers, directors, trustees and key employees of your college or university.”

The revenue sources listed, extending from “a” to “hh”, include

• base salary;
• bonuses;
• incentives;
• stock options;
• “personal use of organization credit card” not reimbursed by the employee;
• use of “organization owned or leased vehicles;”
• value of organization-provided utilities, housing, and vacation homes;
• “personal use of organization-owned aircraft or boat;” and
• “other compensation” and “executive fringe benefits.”

Bethany Stotts is a staff writer at Accuracy in Academia.