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IRS Releases Interim Report on 400 Colleges and Universities

Paul Caron
,

IRS Logo The IRS today released (IR-2010-58) an interim report summarizing responses to compliance questionnaires sent to 400 public and private colleges and universities in October 2008:

The interim report contains preliminary information on the respondents’ organizational structures, demographics, exempt and unrelated business activities, endowments, executive compensation as well as governance practices. Respondents are divided into three groups based on size of student population.

The Preliminary Summary of Data is below the fold:




A. Organizational Information/Demographics


Related organizations.

  1. o Large colleges and universities reported the highest percentage of respondents with related entities (96% compared with 82% for medium organizations and 45% for small organizations).
  2. o Related tax-exempt organizations were the most commonly reported type of related entity for all size categories, followed by taxable corporations and trusts, disregarded entities, and then partnerships.

    Controlling organizations.

    1. o Large organizations reported the highest percentage of respondents that were controlling entities (within the meaning of IRC section 512(b)(13)) (45% compared with 34% for medium organizations and 26% for small organizations). The number of controlled organizations of an entity increased with student size of the organization.
    2. o Only 26% of large respondents with at least one controlled entity reported receiving any income from controlled entities (29% of the small and 45% of the medium organizations did so). Less than half of the organizations reporting income from controlled entities on the questionnaire indicated that they reported income from controlled entities on their Form 990-T.

      B. Activities


      Filing of Form 990-T.



      o

      Nearly half (48%) of small colleges and universities reported never filing a Form 990-T, compared with 29% for medium colleges and universities and 4% for large colleges and universities.

      Engagement in and reporting of activities on Form 990-T.

      1. o Large organizations reported the largest percentage of respondents conducting various types of activities and the largest percentage including those activities that generated unrelated business income (UBI) on their Form 990-T.
      2. o The most frequently reported UBI activities were advertising and facility rental.
      3. o In most cases, the percentage of colleges and universities that indicated engaging in an activity was much higher than the percentage of organizations that reported including that activity on their Form 990-T.

        C. Endowment Funds

        1. o Endowment funds. Almost all organizations reported either having an endowment fund or that another organization held or maintained an endowment fund on their behalf (87% of small, 97% of medium, and 100% of large organizations).
        2. o Target spending rate – The average and median target spending rates reported by each size category was consistent – ranging from 4.7% to 5.0%.

          Investments

          .

          1. o Organizations at all sizes reported investing endowment assets in a variety of investments; U.S. fixed income and U.S. equity investments predominated.
          2. o Although the likelihood of participation in a particular type of investment varied by size level, for those colleges or universities that invested in a particular type of investment, the average and median percentage of total assets invested within that type of investment was fairly comparable across all size levels.

            International Activities and Investments

            .

            1. o The majority of colleges and universities reported engaging in foreign investments (e.g., 53% of small, 67% of medium, and 82% of large respondents reported investments in non-U.S. equities).
            2. o Many colleges and universities reported using investment entities to make foreign investments of endowment funds (34% of small, 47% of medium, and 69% of large colleges and universities). Of those, at all size levels, respondents used more than one type of entity to make foreign investments (36% of small, 48% of medium, and 47% of large organizations that reported using investment entities).
            3. o 30% of small, 54% of medium, and 83% of large organizations reported conducting educational programs outside of the United States.

              D. Compensation


              Highest paid officer, director, trustee, or key employee.

              1. o The reported compensation of the highest paid officer, director, trustee or key employee (ODTKE) was highest for the large colleges and universities (average approximately $428,000; median $361,000) and lowest for the small colleges and universities (average $202,000; median $174,000).
              2. o In the majority of cases, the highest paid ODTKE was the chancellor/president.

                Highest paid employee (other than an ODTKE).

                1. o The reported compensation of the highest paid employee that was not an ODTKE was highest for the large colleges and universities (average approximately $798,000; median $352,000) and lowest for the small colleges and universities (average $145,000; median $98,000).
                2. o In small and medium organizations, the highest paid employee (other than an ODTKE) was most often a faculty member (approximately half of the organizations). In the case of large organizations, the highest paid employee (other than an ODTKE) was most often a sports coach (43% of organizations). A faculty member was the highest paid non-ODTKE employee in 34% of large organizations.
                3. o In the case of large organizations, the average amount paid to the highest compensated non-ODTKE employee was more than $350,000 higher than the average amount paid to the highest paid ODTKE (the medians were similar). m

                  Use of rebuttable presumption process

                  .

                  1. o More than half of the private organizations at all size levels reported using a procedure intended to satisfy the rebuttable presumption process for at least one of the six highest paid ODTKEs (55% in the case of small; 71% in the case of medium; and 63% in the case of large organizations).
                  2. o At all size levels, the use of comparability data to establish compensation was present less frequently than the other rebuttable presumption factors (contemporaneous documentation and approval by an independent governing body).

                    Initial contract exception

                    .

                    1. o In the majority of cases (87% of small; 79% of medium; and 63% of large organizations), organizations reported that none of their six highest paid ODTKEs were disqualified persons immediately before entering into their compensation arrangements with the organization.
                    2. o However, relatively few organizations reported making fixed payments under the initial contract exception to any of their six highest paid ODTKEs (17% in the case of small organizations and 15% in the case of medium organizations).

                      E. Governance


                      Policies.

                      1. o In general, large organizations reported the highest percentages of colleges and universities with various governance policies.
                      2. o More than 80% of organizations in each size category reported having conflict of interest policies covering members of the ruling body and top management officials. Many organizations also reported conflict of interest policies for full-time faculty (ranging from 58% to 100%).
                      3. o Small and medium organizations that reported at least one controlled entity were less likely than large organizations to have a written policy or statute in place designed to assure transactions with its controlled entities were at arm’s length.

                        Audited financial statements

                        .

                        o

                        76% of small colleges and universities reported making their audited financial statements available to the public while 91% of medium organizations and nearly all (97%) of the large college and universities reported doing so.

                        Use of outside advisors

                        .

                        o

                        More than 60% of the colleges and universities in each size category reported they did not rely on outside advice on unrelated business income issues, such as determining whether business activities were related or unrelated to the organization’s exempt purpose, the allocation of expenses between related and unrelated business activities, and intercompany pricing between the organization and related entities.

                        4. About the Author

                        Paul Caron Avatar
                        Paul Caron
                        Paul Caron was named Duane and Kelly Roberts Dean of Pepperdine University School of Law on June 1, 2017. Dean Caron joined the Pepperdine faculty in 2013 after serving as the Dorothy and Leonard Straus Distinguished Visiting Professor of Law in the spring semesters of 2010 through 2013. He served as Associate Dean for Research and Faculty Development at Pepperdine in 2015-2017. Before coming to Pepperdine, he was Associate Dean of Faculty and Charles Hartsock Professor of Law at the University of Cincinnati College of Law.
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