Thursday, January 15, 2009

IRS Considering Looking into Whether Colleges and Universities are Properly Paying Taxes on Transactions Unrelated to Their Core Nonprofit Status

The New York Times reports that the I.R.S. is considering expanding its scrutiny of colleges and universities to focus on billions of dollars associated with academic research, federal financing and intellectual property. The expansion of an investigation would put pressure on the schools to further disclose their inner financial workings as the I.R.S. undertakes a major effort to learn more about whether academic institutions are improperly using their nonprofit status to avoid paying certain taxes.

As part of its current investigation, which began last October, the I.R.S. sent unusually detailed questionnaires to 400 private and public universities and colleges about their executive compensation policies and their business activities. While the institutions are not obligated to respond, not doing so can potentially lead to an audit. The investigation is modeled upon similar scrutiny of hospitals that began in 2006 and has prompted audits, legislative hearings and stricter tax-filing requirements. The idea is to give the I.R.S. a clear view of how the business of academia operates in the 21st century.

Under its review, the I.R.S. is looking at whether universities and colleges are properly paying any special federal taxes owed on transactions, investments or businesses that are unrelated to their core nonprofit activities. The I.R.S. is also scrutinizing whether the large endowments held by universities and colleges are properly paying taxes due on income related to debt financing. Universities have invested in hedge funds in recent years, and the I.R.S. is looking at whether they are properly paying taxes owed on income produced by hedge funds that engage in leveraged, or debt-financed, investments. Some endowments have tried to avoid the unrelated business income tax on leveraged entities by dealing with offshore hedge funds, a move that has drawn scrutiny from Congressional regulators. According to I.R.S. Director of Exempt Organizations, Lois G. Lerner, the expanded review might take the form of a new questionnaire and would most likely also touch on offshore issues because intellectual property and its commercial applications are often held in overseas tax havens.

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http://lawprofessors.typepad.com/nonprofit/2009/01/irs-considering.html

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