In February, the congressional tax-writing committees sent letters to certain colleges and universities with large endowments of more than $1 billion. The recipients of these letters included, among others, Amherst, Harvard, MIT, SMU, Princeton and Yale. The committees’ letters stated they were conducting additional oversight of how colleges and universities are using endowment assets to fulfill their charitable and educational purposes, and to oversee the numerous tax preferences that they enjoy. The committees’ concern with these endowments is the cost of tuition continues to increase faster than inflation, while the endowments and the earnings on their investment are tax-exempt.
The letters were authored by Chairman Hatch, Chairman Brady, and Chairman Roskam, of the Senate Finance Committee, House Ways and Means Committee, and the Ways and Means Oversight Subcommittee, respectively. The schools received a 13 question letter on the topics of endowment management, endowment spending and use, donations and conflicts of interest. Many of the universities have already responded to the inquiry as the committee requested to hear from them by April 1.
This isn’t the first time Congress has inquired about these endowments. In 2008, the Senate aggressively questioned these endowments, but appeared to back off during the economic downturn. In recent years, many of these universities have experienced double-digit returns on their endowment investments while the price to attend these universities has dramatically risen. This has once again given rise to the debate over whether these endowments should remain tax exempt and caused the committees to focus on these endowments and related investment practices.
Also in 2008, the IRS implemented expanded endowment reporting by tax-exempt schools filing the Form 990. Schedule D, Part V, Endowment Funds, requires schools to report endowment values, receipts, disbursements, investment earnings and administrative expense information for the current and four prior years. This information is publicly available and has been scrutinized by Congress and others in the public. Endowments were also one of the topics included in the IRS Exempt Organizations function’s “College and Universities Study” conducted from 2008 through 2013. A copy of the IRS Interim Report summarizing certain endowment information for the tax year ending in 2006 is available at https://www.irs.gov/pub/irs-tege/cucp_interimrpt_052010.pdf.
The issue of taxation of a university’s endowments is picking up momentum on the state level as well. In March, Connecticut lawmakers introduced a bill that would tax unspent earnings on university endowments with more than $10 billion in assets. There is reportedly only one school in Connecticut that fits this definition, Yale, which had $25.6 billion in endowment assets as of June 2015. The bill would impose the state’s unrelated business income tax on those endowment fund earnings, which have not been spent for educational and related purposes. Smaller schools are rallying to the defense of Yale because of the precedent this bill could set.
While Connecticut might be taking a more aggressive approach than the congressional committees at this time, the data gathering on the federal side gives warning to colleges and universities that tax reform impacting endowments might be on its way. The Camp tax reform proposal released in 2014 contained a proposal to impose a one percent excise tax on the net investment income of private colleges and universities with endowment assets of at least $100,000 per full time student. All of this suggests considerable legislative interest in taxing unspent endowment funds as a means to encourage schools to increase scholarships and other financial aid to students in this period of increasing tuition costs.
alliantNational, alliantgroup’s national practice, provides subject matter expertise on complex and emerging federal, state and international tax issues as well as legislative and regulatory affairs to help businesses receive timely and precise guidance on all their tax matters. Contact us today to learn how your business can benefit from alliantgroup’s tax consulting services.