The Internal Revenue Service released an interim report (the "Report") on May 7, 2010, summarizing responses to compliance questionnaires sent to 400 public and private colleges and universities in October 2008. The Report and underlying project principally focused on (1) the conduct and reporting of exempt or other activities that may generate unrelated business taxable income; (2) investment, management, and use of endowment funds; and (3) executive compensation practices. The compliance check also focused on a number of issues related to governance in these areas.
Here are some highlights from the Executive Summary of the Report:
- A large number of organizations reported having related entities (45% of small, 82% of medium, and 96% of large organizations) – the most common type being related tax-exempt organizations.
- Many organizations reported conducting a wide variety of activities that, depending on the facts and circumstances, might be exempt or taxable. Generally, a much larger percentage of organizations indicated that they conducted a particular activity than reported they included the activity on Form 990-T.
- The majority of colleges and universities reported making foreign investments through their endowments (e.g., 53% of small, 67% of medium, and 82% of large organizations reported investments in non-U.S. equities).
- Many colleges and universities reported using investment entities to make foreign investments of endowment funds.
- The reported compensation of the highest paid officer, director, trustee, or key employee (ODTKE) was highest for large colleges and universities (average $428,000, median $361,000) and lowest for small colleges and universities (average $202,000, median $174,000).
- 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.
- More than half of the organizations in each size category reported using the rebuttable presumption procedure to establish executive compensation.
- Comparability data was less frequently relied on to establish compensation than the other rebuttable presumption factors (approval by independent governing body and contemporaneous documentation).
- In the majority of cases, organizations reported that none of their six highest paid ODTKEs were disqualified persons (persons in a position to exercise substantial influence over the affairs of the organization) immediately before entering into their compensation arrangements with the organization; thus, fixed payments fell outside of the section 4958 excess benefit transaction rules.
The Report stated that further work is expected to include additional analysis in areas, including: "(1) the use of and relationship with controlled entities and related organizations; (2) the reported differences in treatment by organizations of various activities as exempt or unrelated and of cost allocation practices across activities and related organizations; (3) the reporting of losses from certain exempt and unrelated activities; (4) the use of comparability data and compensation practices and procedures to establish compensation of executives and other highly paid individuals; and (5) the impact the initial contract exception might have on the rebuttable presumption procedure."
The implications for other 501(c)(3) organizations: possible new developments in the areas of unrelated business income tax (UBIT) and executive compensation.