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Hearing on the Internal Revenue Service’s Colleges and Universities Compliance Project

May 08, 2013

Hearing on the Internal Revenue Service’s Colleges and Universities Compliance Project










May 8, 2013


Printed for the use of the Committee on Ways and Means


DAVE CAMP, Michigan,Chairman

PAUL RYAN, Wisconsin
DEVIN NUNES, California
JIM GERLACH, Pennsylvania
TOM PRICE, Georgia
DIANE BLACK, Tennessee
TOM REED, New York
MIKE KELLY, Pennsylvania

RICHARD E. NEAL, Massachusetts
JOHN B. LARSON, Connecticut
RON KIND, Wisconsin

JENNIFER M. SAFAVIAN, Staff Director and General Counsel
JANICE MAYS, Minority Chief Counsel


CHARLES W. BOUSTANY, JR., Louisiana, Chairman

DIANE BLACK, Tennessee
TOM REED, New York
MIKE KELLY, Pennsylvania






Advisory of May 8, 2013 announcing the hearing


Ms. Lois Lerner
Director, Exempt Organizations Division, Internal Revenue Service


Hearing on the Internal Revenue Service’s Colleges and Universities Compliance Project

Wednesday, May 8, 2013
U.S. House of Representatives, 
Committee on Ways and Means, 
Washington, D.C. 


The subcommittee met, pursuant to call, at 2:00 p.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.

 [The advisory of the hearing follows:]


Chairman Boustany.  This subcommittee will come to order. Welcome to this hearing on the IRS’ final report on its Colleges and Universities Compliance Project.  Over the last 2 decades, tax‑exempt organizations have grown increasingly complex in their organizational structures and operations.  This has made it more difficult for the IRS to conduct oversight of the sector.  Lending to this complexity is the prevalence of profit‑generating arms and investment activities within the tax‑exempt organizations that may be subject to unrelated business income tax, or UBIT. 

Colleges and universities have been at the forefront of this trend toward greater complexity and the expansion of for‑profit activities.  These institutions have evolved to meet changing needs of students, but also have engaged in activities that are not ordinarily associated with higher education’s tax‑exempt function.  Indeed, colleges and universities are a huge part of the tax‑exempt sector.  They generate a disproportionate level of tax‑exempt revenue and hold a disproportionate quantity of tax‑exempt assets. 

In number, colleges and universities represent just 0.5 percent of the tax‑exempt sector but generate more than 11 percent of the revenue of charitable organizations, nearly $160 billion in annual revenue, and they hold over $150 billion in assets, which is more than 21 percent of the entire charitable sector’s assets.

Given the significance of colleges and universities to the tax‑exempt sector and the compliance difficulties that can be associated with such a large concentration of assets and revenue, the IRS launched the Colleges and Universities Compliance Project to review compliance in this area.  The project began in 2008 with the IRS sending questionnaires to 400 randomly selected colleges and universities.  The IRS then selected 34 of the 400 institutions for further examination based on questionnaire responses and Form 990 reporting, which suggested possible noncompliance.

The IRS’ examinations focused on under‑reporting of UBIT, executive compensation, and employment taxes.  The final report was issued on April 25th of this year.  The IRS found almost universal noncompliance by some of the most sophisticated organizations in the tax‑exempt sector.  Noncompliance included widespread calculation errors and misreporting, 90 percent of the 34 institutions had their UBIT calculations adjusted upward for a total increase of around $90 million.  The adjustments came from misreporting income from activities likes facility rentals, fitness centers, fitness center operation, golf courses as well as the improper classification of loss‑generating activities as trade or businesses to offset for‑profit income.

While the UBIT rules like many tax rules may involve uncertainties, these findings may suggest deeper problems with the classification of for‑profit activities by colleges and universities.  Additionally, the report found that many institutions were unreasonably compensating top officials.  In all, wage adjustments totaled around $36 million, with over $7 million in corresponding taxes and penalties. 

Today, we will hear testimony from Lois Lerner, Director of IRS’ Exempt Organizations Division.  I look forward to hearing her views on this troubling report and look forward to taking a deeper look at the issues that have been raised.  And so I want to thank our witness, Ms. Lerner, for being here with us today.  And with that I will yield to the distinguished ranking member from Georgia, Mr. Lewis.

Mr. Lewis.  Thank you, Mr. Chairman.  Mr. Chairman, I want to thank you for holding this hearing.  Today, we will review the results of an Internal Revenue Service project on colleges and universities.  Colleges and universities play an important role in our society.  They educate our young people and create our workforce for the future.

I am honored to have many colleges and universities in my district.  We have wonderful institutions in metro Atlanta:  Spelman, Morehouse, Georgia State University, Clark Atlanta University, Georgia Tech, and Emory University, to name just a few.  They are training the next generation of scientists, doctors, and engineers.  They also provide many positive benefits to their local communities. 

I understand that many colleges are large and complex organizations.  They have sports program that enrich their student body and raise revenue for the university.  They may engage in activities such as advertising and operating golf courses, as the chairman stated, that may generate income subject to Federal tax. 

The range of their activities is diverse.  I commend the Internal Revenue Service for taking a closer look at these organizations and groups.  Projects like this are positive for both the agency and the universities.  They are useful tools for educating each other. 

As we move toward tax reform, it is important that we all understand how colleges and universities operate and comply with the Federal tax laws.  The agency report helps us begin this process.  I look forward to hearing from our witness today.  I am pleased that she is here to discuss what the agency learned from this report. 

Thank you.  And like the chairman, I welcome you. 

And I yield back, Mr. Chairman. 

Chairman Boustany.  I thank the gentleman. 

Chairman Boustany.  And now it is my pleasure to introduce our witness today, Lois Lerner.  Ms. Lerner is Director of the Exempt Organizations Division at the Internal Revenue Service and has been since 2006.  Before her appointment, Ms. Lerner was Director of the Exempt Organizations Ruling and Agreements Division. 

Ms. Lerner, I want to thank you for joining us today, and you will have 5 minutes to give your oral testimony.  The subcommittee has received your full written statement.  That will be made part of the formal record.

At this time I also ask unanimous consent to enter into the record the final report of the IRS’ Colleges and Universities Compliance Project.  And without objection, it is so ordered. 

[The Colleges and Universities Compliance Project Final Report follows:]

Chairman Boustany.  Ms. Lerner, you are now recognized for 5 minutes.  Thank you.


Ms. Lerner.  Thank you, Chairman Boustany, Ranking Member Lewis, and the members of the subcommittee.  I appreciate the opportunity to come and talk to you today.  My name is Lois Lerner and I am the Director of Exempt Organizations at the Internal Revenue Service, and I am here today to discuss with you what we have learned in our recent examinations of tax‑exempt colleges and universities.  These examinations were the final phase of a multiyear project that began in 2008 with the distribution of a wide‑ranging questionnaire to 400 public and private colleges and universities. 

IRS has a very good relationship with the college and university sector, so we asked the National Association of College and University Business Officers for input in designing the questionnaire so that the recipients would understand the questions and we would get the best information.  Responding to the questionnaire was voluntary and the response rate was about 97 percent. 

There were no big surprises in these responses.  We saw a high level of good governance practices and policies, general use of the rebuttable presumption and executive compensation setting, and a significant amount of unrelated business activity. 

After reviewing the responses, along with the organizations’ 990s and 990‑T’s, we selected 34 institutions for examination, concentrating on unrelated business income and executive compensation.  We have completed almost all of these exams and released our final report last month.  Please keep in mind that the schools examined don’t represent a statistical sample, so the results are not attributable to all colleges and universities; and also, because section 6103 of the Internal Revenue Code prohibits disclosure of taxpayer information, the report and my comments are not taxpayer specific.

So what did we kind in these exams?  Significant under‑reporting of unrelated business taxable income.  Taxable income from unrelated business activities was under‑reported at 90 percent of the schools we examined and the amount totaled about $90 million.  Amounts were under‑reported for 30 different types of activities, but the majority of adjustments were made from only five, and those were fitness and recreation centers and sports camps, advertising, facility rental, arenas, and golf courses.

In total, the IRS disallowed more than $170 million in losses in net operating losses, which could result in more than $60 million in tax liability for the impacted organizations.  The most common reasons for these adjustments were that in about 70 percent of the schools they were reporting activities on their 990‑T that didn’t qualify as a trade or business primarily because they generated continual losses over a protracted time period.

Second, on 60 percent of the forms 990‑T examined, colleges and universities offset income from unrelated business activities with expenses that were not directly connected to the activities.

The third problem area involved net operating losses, which are losses reported in 1 year that can be used to offset income in other years.  On more than a third of the returns examined, the schools had either improperly calculated the net operating losses or the losses were not substantiated. 

Fourth, nearly 40 percent of the schools incorrectly classified activities as exempt or otherwise not reportable on the 990‑T, and after the IRS reclassified these, there was about $40 million in income coming from unrelated activities that was now subject to tax.

We also looked at compensation.  Section 4958 of the Internal Revenue Code requires that public charities, including private colleges and universities, pay no more than reasonable compensation to their officers, directors, trustees, and key employees.  It also imposes a tax on covered individuals who receive unreasonable compensation and on the organizational managers who approved the compensation.  An organization can shift the burden of proving unreasonable compensation to the IRS if it follows the rebuttable presumption process, and under that it must use an independent body to review and determine the amount of compensation, rely on appropriate comparability data, and contemporaneously document the process.

Although we found that most of the colleges and universities use the rebuttable presumption process to set their compensation, at about 20 percent of the schools the comparability data was not appropriate, which means that those schools failed to establish a rebuttable presumption.

Problems with the compensation data included data from supposedly comparable schools that were not similarly situated, compensation studies that didn’t specify the selection criteria for the supposedly comparable schools, compensation surveys that didn’t specify whether the compensation amounts they used were limited to salary only or included the total of other types of compensation as required by section 4958.  We also looked at the amounts of compensation paid to top management officials and other college and university employees, and that information is included in the report.

Mr. Chairman, Ranking Member Lewis, let me thank the subcommittee again for this opportunity to discuss the report, and I would be happy to answer any questions. 

Chairman Boustany.  Thank you, Ms. Lerner. 

[The statement of Ms. Lerner follows:]

Chairman Boustany.  The final report notes that very few colleges and universities sought outside advice about the treatment of potentially unrelated business activities, and when they did, they frequently received incorrect advice.  So I have a few questions regarding that.  First, do you have any thoughts on why such a small number of these universities and colleges failed to seek outside advice?  Are there any insights?

Ms. Lerner.  I really don’t know other than the fact that they are large organizations and oftentimes large organizations have inside resources.

Chairman Boustany.  Okay.  Are you concerned about the high frequency of incorrect advice that colleges and universities did indeed receive? 

Ms. Lerner.  I think it is very important to keep in mind that part of our project was to provide information to folks about what the rules are and how they play out.  If we are seeing that high level of concern with regard to folks who are actually seeking information, that means we could probably do a better job of explaining the rules to them.

Chairman Boustany.  Okay.  Because, thirdly, colleges and universities and advisers were frequently wrong about the classification of activities, allocation of expenses related to activities, and it kind of suggests or indicates that the rules are not well understood or that the institutions, maybe they are taking advantage of ambiguities in the law or some combination of the two.  Could you comment further? 

Ms. Lerner.  Sure.  I think in this area everything is very facts and circumstances.  You have to look at all of the factors in a particular institution that is making that judgment.  What we did not see was organizations that didn’t seem to have a thought‑out reason for classifying things the way they classified them.  But it is very factual related and there were disagreements between the IRS and the organizations, and I think by putting this report out and doing some other work around the issue, that we can probably benefit the college and university sector as well as the exempt sector in general.

Chairman Boustany.  What are your next steps? 

Ms. Lerner.  Well, these are very, very narrow exams.  As I said, there are only 34, and they were selected because they appear to have some potential for noncompliance.  So we have already started a second unrelated business income project.  We are looking at organizations that are reporting unrelated business activity on their 990s but they are not filing a 990‑T.  We think that is problematic.  That is going on this year and we are already developing our projects for next year, which will include, I think, a more expansive project that goes beyond a particular part of the sector to see if these same issues are apparent across the sector. 

Chairman Boustany.  Thank you.  And we will look forward to following up with you on that as it evolves.

It no secret that the Ways and Means Committee this year is looking at tax reform and looking to rewrite the Tax Code.  There is a consensus that the Tax Code is too complicated for many taxpayers and what we need are real solutions for a broken Tax Code.  This report contains some troubling details about tax‑exempt organizations and how they report unrelated business income and determine executive compensation. 

If the Committee were to consider changes in these areas, does the report suggest that there are structural problems with the tax‑exempt sector or perhaps more targeted changes should be contemplated in the code? 

Ms. Lerner.  Again, I think that it is really important for us to get more information than just these 34 organizations, because they were selected because of potential noncompliant activity.  I would like to gather more information more broadly to see where the real issues are that could be addressed before changes were made. 

Chairman Boustany.  Do you have a timeframe on that? 

Ms. Lerner.  The project that I mentioned, it is already ongoing, began in this fiscal year.  With examinations, it is somewhat difficult.  You can’t really predict when they will be completed.  But we are trying to look for ways that we can provide information during projects rather than waiting until the end of the project. 

It is sometimes difficult because in the beginning of the project you might see an issue that doesn’t carry through and you don’t want to give a misimpression that, oh, my goodness, this is going on across the sector, when in fact it is not.  But we will try to get information out to the public as quickly as we can. 

Chairman Boustany.  I thank you. 

Now I am pleased to yield to my friend, Mr. Lewis. 

Mr. Lewis.  Thank you very much, Mr. Chairman. 

Ms. Lerner, I want to somehow in some way for you to clarify the report’s finding regarding unrelated business income tax and compensation.  Maybe in your response to the chairman you covered this.  The report notes that 34 colleges and universities were selected from a pool of 400 for examination.  Were these colleges a valid sample of all colleges and universities?  Are there any assumptions that can be made based on these examinations regarding the practice of all colleges and universities? 

Ms. Lerner.  The questionnaire was a statistically valid sample, so that can be looked at as how colleges and universities in general act.  With regard to the examinations, it was not a statistically valid sample, so the results really only apply to the 34 organizations that were examined.

Mr. Lewis.  Do you think from this examination, from this study, that you learned something or came across something that would be helpful to the IRS in other nonprofit charitable groups when you investigate or conduct an examination? 

Ms. Lerner.  Yeah, I think we did.  The compensation piece is not our first crack at compensation.  We have been looking at this for some time.  There have been allegations of inappropriate compensation in the tax‑exempt arena for quite some time. 

Our first study on this was across the board.  It looked at small, large, medium‑size organizations, as well as private foundations and public charities.  We did not find rampant improper compensation, but we did see some areas that created issues for us, and so we have continued that view. 

And I think the compensation piece that we saw here with regard to the rebuttable presumption and the use of comparables is an important one.  This is the first time we have actually looked beyond the fact that the organizations were using comparables to see whether the comparables were really, in fact, comparable.  And when I speak to groups about this, what I caution the board members and the executive directors about is, don’t just accept the report from a compensation consultant, you need to ask them questions about this, because it can be done correctly and obviously the organizations are trying to do it correctly.  So that is one piece that I think would apply across the board.

Mr. Lewis.  Sometimes you read reports, news reports by way of radio or television where a college president, a university president has been paid a certain salary and maybe the football coach is being paid much more.  Do you look at things like that? 

Ms. Lerner.  We do, and we did look at it here when we gathered information about how people were being paid.  But there are separate rules for individuals that fall under section 4958 of the code than there are for other individuals.  So section 4958, where I talked about the rebuttable presumption of reasonableness, in a private charitable college under 501(c)(3), the pay for everyone has to be reasonable.  The law requires that it be reasonable, that charitable dollars go for charitable purposes. 

How you get to the reasonable is by looking at other like‑situated organizations, people who are in the same part of the country, who have the same level of responsibility, who did the same kinds of jobs with a similar size organization.  You look at those, and if you can find comparable jobs, then you look at what those people are getting paid and that is the way that organizations do set the compensation.

The rebuttable presumption process and the excise tax, however, does not apply; only applies for officers, directors, trustees, key employees, and their families.  It does not apply for a sports coach or an investment manager.  They would not fall under that. 

Mr. Lewis.  Suppose you have a board member of a college or university, a private college, a small college or university, and this particular board member goes out and raises millions of dollars, and they want a certain amount earmarked for a certain department, for a certain professor, or for the coach.  How do you examine something like that? 

Ms. Lerner.  I am sorry.  Could you say it again?  I missed part of the question.

Mr. Lewis.  So, as a member of the board of trustees, okay, and this member maybe is head of a foundation and said we are going to make a grant to this department or to the sports arm of the university to compensate the coach, to compensate a particular head of a particular department.

Ms. Lerner.  There are totally separate rules for that.  What I am looking at here is how do you determine the compensation for that trustee for what the trustee is doing as a trustee?  There are lots of other rules about how organizations and other foundations can provide compensation for an employee of the university outside of the university context, but that wasn’t what we were looking at here.

Mr. Lewis.  Thank you very much. 

Mr. Chairman, I yield back.

Chairman Boustany.  Thank you. 

Ms. Jenkins. 

Ms. Jenkins.  Thank you, Mr. Chairman.  Thank you for holding this hearing. 

Ms. Lerner, thank you for being here.

Your final report states that the IRS weighted the data contained in the interim report so that the findings could be extrapolated to give a sense of the characteristics, activities, and tax reporting of colleges and universities, both private and public, regardless of their size.  Can you briefly describe how the information was weighted, like what factors you took into consideration?  And from the final report findings, is it possible to describe any trends in noncompliance?  Does it depend on the college size, whether it is public, private, or some other variable? 

Ms. Lerner.  Well, let me start with the last part of your question first.  In terms of noncompliance, remember the questionnaire was not an examination.  The questionnaire was asking them for information.  Based on that information, when we went out initially with the questionnaire, we divided the colleges and universities into three groups, small, medium and large, depending upon their student size, because we thought they would probably look different.  So we wanted to get information along those lines.

Then when we got all of the information in, we had a conversation with the people in our office who do statistical analysis and research.  I am not expert in that area.  And what they said to us was:  Very nice study and very nice information, but because of the way that you asked the questions and divided up the groups, you can’t say anything across the board, you can only talk about those groups.  So the weighting was done by statisticians, whatever magic mumbo jumbo they do to do that, so that we could say overall the college and university sector looks like this in this particular area.

We did not find a great difference when we did the weighting than we had seen in the small groups.  So we did it because we thought it would be important to be able to make broad statements, but it really didn’t make a difference.

Ms. Jenkins.  Okay.  And the final report also notes that with regard to the compensation data, weighting the results produced meaningful results at the entity level but not broken down to individuals.  Can you just further explain what that means and what impact it should have on our understanding of the compensation section? 

Ms. Lerner.  Well, first of all, when you look at an organization, you have to see what type of job they have.  So if you are looking at 20 different jobs in the organization, we did not break it down to those 20 different jobs, but we looked at the organization as a whole and said, is this organization using the processes and providing reasonable compensation, what kinds of things are they looking at, and how are they going about this.  That is what we meant by the entity level, the organization as a whole, not particular jobs within the organization.

Ms. Jenkins.  Okay.  Thank you. 

Mr. Chairman, I yield back. 

Chairman Boustany.  Thank you. 

Mr. Davis, you are recognized for 5 minutes. 

Mr. Davis.  Thank you very much, Mr. Chairman.

And thank you, Ms. Lerner.

Let me ask you, were there special characteristics of the 34 institutions that you used as your sample? 

Ms. Lerner.  If you mean by that question did we look at them because we saw particular aspects in them, the answer is yes.  When we looked at the responses to the questionnaires and we looked at their 990s and their 990‑T’s, we were looking for organizations that were paying high levels of compensation, for example.  We were also looking for organizations that appeared to have high levels of unrelated business activity, because those were the two issues we wanted to focus on and we were looking for organizations that we thought might have those issues and might have some problems.  That is why the 34 doesn’t represent a random sample of what the whole sector looks like.

Mr. Davis.  And so you really couldn’t project with any high degree of certainty that this really becomes a problem across the board with colleges and universities throughout the country. 

Ms. Lerner.  That is correct.

Mr. Davis.  I was just thinking, I represent about 30 or so colleges and universities, and I am wondering if maybe some of them may not really understand that they have got to be in compliance with certain kinds of rules and regs ‑‑ I admit that I have sat on the board of a couple and I sometimes wondered how we arrived at paying our chief executives.  Are there guidelines and is there guidance for institutions to use? 

Ms. Lerner.  The rebuttable presumption is probably the best guideline they can use because it lays out the process they need to use to set the compensation, and if they follow the process and the IRS comes in to question the compensation, the onus is on the IRS to prove that it is unreasonable rather than on the organization to prove that it is reasonable. 

There are other ways of showing that you are paying reasonable compensation, but I believe that most organizations try to use that presumption because it is very clear what they have to do, and if they do it correctly, they are pretty safe.

Mr. Davis.  When it came to endowments, your report notes that 56 percent of total endowment spending was for scholarship awards, grants, and loans.  Do you know about the rest or the other portion of the endowments, how they were spent? 

Ms. Lerner.  I don’t have that information with me today, but I can go back and see if we can get that information to your staff.

Mr. Davis.  I would appreciate that.  And let me ask you, when discussing the 56 percent of distributions for scholarships, awards, and grants, is there an average endowment distribution or an average amount ‑‑ I guess I am thinking some institutions have these great endowments where they get help and others have very low endowments or they don’t really get much in the way of endowments.  Is there an average across the board? 

Ms. Lerner.  I think the other thing that is important to remember about the endowment information that is in the report is that we sent the questionnaire out in 2006.  In 2008, when we had the economic downturn, I am guessing most of the information that we got in 2006 may have been impacted greatly by that.  So there are some limitations to looking at that data, but we can provide your staff with what we have.

Mr. Davis.  All right.  Thank you very much. 

Mr. Chairman, I yield back.

Chairman Boustany.  I thank the gentleman. 

Mr. Marchant. 

Mr. Marchant.  Thank you, Mr. Chairman. 

The report says that the IRS made over 180 adjustments to institutions’ unrelated taxable income due to misreporting of income and losses.  The majority of the adjustments came from sources like advertising, facility rentals, golf courses, and arenas.  What income was being offset by losses from these operations is question one, and can you give us some specific examples of that? 

Ms. Lerner.  Probably I can’t answer question one today because I don’t have it on the top of my head, but we would be happy to go back and try and get that information to you.

Ms. Lerner.  Let me make sure I understand exactly what you were asking.  Could you repeat it, please? 

Mr. Marchant.  Well, what income was being offset by the losses? 

Ms. Lerner.  It varied in the institutions.  Let me go back.  There were about 30 different types of unrelated activities across the institutions, and the reason that I mentioned the five that I did was because most of the issues that we saw were in those five.  I think, though, that they were in those five because if you look at the questionnaire results, you will see that those were the five activities that the most organizations conducted anyway.  So you had a much larger number of organizations doing these activities, so it wasn’t surprising that there would be issues there. 

With regard to what they would be offsetting, the unrelated business income rules allow a tax‑exempt organization to conduct its exempt activity and it doesn’t have to pay any taxes on that.  With regard to activities that are not related to its exempt purpose, so you have got a college and its exempt purpose is to train folks and to teach folks, so that is all related.  If you have ‑‑

Mr. Marchant.  Let’s say they have a golf course. 

Ms. Lerner.  Right.  Let’s take the golf course.  The golf course can be related under the right circumstances, but it might be a mixed use.  So if your students who are training for your golf team are using the golf course, that would be related to your educational mandate.  If on the other hand you are allowing your students to use it and your faculty to use it, but you also allow memberships from outside individuals, the money that you get from those outside individuals to use it is unrelated to your educational responsibilities, and so, therefore, it becomes taxable.  So in one organization, one type of activity, you could have both taxable and nontaxable activity and you can allocate your expenses among those. 

But let’s take the golf course.  Let’s say you had a golf course that was making lots of money, which is not what we saw here, but if you had a golf course that was making lots of money and it was unrelated, you would owe taxes on that.  But you also have a parking lot, which is also not related, but you are losing your shirt on that parking lot.  You can offset the gains in the golf course with the losses from the parking lot.  That is how you get to what you have to pay tax on. 

Mr. Marchant.  In a consolidated statement.

Ms. Lerner.  In a consolidated way, yes.  It is no different than a taxable business.  Taxable business may do lots of different things and it has all this big pile of gain and it has a whole bunch of deductions and it applies the deductions against the gain and the bottom line is what you have to pay taxes on.

Mr. Marchant.  What role do outside auditors play in the function of auditing these consolidated statements?  I mean, they have to have independent auditors that come in and audit the books.  Do the auditors certify the accuracy of the compliance of the tax return? 

Ms. Lerner.  I don’t know the answer to that question.  I would imagine that they certify to something, but I am not sure the accuracy is what they are certifying to.  I am not the right person to answer the question.

Mr. Marchant.  So you have got big accounting firms, if these are big universities they have got undoubtedly a big accounting firm that has come in and auditing their financial statements.  And I serve as a trustee of a small university, so I rely pretty heavily, when I go to the meetings, on those audited statements.  But this university has no outside entity, so I wouldn’t worry about it.  But if I were on a trustee, trustee of a big university, I would want the auditor to certify, to also certify that the university was compliant in its tax returns, and maybe some education at that level might help.

Ms. Lerner.  Thank you.

Mr. Marchant.  Thanks. 

Chairman Boustany.  Thank the gentleman. 

Ms. Black, you are recognized. 

Mrs. Black.  Thank you, Mr. Chairman.

And thank you, Ms. Lerner.  This is a very interesting report.  I am interested in the chicken or the egg kind of thing here.  What led you all to do these audits?  Was it the questionnaire that you got back in conjunction with the 990s or did you have the 990s and you saw some things on there and sent questionnaires out? 

Ms. Lerner.  It was the first.  We do questionnaires a lot.  Colleges and universities or large other organizations, we can’t do a lot of audits of them in a particular year, and even if we do and we learn something, it is difficult for us to share that with anyone because it is specifically taxpayer related.  So we use the questionnaires to go out broadly to ask either a particular part of the sector about its activities, or if we have got a particular issue like compensation that crosses the sector, we will go out and ask questions about the issue. 

Then, to use our resources in the most efficient way, we use the answers to the questionnaires and the 990s, and in this case the 990‑T, to narrow down the field so that we can pick a much smaller number to audit and get more information on.

Mrs. Black.  Tell me, what is a 990‑T?  I am familiar with a 990, but I am not familiar with a 990‑T. 

Ms. Lerner.  Very good question.  The 990 is the annual return that any tax‑exempt organization has to file.

Mrs. Black.  Right. 

Ms. Lerner.  If one of these organizations has unrelated business income over $1,000, then they file a separate form, which is the 990‑T.  It is really an income tax form, which is unusual in the tax‑exempt world. 

Mrs. Black.  Right.  Right.  So given what you have seen here, whether it is just a lack of education or maybe someone in the department not being aware of how to do this properly, and what you have found in the university study, are you now going to use this in other sectors of nonprofits that have 990s as well? 

Ms. Lerner.  Yes.  I think it is very important to broaden this out and see what kind of activities are going on in other tax‑exempt organizations because this was a homogenous group.  We want to look farther, and we are developing a project for our next year’s work plan that will do just that.

Mrs. Black.  I know these were only 34 universities.  Obviously there are a whole lot more of those, of universities across this country that might be looked at.  Are you drilling down any deeper now that you have seen certain things that are apparent, to go back and look at some of these other universities to see if they are ‑‑ because I know you are saying that this is not statistically significant because of the way in which it was done.  But are you trying to do anything to go back and look and say, let’s try to do something and really figure out whether this is pervasive across the industry, whether this is just misunderstandings or non‑education or whatever? 

Ms. Lerner.  I think that some of those organizations, other colleges and universities may be included in this larger study that I was talking about, which will look broadly across the sector.  So we may be looking at more of them.

Mrs. Black.  Okay. 

Thank you.  I yield back.

Chairman Boustany.  Thank you. 

Mr. Crowley. 

Mr. Crowley.  Thank you, Mr. Chairman.  And I appreciate particularly Ms. Black’s statements in terms of what the focus of the investigation was and whether or not it will be broadened out beyond colleges and universities.  Because I think it is laudable in terms of ensuring that folks under the status are actually abiding by the requirements of that status and not abusing that.  So I welcome that. 

I want to thank you as well, Ms. Lerner, for the swift approval of the nonprofit status for the Empire State Relief Fund, a charitable nonprofit founded by Governor Cuomo in the aftermath of Hurricane Sandy.  We appreciate the IRS’ quick action on that. 

I understand that after the tragedy some unscrupulous dealers would set up phony charities from time to time with the aim of personally enriching themselves, so it takes some time for the IRS to vet each charity.  I suspect that Governor Cuomo passed the test for being expedited.  I am pleased that you did expedite that request for the Empire State Relief Fund nonprofit status.

Second, with respect to the study ‑‑ and to somewhat follow up on Ms. Black’s line of questioning ‑‑ you have done on colleges and universities, how many of these colleges and universities have law schools?  Do you know? 

Ms. Lerner.  I don’t know the answer to that question.

Mr. Crowley.  So you wouldn’t know if they had them, if they were accredited?  So you don’t have that answer? 

Ms. Lerner.  I do not know that.

Mr. Crowley.  It would be interesting to see if those that have law schools would know whether or not they themselves would know they are in violation of any of the provisions.  But seriously, this investigation is notable for what you uncovered, and I think we are all disturbed by what you have discovered in terms of the abuse within college and university systems.

On that topic, Ms. Lerner, as the Director of the IRS Exempt Organizations Office, your office covers a wide range of areas outside, as Ms. Black was alluding to, the college and university systems, including business leagues and chambers of commerce.  Is that correct? 

Ms. Lerner.  That is correct.

Mr. Crowley.  My question is, if there is a large national umbrella business league that receives its income from collecting dues from its corporate members, the dues paid by those corporate members to the umbrella business league would generally be something the member corporations could deduct on their corporate income taxes.  Is that correct?

Ms. Lerner.  That is correct.

Mr. Crowley.  Now, if the business league used those deductions for political purposes, such as partisan campaign ads, those funds would no longer be deductible by the membership corporations.  Is that also correct? 

Ms. Lerner.  That is right.

Mr. Crowley.  When was the last time the IRS looked into the actions of these large tax‑exempt business chambers to ensure that they are not spending their members’ dues on political activity? 

Ms. Lerner.  Well, they are allowed to spend their member dues on political activity, but they have a responsibility.  The responsibility is either to notify the members that they cannot deduct the entire amount of the dues, or if they want to take the obligation upon themselves, they can pay the tax for this nondeductible activity.  So the law does provide for covering both of those aspects.

Mr. Crowley.  I appreciate that, but I am concerned that some of these business chambers are skirting Federal tax laws and putting their corporate members and the American job creators in legal jeopardy with the IRS to push a certain partisan viewpoint that doesn’t reflect all the members of their membership or the American public.

I would urge the IRS to undertake an investigation immediately into this sector to ensure that when corporations pay their dues to these chambers of commerce, that there is an accounting of the receipts of these business leagues to ensure that every dollar that corporate members give and deduct are not used for political purposes. 

And finally, in the summer of 2012 it was reported that the IRS was going to undertake a similar investigation into the one taken here on colleges and universities on political entities that fund political campaign ads that were taking donations anonymously and are tax exempt.  These are the folks that put on hundreds of millions of dollars in campaign ads in 2012 elections, all with no accountability and with taxpayer subsidy. 

This hearing highlights certain compliance problems in the tax‑exempt sphere, and I hope the IRS aggressively looks into these political and business leagues to see if they are abusing the tax‑exempt status.  I don’t want to speak for the chairman or for the ranking member, but I know my constituents in Queens do not want their tax dollars being used to subsidize political campaigns.  I suspect neither do any of the members on this panel. 

So, Ms. Lerner, if you could comment briefly on the status of the IRS investigation into these political not‑for‑profits, I would appreciate that as well.

Ms. Lerner.  Well, there was a questionnaire that began this discussion and there is also a questionnaire out there, you can look at it on our Web site right now, that is seeking information from section 501(c)(4), (5), and (6) organizations, and a big piece of that questionnaire relates to their political activities.  So that is our beginning.

Mr. Crowley.  I appreciate that.  Thank you.

And thank you, Mr. Chairman. 

Chairman Boustany.  I appreciate the gentleman’s line of questioning, and this hearing was focused specifically on the report dealing with colleges and universities.  But I know there is considerable interest on both sides of the aisle on this subcommittee to look at other areas of the tax‑exempt sector, and it is my intent do so as we go forward.  But I certainly appreciate the gentleman’s line of questioning. 

Mr. Reed, you are recognized. 

Mr. Reed.  Thank you, Mr. Chairman.

And thank you, Ms. Lerner, for being here today.  I reviewed your report, and I am going to veer off a little bit into an issue because we have already covered a lot of issues in relationship to how that impacts IRS and things like that.  But just so I can clearly understand the data that you compiled here when it comes to compensation of folks at these educational institutions, for the key employees and the officers, directors and trustees, what was the average salary you found for those individuals? 

Ms. Lerner.  I am going to have to look in my book. 

Mr. Reed.  Please do.  I have got it in front of me, but I want this on the record.

Ms. Lerner.  Are you talking about the questionnaire or in the exam?

Mr. Reed.  The exam.  At the conclusion of your reports, I am going to ask you some data questions, because the data is amazing to me. 

Ms. Lerner.  Uh‑huh.  The compensation for top managerial ‑‑ oh, I am sorry.  I am looking at the wrong thing.

Mr. Reed.  I believe it is on page 4, but I will let you.  You may have it differently. 

Ms. Lerner.  No, I am looking at something different.  I apologize.  I am looking at my notes, which are not going to match up with what you are talking about. 

So the average base salary for officers, directors, trustees, and key employees was $448,981, and the average total compensation was $561,135.

Mr. Reed.  Okay.  And then for the highly compensated non‑ODTKEs, non‑key employees, officers, directors, for investment managers what was the average compensation you uncovered there?   

Ms. Lerner.  It was $894,214.

Mr. Reed.  Sports coaches? 

Ms. Lerner.  $884,746.

Mr. Reed.  And then when you got into the actual faculties of these institutions, heads of the departments, what is the average compensation you found there? 

Ms. Lerner.  Well, there were two different average compensations.  It depended on whether the heads of the department were also medical doctors.

Mr. Reed.  Medical doctors.

Ms. Lerner.  If they were not medical doctors it was $229,770, and if they were medical doctors it was $753,738.

Mr. Reed.  And then the overall faculty level? 

Ms. Lerner.  Again, there was a distinction between the medical doctor ‑‑

Mr. Reed.  I understand the distinction between the two.

Ms. Lerner.  Do you want both numbers? 

Mr. Reed.  Yeah, both numbers would be great.

Ms. Lerner.  So for the non‑medical folks, it was $215,854, and for the medical folks it was $575,632.

Mr. Reed.  And admin/managerial.

Ms. Lerner.  Non‑medical doctors $381,745, and medical doctors $462,872.

Mr. Reed.  See, the reason why I asked you to do that, because it is amazing to me, as a person who is a firm believer in education and a degree and empowering people to control their own lives to get out of poverty, and when I have lived and seen the data where college tuition costs, data I have seen, public sector educational institutions have gone up over the last 10 years 104 percent; private institutions, 60 percent.  And we are dealing with an accessibility, affordability of college.  When I see compensation levels like that, that jumps out at me as an area that needs to be explored. 

When you are talking about essentially $900,000 as the average in coaches and investment managers and $500,000 for the other folks, how in the world, given the increases of cost of college education in America, how do these institutions justify paying that level of salary? 

Ms. Lerner.  The rules on salary are reasonableness and the rules on reasonableness are to compare the like positions to your position, and that is how they do it.

Mr. Reed.  So if everybody raises the cost of the salary, if everybody increases the salary, and that is something that is going on in education and college institutions, from the IRS perspective that is reasonable.  But from my perspective, as a person who still pays his law school debt every month, when I see salaries like that, that doesn’t appear to me to be reasonable.  It may be reasonable to colleges and universities and their club, but from a student’s perspective that irritates me. 

And I know, Mr. Chairman, that is not the focus and the kind of scope of this hearing, but I think it is an issue that needs to be put out in the public domain, and students need to understand the level of compensation these institutions in America, who get positive treatment by the IRS, are paying their administrators, faculty, and managerial staff, as well as their key employees when it comes to officers, directors, trustees, and elsewhere.  Thank you, Mr. Chairman. 

Chairman Boustany.  I thank the gentleman. 

With that, I would like to thank Ms. Lerner for being here today and for offering some insights into the report.  And there will be plenty more questions, I am sure, going forward as you continue to look at this area and other areas of the tax‑exempt sector, so we look to further meetings down the line.  But we appreciate your insights today on these important issues.

With that, the subcommittee stands adjourned.

[Whereupon, at 2:55 p.m., the subcommittee was adjourned.]

Questions For The Record