WASHINGTON -- The Internal Revenue Service is discovering that some 501(c)(3) colleges and universities are lax in making sure campus facilities financed with tax-exempt bonds do not violate tax law restrictions on private use, an IRS official said Friday.
"In the college and university area what we are seeing is perhaps a tendency for organizations not to pay too close attention to use of the bond proceeds," Marcus Owens, the director of the IRS' exempt organizations division, told a joint meeting of the American Law Institute and American Bar Association.
IRS agents are making the disCoveries as they audit private, nonprofit educational institutions under the agency's Coordinated Examination Program. Owens did not say on Friday how many institutions have been found to have private-use problems with their bonds, but he has said previously that 18 colleges and universities are currently being audited under the program.
Owens said a typical type of violation occurs when a college issues bonds to build a student union building containing, for example, a bookstore and a cafeteria. At the time the bonds are issued, the facilities are run by the college and staffed by college employees.
But several years later, the college decides to contract with a private firm to run the bookstore, and bring in a restaurant chain to run the cafeteria. At that point, the college is in danger of violating the tax law provision that prohibits more than 10% of the proceeds of a bond issue to be used to benefit private businesses, Owens said.
Operating a campus bookstore and a cafeteria is an activity "that would not be taxed if it was done directly by the university, but the rules for private business use would find that activity ... to be private business use" if run by a for-profit firm, Owens said. "If the percentage of tax-exempt financing money used to build the building is over by just a couple of percentage points the [10%] amount," the college has a tax law problem, Owens said.
He warned that in some cases where the IRS is 'finding such problems, "you're going to see a real possibility those bonds would be found to be taxable bonds by the service." Owens urged colleges to plan ahead for such situations. "I've seen some institutions use taxable bonds for that portion of a facility that would be used potentially for private business use, just to forestall that problem," he said.
In addition to the 18 universities being audited under the Coordinated Examination Program, there are also 34 health care institutions and 27 other tax-exempt entities, for a total of 79 organizations.
The audit program "is here to stay. What is going to change over time will be the relative mix of organizations in the program," Owens said.
"Although it's likely health care will always be the largest single component, colleges and universities are a strong second and growing," he said.