A new, wide-ranging report on colleges and universities by the Internal Revenue Service has found that a number of institutions make loans with below-market interest rates to their top administrators.
The May 7 report was part of an IRS review into universities' compliance with tax laws. The agency is looking for possible targets for investigation as the federal budget gets tighter, Inside Higher Ed reports.
Flickr photo by TheTruthAbout...
While the report zeroes in most sharply on executive compensation and taxes on unrelated business income, it also notes that a number of colleges make loans to their six highest paid officers, directors, trustees and key employees.
Of the 344 colleges and universities that responded to the IRS survey, 28 reported making loans or offering lines of credit to these top administrators. In a large percentage of these cases, the loans were offered on terms below the applicable federal rate.
The applicable federal rate is published each month by the IRS. Taxpayers who charge at least this interest rate on below-market loans can avoid being penalized.
In several instances, the loans to administrators were not documented by a written agreement, the IRS found. Some said the loans or loan forgiveness were not reported as compensation.
The finding highlights an issue that has stirred up controversy at Sonoma State University, where the university's foundation made $21 million in private loans to local land owners, including seven loans to a former board member.
The loans came to light last summer, when former board member Clem Carinalli told the university he could no longer make payments on two outstanding loans, the Santa Rosa Press Democrat reported.
The Chronicle of Philanthropy did a big investigation on nonprofits' loans to their own executives in 2004. The reporters found "thousands of loans made by nonprofit groups to charity officers and directors. The transactions include at least 140 interest-free loans … personal loans for investments in stock and real estate, and loans to wealthy donors who borrowed back money they had contributed to nonprofit groups they started."
In California, charities are required to get approval from the attorney general's office before making any loans, according to the Chronicle story. The only exception is when a nonprofit issues a mortgage for a newly hired official.
Yet the Chronicle found in 2004 that 63 nonprofits in California reported on their federal tax returns that they had made loans unrelated to housing costs to officers or directors, and not one had applied for the required permission.
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