Harvard Hotel Draws IRS Scrutiny

Harvard University owns a hotel overlooking the Charles River that charges as much as $300 a night for a room. Yet the country’s richest higher-education institution doesn’t pay a cent in taxes on revenue from the property in Boston and hasn’t for at least five years. Now, the federal government wants to know: are taxpayers getting shorted?

Not-for-profit universities are exempt from paying taxes on tuition or other money that relates directly to their educational mission. Still, the government has long required all nonprofits and even public schools to pay on a class of revenue known as “unrelated business income.” That’s a broad category, encompassing revenue from college-owned bookstores, restaurants, sports arenas, and other venues when they sell goods and services to the public.

Although the regulation has been in place since 1950, the IRS has stepped up enforcement only recently, opening audits into more than 30 universities, Bloomberg Businessweek reports in its Nov. 21 issue.

The IRS declined to disclose a complete list of the schools under review. Notre Dame, Purdue, the University of Texas at Austin, Texas A&M, the University of North Carolina, the University of Georgia, Lamar University, the University of Central Florida, Yeshiva University, Suffolk University, and Harvard confirmed the IRS is scrutinizing them. The government is looking into whether some of the schools improperly claimed tax-exempt status for taxable businesses.

‘Worst Businessmen’

John Walda, president and chief executive officer of the National Association of College and University Business Officers, a trade group in Washington, says the schools have nothing to hide. “Our members are in compliance and doing their best to abide by the spirit and the letter of IRS regulations,” Walda said.

Others suggest some colleges may have gotten creative with their accounting, leaving plenty for the IRS to inspect.

“The joke is they are the world’s worst businessmen because they are always ‘losing’ money,” says Paul Streckfus, a former IRS auditor who publishes EO Tax Journal, an electronic newsletter. “They are making money,” Streckfus says. “Or they wouldn’t be doing this.”

The inquiry began in October 2008, when the IRS sent a 33- page questionnaire to 400 schools asking for details about their non-educational business ventures as well as compensation for their top officials.

Taxable Income

After checking the schools’ responses against their tax filings from previous years, IRS officials announced in a preliminary report last year that most of the colleges appeared to be collecting revenue that the universities considered exempt, while the agency said the same could be subject to taxes. The auditors are investigating whether any of the schools improperly reported losses on the outside businesses, allowing them to avoid paying taxes.

“If you go back and look at all of the audits that are being conducted now I would say virtually every one of them has a commonality in that they all have these loss deduction issues on their returns,” said Bert Harding, a lawyer in Alexandria, Virginia, who is representing some of the institutions under audit. He declined to name his clients.

Communications from the IRS to some of the universities obtained by Bloomberg News through open-records requests show the breadth of the probe. At the University of Central Florida in Orlando, the agency is examining revenue from software sales, study-abroad programs, transactions at a campus computer store, and, among other things, a deal with Coca-Cola Co. (KO) to promote the soft drink to students, according to documents the school released.

Country Club

The university, which has more than 50,000 students, was also asked if dues paid for its president, John Hitt, to belong to the Interlachen Country Club in nearby Winter Park and the Citrus Club in downtown Orlando, as well as $4,000 a month for travel for his spouse, was reported as taxable income. Chad Binette, a university spokesman, declined to comment.

Mayer Fertig, a spokesman for Yeshiva University in New York, said it has already voluntarily resolved its audit, paying $186,000 in back taxes related to benefits it was offering to some employees.

The probe is also reaching into college sports programs, which have attracted federal scrutiny as they have grown. Lamar University in Beaumont, Texas, is being asked about the money it makes from advertisements such as a courtside lighted floor sign for the Cheddars restaurant chain at its basketball games, and promotions for Dairy Queen on the back of tickets it sells, correspondence from the IRS shows.

Brian Sattler, a spokesman for the school, which is part of the Texas State University System, declined to comment.

Golf Course

Harvard reported to the IRS that its non-educational enterprises, including the hotel across from its campus in Cambridge, Massachusetts, lost $1.4 million from 2009 to 2010, according to the university’s tax filings. Because of the losses, Harvard paid no taxes on its outside businesses. That has been the case for at least five years, the school’s annual tax records show. John Longbrake, a Harvard spokesman, declined to comment on the tax filings.

Another school under review, the University of Georgia, runs a 200-room hotel, a health center, an eight-acre athletic complex with three pools and an 18-hole golf course. In 2006 the school reported to the IRS it had just two sources of unrelated income. After the IRS started asking questions, Georgia bumped that number up to 15, according to the university’s tax records. Wendy Jones, a spokeswoman, declined to comment on the tax records.

‘Unfair Advantage’

Universities shouldn’t be operating outside businesses that compete with for-profits and yet avoid most, if not all, of the tax burden, said Dean Zerbe, a former aide to U.S. Senator Charles Grassley, the Republican from Iowa who sparked the IRS audits with a series of hearings starting in 2004 on the growth of tax-exempt organizations. The U.S. Treasury collected $594 million from the unrelated business income levy in 2007, a rate of 5 percent of the gross revenue all nonprofits reported.

“It’s going to show that universities are vast complicated organizations with entities that are really for-profit businesses that are paying no taxes,” said Zerbe, referring to the report the IRS is expected to release when it completes the audits. “That’s an enormous unfair advantage.”

Lois Lerner, the IRS director of tax-exempt organizations who is overseeing the investigation, says many schools are rethinking how and what they report to the government. Receiving a thick questionnaire from the IRS is a “behavior changer,” she said.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

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