UBIT? You bet!

Blackswan87 writes:

Schools are cheating. As ironic as the statement is, it is, nevertheless, true the IRS puts forth. Many Universities are allegedly cheating on their taxes, claiming exemptions on non-educational businesses when there ought not be any, and the schools who are trying to evade taxes are some heavy-hitters, including Harvard, the University of Texas, and Notre Dame, just to name a few. Schools are permitted to have “unrelated business income” (think: the school cafeteria, arcades, or even the school bookstore), but, as any other business would, taxes need to be paid; the problem becomes, however, that many schools are claiming these business ventures fall into the non-taxable educational bracket.
The implications of this fraud are still being unearthed, but what taxpayers will primarily care about is the bottom line: taxpayers are being cheated. Harvard owns a hotel and charges up to $300 a night, the University of Central Florida deals in selling electronics, and even the smaller school of Lamar University advertises for Cheddars restaurant and Dairy Queen at sporting events- none of which is being taxed. With all the possible sources of revenue pouring in, it’s only astounding this fraud has not been found earlier: The law itself has been in place since 1950, but up until the past five years, no one has taken any note of it- unfortunately for competing businesses. Surrounding businesses are at a clear disadvantage; not only are the businesses alone forced to pay taxes, they may also lose clients since a nearby school can charge less for the same quality of goods.
Ultimately, up to 40 schools are being audited, and that is only to the taxpayers’ benefit. No more country clubs and university pizzerias raking in extra money- hopefully the playing field will soon be as even as the currently tax-exempt golf course owned by the University of Central Florida.
I (Mark) have a question here: Most universities and colleges are not shareholder-owned corporations.  Why should they pay income tax?
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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 comments

  1. That is pretty interesting. I thought most schools are exempt from federal taxes, and it appears as long as they can connect a line of business to the not for profit goal of a university then that income may be exempt as well. I found a link from the University of Florida which explains what would be unrelated income. http://www.fa.ufl.edu/tax/unrelated-business-income-tax.aspIn the list of exclusions, an argument can be made for many normally unrelated line items. I think we would have to look at each item from the schools and their reasoning for writing it as a related item rather than unrelated to understand the tax treatments.

  2. I think that tax-exempt organizations need to be carefully monitored in regards to how they classify their income. Yes, not-for-profit schools are tax -exempt but if they engage in unrelated business ventures, then they should have to pay taxes on those profits because the profits are in no way related to their educational mission. Unless these profits are used for the benefit of the students in some way, shape, or form taxes should be imposed on them. Overall, I think the IRS needs to look more closely at tax-exempt organizations and how they classify their income.

  3. To the professor's question: Although most schools are not shareholder owned, they should pay income tax if they are making profit since this country is based on being taxed on your income, not that I think this is right. Moreover, the article is interesting. The IRS needs to be firm with these schools in the way they are allowed to classify certain items on their taxes. There should be stricter guidance so that these schools cannot claim that they believed the unrelated business expenses were tax exempt expenses.

  4. Spfahey made an interesting point. Each item of unrelated income should be scrutinized because according to Spfahey’s link, schools are able to justify certain sources of income as related to the mission of the university. However, things like hotel income and income from selling electronics, even if sold in the University Bookstore, should be taxable. It seems like these things have gone overlooked in the past, and the IRS needs to closely monitor the unrelated income of universities to ensure that they are properly recording their share of income taxes. There should be stricter rules and guidelines for universities to follow, along with the continuance of audits so that universities will start to realize that this is an issue that needs to be addressed.

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