Paul L. Caron

Saturday, June 5, 2021

Aprill: A Tax Lesson For Education Law

Ellen P. Aprill (Loyola-L.A.), A Tax Lesson for Education Law, 171 Tax Notes Fed. 1065 (May 17, 2021):

Tax Notes Federal (2020)In this article, Aprill examines a recent Government Accountability Office report on the role of the Department of Education and the IRS in regulating conversions of for-profit colleges to tax-exempt nonprofit colleges [GAO, IRS and Education Could Better Address Risks Associated With Some For-Profit College Conversions (GAO-21-89) (Dec. 31, 2020)]. She argues that the tax analysis of those conversions should consider section 4958 and the special rules applicable to section 501(c)(3) organizations that are also governmental affiliates.

Under tax law, conversion transactions fall into three main categories, some with subdivisions: (1) those involving newly established section 501(c)(3) organizations; (2) those involving established private section 501(c)(3) organizations; and (3) those involving established section 501(c)(3) organizations that also are governmental entities.

The IRS applies different kinds of analyses to each of these categories:

  1. Newly established section 501(c)(3) organizations must apply for exemption, and review of those applications includes consideration of the statutory private inurement prohibition.

  2. Established private section 501(c)(3) organizations must run the gauntlet of the intermediate sanctions regime. That analysis may result in imposition of an excise tax. In some cases, it could result in revocation of exemption. In yet other cases, the initial contract exception of section 4958 will mean that conversion transactions must be evaluated under the private benefit doctrine.

  3. The appropriate analysis for established section 501(c)(3) organizations that are also governmental entities is unclear under current law because they are not subject to section 4958. Their exclusion altogether from section 4958 could make the statutory private inurement prohibition applicable. Past practice, however, demonstrates that the IRS seldom enforces the statutory private inurement prohibition. Its use to revoke the exemption of governmental affiliates seems to me to be particularly unlikely.

The GAO report and any other analysis regarding the tax aspects of for-profit college conversions would benefit from detailed consideration of section 4958 and of the special rules applicable to section 501(c)(3) organizations that are also governmental affiliates. Moreover, addressing the concerns the report expresses calls for additional IRS resources for oversight of tax-exempt organizations, especially in the case of governmental affiliates, changes to applicable tax laws

Perhaps most importantly, an understanding of the regulatory roles that the IRS and the Department of Education play in connection with for-profit college conversion transactions must include recognition of section 4958. The 1996 enactment of the section 4958 intermediate sanctions regime produced a divergence in review of conversion transactions undertaken by each agency, despite identical statutory language forbidding private inurement.

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