July 23, 2013--501(c)(3)

Colleges and universities are exempt from virtually all federal and state taxes because they are deemed to serve a "public purpose." They provide undergraduate and graduate education services as well as sponsor research, both considered to contribute to the public good.

To gain tax exempt status higher education institutions have to convince the Internal Revenue Service that they are not-for-profit; do in fact serve a public purpose; and do not, under the guise of their not-for-profit status, operate as if they are profit-making corporations.

If they pass these threshold tests (and it is not difficult to do) they are granted 501(c)(3) status. After that  they are required to file a 990 tax statement at the end of each year so the IRS, if it wants too (though it rarely does), can closely examine their sources of income (tuition, grants, endowment earnings, and alumni gifts) and how they in turn spend this income--on faculty and administrative salaries and benefits and on various forms of non-personel overhead costs for classrooms, athletic facilities, staff office, and the like.

A basic understanding between the IRS and universities is that administrative and faculty salaries and benefits should not approach those of for-profit corporations. After all, to provide their public service they in effect receive taxpayer subsidies by the very fact that they are tax exempt. Every dollar of taxes colleges do not pay must be made up by ordinary taxpayers. So keeping control of expenses, especially salaries and benefits, should be serious business and colleges' and universities' fiscal behavior should be closely monitored by the IRS.

This very rarely occurs.

It is almost unheard of for the IRS to audit 501(c)(3) institutions and even rarer for the IRS to keep an eye on salaries and perks.

That is until recently.

It wasn't the sleepy IRS that began to raise questions about questionable fiscal practices at a number of universities but grizzled Iowa Senator Chuck Grassley.

He stumbled onto upsetting information about compensation practices at New York University during Secretary of the Treasury nominee Jack Lew's confirmation hearing.

Lew had briefly been a senior administrator at NYU and, when he left to make his millions on Wall Street, was given a $685,000 golden parachute. Grassley also turned up information that NYU has been attempting to obscure the fact that Lew and others, including NYU's president John Sexton, had been given an array of perks that are, to say the least, questionable at a legitimate 501(c)(3) institution.

Senior administrators as well as some "star" faculty where offered below-market-rate loans to help them buy apartments; senior faculty and staff are able to live in downtown Manhattan apartments at well below market rents; and a number of senior administrators, including the dean of the law school and president Sexton have been give hundreds of thousands of dollars in subsidies so they could buy weekend country houses. In addition to Jack Lew, Sexton and law school dean Richard Revesz have been guaranteed lifetime annual high-six-figure bonuses after they retire. In Sexton's case, it is reported he will receive annually at least $600K above his pension when he leaves. His current salary and benefits package is nearly $2.0 million a year.

To the vast majority of the faculty, Sexton's retirement could not come soon enough.

Almost all of the schools and colleges of the university have voted no-confidence in him and the chair of the board of trustees, mergers-and-aquisition fixer Martin Lipton.

Among the things the faculty claim is that these corporate-like perks are not only being paid for by taxpayers through NYU's 501(c)(3) tax exempt status but by faculty and staff who have not seen their salaries and benefits keep pace with inflation and by increases in student tuition and fees--NYU's primary source of income. Since Sexton became president and the perks began to flow, tuition has risen well above the rate of inflation and scholarships, as a percentage of tuition, have declined.

During the ten years Sexton and his royal staff have been at the trough, NYU's ranking in US News & World Report has consistently fallen. Even the law school declined from 4th to 6th place and its once-esteemed Institute of Fine Arts is no longer number one. And, perhaps most significant, the undergraduate college has been slipping in standing during Sexton's tenure.

NYU and Columbia and many other elite institutions that are behaving in versions of the same manner are doing whatever they can to avoid giving Senator Grassley the information he is demanding.

We will see where this goes. From my experience as a dean at NYU and other institutions, what has been revealed about elite universities' financial practices is the tip of the iceberg.

But there is a simple solution--just as academic accrediting agencies from time-to-time place colleges on probation because they violate academic freedom or replace too many full-time faculty with less expensive and qualified part-timers (at NYU nearly 40 percent of undergrad courses are taught by adjuncts or graduate assistants), Senator Grassley could press the IRS to take a close look at NYU's books; and, if they find what the faculty is alleging, consider revoking NYU's tax-exempt status.

That would get their attention and quickly cause NYU and others engaged in similar practices to begin to reverse the decades-long trend to corporatize American higher education at taxpayers' and their students' expense.