Clarification on Internal Revenue Code sought

March 30, 1995

ANN ARBOR—The University of Michigan is seeking legal clarification from the U.S. Tax Court in interpreting the Internal Revenue Code dealing with ” unrelated” income of a university.

” The Internal Revenue Code pertaining to unrelated income and applicable expenses in exempt organizations is not precise, lacks case law, and is subject to differing interpretations,” said Walter Harrison, U-M vice president for university relations. ” The University is contesting some of the IRS agents’ interpretations. ”

As part of ” coordinated audit program,” the IRS began in 1992 to review financial documents at a number of universities throughout the country. At U-M the audit’s stated purpose was to determine if all taxable income was reported on the University’s tax returns and only ordinary and necessary expenses were deducted during the three fiscal years of 1989-91. A university is exempt from income tax except on net earnings from unrelated income—that is, revenue from services to non-university customers, such as computer services requested by industry.

” A number of issues have been raised by the IRS agents regarding unrelated income and applicable expenses,” Harrison said. ” The agents claim that the University owes income tax on a number of unreported activities for the three fiscal years, totaling approximately $7.7 million. The University’s position is that these revenues are not taxable and, in fact, the University is claiming a total of

” For more than a year, the University has been meeting with the agents in an effort to resolve differences of interpretation in these issues. However, these meetings have not been productive.

” In the absence of resolving the issues with the agents, the University requested and received a Notice of Deficiency from the IRS. The University has filed a Petition with the Tax Court in response to the Notice of Deficiency. ”