Tuesday, July 27, 2004

Is Harvard abusing the law? 

It appears that Harvard Management Company, a separate non-profit arm of the university that manages a $19 billion endowment, may be stretching the tax laws to gain more revenues. Harvard Management has spun off other endowment management firms and in return received a flow of income from those other firms. Not a problem at all, except
[f]or one thing, the arrangement appears to allow the management of outside money, something Harvard Management's board rejected in 1998. For another, it may expose Harvard to a big tax bill - including interest and penalties - on the fee income it receives from these money managers.
Harvard Management is treating income it receives from the money management companies as a partner in those firms as tax-exempt, which is at least a stretch of the law. Harvard says it's gotten a private opinion to support the practice.

The real issue here, as my friend and accountant Chris points out to me in an email, is that Harvard Management is engaged in a business practice that is unrelated to the reason it is tax-exempt and therefore should be taxed. But it happens all the time, be it the use of a gym by middle-class adults at the YMCA (whose tax-exempt status is to minister to poor children) or by a theater that sells advertising in its program. What's likely to happen, he and I agree, is that Congress will tighten the law to prevent Harvard from continuing this practice, and in the crossfire all these other "unrelated income streams" will become taxable, lowering the amount of social services provided by private charities.