GAO report looks at prevalence of ‘insiders’ in nonprofit conversions

by Joseph K. Clark

Dive Brief:

Dive Insight:

nonprofit conversions

Nearly all nonprofit conversions the GAO tracked involved the sale of a for-profit college to a tax-exempt organization. However, IRS approval isn’t enough for the colleges to be considered nonprofits to access federal financial aid. The U.S. Department of Education must also decide.

The GAO notes that the department approved 35 of the 59 transactions and denied two during the period studied. Another nine were being reviewed, and 13 of the schools closed before a decision was made.

The IRS and the department each look at which individuals are involved in a transaction and how they might benefit from its completion, among other factors. The GAO noted it didn’t analyze whether any college’s conversion helped insiders but focused on oversight.

Its report stems from a request by several Democratic lawmakers in 2018 to look into these dealings, which have faced criticism in part for the ties the schools sometimes keep with their former owners.

Of the 57 transactions with available information, the GAO found that in 17, for-profit college officials had leadership roles at the corresponding nonprofit entity “before or upon conclusion” of the deal. The GAO said leadership positions include CEO, college president, and board chair or member.

Colleges whose conversions involved insiders accounted for nearly $1.8 billion of the $2.3 billion in federal student aid received during the 2018-19 academic year by the 44 colleges with that information available.

Eight of the 17 were bought by a nonprofit created for the transaction. That’s compared to one school among the 40 conversions that didn’t involve insiders. Of the eight cases in which an existing nonprofit bought the college, in three, insiders were leaders in the nonprofit before the conversion. In the remaining five, insiders became leaders in the nonprofit after the deal closed.

Insider involvement can be problematic, such as by preventing significant due diligence efforts. But the GAO notes it can also be a boon through the “continued stewardship of individuals with a thorough understanding of the college.”

This was an issue for Grand Canyon University when the department in 2019 denied its request for nonprofit status. The department included Brian Mueller’s roles as president of the university and CEO of its former parent company turned services provider, and as a shareholder in the latter, among its concerns. Mueller was listed as a shareholder as of April 2020.

The GAO pointed out concerns with how the IRS vets applications for tax-exempt status, saying it didn’t always closely consider whether insiders would draw excess benefit. The GAO recommends the IRS review and improves its application approval process.

Although the Ed Department has stepped up scrutiny and oversight of these transactions, the GAO recommends the agency do more to keep tabs on converted schools after the deals occur.

Related Posts

Leave a Comment