Indiana’s Purdue University made headlines in 2017 when it announced a deal it struck to convert a for-profit online college to become part of the state university system. News of the deal, complete with high profile endorsements, treated it as a miraculous coup for public education;
read “Purdue buys for-profit Kaplan University for $1, plans to make it public.” USA Today’s headline
In truth, the transaction was not so straightforward, nor would the online college be like other public colleges in the state. Purdue wouldn’t own it outright:
the deal called for Purdue and Kaplan Higher Education, Inc., to jointly operate the former Kaplan University under a new online brand, Purdue University Global. Receiving zero state support, the venture would be fueled by tuition only, with the two partners claiming their portions of this revenue according to a specific schedule, after each entity recovered its operating costs for running the college.
While the deal for Purdue Global resembled a for-profit partnership, under a new state law, the subsidiary would be established as an Indiana nonprofit corporation. Nonprofit colleges typically seek IRS tax-exempt status under section 501(c)(3) of the Internal Revenue Code, but
Purdue said it hoped to avoid going that route by instead asking the U.S. Department of Education to classify the school as a freestanding public institution. This request seemed peculiar, because in addition to operating without actual state support, Purdue Global would be exempt from the state’s laws regarding public meetings, public records, and public financial oversight.
To bolster Purdue’s request that the U.S. Department of Education ratify the “public” moniker for Purdue Global, the Indiana legislature included
language in its new law specifically addressed to the federal agency: Indiana’s new type of university would be “a governmental entity equivalent to the state for purposes of U.S. Department of Education regulations” (emphasis added). The new law also specifically authorized the state’s higher education commission to “issue a confirmation” that the school is “a public school for purposes of United States Department of Education regulations.”
The U.S. Department of Education
turned down Purdue’s request, explaining that to treat Purdue Global as a freestanding public institution, the state would need to be prepared to act as a financial backstop if necessary, to protect federal taxpayers. The law passed by the Indiana legislature did not allow for that, having prohibited state or local tax dollars from supporting the college.
The Department of Education offered that Purdue Global could be eligible for federal student loans and grants without being classified as for-profit if Purdue University—the actual state university—cosigned Purdue Global’s agreement with the department.
Purdue did. But cosigning was a short-term solution—risky, because it puts Purdue’s assets on the line, potentially involving state funds, which would be in violation of the Indiana law that allowed Purdue University to establish Purdue Global. To protect Purdue University from liability while also avoiding Purdue Global being categorized as for-profit, the corporation would need IRS tax-exempt status if it wanted its enrollees to be eligible for federal student loans.
In May 2019, Purdue University’s CFO filed a nonprofit
tax return (Form 990) with the IRS, followed in August with an application for tax-exempt status (Form 1023). Four months later, in December, the IRS granted the request for tax-exempt status for Purdue Global.
If IRS examiners had studied the Purdue Global deal thoroughly, they likely would have delayed 501(c)(3) approval, if not rejected it completely. Purdue, however, answered questions on the IRS forms on a range of topics in ways that managed to avoid triggering any deeper review.
List of contractors. Form 990 requires an organization to list its largest five contractors. Purdue Global’s return lists only one: Huron Consulting, which was paid $516,169. I asked Purdue’s CFO in an email why Kaplan was not listed, since under the contract Kaplan was likely the recipient of the “support services fee” of $13,174,036 and the “advertising and promotion” expenses of $32,427,461 appearing on the Form 990’s Statement of Functional Expenses. The CFO explained that “It would have been easier to just list one total for Kaplan, but that would not have provided any transparency on the functional area expenses.” However, the section requiring disclosure of contractors is separate: listing the amount paid to Kaplan, as required, would not have changed the items in the schedule of functional expenses.
The upshot: Purdue oddly excluded Kaplan from Purdue Global’s list of contractors, even though Purdue Global has a contract with Kaplan under which Kaplan apparently was paid more than $45 million.
Close connection. Form 1023 asks for a list of any entities with which the organization has a “close connection,” operating “in a coordinated manner with respect to facilities, programs, employees, or other activities.” Purdue did not list Kaplan, even though Purdue Global and Kaplan certainly coordinate with each other. It is not a close call. Kaplan must approve Purdue Global’s budget, as shown in Figure 1, a power the IRS specifically references as indicative of a close connection. Further, the IRS specifically references shared facilities as an indication of a close connection; elsewhere in the application, Purdue says it leases a portion of (that is, it shares) a facility owned by Kaplan’s parent company (a fact Purdue neglected to mention, listing the owner as Iowa College Acquisition, LLC).
The upshot: Purdue Global most definitely has a close connection to Kaplan, but Purdue did not indicate that in its application to the IRS.
The sales contract that transferred Kaplan University to Purdue calls for the annual budget of Purdue Global (referred to as New University in the contract) to be agreed to by both the contractor (the former owner of Kaplan University, referred to as Contributor) and Purdue Global. Source: Author
Asset restrictions. Form 1023 asks if any of the assets received from the predecessor organization came with restrictions on their use or their sale. Purdue answered “No.” Yet the sales contract was contingent on Purdue Global continuing the operation of the school, contracting with Kaplan for its services, and sharing in the profits. Purdue Global’s use of the assets is not just restricted, it is severely restricted, as if Purdue Global is really just renting them. The IRS form asks the applicant to include a copy of the sales agreement; the application documents provided to TCF by Purdue included bylaws, articles of incorporation, and conflict of interest policy, but no sales agreement, not even the link provided to shareholders of Kaplan’s parent company.
The upshot: Purdue claimed to the IRS that the assets it purchased are unencumbered when they are not, and appears to have neglected to include the sales agreement as a relevant attachment in its application.
Joint ventures. Form 1023 asked whether Purdue Global is involved in any “joint ventures . . . in which you share profits and losses with partners other than section 501(c)(3) organizations.” Purdue answered “No.” According to former IRS lawyer and now law professor Philip Hackney, the Purdue–Kaplan arrangement is exactly the type of joint venture that should be disclosed as such on the application form.
The upshot: Purdue claimed that Purdue University Global is not a joint venture, but the description sure fits.
An excerpt from Purdue Global’s application for IRS tax-exempt status, in which Purdue avoided mentioning the profit-sharing and perpetual aspects of its venture with Kaplan. Source: Author
Revenue sharing. On Form 1023, Purdue described its ongoing relationship with Kaplan only once, on a Schedule G regarding entities that are successors to other organizations. In the middle of three paragraphs about the arrangement (see Figure 2) there is a reference to paying a “percentage of our revenues.” But the amounts are described as covering a “deferred purchase price,” when in fact they do not end when the value of the assets (estimated at $29,115,541 on the Form 990) is reached. Rather than acknowledging that the payments depend on profits being available, Purdue says they are “subject to available cash on hand.”
The upshot: Purdue’s description of the Kaplan arrangement was misleading.
The IRS may never get around to examining the details of the sales agreement that established Purdue Global to discover the discrepancies between what was included in the application and what governs the school’s actual operations.
IRS rules are clear, however, that tax-exempt determinations can be revoked retroactively “if the organization omitted or misstated a material fact,” all the way back to an organization’s creation. A retroactive revoking of nonprofit status wouldn’t help students who may have been misled by the designation during the period that it was applied, but the potential for revocation should give pause today to any state officials who may be relying on an IRS letter as protection against future potential liabilities, whether for tax avoidance or for fraud.