The existence of a private, nonprofit college model—free from both government control and the predatory impulses of profiteers—is a distinctly American institution. While colleges in the United States are commonly thought of as being divided into three categories—public, nonprofit, and for-profit, with each model being quite distinct in its structure, behavior, and outcomes—it is that middle category that sets the U.S. system apart. In the rest of the world, there are really just two types of colleges: those under government control,1 and those associated with a for-profit owner,2 even if labeled nonprofit.3 No other country has a multitude of independent, private, nonprofit colleges like those in the United States.

The independence of U.S. nonprofit colleges has played a key role in America’s dominance in higher education.4 Nonprofit colleges have carved out a unique space for themselves, and, in so doing, for public colleges as well: court opinions have prevented excessive political interference into private colleges’ operations by affirming the role of private trustees in nonprofit pursuit of public interest missions.5 Public colleges have benefited from the academic independence norm established by private colleges, using their example to argue against excessive political intrusion and building protections into accrediting bodies.6 Much of the reason for the reverence is that nonprofit colleges have been able to focus on their educational missions.

To be legitimate, a charity (the type of nonprofit we are discussing here, an organization to which donations are tax deductible) must reinvest all of its net revenue—the money it makes beyond the expenses it incurs—into its educational, charitable, or religious mission.7 No spoils are distributed to private parties, hence the “nonprofit” moniker. With billions of dollars flowing through these enterprises, however, the opportunities and temptations for profiting are enormous and multifaceted. As a result, determining whether an arrangement crosses the line into profiteering is not like enforcing a speed limit. Instead, it can be intricate and nuanced, like assessing good parenting. Whether an entity has gone too far may be obvious at times but ultimately depends on the specific facts and circumstances involved, as the IRS says in much of its guidance.8

This unique, world-renowned model for higher education is increasingly being invaded by clever profiteers.

In August, the University of Arizona announced a deal to acquire the for-profit Ashford University from its current owner, Zovio, Inc., in exchange for a long-term contract under which Zovio—for a fee—would help to run the school as a “nonprofit” carrying the public institution’s name, the University of Arizona Global Campus (UAGC).9 The Century Foundation has arranged for a variety of analyses that provide a more complete picture of the UAGC deal, including the following:

The Zovio plan comes on the heels of several other for-profit colleges that have switched in recent years to a nonprofit or public label, sometimes leaving serious doubt about whether the label really fits.10 This report examines this trend as the appropriate context for regulators reviewing the proposed Zovio–Arizona transaction. It begins with a look at how the IRS has increasingly abandoned its role as gatekeeper of which organizations can declare themselves as being nonprofit, and explores how for-profit operators have taken advantage of this opening to invade nonprofit college turf, at great risk to the future quality of both the nonprofit and public sectors. It concludes with a section of recommendations for action to restore integrity to the nonprofit label in higher education.

The Rise and Fall of the IRS as a Higher Education Regulator

The IRS’s role as gatekeeper for what counted as a “nonprofit” college was not assigned overnight. As a uniquely independent nonprofit sector matured in the United States in the nineteenth and twentieth centuries, the nation established personal and corporate income tax systems that needed to exclude from taxation private monies dedicated to a public purpose.11 Theoretically, states were already making that distinction when they incorporated charitable trusts and other nonprofit entities. However, states had little incentive to police a corporation’s nonprofit legitimacy,12 especially once that role was taken on by the IRS, which needed to ensure that nonprofit status would not serve as a tool for tax avoidance. Over time, the IRS determination of tax-exempt status—the decision as to whether an entity would be exempt from corporate income taxes and eligible for tax-deductible contributions from donors—became the de facto nonprofit seal of approval.13

A nonprofit credential is an invaluable tool for universities when it comes to attracting students.

A nonprofit credential is an invaluable tool for universities when it comes to attracting students. In February 2019, Brian Mueller, the CEO of Grand Canyon Education Inc., held a conference call with shareholders to report on the most recent quarterly results. He was effusive, boasting record enrollment of new students at the 80,000-student Grand Canyon University—which had converted to nonprofit status, and where he was president. On top of that, he reported that the company’s operating margin—a measure of profit—was a whopping 34 percent. He went on to explain that the company’s rising fortunes could be attributed to the marketing of the school as a nonprofit: “Being out there a million times a day saying ‘we’re nonprofit’ has had an impact,” he told shareholders.14

Mueller seemed to have established, domestically, the type of captive nonprofit that for-profit companies had previously only been able to achieve abroad.

Where was the IRS? Grand Canyon’s application for IRS tax-exempt status, running nearly 600 pages, was submitted by an attorney at PriceWaterhouseCoopers who had previously worked in the IRS chief counsel’s office.15 The application included descriptions of financial arrangements that typically can invite detailed examination by the IRS, potentially extending the usual approval timeline from months to a year or more. IRS examiners, however, raised no issues and asked no questions (according to the documents provided to us by the IRS). The application was approved in a mere three weeks.16

The IRS tax-exempt division has become an unreliable enforcer of nonprofit integrity. The seeds of the agency’s decline may have been fertilized, ironically, by attempts to give the agency more enforcement tools. Prior to 1996, a nonprofit commitment to public rather than private interests had to be 100 percent: a violation would cause a nonprofit to lose its IRS tax-exempt status; there was no other sanction. Some argued that the severity of the penalty undermined enforcement because it could realistically be applied only in the most egregious cases. Congress adopted a set of intermediate sanctions for transactions involving insiders, leading the IRS to create processes for charities to report such transactions and, if applicable, pay a fine.

Rather than arming the IRS to be tougher on nonprofits, the intermediate sanctions law has had the opposite effect, creating safe harbors that invited higher pay for executives and facilitating business deals with board members.17 Implementation of intermediate sanctions gave profiteers a mechanism “for essentially negating charges of self-dealing,” by claiming that they were complying with the law because they reported it and the IRS did not object.18

The next phase in the collapse of IRS oversight occurred after 2008, when the share of new applications for tax-exempt status that were denied dropped by nearly 80 percent.19 A contributing factor may have been a flood of applications that followed the U.S. Supreme Court decision in Citizens United v. Federal Election Commission.20 Then, in 2013, “Tea Party” groups claimed that they had been unfairly targeted for scrutiny by the IRS nonprofit oversight division.21 As punishment, the Republican Congress slashed the IRS budget. Without adequate staff, the tax-exempt division could not be counted on to review applications rigorously or audit suspicious situations.

Figure 1
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State oversight of nonprofit organizations, meanwhile, has evolved into a role focusing primarily on preventing charity fraud by protecting donor intent or preventing potential donors from being misled.22 Nonprofit schools that transgress, however, avoid this state oversight, as donors are not necessary to keep the flow of federal aid flowing; their covert for-profit schemes are aimed instead at deceiving consumers and regulators.

As IRS oversight and enforcement collapsed, few nonprofit lawyers and associations sounded the alarm. Many in the nonprofit sector overestimate the role that nonprofit cultural norms have played in guiding their enterprises or industries. They tend to assume traits like personal integrity, intelligence, and good judgment are the steward of their organization’s virtuous behavior; they find it inconceivable that they would behave less honorably if they were allowed to. Advocates of vigorous nonprofit oversight are difficult to find at nonprofit associations because even the most well-intentioned nonprofits would prefer to be trusted and left alone.

Many in the nonprofit sector overestimate the role that nonprofit cultural norms have played in guiding their enterprises or industries.

Another factor is that lawyers and law firms that work for nonprofit colleges often also represent for-profit colleges, which may contribute to a tendency among lawyers and firms to downplay or even dismiss the fundamental differences. For example, a major law firm’s memo on nonprofit conversions includes no mention of the importance of fealty to the underlying purpose of nonprofit control; as a result, it reads like a how-to manual for those opportunistically seeking a nonprofit label.23 The firm’s higher education practice includes public, nonprofit, and for-profit organizations—and regulators—as clients.

For-Profit Operators Seize an Opportunity

The covert for-profit invasion of a nonprofit entity comes in two basic forms—compromised governance and contractual captivity—that often operate in tandem, though sometimes they do the damage separately. A nonprofit with compromised governance fails to treat public and student interests as paramount because its decision-making apparatus includes, formally or functionally, people or entities with split financial loyalties. A nonprofit that is contractually captive, on the other hand, may not have insiders with financial interests, but the organization is bound by contracts, loans, or leases that severely constrain its ability to make decisions in the best interests of its students.

Colleges with Compromised Governance

The modern era of covert for-profit colleges was ushered in by Arthur Keiser and his Everglades College in Florida.24 In 2000, Keiser sought IRS tax-exempt status for a for-profit school he had recently purchased. The IRS was suspicious and initially denied his request, but ultimately okayed it after assurances by Keiser that a board without ties to him had been installed. Keiser got his IRS determination letter (granting tax-exempt status) and began to capitalize on it, with a board that turned out to be his business associates, not the independent community representatives that the IRS had expected.25 Over the next several years, Keiser befriended politicians and became heavily involved in various higher education oversight agencies and trade associations. Eventually Everglades gained prestigious regional accreditation in 2010.

In 2011, with accreditation secured and allies playing the role of state regulators,26 Keiser arranged for the intangible assets of a for-profit school he owned, Keiser University, to be “purchased” from him by his nonprofit Everglades through a method that was essentially a percentage of net earnings; that is, profit-taking by another name.27

Keiser was paid in his simultaneous roles as landlord, creditor, airplane-and-hotel-provider, and chancellor of the “nonprofit” schools.

Keiser’s conflicts of interest were publicly disclosed on the schools’ IRS 990 filings, a fact Keiser would use as evidence that his actions were appropriate.28 (As noted earlier, Congress’s intermediate sanctions ended up being used as a safe harbor for schemes like this.)

Also benefiting from a decline in IRS oversight were Warren Stephens and Jerald (Jerry) Barnett, Jr., partners in the Remington Colleges chain. The IRS, without any apparent review, approved Remington’s application for tax-exempt status, which had included a description of the same type of self-dealing transaction as Keiser’s, with a somewhat different version of a compromised board.29

Next was Carl Barney, whose claimed libertarianism and open disdain for regulations gained him charming-bandit treatment in a New York Times feature.30 Barney had taken control of a mostly defunct but already-IRS-approved nonprofit, the Center for Excellence in Higher Education (CEHE), and arranged for it to sign promissory notes for his for-profit schools.31 Like those before him, the approach cloaked hoped-for future streams of profit in the guise of rent and loan payment obligations from the nonprofit entity—which he continued to control through surrogates.32 When officials at the Department of Education became aware of nonprofit abuses in 2015, the CEHE change-of-ownership application was in process, giving the agency an opportunity to take a stand against a faux nonprofit. After investigating, the department denied CEHE’s request to be treated as nonprofit school operator (under the agency’s programs).33

While the Department of Education’s reasoning in its denial of CEHE’s nonprofit status was solid, CEHE sued, arguing that its payments to Barney were reasonable. Since “reasonable” is a valid defense but is also vague, insisting that payments or prices were reasonable can be an effective way to get the courts to at least temporarily keep regulators at bay. Ultimately, CEHE and the Department of Education reached a settlement in December 2018. The terms of the settlement were not disclosed, but the school’s approval for federal aid in 2019 was conditioned on CEHE divesting any Barney-owned real estate and establishing a legitimate nonprofit board.34

The scheme still paid off for Barney, who received more than $130 million from the nonprofit, according to an analysis by the Chronicle of Higher Education.35 On August 21, 2020, CEHE and its leaders were found by a Colorado court to have defrauded students by, among other things, inflating graduation rates and overstating their likely post-graduation salaries.36 As of this writing, the schools continue to be able to recruit students with the imprimatur of federal financial aid, which implies that the school can be trusted.

Evidence suggests the IRS finally may be looking into some of these for-profit incursions.

Evidence suggests the IRS finally may be looking into some of these for-profit incursions. According to CEHE’s financial statements (acquired through a FOIA) the IRS was auditing the organization during 2016 to 2018.37 Further, as revealed by David Halperin of the Republic Report, there have been rumors of an IRS audit of Everglades/Keiser.38 According to Everglades financial statements, the debt owed to Keiser, originally $300 million, was reduced to $75 million.39

Contractually Captive Colleges

The Keiser and Barney schemes produced rivers of revenue for their masterminds, but they were sui generis perversions of nonprofit governance, difficult for a major company with higher visibility to replicate. Mueller’s innovation with Grand Canyon University was to develop an approach that could be adopted without the specter of compromised corporate governance. Instead, the board of the nonprofit corporation could at least arguably pass muster as independent and legitimate, while creative contracting did the work of locking the nonprofit into a plan that steered business to the for-profit former owner, renamed Grand Canyon Education, Inc.

For the contract between the for-profit and the nonprofit Grand Canyons, Mueller used an approach—an online program management (OPM) contract40—that had been blessed by the U.S. Department of Education in a 2011 policy memorandum.41 The online higher education market at that time was dominated by for-profit schools, and one way to help nonprofit and public colleges grow their online offerings was to allow OPMs to launch and run online programs in exchange for a cut of the tuition payments. Federal law generally prohibits schools from paying recruiters on a commission basis, so the memorandum offered the schools some cover for the arrangements.42

The amount of tuition paid to OPMs was frequently quite high, 50 to 60 percent or more. But the programs were typically small side-deals, not a substantial portion of a college’s overall operation. Ignoring that detail, Grand Canyon Education created one massive OPM contract that joined the for-profit company to the nonprofit it created. The company then pointed to the OPM industry’s contract terms as the market standard, suggesting that a 60 percent revenue share therefore would meet the “reasonable” test used by the IRS. If the IRS had a problem with the company’s approach, it could be argued, why did it grant the request for tax-exempt status?

Grand Canyon University’s accreditor, the Higher Learning Commission (HLC), initially turned down Grand Canyon’s plan, explaining that HLC’s policies do not allow for split control of a college: “both teaching and learning as well as service functions” must be “within the accredited structure.”43 The following year, however, after Purdue University made headlines with its deal to convert for-profit Kaplan University into “public” Purdue Global,44 HLC established a new policy that opened the door to arrangements like the one Grand Canyon and now Purdue had proposed.45 Four months after the HLC policy change, in March 2018, HLC approved both the Grand Canyon and Purdue–Kaplan deals.

(It is worth noting here that UAGC—the University of Arizona’s venture with Zovio that The Century Foundation has been scrutinizing—uses the same whole-college OPM contract approach, albeit seeking approval from a different accreditor with its own policies.)

This change in HLC policy was a watershed moment for for-profit OPMs and the nonprofit colleges that contract with them. Before the Grand Canyon and Purdue Global plans, OPM contracts were typically negotiated between a living, breathing university—an independent school with a campus, buildings, in-class attendance, and a legacy—and an outside contractor helping the school add a line of courses. The programs involved were a relatively small but new part of the college’s offerings; if the university wanted to make changes to the contractor’s detriment, it was not an existential issue for the school.

The new nonprofit universities created by the Purdue and Grand Canyon plans are completely different from previous OPMs. The new universities are captive to the contractor at birth; their existence as colleges is a function of the contract, requiring an ongoing partnership with the for-profit entity for a decade or more. HLC approved the deals even though they would seem to violate its stated policy that any shared services agreement should include a no-fault cancellation clause: “there should be a provision allowing the institution to terminate the agreement upon reasonable notice with or without cause.”46

After securing HLC approval, Grand Canyon University’s next stop for claiming to be a legitimate nonprofit was the U.S. Department of Education. Unlike HLC, however, the department analysts saw a big problem with the Grand Canyon plan.

The Department of Education concluded that the contract between the for-profit and nonprofit Grand Canyon entities “violates the most basic tenet of nonprofit status.”

In a detailed November 2019 letter, the Department of Education concluded that the contract between the for-profit and nonprofit Grand Canyon entities “violates the most basic tenet of nonprofit status—that the nonprofit be primarily operated for a tax-exempt purpose and not substantially for the benefit of any other person or entity.”47 The agency cited cases and guidance showing that percentage-of-revenue arrangements, even at a low level such as 5 percent, “can be an impermissible private inurement.” Ultimately the contract terms make the university a “captive client—potentially in perpetuity” to a for-profit contractor.48 Even in the absence of any conflicts of interest in the board or management, Grand Canyon University’s claim to nonprofit status is inappropriate.49

For the purpose of U.S. Department of Education oversight, Grand Canyon University is a for-profit entity.50 Its IRS tax exemption is not affected (at least yet). Meanwhile, the federal veterans agency has decided to be less rigorous in its nonprofit oversight, instructing state agencies that oversee the GI Bill to rely on the IRS letter because—the U.S. Department of Veterans Affairs says—it would be too much work to check the legitimacy of nonprofit claims.51

What about Purdue Global? Purdue’s plan, rather than converting the for-profit Kaplan University into a private nonprofit college, was for Purdue Global to be considered a freestanding public institution.52 There are no universal standards for what makes an entity public, so the State of Indiana simply declared it to be so, even though 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.53

The federal government did not cooperate with Purdue’s plan. To protect federal taxpayers, the U.S. Department of Education expects states to act as a financial backstop for their public colleges if necessary. The State of Indiana, however, had made very clear that Purdue Global was to be a money-maker for the state, not a potential liability. To claim eligibility as a public institution, Purdue University co-signed Purdue Global’s federal agreement, for the time being.54 University officials then completed the IRS application for tax-exempt status, skewing their answers in ways that might reduce the chances that an IRS examiner would actually review the arrangement between Purdue Global and Kaplan.55 The U.S. Department of Education has not said publicly whether Purdue Global could pass muster as a nonprofit institution.

The University of Arizona plans to establish UAGC as a nonprofit university. Yet as of this writing, neither of the schools using the same structure as UAGC has received full regulator approval as a nonprofit.

Restoring Nonprofit Integrity

In no small part, America’s universities have outperformed the rest of the world because the muzzling of the profit motive has allowed curiosity and knowledge creation to flourish. There is plenty to criticize about the U.S. higher education system: stratification by race and income, elitism, big-dollar college athletics, administrative bloat, and high salaries. But despite decades of attempts by usually well-meaning entrepreneurs to improve higher education by inserting the prospect of profit extraction into the business model, the results have been unimpressive, or worse.

Placing a nonprofit or public label on for-profit colleges will not make them better; instead, it undermines the integrity—the meaning—of the label, threatening the practices and norms that have brought excellence to those sectors. Laureate Education’s description of its arrangement with nonprofits in other countries—the schools it puts onto its own balance sheet—is sobering because it reads so much like the role of our domestic OPMs:

Under the mutually agreed service agreements, we are paid at market rates for providing services to institutions such as access to content, support with curriculum design, professional development, student exchange, access to dual degree programs, affiliation and access to the Laureate International Universities network, and management, legal, tax, finance, accounting, treasury, use of real estate and other services.56

Insisting on nonprofit integrity is not a partisan act. In 2019, Maryland’s Democratic legislature and Republican governor enacted a new law requiring all nonprofit schools subject to state oversight to report and explain insider transactions so they can be reviewed.57 Last month California went a step further, enacting with bipartisan support a new law that will require regulator review of all nonprofit conversions, and identifying the key characteristics of a public institution: its employees are government employees, the government is responsible for any liabilities, and it is subject to public financial oversight and public records laws.58

Bills in Congress include provisions to address the problem.59 but the executive branch is where action is most needed at the federal level. The Department of the Treasury must take a leadership role in rebuilding the oversight capacity of the tax-exempt division of the IRS or creating an alternative approach.60 Catch-up with all of the sketchy organizations that have been granted tax-exempt status will take time, but a few vigorous, targeted enforcement actions could go a long way. The Departments of Education and Veterans Affairs should coordinate to ensure that students veterans are not misled by nonprofit colleges that are not fully and completely within the boundaries of legitimacy.

The Department of Education’s 2011 OPM memorandum is being used in ways that go beyond its initial, narrow intent. The OPM companies know the memo is a slender reed to rely on over the long term. As Kaplan’s owner acknowledged in a February disclosure to shareholders, the memo is opinion, not law, so can be revoked at any time.61 The department should place an immediate freeze on any new contracts that rely on the memo, while seeking input for revising or revoking the guidance given the abuses and conflict with the underlying law.

The problem of for-profit capture of nonprofit higher education is not a lost cause. As is clear from the experience of other countries, however, legitimate nonprofit operation is fragile. What’s reasonable is relative: with each entity that is allowed to push the envelope it becomes more and more difficult to rein in the abuse; over time the transgressions become the new norm. As WSCUC, the accreditor, and federal and state agencies consider UAGC’s plan, they should assume that they are deciding not just a single institution but what the future of nonprofit higher education will look like.

Notes

  1. For example: “European private universities are very much funded and regulated by public authorities; American private universities are not.” Philippe Aghion, Mathias Dewatripont, Caroline M. Hoxby, Andreu Mas-Colell, and Andre Sapir, “The governance and performance of universities: Evidence from Europe and the US,” NBER Working Paper, April 2009, 26, https://www.nber.org/papers/w14851.
  2. An example is Laureate Education, Inc., a U.S. company that has such a tight hold on the nonprofit colleges it operates abroad that it treats them as subsidiaries on its own balance sheet. Laureate Education, Inc., “Form S-1 Registration Statement Under the Securities Act of 1933,” December 15, 2016, https://www.sec.gov/Archives/edgar/data/912766/000104746916017211/a2228849zs-1a.htm. Laureate said in its prospectus, “We have obtained board and operating control and controlling financial interests in entities outside the United States that are educational institutions similar to U.S. not-for-profit, non-stock universities.” Because of its close hold on the colleges, the company was treating them as “variable interest entities” on the company’s balance sheet. Laureate is paid as a contractor, but the company has so much control that the entities are considered subsidiaries rather than customers for the purposes of the company’s financial statements. The contract covers a sweep of services that sound much like an OPM agreement in the United States: “Under the mutually agreed service agreements, we are paid at market rates for providing services to institutions such as access to content, support with curriculum design, professional development, student exchange, access to dual degree programs, affiliation and access to the Laureate International Universities network, and management, legal, tax, finance, accounting, treasury, use of real estate and other services.”
  3. Nonprofit colleges outside of the U.S. typically have a proprietor and “act much like the for-profit form,” putting limited resources into quality and having “low expectations for students.” Kevin Kinser, Daniel C. Levy, Juan Carlos Silas Casillas, Andres Bernasconi, Snejana Slantcheva-Durst, Wycliffe Otieno, Jason E. Lane, Prachajani Praphamontripong, William Zumeta, and Robin LaSota, “Special Issue: The Global Growth of Private Higher Education,” ASHE Higher Education Report 36 (2010).
  4. “U.S. universities are obvious positive outliers in performance on the international indices.” Public universities in the U.S. have greater autonomy because of the competition and example of private universities. Philippe Aghion, Mathias Dewatripont, Caroline M. Hoxby, Andreu Mas-Colell, and Andre Sapir, “The governance and performance of universities: Evidence from Europe and the US,” NBER Working Paper, April 2009, https://www.nber.org/papers/w14851.
  5. Starting with Trustees of Dartmouth College v. Woodward, 1819, https://www.oyez.org/cases/1789-1850/17us518. The justices found the corporate charter to be a type of contract between the state and the founding donors, a contract the state could not alter. The justices noted that Dartmouth’s purpose was “not indeed to make a profit” but instead for the “inestimable value” of educating future students. In a nod to nonprofit oversight, Justice Story in his concurring opinion, noted that the state would still be involved to protect against “an abuse of trust, to redress grievances and suppress frauds.”
  6. Public universities are of course not immune from political influence. See Lindsay Ellis, Jack Stripling, and Dan Bauman, “The New Order: How the nation’s partisan divisions consumed public-college boards and warped higher education,” Chronicle of Higher Education, September 25, 2020, https://www.chronicle.com/article/the-new-order.
  7. Organizations exempt under section 501(c)(3) of the Internal Revenue Code (https://www.law.cornell.edu/uscode/text/26/501) must be “organized and operated exclusively for” specifically listed public interest purposes, “no part of the net earnings of which inures to the benefit of any private shareholder or individual” (emphasis added).
  8. For example, the IRS’s guidance regarding charter schools that use for-profit management companies includes a number of “indicia” of excessive private benefit, but offers few absolute boundaries. Terry Berkovsky, Andrew Megosh, Debra Cowen, and David Daume, “Charter Schools,” Exempt Organizations Continuing Professional Education Technical Instruction Program for FY 2000, Internal Revenue Service, July 1999, https://www.irs.gov/charities-non-profits/cpe-for-fy-2000.
  10. Robert Shireman, “These Colleges Say They’re Nonprofit—But Are They?” The Century Foundation, August 24, 2018 (periodically updated), https://tcf.org/content/commentary/colleges-say-theyre-nonprofit/.
  11. To be eligible for an exemption to the corporation income tax under the Revenue Act of 1909, an entity must be “organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.” This language mirrored and expanded on language from an 1894 act. Paul Arnsberger, Melissa Ludlum, Margaret Riley, and Mark Stanton, “A History of the Tax-Exempt Sector: An SOI Perspective Internal Revenue Service,” Statistics of Income Bulletin, Internal Revenue Service, Winter 2008, https://www.irs.gov/pub/irs-soi/tehistory.pdf. “Under this statute, tax exemption was granted to This important addition set forth the idea that tax-exempt charitable organizations should be free of private inurement—in other words, nonprofit.”
  12. Lloyd Hitoshi Mayer, “Fragmented Oversight of Nonprofits in the United States: Does It Work? Can It Work?” Chicago–Kent Law Review 91, no. 3 (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2744820#.
  13. The history of IRS enforcement is described in Helge, Terri Lynn “Policing the Good Guys: Regulation of the Charitable Sector through a Federal Charity Oversight Board,” Cornell Journal of Law and Public Policy 19, no. 1 (2009), http://scholarship.law.cornell.edu/cjlpp/vol19/iss1/1.
  14. Seeking Alpha, “Grand Canyon Education Inc (LOPE) CEO Brian Mueller on Q4 2018 Results— Earnings Call Transcript, February 20, 2019, https://seekingalpha.com/article/4242733-grand-canyon-education-inc-lope-ceo-brian-mueller-on-q4-2018-results-earnings-call-transcript.
  15. Robert Honigman worked at the IRS from 1995 to 2001, according to his LinkedIn profile, https://www.linkedin.com/in/robert-honigman-49a833121. Richard McManus was at the IRS from 1986 to 1990, https://www.linkedin.com/in/richard-mcmanus-6ba99480.
  16. The IRS received the application on October 16, 2015, and approved it on November 9. The application to the IRS included a letter from Mueller asking for expedited treatment, explaining that approval from the IRS was necessary for the scheduled February 2016 review by the school’s accreditor.
  17. For example, nonprofits could raise compensation if they benchmarked it with peers. After the change, university president salaries increased faster, perhaps because of the safe harbor. David Walker and Brian D. Galle, “Nonprofit Executive Pay as an Agency Problem: Evidence from U.S. Colleges and Universities,” Boston University Law Review 94 (2014), https://scholarship.law.bu.edu/faculty_scholarship/32.
  18. Ellen P. Aprill, “The Private Foundation Excise Tax on Self-Dealing: Contours, Comparisons, and Character,” Pittsburgh Tax Review, forthcoming (January 2020 SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3518806).
  19. Before 2009, an average of 1 percent of applications were denied. From 2009 to 2018 the denial rate was 0.22 percent, according to IRS data. See “SOI Tax Stats—Closures of Applications for Tax-Exempt Status—IRS Data Book Table 12,” Internal Revenue Service, https://www.irs.gov/statistics/soi-tax-stats-closures-of-applications-for-tax-exempt-status-irs-data-book-table-24a.
  20. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010). The decision, by causing a dramatic increase in 501(c)(4) applications, may have contributed to the inattention to (c)(3) organizations.
  21. It actually turned out to be not much of a scandal. Paul Farhi, “Four years later, the IRS tea party scandal looks very different. It may not even be a scandal,” The Washington Post, October 5, 2017. https://www.washingtonpost.com/lifestyle/style/four-years-later-the-irs-tea-party-scandal-looks-very-different-it-may-not-even-be-a-scandal/2017/10/05/4e90c7ec-a9f7-11e7-850e-2bdd1236be5d_story.html
  22. The role is often described as preventing “charity fraud,” as in the international effort described here: https://www.ftc.gov/news-events/press-releases/2019/10/ftc-joins-charity-regulators-around-nation-world-raise-awareness. A major activity of the charity division in some states is to ensure that raffles and door-to-door fundraisers are registered.
  23. Cooley LLP, “ISSUE BRIEF: Conversion of a Postsecondary Educational Institution from a For-Profit to a Nonprofit, Tax-Exempt Entity, December 2014. The memo is available at https://drive.google.com/file/d/0B7adHdBE6w3mbzUyTmNzYmljR1E/view?usp=sharing.
  24. In the 1990s at least one conversion appears to have been tainted. Margaret Mattes and Robert Shireman, “Was Wright Wrong? Early Warnings of Covert For-Profit Colleges,” The Century Foundation, November 14, 2017, https://tcf.org/content/commentary/wright-wrong-early-warnings-covert-profit-colleges/.
  25. See details and citations in Robert Shireman, The Covert For-Profit, The Century Foundation, September 22, 2015, https://tcf.org/content/report/covert-for-profit/.
  26. See two April 23, 2015 articles by Michael Vasquez that were part of the Miami Herald project, Higher-Ed Hustle: “Desperate complaints and form-letter responses,” http://media.miamiherald.com/static/media/projects/2015/higher-ed-hustle/watchdog.html, and “For-profit colleges flex political muscle,” https://www.miamiherald.com/news/local/education/article19191054.html.
  27. According to the Everglades College, Inc., audited financial statement for the year ending December 31, 2013 (acquired through a FOIA request):

    “A promissory note bearing interest at 3.48% per annum was issued on January 10, 2011 to the University Chancellor, Dr. Arthur Keiser in the amount of $300,000,000. Interest only payments were made quarterly for the first year commencing on April 1, 2011. Beginning April 1, 2012 interest shall be paid in cash and the outstanding principal amount shall be paid in forty (40) equal quarterly payments ending on April 1, 2022, except that the amount of payments of interest and principal for any year shall not exceed forty percent (40%) of the net surplus of Everglades College, Inc. for the previous year. Any excess payments are added to the principal balance and extend the maturity date of the note. As of December 31, 2013, the note payable amounted to $301,912,541. The lender forfeits its right to collect any of the University’s obligations, which would still be outstanding in January 2041. This note is subordinate to all of the University’s obligations. Accrued interest of $4,093,413. . . “ (Note 15: Notes Payable).

  28. In a statement in response to allegations about his dealings, Keiser said “Fully disclosed tax returns and IRS 990s have always been and remain publicly available,” David Halperin, “Should This College Operator Run a Key Federal Oversight Panel?” Republic Report, June 19, 2017, https://www.republicreport.org/2017/should-this-college-operator-run-a-key-federal-oversight-panel/. In response to earlier allegations of wrongdoing, Keiser’s attorney offered as a defense that “no investigation or charges have been commenced.” March 11, 2015, letter from Christopher R. Fertig to Shireman.
  29. Shireman, The Covert For-Profit. Stephens was later listed among those whose financial dealings were exposed in the Paradise Papers. Scott Shane, Spencer Woodman and Michael Forsythe, “How Business Titans, Pop Stars, and Royals Hide Their Wealth,” New York Times, November 4, 2017, https://www.nytimes.com/2017/11/07/world/offshore-tax-havens.html?_r=0.
  30. Patricia Cohen, “ An Ayn Rand Acolyte Selling Students a Self-Made Dream,” New York Times, May 7, 2016, https://www.nytimes.com/2016/05/08/business/an-ayn-rand-acolyte-selling-students-a-self-made-dream.html.
  31. CEHE’s school brands involved are Independence University, Stevens-Henager College, CollegeAmerica, and California College San Diego.
  32. To the extent that the nonprofit could not meet the obligations, Barney would claim to have charitably reduced the obligation.
  33. The redacted letter of denial and the department’s redacted response to the school’s objections to the denial are available at https://drive.google.com/open?id=0B7adHdBE6w3mMTB3UFlIelVHcjA. Sources say that the department forced a reduction in price CEHE paid to Barney of the properties even before the settlement. Such a reduction is reflected in tax filings but is described as the result of a re-valuation given market conditions.
  34. The provisional Program Participation Agreement (PPA) between the Department of Education and CEHE, acquired through a FOIA, is available at https://drive.google.com/file/d/16hKpK5azwdBc9tbkSd8GkgZZizrQL-uD/view?usp=sharing.
  35. Dan Bauman and Michael Vasquez, “How a For-Profit Tycoon Turned His Colleges Into Nonprofits,” Chronicle of Higher Education, April 12, 2020, https://www.chronicle.com/article/How-a-For-Profit-Tycoon-Turned/248484.
  36. David Halperin, “Big Win For Students: Colorado Court Slaps Carl Barney Colleges With $3 Million Fraud Verdict,” Republic Report, August 21, 2020, https://www.republicreport.org/2020/big-win-for-students-colorado-court-slaps-carl-barney-colleges-with-3-million-fraud-verdict/.
  37. CEHE financial statement for 2016–17, https://drive.google.com/a/tcf.org/file/d/1LP5Te-enWp9ckVbI45sJIx65UqPHempi/view?usp=sharing, and for 2017–18, https://drive.google.com/a/tcf.org/file/d/1WlzhxlH3MRvf4uyVE8PZuOUsbW51lBAA/view?usp=sharing
  38. David Halperin, “Inside Arthur Keiser’s College Empire: Troubling Evidence,” Republic Report, August 6, 2020, https://www.republicreport.org/2020/inside-arthur-keisers-college-empire-troubling-evidence/.
  39. According to the school’s 2017 financial statement (available at https://drive.google.com/open?id=1QbY10dByXzXdPP3IBPX3Th6S5wqz4Eep), the debt was reduced to $75 million going forward (it is not clear what the balance was at that time).
  40. For more information on OPMs, see Stephanie Hall and Taela Dudley, “Dear Colleges: Take Control of Your Online Courses,” The Century Foundation, September 12, 2019, https://tcf.org/content/report/dear-colleges-take-control-online-courses/.
  41. U. S. Department of Education, Office of Postsecondary Education, “Gen-11-05: Implementation of Program Integrity Regulations,” March 17, 2011, 11, https://web.archive.org/web/20170430191936/https://ifap.ed.gov/dpcletters/attachments/GEN1105.pdf.
  42. The memorandum is a slender reed for a college to rely on since it is inconsistent with the Higher Education Act. Robert Shireman, “The Shaky Legal Ground for Online Revenue Sharing,” Inside Higher Ed, October 30, 2019, https://www.insidehighered.com/digital-learning/views/2019/10/30/shaky-legal-ground-revenue-sharing-agreements-student-recruitment.
  43. The HLC statement is available at https://www.insidehighered.com/sites/default/server_files/files/Grand%20Canyon%20University%20PDN.pdf.
  44. Greg Toppo, “Purdue buys for-profit Kaplan University for $1, plans to make it public,” USA Today, April 27, 2017, https://www.usatoday.com/story/news/2017/04/27/purdue-buys-kaplan-university/100990102/.
  45. Adopted in November 2017, HLC’s revised policy is available at http://download.hlcommission.org/SharedServicesGuidelines_OPB.pdf.
  46. Ibid.
  47. U.S. Department of Education, “Re: Review of the Change in Ownership and Conversion to Nonprofit Status of Grand Canyon University (OPE ID 00107400),” November 6, 2019 (letter to Brian Mueller, President, GCU), 15, available at https://www.documentcloud.org/documents/6548148-Grand-Canyon-University-Decision-on-CIO-11-06-19.html.
  48. Ibid, 12.
  49. Prohibited private benefit “does not necessarily involve the flow of funds from an exempt organization to a related private party, it can also include other benefits from the activities of the exempt organization to an unrelated party” (emphasis in original). The department cites a case: “Impermissible benefit to ‘private interests’ thus encompasses not only benefit to insiders but also benefits that an organization may confer on unrelated or even disinterested persons, i.e., outsiders.” Ibid, 11.
  50. For-profit schools are subject to the 90-10 rule (no more than 90 percent funding from Title IV of the Higher Education Act), and they are eligible for aid not as institutions but on the basis of each program preparing students for gainful employment in a recognized profession.
  51. “Policy Advisory: Determining Tax Status for Approvals and Benefits Payments,” January 13, 2020. The advisory, which was emailed to VA State Approving Agencies, was provided to TCF by the Maryland Attorney General’s office. It can be accessed here: https://drive.google.com/file/d/1VSWHRlQ_EqtoX9CUksrJnoFLWVVAvwUQ/view?usp=sharing.
  52. Paul Fain, “Fine Print and Tough Questions for the Purdue-Kaplan Deal,” Inside Higher Ed, May 30, 2017, https://www.insidehighered.com/news/2017/05/30/regulators-and-accreditor-begin-review-purdues-boundary-testing-deal-kaplan.
  53. Dave Bangert, “Law shields Purdue’s new online school: Legislation that set the stage for Purdue’s dive into online higher ed also exempts ‘New U’ from state’s open meetings, public records laws. That, Purdue says, was part of the deal,” Journal & Courier, May 2, 2017, https://www.jconline.com/story/opinion/columnists/dave-bangert/2017/05/02/bangert-law-shields-purdues-new-online-school/101183110/.
  54. “Preacquisition Review of the Proposed Change in Ownership Application of Kaplan University to be acquired by Purdue NewU, an Indiana nonprofit public benefit corporation,” U.S. Department of Education, September 13, 2017, https://drive.google.com/file/d/1-Yicdz6FrIaKDZFGZdTEO6WOiTEvjGJO/view?usp=sharing.
  55. Robert Shireman, “How Purdue Global Got Its IRS Stamp of Approval,” The Century Foundation, September 2, 2020, https://tcf.org/content/commentary/purdue-global-got-irs-stamp-approval/.
  56. Laureate Education, Inc., “Form S-1 Registration Statement Under the Securities Act of 1933,” December 15, 2016https://www.sec.gov/Archives/edgar/data/912766/000104746916017211/a2228849zs-1a.htm.
  57. Authored by Delegate Shelly Hettleman and Senator Paul G. Pinsky, the proposal was developed with the assistance of the state Attorney General’s office. See Maryland Higher Education Commission—Private Nonprofit Institutions of Higher Education—Regulation (Private Nonprofit Institution of Higher Education Protection Act of 2019), http://mgaleg.maryland.gov/mgawebsite/Legislation/Details/HB0461?ys=2019RS&search=True.
  58. Authored by Assemblymember Marc Berman, AB 70 was signed by Governor Gavin Newsom on September 25, http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB70.
  59. PROTECT Students Act of 2019: S. 867 by Senators Maggie Hassan and Richard Durbin, https://www.congress.gov/bill/116th-congress/senate-bill/867, and H.R. 3512 by Reps. Susie Lee and Rosa DeLauro, https://www.congress.gov/bill/116th-congress/house-bill/3512/cosponsors?r=53&s=1&q={%22cosponsor-state%22:%22Connecticut%22}&searchResultViewType=expanded.
  60. For alternatives, see Marcus S. Owens, “Charity Oversight: An Alternative Approach,” Columbia Law School Charities Regulation and Oversight Project Policy Conference on The Future of State Charities Regulation, 2013, https://doi.org/10.7916/D8154F1D.
  61. “Because this guidance is not codified in any rule or law, but is instead an ED opinion on the applicability of the incentive compensation rule, such guidance can be revoked at any time and without notice. Some lawmakers, including certain 2020 presidential candidates, and states, such as California, have publicly called for the revocation of this guidance.” Form 10-K, Graham Holdings Company, February 26, 2020, 6, https://www.sec.gov/Archives/edgar/data/104889/000010488920000007/a2019q410-k.htm.

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