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Dartmouth Restates Allocation of Assets to IRS

Published in print on July 15, 2011

By Rick Jurgens, Special to the Valley News

Dartmouth College plans to submit an amended tax filing with the Internal Revenue Service after discovering that a return filed in May substantially under-reported the portion of its $3 billion endowment tied up in hard-to-sell assets.

"We determined that certain investments in the Form 990 (for fiscal year 2010) were incorrectly classified as 'publicly traded' securities rather than 'other securities,' spokesman Justin Anderson wrote in an email to the Valley News. He did not respond to a question about what prompted the college's discovery.

The statements that Dartmouth plans to amend purported to show the portion of its investment portfolio that was invested in buyout, venture capital or real estate funds. Such funds often are illiquid, or difficult or expensive to sell, in part because of restrictive terms in the investment contracts between the college and private managers. Some of those contracts may obligate the college to make additional investments in a fund.

By comparison, investments in publicly traded securities generally can be much more easily sold, or liquidated, when an institution needs cash.

Anderson's email said that at the end of June 2009 the value of investments that met the criteria for "publicly traded securities" had been $328 million instead of the $1.65 billion reported in the college's 2010 return. Similar totals were included in previous college IRS filings. By June 2010, the total in publicly traded securities had risen to $681 million, still much less than the $1.18 billion originally reported in the college's tax returns.

The numbers in question provided a measure of how readily the college could raise cash. They provided one benchmark by which members of the Dartmouth community might judge the severity of the recent budget crunch and the need for the sacrifices they were being called upon to make to help the college raise money to pay bills and avoid expensive loans.

President Jim Yong Kim, in a December 2009 talk to the Dartmouth community, stressed the importance of liquidity and his desire to see the college limit its exposure in illiquid investments. "We don't want to get into a situation where we're all in these relatively more-difficult-to-sell, more-difficult-to-turn-into-cash instruments," he said. "What we want is balance."

Anderson's disclosure of the college's plan to file an amended filing came in response to questions submitted by the Valley News in early June about the Form 990. Those questions sought an explanation as to why, during fiscal year 2010, when college officials had expressed their intent to make its portfolio more "liquid" the portion of the college's investments held as publicly traded securities fell to 32.8 percent from 52.5 percent.

The filing showed that during the same period holdings of illiquid partnerships and real estate jumped from $1.49 billion to $2.42 billion. But according to the corrected numbers released by Dartmouth, the portion of its investment portfolio held in the form of publicly traded securities rose during fiscal 2010, but only from 10 percent to 19 percent.

Pamela Peedin, the college's chief investment officer, said in a prepared statement that the college ended fiscal year 2010 holding 6 percent of its portfolio in the form of cash, the most liquid asset.

While the college's portfolio remained "overweight to private equity and venture capital" at the end of fiscal 2010, it had reduced "our exposure to these asset classes" during the just-ended fiscal year, she said.

Anderson, the college spokesman, stressed that the amended tax filing "does not change total investments or total assets of the College."

Anderson said in a follow-up email that changes to the 990 had "no impact on the College's audited financial statements, endowment reporting or financial management reporting system, which is what guides the College's financial decisions and budgeting process on a day-to-day basis."

"The Form 990 does not drive decision-making at any level, including the President's Office," Anderson added. "The reclassification of figures will have no impact on the ongoing operations of the College."

Experts differed in their views of the significance of the college's decision to file an amended 990. Dan Kurz, a lawyer who represents tax-exempt clients for the law firm of Skadden Arps Slate Meagher & Flom, said the filing of an amended 990 "is not an everyday occurrence."

He added, "You wouldn't do it for something trivial."

However, John Griswold, executive director of the Commonfund Institute, which researches and provides education on nonprofit endowments, said that while he could not comment on Dartmouth's situation, in general he saw the filing of an amended 990 as not "terribly significant."

Anderson blamed the filing snafu on the Form 990's "narrow definition" of what assets should be listed as publicly traded.

The instructions to the Form 990 say that "publicly traded securities include common and preferred stocks, bonds (including governmental obligations such as bonds and Treasury bills), and mutual fund shares that are listed and regularly traded in an over-the-counter market or an established exchange and for which market quotations are published or are otherwise readily available."

Kurz, the lawyer who represents nonprofits, said that there was a "huge disparity" between the numbers in Dartmouth's original filing and its new numbers, noting that the definition had not changed.

In an interview, Anderson declined to discuss how the college came to use the wrong numbers. He characterized the Form 990 as "a document specifically created to justify with the government the college's tax-exempt status. It's not a financial document like an audited financial statement is."

Anderson noted that a comment by Guidestar.org, a nonprofit organization that compiles 990s and other financial information about nonprofits and posts it online, says that "many consider the Form 990 a poor choice for a person's 'primary or sole source of information about a particular organization.' "

But Jeff Hurwit, a Newton, Mass., lawyer who represents nonprofits, noted that a Form 990 "is a true tax return in all ways." He said that "the 990's numbers are supposed to be consistent with the audited financials."

While in 2008 the IRS extensively revised the Form 990 to require more detailed disclosures from nonprofit filers, some experts continue to view such filings skeptically. Brent Copen, a consultant who teaches a course on nonprofit financial management at the Haas Business School of the University of California, Berkeley, said that he tried to avoid relying on Form 990s, which were too often untimely, inaccurate and lacking in detail.

A nonprofit's audited financial statements provide more assurance of the "integrity of the numbers," he said.

Jim Dupree, an IRS spokesman, declined to comment on the Dartmouth situation, noting that federal privacy laws prohibit discussion of "a particular or specific taxpayer's tax matter or their taxes."

Large nonprofit organizations that file Form 990s containing "incorrect information" are subject to a penalty of up to $50,000, but "can file an amended return at any time to change or add to the information reported on a previously filed return for the same period," according to the agency's official instructions to filers.

Bruce Hopkins, a lawyer in Kansas City who operates the Nonprofit Law Center, said that in order to assess whether the re-filing of the Form 990 by Dartmouth might prompt further review by the IRS "you need to look first at the reason for it."

Anderson did not respond to questions about what explanation, if any, the college planned to give to the IRS about its decision to file the amended return.

New Hampshire law also requires that Dartmouth file the Form 990 with state regulators. Terry Knowles, deputy director of the Charitable Trusts Unit of the state Department of Justice, said that she had not heard of Dartmouth's plan to amend its Form 990, but that the college "should probably file a copy of that with us as well."

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