Private foundations are generally required to distribute 5% of their assets each year for charitable purposes. Beyond that, there is little in the law that requires tax-exempt charitable organizations to distribute or spend their assets for their stated charitable purposes. As a consequence, many charitable institutions have built-up large endowment funds as contributions and investment returns have exceeded charitable spending.
Due to concerns regarding such growth in retained assets, the IRS has indicated that it will be studying whether it is appropriate to apply the "commensurate doctrine" to exempt organizations. The "commensurate doctrine" generally provides that charitable organizations should provide services that are commensurate with their resources, and that measuring expenditures with this doctrine is a method of ensuring that these organizations are fulfilling their charitable mission.
Related to this review will be a study of 400-500 colleges and universities, who will be sent a questionnaire. Some of the areas of questions will relate to endowment funds and executive compensation.
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