Revised final dissertation m villano

OUTSOURCING AND THE UNRELATED BUSINESS INCOME TAX: A SURVEY OF COLLEGE AND UNIVERSITY BUSINESS OFFICERS A dissertation submitted to the Kent State University College of Education, Health, and Human Services in partial fulfillment of the requirements for the degree of Doctor of Philosophy By Michael C. Villano August 2016 © Copyright, 2016 by Michael C. Villano All Rights Reserved ii A dissertation written by Michael C., Youngstown State University, 1998 M., Cleveland State University, 2004 Ph., Kent State University, 2016 Approved by ____________________________________ Director, Doctoral Dissertation Committee Mark A. Kretovics ____________________________________ Member, Doctoral Dissertation Committee Stephen B.

Thomas ____________________________________ External Member, Doctoral Dissertation Curtis Lockwood Reynolds Committee Accepted by ____________________________________ Director, School of Foundations, Kimberly S. Schimmel Leadership and Administration ____________________________________ Interim Dean, College of Education, Mark A. Kretovics Health and Human Services iii VILLANO, MICHAEL C., August 2016 FOUNDATIONS, LEADERSHIP, AND ADMINISTRATION OUTSOURCING AND THE UNRELATED BUSINESS INCOME TAX: A SURVEY OF COLLEGE AND UNIVERSITY BUSINESS OFFICERS (83 pp.) Director of Dissertation: Mark A. Higher education institutions continually explore opportunities to streamline costs and improve efficiency.

In many instances this results in the decision to outsource or privatize operations. Many of the operations that are outsourced are considered unrelated business-type activities according to the Internal Revenue Code. As such, these activities are required to pay U. income tax on their net profits.

These unrelated business type activities include things like food service, bookstores, parking facilities, conference centers, and hotels. This study examines these two issues—outsourcing and unrelated business income tax—in combination. The study surveyed college and university business officers across the United States and inquired about their position within the organization, characteristics of their organization, outsourcing activities at their institution, individual’s perceived understanding of Unrelated Business Income Tax (UBIT), and the perceived compliance with UBIT regulations. The results of the survey first conclude that college and university business officers self-reported an above average understanding of the application and compliance with unrelated business income tax.

Secondly, however, the study concluded that the unrelated business income tax was of minor significance in decisions to outsource HIED operations. DEDICATION To the memory of my grandfather, Nicholas L. iv ACKNOWLEDGMENTS When I began this journey, it seemed as if I would never reach the end. While the process was demanding and challenging, I am overjoyed to finally be writing these final words.

This experience has absolutely been a test of endurance—I am pleased to have made it to the finish line. Over the years, I have read many dissertation acknowledgments, and many writers express their difficulty with these final words. I find these to be the easiest to compose. This would have never been possible without the support and encouragement— and occasional kick in the pants—of my work colleagues.

Jo Ann Oaks, Joyce Schiraldi, and Lorrie Brown have all helped me tremendously throughout my educational journey. This is as much yours as it is mine. Secondly, I would be remiss if I failed to acknowledge the untiring encouragement of my YSU family. Peter Woodlock and Karin Petruska have provided continuous encouragement and support of my endeavors.

For this, I remain ever thankful and appreciative. As I have lived through the highs and lows of academic life as a faculty member, Mrs. Kathy Mumaw has been there every step of the way. Her own experiences with higher education are testament enough to her dedication to her profession.

After all, without her continual friendship and our commiseration sessions, I would never have learned we are the only two NCNG professionals in the world! Can you even imagine. I owe a deep debt of gratitude to my dissertation advisor, Dr. Kretovics was the only person in the world who would take a chance on me as a Ph. He not only opened the door to an opportunity I never thought possible, but he v stuck by me for six long years until I finished.

When things were not progressing well or ideas didn’t work out, Dr. offered his words of support, encouragement, and insight. Kretovics is far more than a dissertation advisor, I consider him a true friend and colleague. I remain forever grateful.

My remaining dissertation committee members have also provided guidance and valuable advice along this journey. Stephen Thomas and Lockwood Reynolds have made significant contributions to my successful completion of this dissertation. Without their advice and insight, this process would have been far more difficult. I express my sincere appreciation to my editor, Sharon Smith, for her careful review of this manuscript.

Further, I am extremely appreciative of the statistical expertise of Anthony Shreffler of the EHHS Research and Evaluation Bureau. His assistance was invaluable with regard to the completion of this project. I owe a huge debt to my doctoral cohort colleagues. We spent many Friday nights and Saturday mornings together—and consumed countless Polar Pops.

Each one of you has been an inspiration to me and has encouraged me to press on. I would especially like to acknowledge Tonia Ferrell, Michael Levinstein, Dr. Holly Craider, Dr. Eboni Pringle, Dr.

Laura Kane, and Stephanie Newman—you are the best! To my best friend, Jeff Baker, you can now order those business cards you have been so patiently waiting to order. You have, perhaps, been waiting longest for this finished product. Always encourage your girls to shoot for the stars! To your mom, Ruthie, and brothers, Roger, Chris, Josh, and Jake thanks for always lending an ear to listen to my woes as I trekked ever so slowly along this journey. vi I owe a deep gratitude to my family—Mom and Dad, Kim, Mark, Dave, Cindy, Anthony, Elaina, and Nick.

It is because of you that I have been empowered to accomplish this task. I deeply regret that our grandparents were not able to see that day I finish this. However, I know they are watching from beyond and have a smile on their faces. Lastly, a little sage advice from an uncle to his niece and nephews: Anthony, Elaine, and Nick: Never give up on your dreams as they might just come true.

If you can dream it, you can do it! - Walt Disney vii TABLE OF CONTENTS Page DEDICATION .v LIST OF TABLES. 1 Statement of Purpose. 2 Statement of the Research Problem. 5 Significance of the Study.

5 Definition of Terms. LITERATURE REVIEW OF UNRELATED BUSINESS INCOME TAX AND OUTSOURCING. 10 Unrelated Business Income Tax .11 The Revenue Act of 1950 .13 The Revenue Act of 1951 .16 The Internal Revenue Code of 1954 .17 The Tax Reform Act of 1969.17 The Tax Reform Act of 1986.18 Internal Revenue Code §511 .18 Internal Revenue Code §512 .19 Internal Revenue Code §513 .20 Internal Revenue Code §514 .22 Internal Revenue Code §515 .24 The Current State of Unrelated Business Income Tax .24 Outsourcing and Privatization. 29 Summary of the Literature.

33 Population and Sample. 38 Respondent and Institutional Profiles. 39 viii Institutional Activities and Privatization Decisions. 41 Unrelated Business Income Tax.

53 Cross Tabulation Results. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS. 63 Recommendations for Future Research. 64 Recommendations for Practitioners.

QUALTRICS ONLINE SURVEY INSTRUMENT. HUMAN SUBJECTS APPROVAL. 79 ix LIST OF TABLES Table Page 1. Geographic Distribution of Respondents.

Highest Degree Awarded. Position Responsible for Outsourcing Decisions. Estimated Annual Savings by Outsourcing. Primary Reason for Outsourcing.

Major Noncompliance Factors. Minor Noncompliance Factors. Compliance Non-Factors. One-Way ANOVA—UBIT Understanding by Experience.

One-Way ANOVA—UBIT Understanding by Position. Cross-Tab—Professional Credential and UBIT as a Factor in Outsourcing Decisions. Cross-Tab—Professional Credential and Perception of UBIT. Cross-Tab—Perception of UBIT Relative to Institutional Size.

Primary Reason for Outsourcing. 62 xi CHAPTER I INTRODUCTION Higher education has been faced with the need to increase efficiency and expand utilization of scare resources at a blinding pace. The period of time from December 2007 through June 2009 is known as The Great Recession, which caused crushing economic effects and tremendous financial turmoil. As a result of this event and an ever shifting economy, higher education institutions need to “re-think” operations.

“Doing more with less” has been a frequently used mantra in higher education, but the economic and financial realities of today’s operating environment demand that we do just that—more with less. A rather unconventional solution to these demands is simply to do less with less. However, the expectations of various constituent groups will not permit educational institutions to assume such a reductionist approach. As a result of this market driven phenomenon, institutions continue to expand the consideration of outsourcing operations.

Commonly proprietary or business-type operations in non-profit higher education institutions have been rendered over to the private sector. Operations such as food service, bookstores, payroll processing, and information technology services have been frequently outsourced with varying degrees of success (Angelo, 2005). However, as increased economic pressure continues to build and scarce resources continue to wane, the potential application of outsourcing solutions has likewise expanded. As reported by Angelo, additional areas of non-traditional outsourcing including housing, safety services, and grounds maintenance have now entered the arena as potential candidates for outsourcing.

1 2 Although outsourcing is not uncommon in higher education, no study has examined the influence of the unrelated business income tax on such decisions. The net profits from proprietary, or business-type activities, are subject to the requirements of Internal Revenue Code Section 512—unrelated business income tax. Adopted in 1950 by the United States Congress, the unrelated business income tax was introduced so that non-profit organizations could not gain a competitive tax advantage—and subsequent pricing advantage—over for profit institutions when engaging in business type activities. As a result of this association, this study seeks to examine the influence of unrelated business income tax relative to outsourcing decisions in higher education settings.

Statement of Purpose This study will examine from a non-experimental survey research design the factors that influence college and university business officers’ decisions to outsource proprietary higher education operations. Further, building upon the existing research by Gupta, Herath, and Mikouiza (2005) and Spikes (1993), this study examines an additional dimension in the outsourcing decision-making paradigm to include the influence of Internal Revenue Code §512—unrelated business income tax. Some studies have examined the reasons why outsourcing occurs—increased program visibility, increased efficiency, cost reductions, enhanced service (Armstrong, 2007; Pack, 1987). Similarly, Spikes’ (1993) dissertation examined the broad impact of unrelated business income tax on higher education institutions.

However no study has examined the impact of the unrelated business income tax as a factor in the decision to outsource. Colleges and universities associated with a particular U. state are provided tax exemption under 3 Internal Revenue Code Section 115 as institutions of the state government. With few exceptions, private non-profit higher education institutions are deemed tax exempt under Internal Revenue Code Section 501(c)(3).

These exemptions provide that the institutions are exempt from United States’ federal income taxation for activities related to its exempt purpose—specifically state government, religious, charitable, or educational purposes. However, activities beyond those exempt purposes—such as housing, parking facilities, athletic sponsorships, licensing—are subject to the provisions of Internal Revenue Code §512, the unrelated business income tax. Tax exempt organizations as described above are not prohibited from engaging in commercial or proprietary activities under Internal Revenue Code Sections 115 or 501(c)(3). Insofar as these activities do not assume a primary role in the institution, the tax exempt status should not be hindered.

Not only are proprietary activities—activities which could otherwise be provided from the open market or private, commercial sector— subject to taxation, the institution must also engage in compliance with the provisions as established by the Internal Revenue Service. The additional layer of tax compliance requires a special set of professional skills, which in turn adds to the cost of sustaining those proprietary operations (IRS Studies Colleges and Universities, 2010).