COOLEY LLP: Conversion of a Postsecondary Educational Institution from a For-Profit to a Nonprofit, Tax-Exempt Entity

Career College Central Summary:

  • The recent announcements that Grand Canyon University would explore nonprofit status and that Corinthian Colleges plans to sell a group of schools to a nonprofit entity have encouraged higher education companies to take a fresh look at conversion into a nonprofit entity. These announcements, along with the challenges posed to for-profit institutions by the recently promulgated gainful employment regulations, have renewed interest among higher education sector participants in the advantages of converting their schools into entities that would be exempt from taxation pursuant to Section 501(c)(3) of the Internal Revenue Code ("IRC") and would be beyond the scope of certain regulations issued by the U.S. Department of Education ("ED") that apply particularly to for-profit institutions.
  • This alert outlines the regulatory and tax concerns in converting a postsecondary educational institution (the "Institution") into a nonprofit entity. Such an entity is commonly referred to as a "public charity."2 For the purposes of this memorandum, it is assumed that the Institution is a participant in the federal student financial assistance programs pursuant to Title IV of the Higher Education Act of 1965, as amended ("Title IV"), and is authorized to operate by a state and accredited by an accrediting commission recognized by the U.S. Secretary of Education.
  • There are three primary ways to achieve such a conversion: the assets of the Institution can be transferred to a new nonprofit entity, acquired by an existing nonprofit educational institution, or acquired by an existing nonprofit entity that is not an institution.3 For the reasons described in the footnote below,4 we do not discuss a stock purchase as a viable option. Similarly, we do not discuss so-called "B" corporations—also known as "benefit corporations"—a newly emerging form of for-profit entity that permits a company to pursue "public benefit" purposes other than value maximization for stockholders, as such entities are not otherwise Section 501(c)(3) organizations and thus do not qualify for the Title IV regulatory relief available to public charities.

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