St. Paul’s School is being audited by the Internal Revenue Service, according to reports by the New York Times and the Associated Press. The I.R.S requested St. Paul’s tax data and statements from the 2001-2002 tax year. Although the cause of the audit remains unknown, the school has been criticized by alumni and parents in the past for alleged financial mismanagement. Two years ago, the New Hampshire Attorney General’s office conducted a review of St. Paul’s School. They noted the abnormally high salaries for the school’s rector, Bishop Craig B. Anderson, and vice rector, Rev. Sharon D. Hennessey. In fiscal year 2003, Dr. Anderson received $502,394, including benefits, while Dr. Hennessey received $321,269. The rector’s total compensation and benefits are currently double his original salary when he took the job eight years ago, according to the Times. When the New Hampshire attorney general began the original investigation, the Wall Street Journal reported that money from the Rector’s Discretionary Fund intended for the school was being used by the rector and his family to pay for fees at a yacht club, a country club, and at the Canyon Ranch Spa. The attorney general’s office reached an agreement with the school to limit the pay of its top two administrators, to establish more stringent internal controls over the discretionary fund, and to submit its tax data for review by a group of experts. Both the rector and the vice rector accepted a voluntary 10 percent pay cut as part of the deal, and any further raises will be pegged to general faculty pay raises. After the cuts, Dr. Anderson will earn $452,000 annually and Dr. Hennessey $297,000. The I.R.S., the New Hampshire Attorney General’s office, and the school have agreed that there are inconsistencies in the filing of certain tax forms among almost all private schools. According to a press release from the state in February of last year, “St. Paul’s has agreed to assist its peer institutions in achieving uniform practice [regarding form 990].” The form in question is used by tax-exempt organizations, nonexempt charitable trusts, and certain political fundraising groups to report income and expenses. The form also is used by the I.R.S. to determine what is considered “reasonable” compensation. “I do not believe that the 990 is all that problematic. It is long and complicated and does take a lot of time to complete. There can always be second guessing in some areas where an institution makes judgment calls on how to report one thing or another,” said Phillips Academy Chief Financial Officer Stephen Carter. It is unclear why the I.R.S has chosen to investigate St. Paul’s. Federal law prohibits the service from commenting on any specific case while the audit is still in progress. However, some alumni and parents have objected to the way the school is being run. The school also has an unusual amount of its endowment invested in alternative assets such as hedge funds, which may also have attracted IRS attention. A hedge fund is a relatively unregulated investment fund, characterized by unconventional strategies such as investing in holdings other than bonds, equities, or money markets. There are few government-imposed restrictions on these funds, which are usually used by the extremely wealthy. As private, lightly-regulated partnerships, hedge funds do not have to disclose their activities to third parties, such as the Securities and Exchange Commission. The New York Times learned of the I.R.S. request from an alumnus who recently received a copy of a confidential November 2004 e-mail from Chairman of the St. Paul’s School Audit Committee John Greene to members of the St. Paul’s Board of Trustees. The board members were told to destroy the memo, but one leaked. The St. Paul’s School would not offer any comment on the current investigation. St. Paul’s spokeswoman Michele Clark told the New York Times, “The Business Office has cooperated fully and provided the information requested.” Mr. Carter said, “[St. Paul’s] has to do a great deal of extra work to satisfy the I.R.S. auditors’ questions.”
