The vast bulk of economic activity in the United States is taxed by the federal government. There are exceptions carved out, primarily for charitable operations, including universities. The rationale is that these organizations serve the public good and should not be reduced in magnitude by the deleterious effects of taxes. Universities in particular get a wide range of tax breaks. Contributions to universities are tax deductible. Earnings from endowments in the form of capital gains, dividends, rents, royalties, or interest are non-taxable. Property owned by universities is rarely taxed at the local or state level, and university fees and often even commercial activities are frequently not subject to sales taxes. Customers of universities typically get tax breaks, such as tuition tax credits, or are allowed to create tax sheltered savings accounts to help pay for college. As university costs have risen, both to student consumers and to society as a whole, people have started to question historic assumptions about university activities. People are asking questions like: Should a person who donates or "buys" a stadium skybox get a tax break for this non-academic expenditure? Should universities be allowed to amass huge endowments from tax free gifts and investment income and then spend only small amounts from the fund, allowing the endowment to rapidly accrue in a tax free fashion? When universities use tax-exempt endowment funds or even annual gifts in a matter different than directed by the donor, should universities be subject to severe criminal or civil penalties for committing fraud? Should federal tax policy towards universities be reviewed and changed? This study focuses on the tax treatment of university endowments, and what are reasonable rules that should be enacted, if any, to assure that monies are expended in a manner consistent with the granting of tax-exempt status. (Contains 4 figures, 3 tables, and 24 notes.)