Golf course lands Carolina in the rough with the IRS.

• Position: Finley Golf Course; auditing of University of North Carolina Chapel Hill's financial records

No wonder UNC Chapel Hill is in the red. It can't even turn a profit on Finley Golf Course.

The university links, open to the public, are a short ride from campus off one of the major roads into Chapel Hill, which should make it a magnet for Carolina alums in this golf-mad state. But for three straight fiscal years - '95, '96 and '97 - the university lost money on its operation, chalking up a $465,801 deficit.

The losses led the Internal Revenue Service, in its recently completed two-year audit of Carolina, to conclude that Finley "is not profit motivated" and to disallow $510,110 in deductions. Like other charities, universities are supposed to pay tax on ventures that aren't essential to their tax-exempt mission. But that means they can take deductions - if the IRS believes a venture was run well enough to hold the promise of a profit. Otherwise, the agency classifies it as a loss-generating dodge, as it did at UNC.

For the audit, an IRS team combed the school's financial records, eyeing everything from Finley to the BMW 525 the school provided former football coach Mack Brown. (Dean Smith got a Cadillac DeVille.) They found $10.8 million in unreported income. And they made $10 million in adjustments to the university's income tax and FICA withholding from paychecks of faculty members who aren't U.S. citizens and from student workers.

"The rules that apply to foreign students and faculty are godawful," says Paul Streckfus, editor of Baltimore-based Exempt Organization Tax Journal...