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IRS Issues Guidance Regarding College and University Excise Tax

As we previously reported, the 2017 tax reform bill instituted an excise tax on the investment income of certain private colleges and universities under new Section 4968 of the Internal Revenue Code (the “Code”).  The Internal Revenue Service (the “IRS”) and the Department of the Treasury (“Treasury”) have now issued Notice 2018-55 which provides guidance (including notification of an intent to issue regulations) regarding the calculation of net investment income for purposes of Code Section 4968(c).

Section 4968 imposes an annual excise tax of 1.4% on the net investment income of a private college or university that (i) has more than 50% of its students located in the United States, (ii) had at least 500 tuition paying students during the preceding taxable year, and (iii) has at least $500,000 in assets per student, other than those assets which are used directly in carrying out the institution’s exempt purpose.  Code Section 4968(c) states that net investment income will be determined under rules similar to the rules that apply to private foundations under Code Section 4940(c). Under Code Section 4948(d) the assets and net investment income of “related organizations” (including Code Section 509(a)(3) supporting organizations) are attributable to the educational institution.

The Notice states that the IRS and Treasury intend to propose regulations which state that, in the case of property held by an educational institution on December 31, 2017 and continuously thereafter to the date of disposition, the basis used for determining gain on the property will be deemed to be not less than the fair market value of the property on December 31, 2017, plus or minus all adjustments made after December 31, 2017 and before the date of disposition (the “New Proposed Basis Rules”).  In addition, for the purposes of determining loss, the proposed regulations are expected to apply basis rules that are consistent with those under Code Section 4940(c).

Further, the IRS and Treasury intend to propose regulations stating that losses from sales or other dispositions of property will generally be allowed only to the extent of gains from such sales or other dispositions, and that there will be no capital loss carryovers or carrybacks.

Finally, the Notice indicates that overall net losses from sales or other dispositions of property from “related organizations” under Code Section 4968(d)(2) may be used to offset overall net gains from such sales or other dispositions from other related organizations (or from the applicable educational institution).  Code Section 4968(d)(2) defines a related organization as any organization which (i) controls or is controlled by the applicable educational institution, (ii) is controlled by one or more persons which also control such institution or (iii) is a supported organization (under Code Section 509(f)(3)) or a supporting organization (as described in Code Section 509(a)(3)) with respect to the applicable educational institution.

The Notice states that before the issuance of the proposed regulations, applicable educational institutions may rely on the New Proposed Basis Rules described above.  The IRS and Treasury have requested comments on the issues addressed in the Notice, including with respect to the ability to use the losses of related organizations to offset gains for other related organizations or the applicable educational institution, by September 6, 2018.