NYSBA Tax Section Issues Report on Proposed Endowment Excise Tax Regs

NYSBA Tax Section Issues Report on Proposed Endowment Excise Tax Regs

New York State Bar Association Tax Section

Deborah L. Paul of the New York State Bar Association Tax Section has submitted a report on proposed regulations (<a href="/lr/resolve//29p1b">REG-106877-18</a>) under <a href="/research/federal/usc26/4968" resolve="/lr/resolve//1xg3h">section 4968</a> providing guidance for determining the excise tax applicable to the net investment income of some private colleges and universities. The Tax Section recommends additional guidance to clarify that separate but affiliated schools that are under common control (such as within the same university system) should be aggregated for purposes of determining the number of students for both the 500-student and the $500,000-per-student tests. Section members believe an appropriate standard for determining common control would be to apply the same definition of control already used in prop. reg. section 53.4968-1(c)(1)(ii). The Tax Section proposes that a student should be considered tuition-paying regardless of the source of tuition funds, except that an eligible educational institution at which no students pay tuition will not be considered to have any tuition-paying students. Section members also suggest that each institution be permitted to determine whether a student is located in the United States using any reasonable approach that is consistently applied. Under the adopted approach, students who spend substantial time in the United States attending classes would be considered located in the United States, members say. The Tax Section recommends that intangible assets (such as patents or other technology used for teaching or research purposes) should in appropriate cases constitute assets used directly in carrying out an institution’s exempt purpose. Section members suggest that to the extent those intangible assets have both exempt and nonexempt uses, institutions should be able to apply the reasonable allocation method described in the proposed regs to determine what portion of the intangible assets would qualify as exempt or nonexempt. The Tax Section proposes that income included in determining an institution’s unrelated business taxable income should be explicitly excluded from the computation of NII. Section members also recommend that income and loss from student and faculty loans and student, faculty, and staff housing arrangements should be excluded from the computation of gross investment income. Members request confirmation that any capital gain derived from the sale of an exempt-function asset is not taken into account in determining the NII of an educational institution. Moreover, the Tax Section suggests that any appreciation in a gift of donated property that occurred before the gift to an applicable educational institution was consummated should be excluded from the computation of NII. Section members recommend that any presumption of use or benefit based on prior distributions from a related organization should only be made if distributions were made in three of the previous five years, and that the portion of the assets and income presumed to be for the benefit of the institution should be based on an average of the amounts distributed during the five-year lookback period. Any presumption should be rebuttable by the institution with facts and circumstances supporting attribution of a lesser amount or by the IRS supporting a larger amount, members say. The Tax Section also requests clarification of the general approach to the application of the excise tax in the context of both controlled domestic taxable corporations and controlled foreign corporations.

Deborah L. Paul of the New York State Bar Association Tax Section has submitted a report on proposed regulations (REG-106877-18) under section 4968 providing guidance for determining the excise tax applicable to the net investment income of some private colleges and universities.

Deborah L. Paul of the New York State Bar Association Tax Section has submitted a report on proposed regulations (REG-106877-18) under section 4968 providing guidance for determining the excise tax applicable to the net investment income of some private colleges and universities. The Tax Section recommends additional guidance to clarify that separate but affiliated schools that are under common control (such as within the same university system) should be aggregated for purposes of determining the number of students for both the 500-student and the $500,000-per-student tests. Section members believe an appropriate standard for determining common control would be to apply the same definition of control already used in prop. reg. section 53.4968-1(c)(1)(ii). The Tax Section proposes that a student should be considered tuition-paying regardless of the source of tuition funds, except that an eligible educational institution at which no students pay tuition will not be considered to have any tuition-paying students. Section members also suggest that each institution be permitted to determine whether a student is located in the United States using any reasonable approach that is consistently applied. Under the adopted approach, students who spend substantial time in the United States attending classes would be considered located in the United States, members say. The Tax Section recommends that intangible assets (such as patents or other technology used for teaching or research purposes) should in appropriate cases constitute assets used directly in carrying out an institution’s exempt purpose. Section members suggest that to the extent those intangible assets have both exempt and nonexempt uses, institutions should be able to apply the reasonable allocation method described in the proposed regs to determine what portion of the intangible assets would qualify as exempt or nonexempt. The Tax Section proposes that income included in determining an institution’s unrelated business taxable income should be explicitly excluded from the computation of NII. Section members also recommend that income and loss from student and faculty loans and student, faculty, and staff housing arrangements should be excluded from the computation of gross investment income. Members request confirmation that any capital gain derived from the sale of an exempt-function asset is not taken into account in determining the NII of an educational institution. Moreover, the Tax Section suggests that any appreciation in a gift of donated property that occurred before the gift to an applicable educational institution was consummated should be excluded from the computation of NII. Section members recommend that any presumption of use or benefit based on prior distributions from a related organization should only be made if distributions were made in three of the previous five years, and that the portion of the assets and income presumed to be for the benefit of the institution should be based on an average of the amounts distributed during the five-year lookback period. Any presumption should be rebuttable by the institution with facts and circumstances supporting attribution of a lesser amount or by the IRS supporting a larger amount, members say. The Tax Section also requests clarification of the general approach to the application of the excise tax in the context of both controlled domestic taxable corporations and controlled foreign corporations.

Sec. 4968 Excise tax based on investment income of private colleges and universities

Sec. 4940 Excise tax based on investment income

Sec. 4960 Tax on excess tax-exempt organization executive compensation

Sec. 25A American Opportunity and Lifetime Learning credits

Sec. 318 Constructive ownership of stock

United States

Excise taxes

Exempt organizations

Net investment income tax

Education

The Exempt Organization Tax Review, Nov. 2019, p. 473

84 Exempt Org. Tax Rev. 473 (2019)

Deborah L. Paul

DOC 2019-37512

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Deborah L. Paul is a partner at Wachtell, Lipton, Rosen &amp; Katz.
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NYSBA Tax Section Issues Report on Proposed Endowment Excise Tax Regs