Private College Seeks Clarity in Endowment Excise Tax Regs

March 19, 2020

Charles P. Rettig, Commissioner
Internal Revenue Service
CC:PA:LPD:PR (REG-106877-18)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Notice.Comments@irscounsel.treas.gov

RE: Comment to Proposed Regulations under Section 4968 of the Code Concerning the Excise Tax Applicable to Certain Private Colleges and Universities [REG-106877-18]

Dear Commissioner Rettig:

On behalf of Hillsdale College, a private college located in southcentral Michigan, we respectfully submit the following comments on Proposed Treasury Regulations proposed for adoption under I.R.C. § 4968 (which will impose an excise tax based on investment income of certain private colleges and universities).

This comment focuses on the definition of an “applicable educational institution” contained in I.R.C. § 4968(b)(1). Hillsdale respectfully requests that the Proposed Regulations be revised to clarify and provide that the tax under I.R.C. § 4968 is only applicable to those institutions that meet the definition of “eligible educational institution.” The Regulations should reject the reference to a Department of Education certification for eligibility for Title IV federal funds in regulations adopted under I.R.C. § 25A(f)(2) because this provision was written for a purpose other than the imposition of a tax, and is not appropriate in this circumstance. Instead, the Regulations should clarify that the excise tax only applies to educational institutions eligible to receive federal education aid (the language contemplated by the statute).

Hillsdale seeks certainty on how these provisions apply to Hillsdale's factual situation. Founded in 1844, Hillsdale College is a nonsectarian Christian institution and one of several institutions in the United States that does not participate in the federal financial aid program under the Higher Education Act of 1965. In fact, Hillsdale has never and does not now participate in any governmental student aid or loan program. This prohibition stems from the College's original Articles of Association, by which Hillsdale, in accord with its founding mission, was the first American college to prohibit in its charter any discrimination based on race, religion, or sex. This commitment informs and supports later Board decisions to not only continue its policy of non-discrimination but also not accept governmental funding and rely solely on private contributions for institutional support. This abiding separation from government assistance is a central part of Hillsdale's mission and its institutional requirement to be a source of higher learning independent from any outside strictures that threaten or compromise the mission of the College.

As adopted under section 13701(a) of the 2017 Tax Cuts and Jobs Act, Section 4968 imposes an excise tax on “applicable educational institutions.” I.R.C. § 4968(b)(1). Section 4968(b)(1) states an “applicable educational institution” means an “eligible educational institution” (as defined in I.R.C. §25A(f)(2)) that meets or exceeds certain thresholds related to its investment assets (and is not a state college or university).

Section 25A allows certain tax credits for individuals attending an “eligible educational institution.” Under I.R.C. § 25A(f)(2), an educational institution is an institution (A) which is described in section 481 of the Higher Education Act of 1965 and (B) which is eligible to participate in a program under Title IV of such Act. The Treasury Regulations adopted under I.R.C. § 25A(f)(2) further provide that an organization is eligible to participate in a program when it is “certified by the Department of Education as eligible to participate in such a program but chooses not to participate.” Treas. Reg. § 1.25A-2(b)(1)(ii).

The regulations under I.R.C. § 25A adopt the certification process used by the Department of Education to determine if students of an educational institution can claim an individual tax credit under I.R.C. § 25A. This provision is reasonable when the result of the school's “certification” (as intended by the underlying law) is merely that students become eligible for individual tax credits (as is the case under I.R.C. § 25A). It is also reasonable that those educational institutions that seek federal aid under Title IV (and request to be certified by the Department of Education for that purpose) would be subject to the excise tax under I.R.C. § 4968.

However, in some cases, the provisions of the regulations under I.R.C. § 25A create an untenable situation. For some educational institutions, like Hillsdale College, general eligibility and certification to receive Title IV funds are separate and distinct questions that relate to and involve the College's mission and fundamental questions of institutional governance. Maintaining this distinction for institutions like Hillsdale College, which has never received any federal funds and whose endowment was not funded, in whole or on part, by federal monies, is crucially important for maintaining the College's institutional mission and well-being. For this reason, it is important that the application of the tax not flow from a certification by the Department of Education (which should have no role in the implementation of a tax), but instead only from eligibility to participate in a program under Title IV.

We are aware of several other institutions of higher education that also do not accept federal funds under Title IV and presumably are or will be in the same untenable position. The peer institutions that we are aware of include Grove City College in Pennsylvania, Gutenberg College in Oregon, New St. Andrews College in Idaho, Patrick Henry College and Christendom College in Virginia, Pensacola Christian College in Florida, Principia College in Illinois, and Wyoming Catholic College in Wyoming. We are also aware and concerned that other educational institutions based on their founding mission and governing purposes, may be placed in this same position in the future.

Instead of simply referring to the regulations under I.R.C. § 25A, the regulations applying I.R.C. § 4968 should be written to closely follow the language of I.R.C. § 25A(f)(2), which focuses on eligibility for federal aid under Title IV. The statute does not provide for an additional mechanism to determine whether a tax is to be imposed on an educational institution. Instead, the Internal Revenue Service and the Department of the Treasury (the appropriate agency and Department to enforce the tax laws) should, in cases where the educational institution does not receive Title IV funding, make a determination of eligibility based on appropriate facts and circumstances. These facts and circumstances should include a consideration of whether internal and external restrictions on the educational institution, present in governing documents or substantial restrictions on the use of institutional funds, result in the educational institution not being able to receive federal funds.

In summary, the Proposed Regulations should not use a reference to the regulations under I.R.C. § 25A because those regulations were written for a wholly different purpose and because it is inappropriate to rely on a “certification” by the Department of Education to impose a tax on an educational institution. Instead, the Proposed Regulations should adopt the definition of an “applicable institution” that restates the definition of “eligible educational institution” contained in I.R.C. § 25A(f)(2). In lieu of referring to a certification, the Regulations should provide guidance that “eligibility” for purposes of the tax under I.R.C. § 4968 must include a reasonable analysis of whether the internal and external restrictions preclude “eligibility” and application of the tax.

This formulation both clearly follows from the statutory approach but also does not impose the certification formulation from the I.R.C. § 25A regulations to an instance where it was not intended and is inappropriate.

Sincerely,

Patrick Flannery
Vice President for Finance and Treasurer

Matthew Spalding
Vice President for Washington Operations

Hillsdale College
Hillsdale, MI