IRS Issues Guidance on the Calculation of Net Investment Income for Purposes of New 1.4% Excise Tax Applicable to Certain Private Colleges and Universities


An exempt private educational institution is generally treated as a public charity, and therefore, is not subject to the 2% excise tax on net investment income that is applicable to private foundations. However, for tax years beginning after December 31, 2017, the 2017 tax act added §4968 to impose a new 1.4% excise tax on the net investment income of certain private colleges and universities. Section 4968(c) provides that net investment income is to be determined under the rules of §4940(c).

In IRS Notice 2018-55, the IRS issued guidance on the calculation of net investment income for purposes of §4968(c). The IRS stated that it intends to issue regulations stating that for property held by an applicable educational institution on December 31, 2017, until its disposition date, the basis of such property for determining gain will be treated as being equal to the fair market value of the property on December 31, 2017 (with any basis adjustments occurring after the date).  

In addition, the IRS stated that it intends to issue regulations stating that losses from sales or other dispositions of property generally will 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. The IRS further stated with respect to related organizations described in §4968(d)(2), that it expects for overall net losses from sales or other dispositions of property in one related organization to be allowed to offset the overall net gains from such sales or other dispositions from other related organizations.

The IRS stated that taxpayers may rely on the basis guidance until proposed regulations are issued.

 

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