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By Robert Lee
Emory University President Claire Sterk has joined the push to delay implementation of new tax law provisions that could penalize higher education—including new excise taxes on the investment income of private colleges and universities, and executive compensation.
Because “it is unlikely that forthcoming guidance in these areas would be published until half-way through 2018 or later, we strongly recommend that Treasury include a one-year delay in the effective date of the provisions discussed in this document,” Sterk wrote in a letter dated May 24 addressed to Treasury Department Secretary Steven Mnuchin.
Emory is facing a multimillion-dollar unbudgeted tax liability under the 2017 tax act (Pub. L. No. 115-97) and a delay would “enable our organization to more accurately estimate our new tax burden” and “budget for this dramatic tax increase,” according to the letter, released May 29 under the Freedom of Information Act.
Sterk’s letter “makes an excellent point,” said Robert A. Wexler, a principal at Adler & Colvin in San Francisco and former chair of the American Bar Association Section of Taxation’s Exempt Organizations Committee. He told Bloomberg Tax May 30 that the Internal Revenue Service and Treasury have been left in the “very difficult position” of having either to rush to create regulations that aren’t consistent with legislative intent or to delay implementation.
“Without a delay in implementation, and without giving Treasury and IRS time to try to bring meaning to some of these undefined terms, exempt organizations and their return preparers will be left guessing at what these provisions mean and hoping the IRS does not disagree if there is an audit,” Wexler said in an email. “This is just not the right way to make law.”
Sterk’s comments are just the latest feedback from colleges and universities on potential ramifications of the new tax law, particularly on the new endowment earnings excise tax.
A 1.4 percent excise tax was imposed by the tax law on the net investment income of endowments belonging to private colleges and universities with more than 500 students and net assets of at least $500,000 per student.
Sterk was one of nearly 50 presidents and chancellors of American colleges and universities—including Harvard University, Yale University, and Stanford University—who signed a March 7 letter urging Congress to repeal or modify the endowment excise tax.
Reps. Bradley Byrne (R-Ala.) and John Delaney (D-Md.) introduced a bill March 8 (H.R. 5220) proposing a simple repeal of the endowment excise tax. Rep. Tom Reed (R-N.Y.) announced plans May 22 to introduce his own legislative package that would waive the new tax on about 30 wealthy college endowments if they spend 25 percent of their annual investment earnings on reducing the cost for middle-income students.
Liz Clark, senior director of federal affairs for the National Association of College and University Business Officers, and Karin Johns, director of tax policy at the National Association of Independent Colleges and Universities, told Bloomberg Tax May 30 in separate emails that while a complete repeal of the endowment tax remains their main priority, a delay in its implementation would be welcome and helpful to affected institutions.
Brian Flahaven, senior director for advocacy at the Council for Advancement and Support of Education, said there seems to be no legislative vehicle for Congress to use to pass endowment tax repeal in the near term. In the absence of a full repeal, delaying implementation of the tax makes sense, “especially with the number of definitional issues in the law that the letter also points out,” Flahaven told Bloomberg Tax May 30.
Lloyd Hitoshi Mayer, a professor at the University of Notre Dame School of Law, told Bloomberg Tax that delaying the implementation of the new tax code provisions relating to tax-exempt organizations would be “desirable because of the many interpretation issues they raise.” However, “it is highly unlikely that Treasury and the IRS will conclude they have the authority to do so,” he said in an email May 30.
Mayer said Sterk was correct that tax-exempt organizations will find compliance difficult without clear guidance from Treasury and the IRS. This is “particularly true for section 512(a)(7), which exposes common fringe benefits such as employee parking to unrelated business income tax for the first time and so could catch many smaller organizations by surprise,” Mayer said.
It is “far less clear,” however, that Treasury and the IRS will feel they have authority to delay the application of these new provisions as Sterk has requested, Mayer said.
He said Treasury and the IRS have concluded in some instances they have the authority to delay new statutory provisions, as detailed in the recent AICPA letter asking for delay of new tax code Section 512(a)(6), which requires exempt organizations to report unrelated business income separately for each trade or business.
However, “none of those situations involved statutes similar to the provisions here, in that they either involved statutes that at least implied they required regulatory guidance to be effective or involved politically charged Obamacare provisions,” Mayer said.
An option for Treasury and the IRS could be issuing interim guidance that “effectively delays implementation of some of these provisions for most tax-exempt organizations,” Mayer said.
He said, for example, that Treasury could address Section 512(a)(6) by broadly defining what constitutes a single unrelated trade or business on a temporary basis so “that most tax-exempt organizations would only have one such trade or business, at least until they issued more detailed guidance.”
Similarly, Treasury could define “student” broadly for the purposes of the new endowment excise tax “such that very few colleges and universities would cross the $500,000/student assets threshold,” Mayer said.
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