Tuesday, July 3, 2018

Treasury Protects Pre-2018 Appreciation from Endowment Excise Tax

TreasuryIn their first piece of official guidance for tax-exempt organizations in the wake of the 2017 tax legislation, the Treasury and IRS in Notice 2018-55 granted a favorable (and, in my view, correct) interpretation of new Internal Revenue Code section 4968 that imposes a 1.4 percent excise tax on private college and university investment income. Following Congress' direction in the new statute to apply rules "similar to the rules of section 4940(c)" when determining the amount of investment income subject to tax, the Treasury and the IRS followed section 4940(c)(4) and the regulations implementing that provision by effectively excluding pre-2018 appreciation from the new tax. They did this by stating they will issue proposed regulations that attribute to property held as of December 31, 2017 a basis of no less than the fair market value of such property on that date (subject to later required adjustments) for purposes of determining the gain on the disposition of such property. Normal basis rules would apply for purposes of determining loss from the disposition of such property. Interestingly, the Joint Committee on Taxation does not appear to have taken the possibility of such an interpretation into account in its estimated budget effects for this provision, in that it projected a flat $0.2 billion revenue increase from this tax for the ten years. (Unless JCT assumed that the tax revenues would be $0.2 billion in 2018 and all subsequent years even without any pre-2018 appreciation subject to tax, which seems unlikely.)

Lloyd Mayer

 

http://lawprofessors.typepad.com/nonprofit/2018/07/treasury-protects-pre-2018-appreciation-from-endowment-excise-tax.html

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