Yertle the Turtle and the Proposed 4968 Regulations

The Washington Post reported last week that the proposed 4968 regulations run counter to Senator Mitch McConnell's efforts to protect tiny, but well meaning, Berea College from the excise tax on endowments.  The article's headline is more ominous than the facts.  No love lost here for McConnell -- also known as "Yertle the Turtle" -- not since his shameless blocking the of the Merrick Garland nomination -- but he is probably right in this effort.  According to WAPO, proposed 4968 included an expanded "Yertle Exemption" which would have excluded Berea College from 4968's tax.  4968(b)(1) makes the tax applicable only to private institutions that have at least "500 tuition paying students."  McConnell apparently wanted to make absolutely sure Berea would not be taxed; schools like Berea that guarantee a college education to low income students should be exempt.  If the statute were based on reasoned policy, even arguable policy, that would be a a good distinction; tax colleges and universities who hoard mountains of resources while charging high tuition, and exempt those that charge no tuition at all (at least not for the majority of students).  But 4968 is not really based on tax policy, its just a revenue raiser designed to offset the corporate tax breaks  and so McConnell's proposed expansion failed, according to the article.  Anyway, not to be outdone, McConnell,  "slipped it into the 2018 Congressional Budget Deal,"  according to the Post.  The Post interprets the proposed regulations as  including in the definition of a "tuition paying student" those whose tuition is funded in whole or part by third parties, including state and federal grant makers.  Are the regulation drafters rewriting the law to exclude the exemption?  Probably so.  Thus, although Berea guarantees all of its students a tuition-free education, the College is subject to the tax nevertheless:  

The trouble is, Berea picks up the tab for tuition after all federal, state and private grants have been awarded. Because Berea students technically pay a portion of their tuition, they would be counted under Treasury’s guidelines.  Scholarships “provided by third parties, even if administered by the institution, are considered payments of tuition on behalf of the student,” Treasury wrote in the draft. “Accordingly, a student will be considered a tuition-paying student . . . if payment of any tuition or a fee is required for enrollment or attendance.”   

Here is the actual statement from the preamble (from page 11 of the proposed regulations):

For purposes of section 4968, the proposed regulations also provide that whether a student is “tuition-paying” is determined after taking into account any scholarships provided directly by the educational institution and any work study programs operated directly by the educational institution. However, scholarship payments provided by third parties, even if administered by the institution, are considered payments of tuition on behalf of the student. Accordingly, a student will be considered a tuition-paying student for purposes of section 4968 if payment of any tuition or a fee is required for the enrollment or attendance of the student for courses of instruction after the application of any scholarships offered directly by the institution or work study program operated directly by the institution. 

Proposed Regulation 53.4968-1(a)(3)(ii)(C) is essentially the same as the the preamble.  It appears to include as tuition paying students those whose tuition is paid by funds not directly granted by the school.  So it sure looks like Pell and state grant recipients will be counted as "tuition-paying" thus making colleges like Berea more likely to be hit by the tax.  An outcome that really makes no sense at all.  Certainly a student who pays no tuition out of pocket, even if as a result of receiving federal, state, or third party scholarships and grants, doesn't claim to be "tuition-paying."  Treasury should change that and I bet they will.  Doing so will at least give the tax some semblance of being moored by rational tax policy.  

In related news, the National Association of College and University Business Officers (NACUBO) have provided a first take look at the regulations.  

 

Darryll K. Jones