§4968 Excise Tax Based on Investment Income of Private Colleges and Universities

Summary

A tax applies to an eligible college or university that meets certain size and funding tests. Each year, the school must pay a tax equal to a percentage of its net investment income. The percentage is 1.4% if the school’s student adjusted endowment is at least $500,000 but not more than $750,000; 4% if it is more than $750,000 but not more than $2,000,000; and 8% if it is over $2,000,000. To be covered, the school must have had at least 3,000 tuition-paying students in the prior year, more than half of those students must be in the United States, its student adjusted endowment must be at least $500,000, and it must not be a state college or university. “Student adjusted endowment” is the fair market value of assets not used directly for the school’s exempt purpose divided by the number of students. The student count is the daily average of full-time students, with part-time students converted to full-time equivalents. Net investment income is figured using rules like those for private foundations, but it must include interest from student loans made by the school and any royalties tied to intellectual property developed with Federal funds. Assets and investment income of related organizations are also counted, with limits to avoid double-counting. The Treasury Secretary must issue rules to stop attempts to avoid this tax.