September 30, 2019
Ms. Janine Cook
Deputy Associate Chief Counsel, Tax Exempt & Government Entities
Internal Revenue Service
Ms. Elinor Ramey
Attorney-Advisor, Office of Tax Policy
U.S. Department of Treasury
Mr. Jeff Van Hove
Senior Advisor, Office of Tax Policy
U. S. Department of Treasury
Re: IRS REG-106877-18
Dear Ms. Cook, Ms. Ramey, and Mr. Van Hove:
On behalf of the National Association of College and University Business Officers (NACUBO) and the
undersigned higher education associations, I am writing to offer comments on the Notice of Proposed
Rulemaking (NPRM) regarding implementation of the excise tax on certain private colleges and
universities imposed by section 4968 (84 FR 31795).
Enacted as part of H.R. 1 (commonly known as the Tax Cuts and Jobs Act of 2017, or TCJA), section
4968 of the Internal Revenue Code imposes a 1.4 percent excise tax on the net investment income (NII)
of private educational institutions with at least 500 tuition-paying students, of which more than 50 percent
of the tuition-paying students are located in the United States, and which have assets (other than those
used directly in carrying out the institution’s exempt purpose) of at least $500,000 per student.
We remain strongly opposed to this tax. It is an unprecedented and damaging attack on the tax-exempt
status of higher education institutions and their students. It will diminish charitable resources available for
financial aid, research, academic support, public service, and innovation. As public charities and
educational entities, colleges and universities dedicate their efforts and resources to the public good
through education and scholarship. The NII creates a new tax liability for private institutions that, by
definition, will reduce resources available to improve access and invest in scholarship.
As you develop final regulations, we urge you to please consider the following issues addressed in the
NPRM and our recommendations.
NACUBO, founded in 1962, is a nonprofit professional organization representing chief administrative
and financial officers at more than 1,900 colleges and universities across the country. NACUBO’s
mission is to advance the economic vitality, business practices, and support of higher education
institutions in pursuit of their missions.
Today, we are writing to specifically draw your attention to our recommendations in the following areas:
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Considerations for attempting to treat institutions of higher education identically, rather than
similarly, to private foundations for purposes of implementing section 4968;

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The exclusion of income derived from institutional student loans in the calculation of NII;
The exclusion of housing payments from “rents” treated as NII;
Removal of the proposed 1.5 percent safe harbor as a benchmark for cash that an institution may
exclude from its non-charitable use assets in determining whether it is subject to tax; and
Removal of the proposals requiring colleges to gather property basis information from donors of
gifts of appreciated property as well as from partnerships.

COLLEGES AND UNIVERSITIES ARE NOT STRICTLY COMPARABLE TO PRIVATE FOUNDATIONS
Law- and policy-makers have long sought to draw comparisons between private foundations and the
endowments of higher education institutions. The NPRM takes this approach to an extreme, proposing to
apply the rules for private foundations to colleges and university endowments, rather than proposing
implementation requirements that reflect the structure, nature, and practical operation of college
endowments. In the broadest sense, private foundations and college and university endowments both exist
for the financial support of charitable missions. However, as regulators examine ways to implement the
new excise tax, it is important to recognize that existing rules that work well for private foundations are
not inherently suitable for colleges and universities.
Private foundations are typically funded and controlled by a small group of individuals or a single family
and receive support from a limited number of sources. Many private foundations do not accept outside
donations and instead choose to rely on investment income earned from the principal funding. Because
private foundations are less open to public scrutiny than public charities, they are subject to a variety of
restrictions and excise taxes to ensure that assets devoted to a charitable mission are used appropriately.
Further, non-operating private foundations do not directly perform charitable programs or services; rather,
they grant funds to outside organizations that advance causes the private foundation supports. The exempt
status of private foundations flows from their financial support of charitable goals.
In contrast to private non-operating foundations, colleges and universities are tax-exempt entities because
of the direct educational, scientific, and charitable activities they engage in – teaching students,
performing research, and addressing problems affecting communities, states, and the nation. Like the
activities of other public charities (and unlike those of private foundations), these activities are funded
through various sources, including endowment payout, charitable gifts, tuition, sponsored research grants,
and other sources.
Further, unlike private foundations that are required to disclose limited information on the Form 990-PF,
private colleges and universities — through comprehensive reporting on the Form 990 — annually share
detailed information about the institution, its governance, financial status, compensation structure,
programs, and how donated funds are used. The volume of information reported on the annual return
provides the general public a wealth of information about a higher education institution’s funding and
operations.
There are profound structural differences between most private foundations and colleges and universities.
A private foundation typically exists primarily to make grants to meet the founder’s charitable goals and a
foundation’s funds generally remain under the control of the donor or donor’s family. In contrast, a
university’s endowment is built through gifts from potentially tens of thousands of donors to form an
array of investments pooled and managed to fund an institution’s financial aid, academic programs
(instruction and research), community service, the campus physical plant, and other programs in
perpetuity.
In terms of oversight, special rules in the Code were implemented governing private foundations and
distinguishing them from public charities intentionally to impose oversight and accountability into a
potentially insular, family-controlled environment. In contrast, college and university endowments are

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 typically overseen by a finance committee of the institution’s governing board. Trustees, students, faculty,
alumni, residents, and other institutional stakeholders are closely tied to an institution’s actions and act to
ensure that it manages its finances and activities appropriately. Trustees’ decisions about prudent
investing and endowment expenditures are also governed by their state’s version of the Uniform Prudent
Management of Institutional Funds Act.
For purposes of the new excise tax, the TCJA suggests that an applicable educational institution’s NII
shall be determined under rules similar, rather than identical, to the private foundation rules of section
4940(c). As final rules implementing section 4968 are developed, we respectfully ask you to consider
the inherent differences between foundations and institutions of higher education and promulgate
guidance that reflects an understanding of how colleges and universities are structured, operate, and
are governed.
INTEREST ON STUDENT LOANS
The rules of section 4940(c) specifically include student loan interest as NII of a private foundation.
However, in the case of a college or university, the loans that the institution makes to its own students are
in no way offered in the interest of making an investment in anything other than the student borrower who
may need additional support to access and complete his or her studies. Making such a loan is in keeping
with the college’s primary exempt purpose of educating students. As the NPRM states, “student loans
provided directly by an applicable educational institution to its students arguably can be viewed as a form
of deferred tuition which will be paid when the student enters the workforce” and can therefore be
distinguished from investment income.
Most, if not all, colleges and universities that provide institutional loans to students, do so at below the
market rate of private loans. In addition, some institutional student loans are offered as a “loan of last
resort” for students that aren’t eligible for private loan programs and will typically feature relaxed
eligibility requirements, as well as more flexible repayment options for borrowers than are available from
private lenders.
The provision of loans by colleges and universities is a mechanism to help students fill gaps in their
college funding, not to create investment returns. We strongly urge you to exclude institutional student
loan income from the calculation of the institution’s net investment income.
TREATMENT OF HOUSING FEES AS INVESTMENT INCOME
While NACUBO recognizes the interest in keeping the rules associated with the NII excise tax of private
colleges and universities similar to existing rules governing private foundations, fees for housing or
dormitory for students should be excluded from the calculation of NII under IRC section 4968(c). Student
fees for housing or dormitories differ significantly from traditional rents.
Rental income from investment property entails a landlord/tenant arrangement where the investor in the
property is counting on a regular stream of income with an anticipated gain on the disposal of the
investment property. There is a lease governing the arrangement, and tenants have certain rights under its
terms.
Higher education institutions acquire or build student housing with an intent to house future generations
of students rather than generate gain or income upon disposal. The sole purpose of dormitories is to
further a student’s education by immersing them into their academic life and facilitating the transition to
independent adulthood. Many higher education institutions require (or at least strongly encourage) their
freshmen and, sometimes, upper class students to live on campus. Residential life on campus in most

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 cases is designed to support students’ success — academic, social, and sometimes spiritual — as well as
their overall health and wellbeing. Student housing creates non-classroom opportunities for students to
engage with individuals with a similar academic focus as well as those with diverse perspectives and
backgrounds, which promotes development of social skills. This direct interaction facilitates learning,
collaboration, community, and strong relationships.
Fees associated with dorms typically offset some expenses associated with the current dorm operations,
such as maintenance, personnel, repairs, utilities, common facilities, technology, and security. Many
institutions provide scholarships toward room and board or waive dorm fees for some students. Most
institutions provide resident advisors on site available at all hours for students.
Typical residential rental agreements provide secure access to a specific location for the tenant’s use
provided by the landlord. The tenant has the right to continuous occupancy and use of the specified space
over the term of the lease. In contrast, students sign up for housing but typically do not sign leases. They
are assigned a space, within a room usually shared by at least one other individual, frequently a stranger.
Residence halls and student apartments or houses are typically not available year-round, but only during
academic terms. Housing space is contingent on enrollment at the educational institution, and students
that withdraw from the institution must vacate their room. Guest access to student residences is often
monitored or restricted. Finally, housing costs are generally not set based on market rates but on actual
cost. Student housing is a critical component of most higher education institutions’ educational mission
and exempt purpose.
Accordingly, we urge the exclusion of income from student housing fees from NII under IRC section
4968(c) and the corresponding assets (such as dorms, houses, etc.) should likewise be treated as assets
used directly in carrying out the institution’s exempt purpose for purposes of determining the
institution’s ratio of assets per student.
THE 1.5% OF NON-CHARITABLE USE ASSETS TO BE EXCLUDABLE FROM TAX
The NPRM proposes a safe harbor providing that an amount equal to 1.5 percent of the fair market value
(FMV) of the institution’s non-charitable use assets will be deemed a reasonable cash balance treated as
used directly in carrying out the institution’s exempt purpose and therefore excluded in determining
whether the institution’s non-charitable use assets are equal to at least $500,000 per student. We
recommend that the safe harbor be removed. The safe harbor appears to be based on the private
foundation rules for the calculation of the minimum investment return as described in Treasury
Regulation section 53.4942(a)-2(c)(3)(ii)(e), which provides an exclusion for assets used (or held for use)
directly in carrying out the foundation's exempt purpose, including the reasonable cash balances
necessary to cover current administrative expenses and other normal and current disbursements directly
connected with the foundation's charitable, educational, or other similar exempt activities.
Treasury Regulation section 53.4942(a)-2(c)(3)(iv) elaborates on cash held for charitable activities. The
reasonable cash balances that a private foundation needs to have on hand to cover expenses and
disbursements described in such subdivision will generally be deemed to be an amount, computed on an
annual basis, equal to one and one-half percent (1.5%) of the FMV of all assets in a manner that appears
similar to the proposed regulation’s definition of an educational institution’s non-charitable use assets.
Treasury Regulation section 53.4942(a)-2(c)(3)(iv) goes on to provide a private foundation with the
option to show that, based on all facts and circumstances, an amount in addition to 1.5 percent is
necessary for payment of such expenses and disbursements, in which case such additional amount may
also be treated as assets used (or held for use) directly in carrying out the foundation's exempt purpose.

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 The Treasury Department’s preamble to the proposed regulations recognizes that differences exist in the
section 4968 and 4942 rules and requests comments on whether a different percentage for determining a
reasonable cash balance under section 4968 may be more appropriate.
Colleges and universities affected by the excise tax vary widely in size and focus. Some are expansive
research institutions; some are small colleges; some have medical schools and teaching hospitals.
Education delivery methods — drivers of operating expenses and corresponding cash outflow and timing
— similarly vary. Some institutions, for example, may have a summer session with a lower attendance
(therefore requiring less resources) as compared to their traditional fall or spring sessions. Accordingly,
those institutions may have a lower cash balance at their fiscal year end which may fall in the middle of
summer or as activities are winding down for the year.
While the 1.5 percent of non-charitable use assets limitation of cash treated as exempt use assets may be
appropriate for a private foundation — essentially a grantmaking entity — this percentage would be
unreasonably low for most educational institutions. Some institutions subject to the tax have noted that
ratings agencies would downgrade their credit rating based on such a minimal amount of cash on hand.
Salary expense is typically one of the largest, if not the largest, operating expenses for most educational
institutions, which would represent one category of operating cash outflows that are directly related to
exempt purposes. Educational institutions must have faculties comprised of highly educated employees in
order to fulfill their teaching and research missions. By comparison, private foundations rarely, if ever,
require the volume of employees that colleges do to support their exempt purposes.
Not far behind the expense for an institution’s human resources is the cost of operating an expansive
physical plant. Unlike foundations, university facilities are comprised of multiple buildings and grounds,
sometimes covering several square miles. In addition to classrooms, providing postsecondary education to
students entails operating libraries, laboratories, dining halls, medical treatment centers, meeting spaces,
art studios, theatres, gymnasiums and playing fields. Facilities planning, operations, and energy
management is mission-critical at a college or university and on a scale that is simply not comparable to
the physical operation of a private foundation.
Some higher education institutions have issued bonds for large, exempt purpose-driven projects.
Proceeds from the issuance of bonds must be held in liquid assets until used for their intended purpose. In
many instances, bond-financed projects are long term in nature, such as construction or renovation of
exempt purpose use buildings. Therefore, this cash (including permitted liquid investment, such as
Treasury bonds) should not be subject to the 1.5 percent limitation and should be considered related use
assets regardless of their amount.
Following bond issuance, the institution must also make periodic payments to bond holders. Depending
on the size of the bond issue, the bond holder payment can be sizable. Cash on hand for such payments
should also be considered an exempt purpose asset.
We recommend removal of the safe harbor and a regulatory approach that allows an institution’s
reasonable cash balance to be determined on a facts and circumstances basis, as permitted by the
private foundation rules. This results in similar rules between private foundations and colleges and
universities, and recognition of the structural, financial, and operational differences between the two types
of entities, as well as the breadth of diversity amongst education institutions.

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 REQUIREMENT TO ACQUIRE BASIS INFORMATION FROM DONORS OF GIFTS OF APPRECIATED
PROPERTY

The preamble to the NPRM requests comments on whether a special rule excluding any appreciation in a
gift of donated property that occurred before the date of receipt by the applicable educational institution
should be included in the final regulations and how such a rule would be consistent with section 4968. We
are generally concerned that a requirement to obtain basis information would have a chilling effect on
gifts of appreciated property. In addition, for the following reasons explained below, a special rule should
be included in the final regulations.
1) It is impractical, if not impossible, for colleges and universities to obtain the donor’s basis in all
donated property.
2) Institutions have no means to collect this information reliably, creating inconsistencies among
educational institutions and uncertainty as to what type of documentation would be acceptable to
support a basis determination.
3) Even without those hurdles, the administrative burden of obtaining donor basis is wholly
disproportionate to the additional tax to be collected.
4) Tax on donated appreciated property erodes the value of the donation despite lack of investment
intent on the part of the educational institution.
5) Finally, a special rule would not be inconsistent with section 4968’s requirement that guidance be
similar to section 4940(c) since an exception in section 4940(c) would not be necessary for
private foundations.
Given the volume and types of donated property received by colleges and universities, it is impractical for
an educational institution to obtain the donor’s basis in all donated property. Most gifts of appreciated
property are in the form of securities. There is no standard process in place for transferring ownership of
securities. For instance, paper stock certificates can be transferred by simply delivering the certificate,
whereas the process for transferring electronic stock shares varies depending on the brokerage company.
Beyond the volume of gifts and this lack of a standard process, colleges and universities will be forced to
rely on donors to be provide information on their basis which will stress donor relationships and create
substantial confusion around what is necessary and what is reliable. If solicitation of donor basis
information is unsuccessful, the only options for the institution would be to reject and return the gift or to
accept it and pay the excise tax on the full gain from the sale assuming a zero basis.
Since the tax under section 4968 has been imposed, donors have begun asking colleges about the impact
of the tax on their donations. Institutions typically sell donated appreciated property upon receipt and use
the cash received to fund operations. Typically, there is no intent for the institution to invest these funds
further. Therefore, it generally makes little difference to the institution whether the donor provides cash or
appreciated property.
Without a special rule for donated appreciated property, there will be reduced amounts available for the
educational institution to spend on operations. A donation of appreciated property would be diminished
by the amount of excise tax on the gain upon sale. Donors are keenly interested in how much of their
donation supports the exempt activities of the organization. This tax cuts into the amount of the donation
and reduces the value of that donation’s ability to fund exempt activities, which is principally at odd with
donors’ intent when making gifts to exempt organizations.

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 A special rule would not be inconsistent with the statutory language of section 4968 requiring that the
calculation of net investment income be similar to the rules under section 4940(c). Section 4940(c)
provides that net investment income is determined under the principles of subtitle A except to the extent it
is inconsistent with the provisions of section 4940. Section 4940(c) provides one exception to subtitle A
in calculating the gain on property held by a private foundation before a specific date. This exception
applies to a foreseeable scenario in which a private foundation would be subject to net investment income
excise tax on the gain from the sale of a piece of property that it held prior to the enactment of section
4940. However, the scenario in which a private foundation would be subject to net investment income
excise tax on the income from the sale of a piece of donated property could be avoided by the private
foundation granting the property to a charity. Therefore, an exception to this rule under subtitle A
(specifically section 1015) would not be necessary within 4940 since other means are available to the
private foundation to reduce the tax. Additionally, the fact that an exception was provided in section
4940(c) for the calculation of gains on the sale of property owned by the private foundation lends support
to the argument that, were there no other means to reduce the impact of the tax on the sale of property
(donated appreciated property, in this case), an exception may have been included. Since there is no
method for educational institutions to reduce the impact of the tax on donated appreciated property, a
special rule would be warranted and not inconsistent with section 4968’s mandate that NII is to be
determined under rules similar to those under section 4940(c).
We recommend that final regulations include a special rule excluding the gain on the sale of donated
appreciated property from tax under section 4968.
REQUIREMENT TO GARNER BASIS INFORMATION FROM INSIDE PARTNERSHIPS
The NPRM states that, for purposes of determining NII, the basis of an asset in a partnership (including
through one or more tiers of partnerships) held continuously since at least December 31, 2017, will be not
less than the FMV of such asset on December 31, 2017 (as subsequently adjusted under the general basis
rules). The FMV of the institution’s interest in the partnership itself is typically called the “outside basis”
and the basis of the assets held by the partnership is typically referred to as the “inside basis.” The outside
basis and the FMV of an educational institution’s interest in the partnership as of December 31, 2017, is
obtainable. The inside basis of the partnership assets, on the other hand, is not readily accessible to the
institution. The NPRM proposes to require institutions to obtain inside basis information from
partnerships in order to substantiate the claim for a step-up in basis for assets held by partnerships. For
many reasons, this requirement is not administrable in any meaningful manner and it may ultimately be
impossible to obtain documentation with respect to such basis that has any degree of accuracy.
Colleges and universities invest in a wide variety of partnerships. Many of these partnerships have
multiple tiers of partnerships and other vehicles through which they operate and invest on behalf of their
partners. For discussion purposes, consider the following example.
Example: Educational institution invests in Partnership A. Partnership A has the following assets and
investments:
1. Asset 1
2. Asset 2
3. Asset 3
4. Partnership B, which has the following:
a. Asset 4
b. Partnership C, which has the following:
i. Asset 5
ii. Partnership D, which has the following:

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 1. Asset 6
2. Partnership E, which has the following:
a. Asset 7
b. Partnership F, which has the following:
i. Asset 8
Each partnership must report its income and assets up to its partners. Thus, in the above example
Partnership E reports information on its assets to Partnership D, which reports information received from
Partnership E plus information on its assets up to Partnership C, and so on up to Partnership A.
Partnership A then reports the consolidated underlying information received from Partnership B plus
information regarding its own assets to the educational institution partner. The accuracy and level of
detail in the information reported by each partnership can be expected to vary significantly based on the
knowledge, preferences, and interpretations of the partnership personnel reporting the information. This
structure creates impracticalities in requiring the educational institution to receive documentation from
Partnership A on all the assets of the underlying partnerships, particularly the further down the tier they
reside.
There is no specific method for supplying the basis information of underlying assets as of any specific
date to partners. The rules for reporting partnership income and assets only require that the partner supply
sufficient information for the partners to calculate income tax. This general rule creates a wide degree of
variation on the extent of information each partnership supplies to its partners. Further, the partnership
allocates the value of items among partners and there is a degree of flexibility in the allowable allocation
methods. Generally, there are already existing inconsistencies in reporting partnership income among
partnerships. A requirement to report inside basis would complicate things further and create even deeper
inconsistencies and inaccuracies in reporting.
For instance, in the example above, Partnership E might report the FMV of an asset to Partnership D
based on an estimate by the CEO and equally allocating the value to each partner, whereas Partnership C
might obtain an independent appraisal of its assets and allocate value based on profit ownership of the
partners. The ultimate information provided to Partnership A would be difficult to aggregate and by the
time it gets to Partnership A may have been allocated in five different ways. Thus, even if the information
could somehow be collected and reported, the clarity and value of the information would be diminished.
Further, a partnership would typically only supply information to a partner that is applicable to, or
requested to be supplied by, that partner. This means that, in the above example, Partnerships B through F
would not supply asset information to Partnership A as of December 31, 2017, because Partnership A is
not an applicable educational institution. However, Partnership A would need to supply this information
to its applicable educational institution partner. Therefore, Partnership A will need to request such
information on behalf of its applicable educational institution partner(s) down to Partnership B, which
would make another request down to Partnership C, and so on down through Partnership F. Most likely,
this would all occur after Partnership A delivers its K-1 to the educational institution and the institution
requests this information to complete its tax return. A partnership would not inherently be aware of the
existence of the excise tax, nor would it know whether an educational institution is subject to the tax.
Even if it knew about the tax, it would not be familiar with or necessarily prepared to adopt any unique
new reporting obligations.
Finally, partnerships are not required to value assets at different dates, so providing the asset FMV as of
December 31, 2017 for all assets may not be information that is readily available to the partnerships.

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 We strongly recommend that the requirement that an applicable educational institution obtain
documentation from a partnership in order to support a basis step-up for assets held by such
partnership as of December 31, 2017, be removed in the final regulations.
We are grateful for the opportunity to share our recommendations with you as you continue to develop
guidance implementing the TCJA and welcome communication between our organizations as you
continue to work on provisions affecting colleges and universities. Please contact Mary Bachinger,
director of tax policy, at 202-861-2581, mary.bachinger@nacubo.org or Liz Clark, vice president, policy
and research, at 202-861-2553, liz.clark@nacubo.org.
Sincerely,

Susan Whealler Johnston
President and Chief Executive Officer
On behalf of the following associations:
American Association of Medical Colleges
American Council on Education
Association of American Universities
Association of Governing Boards of Universities and Colleges
Association of Jesuit Colleges and Universities
Council for Advancement and Support of Education
Council for Christian Colleges and Universities
Council of Graduate Schools
National Association of Independent Colleges and Universities
United Negro College Fund
cc:

Hannah Hawkins, Deputy Tax Legislative Counsel, U.S. Department of the Treasury
Victoria Judson, Associate Chief Counsel (EEE), Internal Revenue Service
David Kautter, Assistant Secretary for Tax Policy, U. S. Department of the Treasury
Amber MacKenzie, Office of Associate Chief Counsel (TE/GE), Internal Revenue Service
Melinda Williams, Office of Associate Chief Counsel (TE/GE), Internal Revenue Service

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