n-18-55.pdf

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Guidance on the Calculation of Net Investment Income for Purposes of the Section 4968 Excise
Tax Applicable to Certain Private Colleges and Universities

Notice 2018-55
SECTION 1. PURPOSE
This notice announces that the Department of the Treasury (the Treasury Department)
and the Internal Revenue Service (the IRS) intend to issue proposed regulations providing
clarification regarding the calculation of net investment income for purposes of section 4968(c)
of the Internal Revenue Code (Code). Taxpayers may rely on section 3 of this notice until
further guidance is issued.
SECTION 2. BACKGROUND
Section 13701 of Pub. L. No. 115-97, an Act to Provide for Reconciliation Pursuant to
Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, imposes on
each applicable educational institution, as defined in section 4968(b)(1), an excise tax equal to
1.4% of the institution’s net investment income for the taxable year. Section 4968(c) provides
that net investment income is to be determined under rules similar to the rules of section
4940(c). Section 4968(d)(1) provides that certain assets and net investment income of related
organizations described in section 4968(d)(2) are treated as assets and net investment income
of the educational institution. Section 4968 applies to taxable years beginning after December
31, 2017.
Section 4940(c)(1) provides that net investment income is the amount by which the sum
of the gross investment income and the capital gain net income exceeds allowable deductions.
Except to the extent inconsistent with the provisions of section 4940, net investment income is
determined under the principles of subtitle A of the Code.

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Section 4940(c)(2) provides that, for purposes of section 4940(c)(1), gross investment
income means the gross amount of income from interest, dividends, rents, payments with
respect to securities loans (as defined in section 512(a)(5)), and royalties, but not including any
such income to the extent included in computing the tax imposed by section 511. Investment
income also includes income from sources similar to those specifically listed in the preceding
sentence.
Section 4940(c)(3) provides that, for purposes of section 4940(c)(1), there is allowed as
a deduction all the ordinary and necessary expenses paid or incurred for the production or
collection of gross investment income or for the management, conservation, or maintenance of
property held for the production of such income, determined with the following modifications:
(i) the deduction provided by section 167 is allowed, but only on the basis of the straight line
method of depreciation; and (ii) the deduction for depletion provided by section 611 is allowed,
but such deduction shall be determined without regard to section 613 (relating to percentage
depletion).
Section 4940(c)(4) provides that, for purposes of section 4940(c)(1): (A) no gain or loss
from the sale or other disposition of property is taken into account to the extent that any such
gain or loss is taken into account for purposes of computing the tax imposed by section 511;
(B) in the case of property held by a private foundation on December 31, 1969, and
continuously thereafter to the date of its disposition, the basis for determining gain shall be
deemed to be not less than the fair market value of such property on December 31, 1969;
(C) losses from sales or other dispositions of property are allowed only to the extent of gains
from such sales or other dispositions, and there shall be no capital loss carryovers or
carrybacks; and (D) except to the extent provided by regulation, under rules similar to the rules
of section 1031 (including the exception under subsection (a)(2) thereof), no gain or loss is
taken into account with respect to any portion of property used for a period of not less than 1

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year for a purpose or function constituting the basis of the private foundation's exemption if the
entire property is exchanged immediately following such period solely for property of like kind
which is to be used primarily for a purpose or function constituting the basis for such
foundation's exemption.
Treasury Regulations § 53.4940-1(f)(2)(i) provides that basis for purposes of determining
gain from the sale or other disposition of property shall be the greater of: (A) fair market value
on December 31, 1969, plus or minus all adjustments after December 31, 1969, and before the
date of disposition under the rules of Part II of Subchapter O of Chapter 1, provided that the
property was held by the private foundation on December 31, 1969, and continuously thereafter
to the date of disposition, or (B) basis as determined under the rules of Part II of Subchapter O
of Chapter 1, subject to the provisions of section 4940(c)(3)(B) (and without regard to section
362(c)). Treas. Reg. § 53.4940-1(f)(2)(ii) provides that for purposes of determining loss from
the sale or other disposition of property, basis shall be determined under the rules of Part II of
Subchapter O of Chapter 1, subject to the provisions of section 4940(c)(3)(B) (and without
regard to section 362(c)).
Section 4940(c)(5) provides that, for purposes of section 4940, net investment income is
determined by applying section 103 (relating to State and local bonds) and section 265 (relating
to expenses and interest relating to tax-exempt income).
SECTION 3. BASIS FOR DETERMINING GAIN OR LOSS ON DISPOSITION OF PROPERTY
Similar to the rules found in section 4940(c), the Treasury Department and the IRS
intend to propose regulations stating that, in the case of property held by an applicable
educational institution on December 31, 2017, and continuously thereafter to the date of its
disposition, basis of such property for determining gain shall be deemed to be not less than the
fair market value of such property on December 31, 2017, plus or minus all adjustments after
December 31, 2017, and before the date of disposition consistent with the regulations under

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section 4940(c). In addition, for purposes of determining loss, basis rules that are consistent
with the regulations under section 4940(c) will apply.
SECTION 4. NETTING CAPITAL GAINS AND LOSSES
Similar to the rules found in section 4940(c)(4)(C), the Treasury Department and the IRS
intend to propose regulations stating that losses from sales or other dispositions of property
generally shall be allowed only to the extent of gains from such sales or other dispositions, and
there shall be no capital loss carryovers or carrybacks. The Treasury Department and the IRS
also expect that with respect to related organizations described in section 4968(d)(2), overall net
losses from sales or other dispositions of property in one related organization (or from the
applicable educational institution) will be allowed to offset overall net gains from such sales or
other dispositions from other related organizations (or from the applicable educational
institution), but request comments on this issue.
SECTION 5. RELIANCE
Before the issuance of the proposed regulations described in this notice, applicable
educational institutions described in section 4968(b)(1) may rely on the rules described in
section 3 of this notice.
SECTION 6. REQUEST FOR PUBLIC COMMENTS
The Treasury Department and the IRS request comments on the issues addressed in
this notice, including comments on what other guidance under section 4968(c) is needed and
whether, and what type of, transitional relief may be necessary.
Written comments may be submitted by September 6, 2018, to Internal Revenue
Service, CC:PA:LPD:PR (Notice 2018-55), Room 5203, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044, or electronically to Notice.Comments@irscounsel.treas.gov (please
include “Notice 2018-55” in the subject line). Alternatively, comments may be hand delivered
between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to CC:PA:LPD:PR (Notice

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2018-55), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW,
Washington, D.C. Comments will be available for public inspection and copying.
SECTION 7. DRAFTING INFORMATION
The principal author of this notice is Amber Mackenzie of the Office of Associate Chief
Counsel (Tax Exempt and Government Entities). For further information regarding this notice,
contact Amber Mackenzie or Melinda Williams at (202) 317-5800 (not a toll-free number).