26 U.S.C. § 4968 — Excise tax based on investment income of private colleges and universities

(a) Each applicable educational institution must pay a tax for the taxable year^* equal to the applicable percentage of its net investment income for that year. (b) The applicable percentage is (1) 1.4 percent for an institution with a student adjusted endowment of at least $500,000 and no more than $750,000, (2) 4 percent for an institution with a student adjusted endowment greater than $750,000 and no more than $2,000,000, and (3) 8 percent for an institution with a student adjusted endowment greater than $2,000,000. (c) “Applicable educational institution” means an eligible educational institution, as defined in section 25A(f)(2), that (1) had at least 3,000 tuition-paying students during the preceding taxable year, (2) has more than 50 percent of its tuition-paying students located in the United States, (3) has a student adjusted endowment of at least $500,000, and (4) is not described in the first sentence of section 511(a)(2)(B), concerning State colleges and universities. (d) “Student adjusted endowment,” for an institution and taxable year, means the aggregate fair market value at the end of the preceding taxable year of the institution’s assets, other than assets used directly to carry out its exempt purpose, divided by the number of the institution’s students. (e) For subsections (c) and (d), the number of students, including students at a particular location, is based on the daily average number of full-time students attending the institution. Part-time students are counted on a full-time-student-equivalent basis. (f)(1) Net investment income is determined under rules similar to section 4940(c). (2)(A) It must include as gross investment income any interest income from a student loan made by the applicable educational institution or a related organization. (B)(i) It must include as gross investment income any federally subsidized royalty income. (ii)(I) “Federally subsidized royalty income” means otherwise-regulatory-exempt royalty income if any Federal funds were used in the research, development, or creation of the patent, copyright, or other intellectual or intangible property from which the royalty income comes. (II) “Otherwise-regulatory-exempt royalty income” means royalty income that, except for this subparagraph, would not be counted as gross investment income because it comes from a patent, copyright, or other intellectual or intangible property resulting from the work of students or faculty members in their capacities as students or faculty members at the applicable educational institution. (III) “Federal funds” includes any grant made by, and any payment under a contract with, a Federal agency to the applicable educational institution, a related organization, or a student or faculty member described in subclause (II). (g)(1) For subsections (d) and (f), a related organization’s assets and net investment income are treated as the educational institution’s assets and net investment income. However, (A) an amount may not be counted for more than one educational institution, and (B) unless the related organization is controlled by the institution or is described in section 509(a)(3) with respect to it for the taxable year, assets and net investment income not intended or available for the institution’s use or benefit are not counted. (2) “Related organization,” for an educational institution, means an organization that (A) controls, or is controlled by, the institution, (B) is controlled by one or more persons who also control the institution, or (C) is a supported organization, as defined in section 509(f)(3), or an organization described in section 509(a)(3), during the taxable year with respect to the institution. (h) The Secretary^* must issue regulations or other guidance needed to prevent avoidance of this tax, including avoidance through restructuring endowment funds or other arrangements designed to reduce or eliminate the value of net investment income or assets subject to the tax.