IRS, Treasury Soften Blow of Endowment Tax

The IRS and the Department of the Treasury have released final rules for the so-called endowment tax, an excise tax created under the Tax Cuts and Jobs Act of 2017 levied against private higher education endowments that enroll at least 500 students and have a market value of at least $500,000 per student.

The final regulations recognize that colleges and universities are not strictly comparable to private foundations and make adjustments to the proposed rules that reflect that difference.

“Instead of providing a special rule for a non-financial asset of an activity of an educational institution,” the IRS and Treasury said in the 156-page guidelines, “the general rule is that an educational institution evaluates each asset based on all the facts and circumstances to determine whether the asset is used directly in furthering the institution’s exempt purpose.”

The rule changes also provide a safe harbor for calculating cash needs, rather than the proposed 1.5% of the fair market value of the institution’s non-charitable use assets. And regarding the calculation of net investment income, the changes exclude income that is derived from institutional student loans; income from housing for student, faculty, and staff; royalty income derived from patents and copyrights resulting from the work of students or faculty members; and appreciation income from a gift of donated property that occurred prior to the donation.

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Additionally, the final rules allow institutions to carry over capital losses against capital gains in future years; excludes charitable lead trusts and charitable remainder trusts from the definition of related organizations, as well as 403(b) retirement savings plans and custodial accounts. The rules also streamline the requirements to gather basis information from donors of gifts of appreciated property and tailor the rules related to controlled organizations to better reflect campus scenarios.

The National Association of College and University Business Officers (NACUBO) welcomed the changes and said the IRS and Treasury responded to a lot of its concerns and adopted many of its recommendations. However, the organization still strongly objects to the existence of the tax.

“NACUBO is pleased to see that the IRS and Treasury recognized some of the unique operating challenges colleges and universities contend with,” Liz Clark, NACUBO’s vice president for policy and research, said in a statement. “While we applaud this approach, NACUBO remains staunchly opposed to the legislative policy driving the creation of the tax, which diminishes the charitable resources the affected colleges have for students.”

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Tags: Endowment Tax, excise tax, IRS, NACUBO, National Association of College and University Business Officers, Tax Cuts and Jobs Act of 2017, Treasury Department

Nice quarter for the stock market, disagreeable last month. That was the pattern for the just-completed third quarter, which saw the S&P 500 rise 8.5%, despite a punk September (down 3.9%). Well, guess what? A good third period portends a continued rally in the fourth quarter—although in an election year, those gains are muted.

So says Ryan Detrick, chief market strategist for LPL Financial. “The third quarter is usually weak, but when it is really strong, like it was in 2020, this says the rally isn’t over yet,” he explained in a research note.

For every third quarter that exceeded 7.5% from 1950 through 2010 (there have been 11 of them), he went on, the following “fourth quarter gained.” Since 1950, by Detrick’s figuring, the fourth quarter is usually the champ: It has been higher than the others nearly 79% of the time and up an average 3.9%.

Over that same 70-year span, election years have logged a so-so 2% increase on average in the fourth quarter. The run-up to the election, namely October, is the weakest time of a presidential year, Detrick stated. That month is down roughly 1% on average. But then November and December usually are gainers.

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Detrick wrote that “stock prices tend to be weak from now until late October.” In 2016, the market dipped after the election of President Donald Trump, but then shot upward.

Of course, the pandemic has made this year a chaotic one, and customary norms aren’t always kicking in. Aside from the harsh downswing in February and March, the market since has been on fire, with some interruptions.

And that’s despite large unemployment, other troubling economic signs lately, and negative earnings. Corporate profits customarily drive the market. Not this time. According to FactSet research, the second quarter’s S&P 500 earnings shriveled 26.9%, and analysts’ outlook for the third is for another painful shrinkage, of 25.4%. The fourth quarter? Slightly less lousy, yet still lousy: profits down 12.8%.

This market, however, is driven by expectations of a COVID-19 vaccine and an economic rebound net year. The earnings estimate for 2021’s first period is a 13.3% increase.

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Tags: Donald Trump, Earnings, election year, Fourth Quarter, October, Pandemic, S&P 500, Stock Market