Protecting Endowments from Our Adversaries Act
This bill would add a new excise tax (Sec. 4969) to the Internal Revenue Code aimed at private colleges and universities with very large endowments. It targets certain investments by these institutions that involve listed entities, defined broadly to include companies or entities on several U.S. government restricted lists (Entity List, Military End User List, Unverified List) and a FCC “Covered List.” The tax structure has two main parts: (1) a 50% tax on the fair market value of listed investments acquired during a taxable year, and (2) a 100% tax on net income from “1-year listed investments” (income and gains minus related deductions and losses) for that year. The bill also sets rules for how to define and verify listed investments, how pooled investments can certify they do not hold such assets, and how assets of related organizations are treated. It applies only to specified educational institutions with aggregate assets above $1 billion (not counting assets used directly for exempt purposes) and only after a short effective date, with transitional relief for investments acquired or income earned before the new rules take effect. In short, the bill would impose steep taxes on acquisitions and short-term gains from investments tied to restricted or adversarial-listed entities, and it would require endowments to avoid or divest from such holdings to minimize tax liability.
Key Points
- 1New excise tax on acquisitions of listed investments: 50% of the fair market value of any listed investment acquired during the taxable year (based on the value at acquisition).
- 2New excise tax on net income from 1-year listed investments: 100% of the excess of (income plus gains from 1-year listed investments) over (allocable deductions plus losses) for the taxable year. A “1-year listed investment” is one that was a listed investment for the entire 1-year period.
- 3Definition and scope of listed investments: Includes specified interests (stock/equity, debt, or contracts/derivatives) in persons listed on what the bill designates as the Entity List, the Military End User List, the Unverified List, or the FCC Covered List.
- 4List creation and administration: The Secretary of the Treasury/Commerce must establish and maintain a “listed persons” list within 60 days after enactment, with updates as needed.
- 5Pooled funds provision: Investments in regulated investment companies (RICs), ETFs, and other pooled vehicles can be certified by the Secretary as not holding any listed investments, so they can avoid triggering the acquisition tax. The bill also allows for procedures to certify such funds.
- 6Treatment of related organizations: Assets held by related organizations (as defined in the code) are treated as assets of the educational institution, with safeguards to avoid double counting or counting assets not intended for the institution. These assets can count for at most one institution, and certain assets not intended for the institution may be excluded unless the related organization is controlled by the institution or described in 509(a)(3).
- 7Asset threshold and scope: The targeted institutions are “specified educational institutions” defined as eligible educational institutions (per section 25A) that are not State colleges/universities and that have non-exempt assets exceeding $1 billion at the end of the preceding year.
- 8Effective dates and transitional rules: The new taxes generally apply to taxable years ending after the earlier of (a) the end of the first calendar year after enactment or (b) the end of the 1-year period after the list is established. Investments acquired before the applicable year-end and income/gains earned before the end of the 1-year period are not subject to the new taxes.