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concerning the excise tax applicable to the net investment income of certain private colleges and universities.^108.1

      The statute does not define the terms student, tuition‐paying student, or similar to. It does not define the term control as it relates to the definition of a related organization with respect to an educational institution. These final regulations provide general definitional guidance with respect to these and other relevant terms and rules. They are, in several aspects, more favorable, from the standpoint of colleges and universities, than the proposed regulations.

The final regulations define the term student as an individual who is enrolled and attending a course for academic credit from the educational institution and who is being charged tuition at a rate that is commensurate with the tuition rate charged to students enrolled for a degree.^108.2 The standards for determining full‐time and part‐time students, and full‐time equivalents, are determined by each institution.^108.3 (This is an expanded definition of the term student, which may enable some institutions to sidestep this excise tax by reason of the $500,000‐per‐student ratio.) They do not count federal, state, and local grants or financial aid as tuition but count grants and scholarships provided by a nongovernmental party other than the particular educational institution as tuition.^108.4 A student is considered to be located in the United States on the basis of each institution's reasonable approach on the point, as long as the rule is consistently applied.^108.5

The final regulations expand the concept of assets that are exempt from the tax base to include certain intangible assets and nonfinancial assets used in a functionally related business and certain assets of organizations that are related to the educational institution.^108.6 An asset of a related organization that is treated as an asset of an educational institution and that is used directly in carrying out an educational institution's exempt purpose, or that is used directly in carrying out the exempt purpose of a related charitable organization, is considered used directly by the educational institution in carrying out its exempt purpose.^108.7

Net investment income is determined using the law similar to that concerning the net investment income of private foundations.^108.8 Excluded from the concept of gross investment income^108.9 are interest income from student loans, certain royalties, and certain rental income from the provision of housing to students and faculty.^108.10 Capital loss carryovers may be used by educational institutions with more flexibility than private foundations.^108.11

As noted, the assets and net investment income of a related organization with respect to an educational institution are generally treated as assets and net investment income of the institution. The term related organization means an organization that (1) controls the institution, (2) is controlled by the institution, (3) is controlled by one or more persons that also control the institution, (4) is a supported organization with respect to the institution, or (5) is a supporting organization with respect to the institution.^108.12

The term related organization does not include a grantor charitable lead trust, a charitable remainder trust, or a decedent's estate.^108.13 The Treasury and the IRS recognized that some types of entities that might be related organizations may be taxed, then provide after‐tax funds to an educational institution; taxation of these distributions again pursuant to this excise tax would lead to double taxation. Thus, the final regulations also exclude from the definition of related organization taxable corporations and certain taxable trusts.^108.14 Further so excluded are partnerships, S corporations, and other pass‐through entities a portion of the income of which flows through to an educational institution.^108.15

Although the first three of these categories require control, the statute does not define the term. The proposed regulations utilized the concept of control used in the controlled subsidiary context.^108.16 That approach did not survive the comment process. The final regulations provide separate rules for the different relationships that may exist and separately define control for purposes of the three control relationships.^108.17

An organization controls an educational institution if (1) the organization owns (by vote or value) more than 50 percent of the voting and nonvoting stock or membership interest of the institution or (2) the organization (or one or more of its managers) can (a) appoint or elect more than 50 percent of the members of the institution's governing body or otherwise has the ongoing power to appoint or elect more than 50 percent of the members with reasonable frequency, (b) require the institution to make an expenditure or prevent the institution from making an expenditure, or (c) require the institution to perform any act that significantly affects its operations or prevent it from performing an act.^108.18

A tax‐exempt corporation is controlled by an educational organization if the institution owns (by vote or value) more than 50 percent of the voting and nonvoting stock or membership interest of the corporation.^108.19

An organization (other than an entity that is not a related one) is controlled by one or more persons that also control the educational institution if more than 50 percent of the members of the governing body of the other organization are directly or indirectly controlled by persons that comprise more than 50 percent of the members of the governing body of the institution.^108.20

As to the circumstances where a trust is deemed to have a relationship with an educational institution comparable to the concept of control, the final regulations were substantially revised. They provide that a trust is a related organization and there is deemed control only (1) if the educational institution is substantially the sole permissible trust beneficiary or appointee of both income and principal, (2) if the trust is a pooled income fund, (3) to the extent the assets of the trust were contributed to the trust by the institution or a controlled entity, or (4) to the extent the institution or a controlled entity has the right to demand or otherwise cause distribution of principal from the trust to the institution or controlled entity.^108.21

The rule as to control of nonstock organizations in the proposed regulations was revised. Pursuant to the final regulations, an educational institution controls a nonstock organization if the institution (or one or more of its managers) can (1) appoint or elect more than 50 percent of the members of the organization's governing body or otherwise can appoint or elect that majority with reasonable frequency, (2) require the organization to make an expenditure or prevent it from making an expenditure, or (3) require the organization to perform any act that significantly affects its operations

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