NYSBA Tax Section Submits Report on Proposed UBTI Calculation Regs

NYSBA Tax Section Submits Report on Proposed UBTI Calculation Regs

New York State Bar Association Tax Section

The New York State Bar Association Tax Section has submitted a report on proposed regulations (<a href="/lr/resolve//2cg0b">REG-106864-18</a>) that provide guidance on how an exempt organization subject to the unrelated business income tax determines if it has more than one unrelated trade or business. The Tax Section supports the provision in the proposed regs under which business activities conducted directly by an EO or indirectly through a partnership that is not a qualified partnership interest must be reported on the basis of 20 North American Industry Classification System (NAICS) two-digit sector codes. Section members recommend that all EOs that participate in the same unrelated trade or business through one or more passthrough entities be required to report that trade or business consistently. The regs should clarify, however, that EOs can change the NAICS two-digit code for a trade or business if the nature of the business has so evolved or shifted that another NAICS two-digit code more accurately describes the trade or business, the report says. The Tax Section also agrees that an EO should be able to allocate expenses among multiple trades or businesses using any reasonable basis taking into account all facts and circumstances. Section members believe that no method (including the unadjusted gross-to-gross method) should be deemed per se unreasonable. The report recommends that Treasury and the IRS clarify the method of allocating pre-2018 net operating losses among multiple trades or businesses and suggests two alternatives. Under the proposed regs, holding debt-financed property (within the meaning of <a href="/research/federal/usc26/514" resolve="/lr/resolve//cqqy">section 514</a>) is treated as an investment activity[,] but holding interests in partnerships that are controlled entities within the meaning of <a href="/research/federal/usc26/512#cp1n-0000058" resolve="/lr/resolve//cp1n#cp1n-0000058">section 512(b)(13)</a>) is not. To prevent taxpayers from sidestepping the qualified partnership interest framework, the Tax Section recommends that the definition of debt-financed property be clarified to exclude debt-financed partnership interests that are also controlled entities. Section members suggest expanding the scope of enumerated investment activities in the proposed regs to include the ownership of some holding company partnership interests.  The Tax Section recommends that EOs be required to look through specified partnerships that would otherwise be treated as qualified partnership interests to prevent tiered structures from being used to avoid the limitations on aggregating partnership interests. Members also propose extending the requirement to aggregate partnership interests to interests that are owned by related persons and to EOs that are controlled taxpayers. The Tax Section generally supports the control test as an administrable method of identifying qualified partnership interests, but believes the ownership threshold of the control test should be satisfied if an EO owns less than 20 percent of both the capital and profits interests of a partnership. Moreover, although section members endorse the facts and circumstances approach to evaluate control, they do not think any of the four control rights listed in the proposed regs should be treated as per se evidence of control.

The New York State Bar Association Tax Section has submitted a report on proposed regulations (<a href="/lr/resolve//2cg0b">REG-106864-18</a>) that provide guidance on how an exempt organization subject to the unrelated business income tax determines if it has more than one unrelated trade or business.

The New York State Bar Association Tax Section has submitted a report on proposed regulations (REG-106864-18) that provide guidance on how an exempt organization subject to the unrelated business income tax determines if it has more than one unrelated trade or business. The Tax Section supports the provision in the proposed regs under which business activities conducted directly by an EO or indirectly through a partnership that is not a qualified partnership interest must be reported on the basis of 20 North American Industry Classification System (NAICS) two-digit sector codes. Section members recommend that all EOs that participate in the same unrelated trade or business through one or more passthrough entities be required to report that trade or business consistently. The regs should clarify, however, that EOs can change the NAICS two-digit code for a trade or business if the nature of the business has so evolved or shifted that another NAICS two-digit code more accurately describes the trade or business, the report says. The Tax Section also agrees that an EO should be able to allocate expenses among multiple trades or businesses using any reasonable basis taking into account all facts and circumstances. Section members believe that no method (including the unadjusted gross-to-gross method) should be deemed per se unreasonable. The report recommends that Treasury and the IRS clarify the method of allocating pre-2018 net operating losses among multiple trades or businesses and suggests two alternatives. Under the proposed regs, holding debt-financed property (within the meaning of section 514) is treated as an investment activity[,] but holding interests in partnerships that are controlled entities within the meaning of section 512(b)(13)) is not. To prevent taxpayers from sidestepping the qualified partnership interest framework, the Tax Section recommends that the definition of debt-financed property be clarified to exclude debt-financed partnership interests that are also controlled entities. Section members suggest expanding the scope of enumerated investment activities in the proposed regs to include the ownership of some holding company partnership interests.  The Tax Section recommends that EOs be required to look through specified partnerships that would otherwise be treated as qualified partnership interests to prevent tiered structures from being used to avoid the limitations on aggregating partnership interests. Members also propose extending the requirement to aggregate partnership interests to interests that are owned by related persons and to EOs that are controlled taxpayers. The Tax Section generally supports the control test as an administrable method of identifying qualified partnership interests, but believes the ownership threshold of the control test should be satisfied if an EO owns less than 20 percent of both the capital and profits interests of a partnership. Moreover, although section members endorse the facts and circumstances approach to evaluate control, they do not think any of the four control rights listed in the proposed regs should be treated as per se evidence of control.

Sec. 512 Unrelated business taxable income

Sec. 509 Private foundation defined

Sec. 513 Unrelated trade or business

Sec. 170 Charitable, etc., contributions and gifts

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NYSBA Tax Section Submits Report on Proposed UBTI Calculation Regs