CPA Firm Raises Concerns With UBTI Guidance

December 2, 2018

Internal Revenue Service
CC:PA:LPD:PR (Notice 2018-67), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Notice 2018-67
Interim and Transition Rules for Aggregating Certain Income in the Nature of Investments (Interim Guidance)

To Whom It May Concern:

Thank you for this opportunity to comment on the Interim Guidance for implementation of new IRC § 512(a)(6). Our comments will focus on investments in pass-thru entities that result in unrelated business income and losses.

Lindquist LLP is a regional certified public accounting firm that audits and prepares filings for more than 200 multiemployer benefit plan clients, including both pension and health and welfare trust funds.

Transitional Safe Harbors

IRC § 512(a)(6) requires unrelated business taxable income (UBTI) to be computed separately and net operating loss carryforwards (NOLs) to be tracked separately with respect to each trade or business. The Interim Guidance provides options for identifying separate lines of business for organizations with pass-thru investments, including reasonable, good-faith interpretation such as the use of NAICS codes or if the organization does not significantly participate, investment interests can be aggregated based on the de minimus test (no more than 2% capital or profits interest per Schedule K-1) or the control test (no more than 20% of capital interest per Schedule K-1 and no control or influence over the partnership under the facts and circumstances test).

Concern with NAICS Codes

Our clients invest in numerous pass-thru investments that generate unrelated business income, many of which will not pass the de minimus or control tests for creating the new SILOs under the Interim Guidance. For these numerous investments, it appears that our clients would need to apply the reasonable, good-faith interpretation (use NAICS codes) under the Interim Guidance. The selection of NAICS codes is unclear as to which code(s) to use and who is charged with the responsibility to assign the code to each pass-thru investment. Please note that the NAICS code is not reported on Schedule K-1. There are over 1,000 NAICS codes to choose from, although the Form 990 and 990-T instructions include an abbreviated list. NAICS codes are intended to describe the primary activity of “establishment” and not intended to describe specific activities.

Each pass-thru investment is unique with respect to their underlying operations or assets. It appears that there can be multiple sectors, subsectors, industries and activities within one pass-thru investment. For example, a common investment strategy is to invest in a limited partnership that investments in a fund of funds.

The use of NAICS codes to create SILOs does not appear to be a good option based on the numerous NAICS codes available and the numerous types of underlying business activities of just one pass-thru investment, unless the IRS can reduce the list of codes to one or two and provide clear instructions on how to apply the codes. Perhaps, one NAICS code can be used for investments with debt-financed unrelated business income and one NAICS code for all other pass-thru investments that do not meet the de minimus or control tests.

Concern with Treatment of NOLs

Current guidance suggests that post-2017 NOLs be used before applying pre-2018 NOLs. We suggest the first in first out (FIFO) method be used to apply NOLs. Pre-2018 NOLs applied first and then apply post-2017 NOLs. Organizations should be given the opportunity to use up the pre-2018 NOLs before they expire and before the post-2017 NOLs are applied.

Concern with Administrative Burden

As a paid preparer of Form 990-T for numerous clients, we obtain Schedule K-1s for all pass-thru investments (limited partnerships and limited liability companies) as soon as they become available (mid to late September for calendar year-end clients). With a deadline of October 15^th for the majority our Pension Trust clients, the turnaround time for preparing the Form 990-T is difficult to meet because the Schedule K-1s are not available to us until mid or late September. With implementation of the SILOs, there will be a huge administrative burden and added cost to our clients to prepare their Form 990-Ts.

To understand the extent of the burden, we prepare the Form 990-T for a client that invests in over 100 pass-thru investments with unrelated business income/losses. Based on 2017 information, approximately 10 of these investments should meet the de minimus test (one SILO), approximately 75 investments should meet the control test (one SILO) and the remaining 25 investments will need a NAICS code (potentially 25 SILOs). Tracking the investments and related activity using 27 SILOs for this client will likely require 25 to 30 additional hours of a highly experienced/skilled CPA which translates to added cost estimated at $10,000 to complete the client's Form 990-T for 2018.

Other Considerations

In most cases, reporting of UBTI for pass-thru investments is found in the numerous pages of footnotes to the Schedule K-1, There is no standardized information requirement for the information provided in the footnotes, As a paid preparer, information in the footnotes is often confusing or incomplete and requires us to make a call(s) to the preparer of the Schedule K-1, to get verbal answers to questions that are needed report the partner's taxable income on the Form 990-T. We believe that the Schedule K should be updated for standardized information fields that are needed for reporting UBTI on Form 990-T, to promote consistency, accuracy and completeness of K-1s for pass-thru investments. If NAICS codes are needed to determine the separate lines of business, a field can be added to the K-1 to require the appropriate code.

Implementation Date

There are so many questions left unanswered under the Interim Guidance with respect to application to pass-thru investments. Once proposed rules are issued, time is needed to update systems and tools used to manually track the new SILOs, to educate organizations and our employees. Consideration should be made to postpone the implementation date with respect to pass-thru investments.

Conclusion

Lindquist LLP respectfully requests for the Internal Revenue Service to minimize the number of SILOs required to track pass-thru investments with unrelated business income. Consider use of two SILOs, one for debt-financed pass-thru investments and a separate SILO for all other pass-thru investments. Minimizing the number of SILOs will minimize the administrative burden, minimize added cost of compliance for our clients and ultimately help the Service with their added burden and cost of enforcement.

Other considerations include updating the Schedule K-1 to add fields for information needed for UBTI and to postpone the implementation date for use of SILOs for pass-thru investments.

Thank you for your consideration. Please contact me at (925) 277-9100 with any questions.

Sincerely,

Michelle L. McCann, CPA
Partner
for Lindquist LLP
San Ramon, CA