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Emory Urges 1-Year Delay of UBTI Tax Implementation

DEC. 3, 2018

Emory Urges 1-Year Delay of UBTI Tax Implementation

DATED DEC. 3, 2018
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December 3, 2018

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

Comments — Notice 2018-67

Emory University ("Emory") appreciates the opportunity to provide comments as Treasury develops guidance for implementation of the Tax Cuts and Jobs Act ("TCJA"). The implementation of this law will have a significant impact on Emory's campus and mission as we serve and support the students, faculty, employees, and healthcare patients of Emory University and its affiliated entities.

Founded in 1836, Emory is a top-ranked private institution of higher education and one of the world's leading healthcare systems. With nine schools and colleges, Emory educates over 15,000 undergraduate and graduate students from across the country and world. As an academic medical center, Emory also includes Emory Healthcare, which is comprised of primary, urgent, and specialty care practices at 200 locations including nine hospitals. As the second largest employer in Atlanta, Emory's comments below focus on areas of implementation that will impact our students, patients, and employees.

We are writing specifically to provide recommendations in three areas related to Notice 2018-67 on implementation of Internal Revenue Code Section 512(a)(6) and by extension the draft Form 990-T and the draft form instructions. All code section references are to the Internal Revenue Code of 1986 as amended ("IRC"). Section numbers refer to the sections of Notice 2018-67:

1. Section 3.03 — Possible Methods for Identifying Separate Trades or Businesses

2. Section 5 — Activities in the Nature of Investments and Section 6 — Interim and Transition Rules for Partnership Investments,

3. Section 9 — Net Operating Losses and UBTI

Because of the complexities in the TCJA and, given many exempt organizations are already eleven months into the tax year affected by 512(a)(6) with little guidance and no opportunities to plan and budget for increased tax burden, we strongly recommend Treasury include a one-year delay in the effective date of 512(a)(6). Given the timing of the implementation of the various provisions of the TCJA, Emory is facing a multimillion dollar unbudgeted tax liability.

A delay will enable Emory and other organizations to more accurately estimate its new tax burden, budget for this dramatic tax increase, submit timely estimated tax payments, and communicate and implement new policies and processes to employees. If a delay is not granted for any of these provisions, we respectfully request any penalties that might arise due to underpayment resulting from the lack of guidance related to these provisions be waived.

1. Section 3.03 — Possible Methods for Identifying Separate Trades or Businesses

IRC Section 512(a)(6) requires Unrelated Business Taxable Income ("UBTI") be computed separately for each trade or business. Losses from one trade or business cannot be used to offset income of another. The fundamental question in implementing this provision is: Which activities constitute a separate trade or business? There exist some statutory groupings of "trade or business" in IRC sections 511-514. Using existing law to categorize each trade or business would help to minimize the administrative burden in computing UBTI under the new provision and would present more accurately the way separate trades or businesses are structured within organizations.

Section 3.03 of the Notice requests comments on whether using the 6-digit North American Industry Classification System ("NAICS") codes, using less than 6 digits of the NAICS codes, or combining NAICS codes with other criteria would appropriately identify separate trades or businesses for purposes of achieving the objective of 512(a)(6).

The NAICS codes were developed for census purposes and may not tie directly to specific trades or businesses operated by exempt organizations. Using the 6-digit codes would provide an additional burden on exempt organizations as it would require organizations to split activities that have traditionally been operated together (such as a hotel and conference center) into three or more different trades or businesses (such as hotel, catering, restaurant, snack bar). Not only would this create an additional administrative burden, but it would also require more cost allocations to be conducted and would create artificial subdivisions of operationally cohesive activities.

If NAICS codes are to be used in the determination of a trade or business under 512(a)(6), Emory recommends using a 2-digit code along with a facts and circumstances test for determination. This would allow for consistency across all exempt organizations while allowing for variations in organizational structures and operations.

2. Section 5 — Activities in the Nature of Investments and Section 6 — Interim and Transition Rules for Partnership Investments

Section 5 of the Notice states the Treasury Department and the IRS intend to propose regulations that treat "investment activities" as one trade or business for purposes of 512(a)(6)(A) and requests comments regarding the scope of activities that should be considered "investment activities."

Section 6 of the Notice provides for interim and transition rules for partnership investments. Under the interim rule, an exempt organization can aggregate UBTI from its interest in a single partnership with multiple trades or businesses, as well as aggregate all qualifying partnership interests, into a single trade or business ("qualifying partnership interest") if either the de minimis test or the control test (as defined in the Notice) are met. Under the transition rule, an exempt organization may treat a partnership interest acquired before August 21, 2018 as constituting a single trade or business, regardless of whether the de minimis or control tests are met.

For purposes of the de minimis test (defined in Section 6.02 of the Notice), a partnership interest is a qualifying interest if the organization holds directly no more than two percent of the profits interest and no more than two percent of the capital interest. For purposes of the control test (defined in Section 6.03 of the notice), a partnership interest is not considered controlled if the exempt organization (1) directly holds no more than 20 percent capital interest and (2) does not have control or influence over the partnership. For determining percentage ownership under either of these test, amounts held by related interests (disqualified persons, supporting organizations, or controlled entities) in the same partnership are taken into account.

Emory recommends all investment activities, including investments as a limited investment in a partnership, be treated as a single basket in computing UBTI pursuant to section 512(a)(6), which is a logical extension of the governance approach to managing investment pools. As part of Emory's overall investment strategy and management of the investment pool, Emory is invested in approximately 400 investment entities. These investments are governed according to policies created and regularly reviewed by Emory's investment committee of its Board of Trustees. The spending policy (the rules that determine the amount of funds available for withdrawal from the pool and spent by Emory) is typically based on the investment pool's market value. Many of these investments are in the form of limited partnership interests where Emory does not have control or own more than fifty percent of the partnership. As a limited partner, the university generally does not have control or influence over the partnership even if it owns more than 20 percent.

Control is defined in many sections of the Internal Revenue Code. In Section 512(b)(13) control of a partnership is defined as ownership of more than 50 percent of the profits interests or capital interests in such partnership. Under Section 368(c), control is defined as ownership of at least 80 percent of the voting power.

If the recommendation above is not adopted, then Emory recommends that control for purposes of determining qualified partnership interests under Section 512(a)(6) be defined the same as in Section 512(b)(13) as ownership of more than 50 percent of the profits or capital interest in a partnership. This definition would provide consistency through the same Internal Revenue Code section and reduce administrative burden on exempt organizations, while serving the purpose of Section 512(a)(6) by permitting only those investments in which the organization does not have control over the day-to-day operations to be aggregated.

Emory also recommends that only interests owned by controlled entities and persons with direct control over the organization's investment decisions be aggregated in determining the ownership percentage for the de minimis and control tests. With a large number of investments generally owned by exempt organizations (especially colleges and universities), requiring organizations to track personal ownership percentages of all of its officers, directors, trustees, and key employees who are not involved in deciding in which partnerships to invest will create an undue administrative burden on organizations. Additionally, requiring similar tracking for supporting organizations (especially Type III supporting organizations) where the supported organization does not control the supporting organization nor have access to its books and records would add to this administrative burden.

4. Section 9 — Net Operating Losses and UBTI

Changes in Section 172 made by the TCJA allow for no carryback of net operating losses generated in tax years beginning after 2017 but provide for indefinite carryforward of such losses. Use of such loss carryforwards is limited to eighty percent of the taxable income for the year. For net operating losses generated in tax years beginning prior to 2018, losses can be carried forward up to twenty years but may be used to offset one hundred percent of taxable income.

Under Section 512(a)(6), losses generated from a trade or business for tax years beginning after 2017 can only offset income of that same trade or business. Based on the guidance in Section 9 of the notice as well as the draft 2018 Form 990-T and instructions, these post 2017 losses for a trade or business would be applied before any pre-2018 losses. This ordering could result in pre 2018 net operating losses expiring before they can be utilized.

Emory recommends that, for exempt organizations subject to 512(a)(6) with net operating loss carryforwards from tax years beginning prior to 2018, such organizations be allowed to apply these pre-2018 losses first before applying any post 2017 losses from individual trades or businesses and that such an election be available for each year during which an organization has pre-2018 losses. Alternatively, if the proposed ordering provisions are kept, Emory recommends that exempt organizations subject to 512(a)(6) be able to carry forward any pre-2018 losses indefinitely with no expiration.

We appreciate the opportunity to share our recommendations with you as you develop guidance in these areas and welcome any communication opportunities as you continue to work on these provisions. Please consider Emory University a resource during the rule-making process. If I can answer any questions, please feel free to reach out to me or have your staff contact Cameron Taylor, Vice President, Government and Community Affairs at Cameron.Taylor@emory.edu.

Sincerely,

Claire E. Sterk,
President
Emory University
Atlanta, GA

CC:
Elinor Ramey, Attorney-Advisor, Office of Tax Policy, U.S. Department of Treasury
Stephen LaGarde, Attorney-Advisor, Office of Benefits Tax Counsel, U.S. Department of Treasury
Shelly Leonard, U.S. Department of Treasury
The Honorable Senator Isakson
The Honorable Senator Perdue

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