UMass Balks at UBTI Guidance, Suggests Changes

November 29, 2018

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

Comments Regarding the Calculation of Unrelated Business Taxable Income under § 512(a)(6) for Exempt Organizations with More than One Unrelated Trade or Business.

Dear Sir or Madam:

The University of Massachusetts respectfully submits the following comments concerning the application of § 512(a)(6) to exempt organizations with more than one unrelated trade or business. Specifically, we are providing comments on the general interim rule for distinguishing between trades and businesses under § 512(a)(6) (section 3 of Notice 2018-67); the possibility of other Code sections providing an administrable model for identifying an exempt organization's separate trades or businesses (section 3.03 Notice 2018-67); and whether NAICS of less than 6-digit codes might be a method for identifying separate trades or businesses (section 3.03 of Notice 2018-67).

We appreciate the opportunity to comment.

• UMass is responsible for the accurate and timely filing of Form 990-T for our five-campus public university system of the Commonwealth of Massachusetts. The system includes four university campuses, a medical school and a system's office.

• The new computation requirement of section 512(a)(6) represents a significant departure from previous law. The new Section 512(a)(6) of the Internal Revenue Code changes the way all Exempt organizations calculate UBIT; instead of aggregating our profits and losses from unrelated business activities, we must now "silo" our revenues and expenses for each "separate" "trade or business" and pay UBIT on each.

• We want to thank Treasury for providing the proposed rules that were released in August. They offer some clear answers and instructions on how to comply with the law immediately, but many questions remain.

* * *

The Notice expressly provides that starting on January 1, 2018 (when the tax-law provision took effect) until issuance of final regulations Exempt organizations may rely on a reasonable, good faith interpretation of the UBIT statutes in determining whether their organizations have more than one "trade or business." Specifically, the IRS suggested using the North American Industry Classification System (NAICS) 6-digit codes as a reasonable, good faith interpretation.

This is one of the most interesting features of the Notice in that it allows us to use "a reasonable, good-faith interpretation" of sections 511-514 "considering all of the facts and circumstances" to determine if we have multiple trades or businesses. We must calculate net unrelated trade or business income for each trade or business under section 512(a)(6). What requires further consideration is the suggestion that Treasury and the IRS might use the North American Industry Classification System (NAICS) 6-digit codes to determine what constitutes a separate trade or business. Although Forms 990 and 990-T have required us to use the NAICS codes in a limited capacity historically, it has not had much tax significance. Therefore, it is difficult to determine if the NAICS codes actually fit our business activities.

What should we use if we cannot find a NAICS code that is relevant? Should we use code 900099 for activities if we are not certain which of the six digit codes our activities would fall under? We do realize that this is not an actual NAICS code. (However, the Form 990 instructions say to use this code if none of the NAICS six-digit codes correctly applies to the activity.) What is the criteria for determining if a NAICS code fits? Should facts and circumstances be a part of this?

The NAICS codes may not provide clarity for many of our activities. Although we can combine the revenue and expenses from all advertising activities into one category, (NAICS code 541800), the NAICS has multiple codes relating to rentals thus forcing us to consider each rental activity individually. Another example is that the six-digit code defines a snack bar, a cafeteria and a restaurant differently.

We will have difficulty using the six digit NAICS codes to determine many of our separate unrelated trades or businesses. Many times more than one NAICS code may apply. NAICS code definitions are broad and can incorporate multiple types of work or disciplines. How do we define many of our recreational activities? For example, is our Kayak center a recreational activity or does it fall under one of the boating activities? Our core research activities also present classification questions. For example, our Gene Therapy Vector Core falls under the definition of a medical laboratory and a biotechnology research laboratory.

Although the NAICS codes do provide a framework, the six digits code also will make record keeping overwhelming with an over 900-page manual. This will require a significant effort to implement. New NAICS codes and new industries may be added. How will this impact us if we have been categorizing an activity under one code, but a new more closely related code is later provided? What should we do about that NOL (if any)? We believe a three digit code would provide a better “lens through which to view our data.” This would give us both industry sector and subsector categories. We believe that “facts and circumstances” are the basis for our determining which if any NAICS code will fit a particular activity. Thus, we believe that facts and circumstances should also be a part of any guidance.

The issues discussed in this letter represent a non-exhaustive list of where clarifications and/or modifications may be needed in the final regulations. We respectfully request Treasury and IRS consider the above issues when providing final guidance.

If you have further questions, please contact Kathy O'Neil at 774-455-7515.

Sincerely,

Andrew Russell
Associate Treasurer
University of Massachusetts Treasurer's Office
333 South Street, Suite 450
Shrewsbury, MA 01545-4176
Tel (774) 455-7590
Fax (774) 455-7592