EY Questions Application of BEAT Gross Receipts Threshold to EOs

From:
Ray Beeman 

Sent:
Monday, October 14, 2019 10:56 AM

To:
Poms, Douglas 

Subject:
RE: Quick BEAT question

Good Monday morning Doug, I just wanted to follow up on my inquiry below regarding the application of the BEAT gross receipts threshold to exempt organizations. Specifically, I wanted to share this analysis on why the threshold should only take into account unrelated business income (rather than total gross receipts including income from EO activities). I hope this is helpful and feel free to share with the EO attorneys who might be considering this question. As always, I'm available if you or they have any questions, etc. Thanks. — Ray

Key points:

• When defining gross receipts, the BEAT statute (§59A) and the proposed regulations cross reference §448 and §1.448-1T(f)(2)(iv) respectively.

• For purposes of the §448 gross receipts test, organizations exempt from tax under §501(a) include only their gross receipts from unrelated trades or businesses. That part of the gross receipts definition is in §1.448-1T(f)(2)(i) however, not §1.448-1T(f)(2)(iv).

• The BEAT regulations should include that part of the definition, which gives effect to statutory intent and reduces administrative burdens:

  • It is a more complete reflection of the definition of gross receipts for 448 (and therefore 59A) purposes.

  • It gives effect to the intent of the statute to focus on organizations with significant amounts of potentially taxable gross receipts that can be reduced using base erosion payments. Only a tax-exempt organization's gross receipts from an unrelated trade or business meet this description.

  • Without including that additional part of the definition, many tax-exempt organizations that have over $500 million in total gross receipts but no, or minimal, gross receipts from unrelated businesses, could have a Form 8991 filing requirement and be required to do complex calculations even though they have no tax base to erode and there is no useful information or tax reported to the IRS.

• This inclusion would be fairly straightforward, along one of the following lines:

  • Modify the definition of gross receipts test in §1.59A-2(d)(1), which says "Amount of gross receipts. A taxpayer, or the aggregate group of which the taxpayer is a member, satisfies the gross receipts test if it has average annual gross receipts of at least $500,000,000 for the three-taxable-year period ending with the preceding taxable year."

    • After that sentence add the relevant wording from § 1.448-1T(f)(2)(i): "In the case of a taxpayer exempt from federal income taxes under section 501(a), only gross receipts from the activities of such taxpayer that constitute unrelated trades or businesses are taken into account."

  • Modify the gross receipts definition in § 1.59A-1(b)(13), which says "Gross Receipts. The term gross receipts has the meaning provided in §1.448-1T(F)(2)(iv)."

    • The proposed modification would read something like one of the following options:

      • The term gross receipts has the meaning provided in §1.448-1T(f)(2)(iv) and, for taxpayers exempt from federal income taxes under section 501(a), the meaning provided in §1.448-1T(f)(2)(i).

      • The term gross receipts has the meaning provided in §1.448-1T(f)(2)(iv). In the case of a taxpayer exempt from federal income taxes under section 501(a), only gross receipts from the activities of such taxpayer that constitute unrelated trades or businesses are taken into account.

Ray Beeman | Principal
Washington Council Emst & Young
1101 New York Avenue, N.W., 4th Floor, Washington, DC 20005, United States of America
Direct: (202) 327-7397 | Office: (202) 293-7474 | ray.beeman@ey.com
Cell: (703) 395-5959 | EY/Comm 9232336
Website: https://hyperlink.services.treasury.gov/agency.do?origin=http://www.ey.com