IRS Issues Pre-Released Version of Final UBTI Calculation Regs

IRS Issues Pre-Released Version of Final UBTI Calculation Regs

Internal Revenue Service

The IRS has issued a pre-released version of final regulations (T.D. 9933) 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, and if so, how it calculates unrelated business taxable income. The final version of the regs will be posted on the Federal Register website at a later date and will incorporate any changes made during the government’s review process. The final regs adopt, with minor changes requested by commentators, proposed regs (<a href="/lr/resolve//2cg0b">REG-106864-18</a>) issued in April 2020. The final regs provide that an exempt organization with more than one unrelated trade or business must compute UBTI separately for each unrelated trade or business, without regard to the specific deduction in section 512(b)(12), including for purposes of determining any net operating loss deduction. The regs retain the North American Industry Classification System (NAICS) two-digit codes for identifying separate unrelated trades or businesses. In response to comments, the regs provide further guidance for identifying the appropriate NAICS two-digit code. Also in response to comments, the regs remove the restriction on changing NAICS two-digit codes and instead require an exempt organization that changes the identification of a separate unrelated trade or business to report the change in that tax year, in accordance with the applicable forms and instructions. The regs provide that an exempt organization with more than one unrelated trade or business must allocate deductions between separate unrelated trades or businesses using the reasonable basis standard described in reg. section 1.512(a)-1(c). The regs clarify that an allocation method that fails to equalize price differences between related activities and unrelated trade or business activities is not reasonable. The final regs treat an exempt organization’s investment activities that are subject to UBIT as a separate unrelated trade or business for purposes of section 512(a)(6). They adopt the proposed list of investment activities (qualifying partnership and S corporation interests and debt-financed properties) without change. The regs made some clarifications regarding qualifying partnership interests and renamed the proposed control test the "participation test" to better capture the purpose of the test, which is to identify partnerships in which exempt organization partners significantly participate. The regs retain the 20 percent capital interest threshold for purposes of that test as well as the four factors as per se indicators of significant participation. The regs modify the proposed treatment of the ability of an exempt organization, by itself, to prevent a partnership from performing an act as a factor that indicates significant participation. The regs adopt the proposed treatment of debt-financed income without change and provide greater clarify on how the qualifying partnership interest rules apply to S corporation interests. The regs also adopt, without change, proposed regs on nonqualifying S corporation interests. The final regs adopt the proposed approach regarding social clubs, voluntary employees’ beneficiary associations, and supplemental unemployment compensation benefits trusts along with the applicable investment activity rules. The regs clarify that an exempt organization’s total UBTI is the sum of the UBTI for each separate unrelated trade or business less a charitable contribution deduction, a specified NOL deduction, and a specific deduction under section 512(b)(12). The final regs provide that, for tax years beginning after December 31, 2017, an exempt organization with more than one unrelated trade or business determines the NOL deduction allowed by sections 172(a) and 512(b)(6) separately for each of its unrelated trades or businesses. A reg provision addressing the application of section 172 in the context of UBIT also applies separately for each unrelated trade or business. The regs clarify that pre-2018 NOLs are taken against the total UBTI in a way that allows for maximum use of post-2017 NOLs, rather than pre-2018 NOLs, in a tax year. The regs also address the treatment of NOLs upon changing the identification or the sale, transfer, termination, or other disposition of a separate unrelated trade or business. The final regs clarify that the definition of unrelated trade or business applies to IRAs and provide that inclusions of subpart F income and global intangible low-taxed income are treated in the same way as dividends for purposes of determining UBTI. In response to comments, the regs allow an exempt organization with more than one unrelated trade or business to determine public support using either its UBTI calculated under section 512(a)(6) or its UBTI calculated in the aggregate. The final regs adopt the proposed applicability dates.

T.D. 9933, which was posted on the Federal Register website on November 30, 2020, is the <a href="/lr/resolve//2d85j">official version </a>of the final regs.

The IRS has issued a pre-released version of final regulations (T.D. 9933) 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, and if so, how it calculates unrelated business taxable income.

The IRS has issued a pre-released version of final regulations (T.D. 9933) 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, and if so, how it calculates unrelated business taxable income. The final version of the regs will be posted on the Federal Register website at a later date and will incorporate any changes made during the government’s review process. The final regs adopt, with minor changes requested by commentators, proposed regs (REG-106864-18) issued in April 2020. The final regs provide that an exempt organization with more than one unrelated trade or business must compute UBTI separately for each unrelated trade or business, without regard to the specific deduction in section 512(b)(12), including for purposes of determining any net operating loss deduction. The regs retain the North American Industry Classification System (NAICS) two-digit codes for identifying separate unrelated trades or businesses. In response to comments, the regs provide further guidance for identifying the appropriate NAICS two-digit code. Also in response to comments, the regs remove the restriction on changing NAICS two-digit codes and instead require an exempt organization that changes the identification of a separate unrelated trade or business to report the change in that tax year, in accordance with the applicable forms and instructions. The regs provide that an exempt organization with more than one unrelated trade or business must allocate deductions between separate unrelated trades or businesses using the reasonable basis standard described in reg. section 1.512(a)-1(c). The regs clarify that an allocation method that fails to equalize price differences between related activities and unrelated trade or business activities is not reasonable. The final regs treat an exempt organization’s investment activities that are subject to UBIT as a separate unrelated trade or business for purposes of section 512(a)(6). They adopt the proposed list of investment activities (qualifying partnership and S corporation interests and debt-financed properties) without change. The regs made some clarifications regarding qualifying partnership interests and renamed the proposed control test the "participation test" to better capture the purpose of the test, which is to identify partnerships in which exempt organization partners significantly participate. The regs retain the 20 percent capital interest threshold for purposes of that test as well as the four factors as per se indicators of significant participation. The regs modify the proposed treatment of the ability of an exempt organization, by itself, to prevent a partnership from performing an act as a factor that indicates significant participation. The regs adopt the proposed treatment of debt-financed income without change and provide greater clarify on how the qualifying partnership interest rules apply to S corporation interests. The regs also adopt, without change, proposed regs on nonqualifying S corporation interests. The final regs adopt the proposed approach regarding social clubs, voluntary employees’ beneficiary associations, and supplemental unemployment compensation benefits trusts along with the applicable investment activity rules. The regs clarify that an exempt organization’s total UBTI is the sum of the UBTI for each separate unrelated trade or business less a charitable contribution deduction, a specified NOL deduction, and a specific deduction under section 512(b)(12). The final regs provide that, for tax years beginning after December 31, 2017, an exempt organization with more than one unrelated trade or business determines the NOL deduction allowed by sections 172(a) and 512(b)(6) separately for each of its unrelated trades or businesses. A reg provision addressing the application of section 172 in the context of UBIT also applies separately for each unrelated trade or business. The regs clarify that pre-2018 NOLs are taken against the total UBTI in a way that allows for maximum use of post-2017 NOLs, rather than pre-2018 NOLs, in a tax year. The regs also address the treatment of NOLs upon changing the identification or the sale, transfer, termination, or other disposition of a separate unrelated trade or business. The final regs clarify that the definition of unrelated trade or business applies to IRAs and provide that inclusions of subpart F income and global intangible low-taxed income are treated in the same way as dividends for purposes of determining UBTI. In response to comments, the regs allow an exempt organization with more than one unrelated trade or business to determine public support using either its UBTI calculated under section 512(a)(6) or its UBTI calculated in the aggregate. The final regs adopt the proposed applicability dates.

Sec. 509 Private foundation defined

Sec. 512 Unrelated business taxable income

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IRS Issues Pre-Released Version of Final UBTI Calculation Regs