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IRS Issues Much-awaited Interim Guidance Notice 2018-67: Calculation of UBI

The IRS recently issued much-awaited interim guidance, Notice 2018-67, on the calculation of UBI for organizations, reasonable standards for identifying separate lines of business and requesting comments from the public. Read this article for highlights from the guidance.

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Insights  <  IRS Issues Much-awaited Interim Guidance Notice 2018-67: Calculation of UBI

The IRS recently issued much-awaited interim guidance, Notice 2018-67, on the calculation of UBI for organizations, reasonable standards for identifying separate lines of business and requesting comments from the public. Read this article for highlights from the guidance.

The IRS recently issued much-awaited interim guidance, Notice 2018-67, on the calculation of UBI for organizations, reasonable standards for identifying separate lines of business and requesting comments from the public. These are the “silo” or “bucketing” rules for separate lines of unrelated business for tax-exempt organizations.

Here are some highlights from the guidance:

  • Tax reform enacted new Section 512(a)(6) requiring a tax-exempt organization (including qualified employee benefit plans) with more than one unrelated business activity to separately calculate unrelated business taxable income for each trade or business
  • Congress’s intent was that a deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same tax year
  • Exempt organizations may rely on reasonable, good faith interpretation, considering all facts and circumstances, when determining if an organization has more than one unrelated trade or business, including use of
  • IRS is hoping to implement a more administrative method than just a facts and circumstances test, because a facts and circumstances test
    • increases administrative burden on exempt organizations to comply with
      • a fact-intensive analysis
      • document analysis
      • tracking and keeping records consistent with analysis
    • results in inconsistency across the nonprofit sector
    • increases administrative burden on IRS to implement and enforce §512(a)(6)
  • IRS is requesting comments regarding defined standards for allocating indirect expenses between separate unrelated trades or business and what methods should be considered “reasonable”
  • IRS is requesting comments regarding aggregating UBI from all debt-financed property and from all controlled entities rather than tracking income from each debt-financed property or from each controlled entity separately
  • The notice says that one interpretation of this new rule would require an exempt organization to calculate UBTI separately for each unrelated trade or business carried on by partnerships in which the exempt organization is a direct or indirect partner. This obviously could be an administrative nightmare if, for example, the organization is a partner in a holding partnership that is a partner in multiple partnerships (a fund of funds), or if it holds multiple partnership investments
  • IRS intends to propose regulations that treat investment activities as one trade or business for purposes of §512(a)(6) to permit exempts to aggregate income and directly connected deductions from investment activities
  • This notice gives exempt organizations interim guidance that allows all qualifying partnership interests as comprising a single trade or business for purposes of §512(a)(6)
  • The interim rule does not apply to social clubs
  • Qualifying partnership interest is defined as meeting either
    • De minimis test – the exempt organization (and related persons/entities) holds no more than 2% of the profits interest and no more than 2% of the capital interest
    • Control test – the exempt organization (along with related persons/entities) holds no more than 20% of the capital interest and does not have control or influence over the partnership
  • Transition rule – if the partnership doesn’t meet the de minimis or control test and was acquired prior to 8/21/18, the exempt organization may treat the partnership interest as a single trade or business
  • This interim rule for qualifying partnership interest permitted to be aggregated includes unrelated debt-financed income, such as from hedge funds
  • The IRS does not believe that qualified transportation fringe benefits are subject to §512(a)(6)
  • Congress’s intent is to allow an NOL deduction only with respect to a trade or business from which the loss arose, except for pre-2018 NOLs
  • IRS is requesting comments on the ordering of pre-2018 NOLs and post-2017 NOLs, as it appears there’s a question on which is taken first
  • Global intangible low-taxed income (GILTI) is generally going to be treated as dividend income, which is excluded from UBTI
  • Exempt organizations may rely on this notice for tax years beginning after 12/31/17 until proposed regulations are published, and may rely on reasonable, good-faith interpretations of the UBI rules taking into account all the facts and circumstances
  • The IRS and Treasury are requesting comments from the public to be submitted by December 3, 2018

As always, our non-profit team will continue to keep you apprised as additional guidance that may affect your organization is issued. For questions, please reach out to your blumshapiro partner or Laura Kenney at lkenney@blumshapiro.com or 617.221.1944.

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