In Notice 2018-67 the IRS has provided rules to deal with separate trade or business issues for Unrelated Business Income found in IRC §512(a)(6) as added by the Tax Cuts and Jobs Act.

IRC §512(a)(6) was added by the Tax Cuts and Jobs Acts and reads as follows:

(6) Special rule for organization with more than 1 unrelated trade or business

In the case of any organization with more than 1 unrelated trade or business --

(A) unrelated business taxable income, including for purposes of determining any net operating loss deduction, shall be computed separately with respect to each such trade or business and without regard to subsection (b)(12),

(B) the unrelated business taxable income of such organization shall be the sum of the unrelated business taxable income so computed with respect to each such trade or business, less a specific deduction under subsection (b)(12), and

(C) for purposes of subparagraph (B), unrelated business taxable income with respect to any such trade or business shall not be less than zero.

No Netting of Income and Loss from Different Trades or Businesses

As is described in Section 2 of the Notice, the key change under this provision is that no longer can exempt organizations net losses from one trade or business against income from another:

Prior to the enactment of § 512(a)(6), § 1.512(a)-1(a) provided that, with respect to an exempt organization that derives gross income from the regular conduct of two or more unrelated trades or businesses, UBTI was the aggregate gross income from all such unrelated trades or businesses less the aggregate deductions allowed with respect to all such unrelated trades or businesses. However, § 512(a)(6) changes this calculation for exempt organizations with more than one unrelated trade or business. Congress intended “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 taxable year.” H.R. Rep. No. 115-466, at 548 (2017). Specifically, § 512(a)(6) provides that, in the case of any exempt organization with more than one unrelated trade or business:

(A) UBTI, including for purposes of determining any net operating loss (NOL) deduction, shall be computed separately with respect to each trade or business and without regard to § 512(b)(12) (allowing a specific deduction of $1,000),

(B) The UBTI of such organization shall be the sum of the UBTI so computed with respect to each trade or business, less a specific deduction under § 512(b)(12), and

(C) For purposes of § 512(a)(6)(B), UBTI with respect to any such trade or business shall not be less than zero.

Thus, § 512(a)(6) no longer allows aggregation of income and deductions from all unrelated trades or businesses.

One key factor disclosed early in the Notice is that this rule against aggregating income and deductions will not apply to NOLS arising before January 1, 2018 that carried over into years beginning on or after that date. [1]

Identifying Separate Trades or Businesses

One obvious issue that must be resolved to insure no netting of income and deductions from separate trades or businesses of an exempt organization is to define what is a trade or business.  Section 3 of the Notice deals with this issue.  As the Notice points out, “Congress did not provide criteria for determining whether an exempt organization has more than one unrelated trade or business or how to identify separate unrelated trades or businesses for purposes of calculating UBTI.” [2]   Thus, the IRS will need to issue regulations in that area.

Until those regulations are issued, the IRS provides the following “good faith” provisions in the Notice:

Pending issuance of proposed regulations, and pursuant to additional interim guidance provided in section 6 of this notice, exempt organizations may rely on a reasonable, good-faith interpretation of §§ 511 through 514, considering all the facts and circumstances, when determining whether an exempt organization has more than one unrelated trade or business for purposes of § 512(a)(6). A reasonable, good-faith interpretation includes using the North American Industry Classification System 6-digit codes described in section 3.03.

The Notice specifically refers tax-exempt organizations to guidance related to IRC §513(c) and Reg. §1.513-1(b) and the fragmentation principle.  As the Notice continues:

Prior to the passage of § 512(a)(6), the fragmentation principle was primarily used to separate unrelated trades or businesses from exempt activities, but it might also have utility in identifying separate trades or businesses for purposes of § 512(a)(6)(A). The fragmentation principle provides that an activity does not lose its identity as a trade or business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of an organization. [3]

The Notice continues by offering up two examples that illustrate the use of the fragmentation principle to treat an activity as a separate trade or business, even though it may be carried on within an otherwise exempt function:

For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its status as a trade or business merely because the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purposes or in compliance with the terms of § 513(a)(2) (stating, in part, that the term “trade or business” does not include any trade or business that is carried on by an organization described in § 501(c)(3) or a state college or university primarily for the convenience of its members, students, patients, officers, or employees). See § 1.513-1(b). Similarly, activities of soliciting, selling, and publishing commercial advertising do not lose their statuses as trades or businesses even though the advertising is published in an exempt organization periodical that contains editorial matter related to the exempt purposes of the organization. Id. Additionally, several revenue rulings provide examples of how the fragmentation principle has been applied. See, e.g., Rev. Rul. 78-145, 1978-1 C.B. 169 (regarding the sale of blood products by a blood bank). [4]

The Notice goes on to state that the IRS, having looked the various definitions of the term “trade or business” found in IRC §§132, 162, 183, 414 and 469, arrived at the concern that none of them were appropriate to be used to determine separate trades or businesses under IRC §512(a).  The agency did reject the use of a “facts and circumstances” test suggested in some comments the agency has received, finding it to be too administratively burdensome on the exempt organizations and the IRS, as well as very likely to be applied inconsistently across multiple organizations. [5]

Proposed Use of NAICS 6-Digit Codes

The IRS does indicate that it is considering using the North American Industry Classification System (NAICS) codes and will consider the use of NAICS 6-digit codes to “reasonable, good-faith interpretation under section 3.02 of this notice” until proposed regulations are issued. [6]

The Notice explains:

The NAICS is an industry classification system for purposes of collecting, analyzing, and publishing statistical data related to the United States business economy. See EXECUTIVE OFFICE OF THE PRESIDENT, OFFICE OF MANAGEMENT AND BUDGET, NORTH AMERICAN INDUSTRY CLASSIFICATION SYSTEM (2017), available at https://www.census.gov/eos/www/naics/2017NAICS/2017_NAICS_Manual.pdf. For example, under a NAICS 6-digit code, all of an exempt organization’s advertising activities and related services (NAICS code 541800) might be considered one unrelated trade or business activity, regardless of the source of the advertising income. Use of all 6 digits of the NAICS codes would result in more specific categories of trades or businesses whereas use of fewer than 6 digits of the NAICS codes would result in broader categories of trades or businesses. [7]

Allocation of Shared Expenses

The IRS notes that the agency already as regulations dealing with allocating shared expenses between exempt activities and those generating UBTI that it plans to modify to allow for allocating such items between distinct trades or businesses:

The allocation issues under § 512(a)(1) also are relevant under § 512(a)(6) because an exempt organization with more than one unrelated trade or business must not only allocate indirect expenses among exempt and taxable activities as described in § 1.512(a)-1(c) and (d) but also among separate unrelated trades or businesses. The Treasury Department and the IRS therefore are considering modifying the underlying reasonable allocation method in § 1.512(a)-1(c) and providing specific standards for allocating expenses relating to dual use facilities and the rules under § 512(a)(6). [8]

Considerations from UBIT from §§512(b)(4), (13) and (17)

In Section 4 of the Notice, the IRS discusses issues arising with certain items that are treated as if they were derived from an unrelated trade or business but have no direct connection with any particular unrelated trade or business:

Sections 512(b)(4), (13), and (17) treat unrelated debt financed income, specified payments received from controlled entities, and certain insurance income (as defined in § 953) as items of gross income derived from an unrelated trade or business and therefore includable in the calculation of UBTI under § 512(a) even though such amounts ordinarily would be excluded from the calculation of UBTI under § 512(b)(1), (2), (3), or (5). At least one commenter has questioned how income that is included in UBTI under § 512(b)(4), (13), and (17) is treated for purposes of § 512(a)(6) because that commenter states that amounts included in UBTI under these provisions do not have a nexus to an unrelated trade or business.

… the Treasury Department and the IRS recognize that one interpretation of § 512(a)(6) might impose a significant burden on organizations required to include amounts in UBTI under § 512(b)(4), (13), or (17). For example, one interpretation of § 512(a)(6) might require treating each debt-financed property owned by an exempt organization as a separate trade or business for purposes of § 512(a)(6)(A), because the debt/basis percentage used to calculate the portion of income that is unrelated debt-financed income included in the calculation of UBTI under § 512(b)(4) is specific to each property. Similarly, an exempt organization might be required to report income from each controlled entity as income from a separate trade or business for purposes of § 512(a)(6)(A). The exempt organization would have to track and report each debt-financed property owned directly by an exempt organization or income from each controlled entity separately, which imposes a burden both on the exempt organization and on the IRS. Accordingly, aggregating income included in UBTI under § 512(b)(4), (13), or (17) may be appropriate in certain circumstances. [9]

The IRS is requesting comments on treatment of income not from a partnership that is included in UBTI under these sections. [10]

Partnership Investments and the Trade or Business Rule

Section 5 discusses potential relief by being able to aggregate, under certain conditions, multiple trades or businesses carried by a partnership held by the organization which itself invests in other partnerships, proposing to allow aggregation of activities in the nature of an investment in such entities as opposed to items more like carrying on a trade or business coming from the partnership.  The IRS is asking for comments about the implementation of such a rule in the Notice. [11]

Interim and Transition Rules for Partnership Investments

Section 6 provides interim and transition rules for dealing with partnership investments, in general requiring the use of a reasonable, good-faith interpretation of IRC §§511 and 514 when identifying separate trades or businesses until proposed regulations are issued.

The IRS provides an interim rule for aggregating partnership interests as part of the Notice.

(2) Interim Rule for Aggregation of Qualifying Partnership Interests under the De Minimis and Control Tests. Pending publication of proposed regulations, an exempt organization may aggregate its UBTI from its interest in a single partnership with multiple trades or businesses, including trades or businesses conducted by lower-tier partnerships, as long as the directly-held interest in the partnership meets the requirements of either the de minimis test (described in section 6.02 of this notice) or the control test (described in section 6.03 of this notice) (“qualifying partnership interest”). Additionally, under this interim rule, an exempt organization may aggregate all qualifying partnership interests and treat the aggregate group of qualifying partnership interests as comprising a single trade or business for purposes of § 512(a)(6)(A). [12]

The IRS is also proposing a transition rule for those where the interim rule is not used. [13]

Neither rule may be used by §501(c)(7) organizations subject to IRC §512(a)(3). [14]

De Minimis Test

The de minis test is met if an exempt organization hold no more than 2% of the profits interest and no more than 2% of the capital interest of a partnership, subject to special rules that may require combining related interests. [15]

The Notice provides that each 2% test is calculated using the information in Part II, line J of Schedule K-1:

An organization will be considered to have no more than 2 percent of the profits or capital interests in the case of a partnership, if the average of the organization’s percentage interest at the beginning and the end of the partnership’s taxable year, or, in the case of a partnership interest held for less than a year, the percentage interest held at the beginning and end of the period of ownership within the partnership’s taxable year, entered in Part II, line J, of Schedule K-1 is no more than 2 percent (without regard to the number of days each such percentage is held during the taxable year). … To the extent that a specific profits interest is not identified in Part II, Line J, of Schedule K-1, an organization does not meet the de minimis test. [16]

The Notice goes on to give the following example:

For example, if an exempt organization acquires an interest in a partnership that files on a calendar year basis in May and the partnership reports in Part II, Line J, of Schedule K-1 that the partner held a 3 percent profits interest at the date of acquisition but held a 1 percent profits interest at the end of the calendar year, the exempt organization will be considered to have held 2 percent of the profits interest in that partnership for that year ((3 percent + 1 percent)/2 = 2 percent). [17]

The de minimis test is applied after combining certain related interests.  The required combinations include interests in the same partnership of:

·         A disqualified person (§4958(f)).

·         A supporting organization (§509(a)(3)), or

·         A controlled entity (§512(b)(13)(D)) [18]

The Notice gives the following example of such a combination:

For example, if an exempt organization owns 1.5 percent of the profits interests in a partnership and a disqualified person with respect to the exempt organization owns an additional 1 percent profits interest in that partnership, the exempt organization would not meet the requirements of the de minimis test because its aggregate percentage interest exceeds 2 percent. However, the exempt organization may still be able to aggregate the income (and directly connected deductions) from that partnership interest with other qualifying partnership interests if the partnership interest meets the requirements of the control test (described in section 6.03 of this notice).

Control Test

A second method via which a partnership may aggregate various partnership trades or businesses is via a control test, which is really of a lack of control test.  If a partnership meets this test, it can combine all the trades or businesses of the partnership in which it holds an interest into a single trade or business.

To meet the control test (that is, to demonstrate lack of control) two tests must be met.  The exempt organization:

·         Directly holds no more than 20 percent of the capital interest; and

·         Does not have control or influence over the partnership. [19]

The same combination of interests rule described for the de minimis test applies for the control test as well. [20]

Again, percentage of capital interest is computed by looking at the K-1 the exempt organization receives.  The Notice provides:

When determining the exempt organization’s percentage interest in a partnership the exempt organization may rely on the Schedule K-1 it receives from the partnership. An organization will be considered to have no more than 20 percent of the capital interest, if the average of the organization’s percentage interest at the beginning and the end of the partnership’s taxable year, or, in the case of a partnership interest held for less than a year, the percentage interest held at the beginning and end of the period of ownership within the partnership’s taxable year, entered in Part II, line J, of Schedule K-1 is no more than 20 percent (without regard to the number of days each such percentage is held during the taxable year). [21]

While the percentage of capital calculation is a mechanical one, the control or influence test is far more subjective, taking into consideration all facts and circumstances.  As the Notice provides:

All facts and circumstances are relevant for determining whether an exempt organization has control or influence over a partnership. An exempt organization has control or influence if the exempt organization may require the partnership to perform, or may prevent the partnership from performing, any act that significantly affects the operations of the partnership. An exempt organization also has control or influence over a partnership if any of the exempt organization’s officers, directors, trustees, or employees have rights to participate in the management of the partnership or conduct the partnership’s business at any time, or if the exempt organization has the power to appoint or remove any of the partnership’s officers, directors, trustees, or employees.

Transition Rule

The IRS provides a special rule for partnership interests acquired before August 21, 2019 to take into account that the exempt organizations did not know about these rules prior to August 21, 2018 (when the Notice was issued) and, even then, an organization that doesn’t have someone reading the IRS Notices constantly (shall we say, most of them) likely won’t discover these rules until some time after that. 

The transition rule provides:

…[A]n organization may choose to apply the following transition rule, if applicable, for a partnership interest acquired prior to August 21, 2018: an exempt organization may treat each such partnership interest as comprising a single trade or business for purposes of § 512(a)(6) whether or not there is more than one trade or business directly or indirectly conducted by the partnership or lower-tier partnerships. For example, if an organization has a thirty-five percent interest in a partnership prior to August 21, 2019, it can treat the partnership as being in a single unrelated trade or business even if the partnership’s investments generated UBTI from various lower-tier partnerships that were engaged in multiple types of trades or businesses. [22]

Note that in this case the only test is whether the interest was held on August 20, 2019. [23]

Unrelated Debt-Financed Income

The Notice provides the following information about unrelated debt-financed income under the interim rule:

The income from qualifying partnership interests permitted to be aggregated under the interim rule includes any unrelated debt-financed income (within the meaning of § 514) that arises in connection with the qualifying partnership interest that meets the requirements of either the de minimis test or the control test. See §§ 512(b)(4) and 514. [24]

The Notice provides the following example to illustrate the application of the interim rule in such a case:

For example, assume an exempt organization has an interest in a hedge fund that is treated as a partnership for federal income tax purposes, the interest is a qualifying partnership interest that meets the requirements of the de minimis test, and the hedge fund regularly trades stock on margin. Ordinarily, the dividends from such stock and any income (or loss) from the sale, exchange, or other disposition of such stock would be excluded from UBTI under § 512(b)(1) and (5). However, because all or a portion of the stock’s purchase is debt-financed, § 512(b)(4) requires that all of or a portion (depending on the debt-basis percentage applied) of the dividend income (if any) and any income (or loss) from the sale of the stock be included in UBTI. For the purpose of the interim rule, the exempt organization may aggregate unrelated debt-financed income generated by the hedge fund with any other UBTI generated by any of the hedge fund’s trades or businesses that are unrelated trades or businesses with respect to the exempt organization.

Similarly, any unrelated debt-financed income that arises in connection with a partnership interest that meets the requirements of the transition rule may be aggregated with the other UBTI that arises in connection with that partnership interest. [25]

Application to Social Clubs, VEBAs and SUBs

The Notice points out that special UBTI definitions apply to social clubs, VEBAs and SUBs:

…[S]ocial clubs, VEBAs, and SUBs are taxed under § 511 on their non-exempt function income, which generally includes investment income and income derived from an unrelated trade or business. [26]

But the Notice points out that the other, more standard, UBTI rules also apply to such groups.  Therefore:

…even though § 512(a)(3) uses terminology different from § 512(a)(1), § 512(a)(6) applies to an organization subject to § 512(a)(3) if such organization has more than one unrelated trade or business. For example, a social club that receives non-member income from multiple sources, such as from a dining facility and from a retail store, would have more than one unrelated trade or business and therefore be subject to the requirements of § 512(a)(6). [27]

While the IRS provides that they expect the rules for identifying separate trades or businesses will apply equally under IRC §512(a)(1) and (3), the IRS does ask for comments:

Nonetheless, because social clubs, VEBAs, and SUBs are taxed differently than other exempt organizations under § 511, the Treasury Department and the IRS request comments regarding any additional considerations that should be given to how § 512(a)(6) applies within the context of § 512(a)(3). In particular, the Treasury Department and the IRS request comments regarding how these exempt organizations’ investment income should be treated for purposes of § 512(a)(6). [28]

As was noted earlier, the aggregation rules under the interim test do not apply to §501(c)(7) social clubs. [29]

Calculation of Total UBTI

The Notice reminds organizations that, under IRC §512(a)(6)(C), total UBTI includes the positive UBTI arising from each distinct trade or business.  That amount used in combing total UBTI from any particular trade or business cannot be less than zero following the changes made by the Tax Cuts and Jobs Act. [30]

The Notice also deals with the fringe benefit rule found at IRC §512(a)(7), derisively referred to by many in the exempt organization arenas the “parking lot tax” that was added to the law by TCJA.  The parking lot tax sets up a new source of UBTI beginning in 2018:

Section 512(a)(7) increases UBTI by any amount for which a deduction is not allowable under this chapter by reason of § 274 and which is paid or incurred by such exempt organization for any qualified transportation fringe (as defined in § 132(f)), any parking facility used in connection with qualified parking (as defined in § 132(f)(5)(C)), or any on-premises athletic facility (as defined in § 132(j)(4)(B)). [31]

This new category of UBTI does not include any such benefit provided by the charity that is directly incurred with an unrelated trade or business regularly carried on by the organization—in that case, there will simply be deduction allowed under IRC §274 in computing UBTI for that amount, just as is true for for-profit businesses.

The IRS has determined this special category of UBTI is not a separate trade or business of the exempt organization and thus holds:

Unlike other paragraphs of § 512, § 512(a)(7) does not treat amounts included in UBTI as a result of that section as an item of gross income derived from an unrelated trade or business (see section 4 of this notice). Furthermore, the Treasury Department and the IRS do not believe that the provision of the fringe benefits described in § 512(a)(7) is an unrelated trade or business. Accordingly, any amount included in UBTI under § 512(a)(7) is not subject to § 512(a)(6). [32]

Net Operating Losses

As the Notice points out, the rules for NOLs from unrelated trades or businesses is impacted by the provisions of IRC §512(a)(6).

In particular, § 512(a)(6)(A) requires such an organization to calculate UBTI, including for purposes of determining any NOL deduction, separately with respect to each trade or business for taxable years beginning after December 31, 2017 (post-2017 NOLs). The Congressional intent behind this change is to allow an NOL deduction “only with respect to a trade or business from which the loss arose.” H.R. Rep. No. 115-466, at 547-48. In the first taxable year beginning after December 31, 2017, no exempt organization with more than one unrelated trade or business will have an NOL deduction to take against the UBTI of a particular trade or business calculated under § 512(a)(6)(A). [33]

The Notice points out that a special transition rule applies to any NOLs that the organization may have entering 2018:

… [I]n order to preserve NOLs from tax years prior to the effective date of the Act, Congress created a special transition rule to permit the carryover of any NOL arising in a taxable year beginning before January 1, 2018 (pre-2018 NOLs). In particular, section 13702(b)(2) of the Act provides that § 512(a)(6)(A) does not apply to pre-2018 NOLs; rather, pre-2018 NOLs are taken against total UBTI calculated under § 512(a)(6)(B). Accordingly, even though an exempt organization with more than one unrelated trade or business will not have any NOL deductions when calculating UBTI with respect to a separate trade or business under § 512(a)(6)(A) for the first taxable year beginning after December 31, 2017, such an organization may be able to take an NOL deduction against total UBTI calculated for such year under § 512(a)(6)(B) if the organization has pre-2018 NOLs. [34]

As a consequence, beginning in 2019 an exempt organization may have both pre-2018 NOLs (not subject to the special rules) and post-2017 NOLs (that are subject to these rules).  The Notice describes the impact of this as follows:

In the second taxable year beginning after December 31, 2017, an exempt organization with more than one unrelated trade or business may have both pre-2018 NOLs and post-2017 NOLs. Section 512(a)(6) may have changed the order in which an organization would ordinarily take losses because § 512(a)(6)(A) requires an organization with more than one unrelated trade or business to calculate UBTI separately (including for purposes of determining any NOL deduction) with respect to each such trade or business before calculating total UBTI under § 512(a)(6)(B). If § 512(a)(6) is read as an ordering rule for purposes of calculating and taking the NOL deduction, post-2017 NOLs will be calculated and taken before pre-2018 NOLs because the UBTI with respect to each separate trade or business is calculated under § 512(a)(6)(A) before calculating total UBTI under § 512(a)(6)(B). [35]

The situation is further complicated by the fact that Congress made changes in general to how net operating losses are dealt with that also need to be factored into the situation.  The IRS specifically asks for comments on how to deal with the interaction of IRC §512(a)(6) and the changes made to the general NOL rules at IRC §172.

Furthermore, section 13302 of the Act made extensive changes to § 172, including limiting post-2017 NOLs to the lesser of (1) the aggregate NOL carryovers to such year, plus the NOL carrybacks to such year, or (2) 80 percent of taxable income computed without regard to the deduction generally allowable under § 172. The limitation in § 172(a) applies only to post-2017 NOLs, but a question exists regarding how the § 172(a) 80 percent income limitation applies when both pre-2018 and post-2017 NOLs exist. The Treasury Department and the IRS intend to issue guidance regarding how § 172 generally applies. However, because § 512(a)(6) provides a more specific rule than the one found in § 172 regarding how the NOL deduction is calculated and taken in the context of calculating UBTI, the Treasury Department and the IRS are requesting comments regarding how the NOL deduction should be taken under § 512(a)(6) by exempt organizations with more than one unrelated trade or business and, in particular, by such organizations with both pre-2018 and post-2017 NOLs. The Treasury Department and the IRS also request comments on the ordering of pre-2018 and post-2017 NOLs and the potential treatment of pre-2018 NOLs that may expire in a given tax year if not taken before post-2017 NOLs.

Global Intangible Low-Taxed Income (GILTI) and UBTI

The IRS also deals with the issue how the new GILTI regime interacts with UBTI.  The IRS concludes that GILTI should be treated similarly to an inclusion of subpart F income for UBTI purposes.

GILTI is not an inclusion of subpart F income under § 951(a)(1)(A), but instead is a separate inclusion under § 951A(a). Nonetheless, an inclusion of GILTI is generally treated in a manner similar to an inclusion of subpart F income for other purposes of the Code. See H.R. Rep. No. 115-446, at 641 (stating that, “[u]nder the provision, a U.S. shareholder of any [controlled foreign corporation] must include in gross income for a taxable year its [GILTI] in a manner generally similar to inclusions of subpart F income”). The Treasury Department and the IRS have determined that an inclusion of GILTI under § 951A(a) should be treated in the same manner as an inclusion of subpart F income under § 951(a)(1)(A) for purposes of § 512(b)(1) and (4). Accordingly, an inclusion of GILTI will be treated as a dividend which is generally excluded from UBTI under § 512(b)(1).

Commenters have also questioned whether § 512(b)(17) will apply to treat as UBTI an inclusion of GILTI to the extent attributable to insurance income (as defined in § 953) that does not constitute subpart F income. The Treasury Department and the IRS note that Congress made no changes to § 512(b) when enacting § 951A, and has not otherwise specifically required the inclusion of such insurance income in UBTI. Accordingly, unless provided otherwise in proposed regulations, the Treasury Department and the IRS will not treat GILTI included in gross income under § 951A(a) that is attributable to insurance income as includible in the UBTI of a tax-exempt organization. [36]

Reliance on Notice 2018-67

The IRS provides that, generally, organizations may rely on this Notice until proposed regulations are issued.

Specifically, the IRS provides:

For taxable years beginning after December 31, 2017, organizations described in § 511(a)(2) and trusts described in § 511(b)(2), collectively called “exempt organizations” throughout this notice, may rely on methods of aggregating or identifying separate trades or businesses under § 512(a)(6) provided in this notice until proposed regulations are published. All such organizations may rely on a reasonable, good-faith interpretation of §§ 511 through 514 taking into account all the facts and circumstances when determining whether an exempt organization has more than one unrelated trade or business for purposes of § 512(a)(6). For an exempt organization this also includes using a reasonable, good-faith interpretation when determining:

• Whether to separate debt-financed income described in §§ 512(b)(4) and 514;

• Whether to separate income from a controlled entity described in § 512(b)(13); and

• Whether to separate insurance income earned through a controlled foreign corporation as described in § 512(b)(17).

The use of NAICS 6-digit codes will be considered a reasonable, good-faith interpretation until regulations are proposed.

For taxable years beginning after December 31, 2017, exempt organizations, other than organizations described in § 501(c)(7) (social clubs), may also rely on the rules provided for aggregating income from partnerships in section 6 of this notice until proposed regulations are published. These aggregation rules include any unrelated debt-financed income that is earned through a partnership that meets the requirements of the rules described in section 6 of this notice. The rules described in section 6 of this notice include:

• The interim rule that permits the aggregation of qualifying partnership interests that meet either the de minimis test or control test into a single trade or business; and

• The transition rule, which allows for aggregating income within each direct partnership interest acquired before August 21, 2018.

Finally, exempt organizations may rely on sections 8.02 and 10 of this notice. These sections provide that:

• Income under § 512(a)(7) is not income from a trade or business for purposes of § 512(a)(6); and

• For purposes of calculating UBTI, an inclusion of GILTI under § 951A(a) is treated as a dividend and follows the treatment of dividends under § 512(b)(1) and (b)(4).

 

[1] Notice 2018-67, Section 2

[2] Notice 2018-67, Section 3.01

[3] Notice 2018-67, Section 3.02

[4] Notice 2018-67, Section 3.02

[5] Notice 2018-67, Section 3.03

[6] Notice 2018-67, Section 3.03

[7] Notice 2018-67, Section 3.03

[8] Notice 2018-67, Section 3.04

[9] Notice 2018-67, Section 4

[10] Notice 2018-67, Section 4

[11] Notice 2018-67, Section 5.02

[12] Notice 2018-67, Section 6.01(2)

[13] Notice 2018-67, Section 6.01(3)

[14] Notice 2018-67, Section 6.01(4), Section 7, Footnote 6

[15] Notice 2018-67, Section 6.02(1)

[16] Notice 2018-67, Section 6.02(2)(a)

[17] Notice 2018-67, Section 6.02(2)(a)

[18] Notice 2018-67, Section 6.02(2)(b)(i)

[19] Notice 2018-67, Section 6.03(1)

[20] Notice 2018-67, Section 6.03(1)

[21] Notice 2018-67, Section 6.03(2)

[22] Notice 2018-67, Section 6.04

[23] Notice 2018-67, Section 6.04

[24] Notice 2018-67, Section 6.05

[25] Notice 2018-67, Section 6.05

[26] Notice 2018-67, Section 7

[27] Notice 2018-67, Section 7

[28] Notice 2018-67, Section 7

[29] Notice 2018-67, Section 7, footnote 6

[30] Notice 2018-67, Section 8.01

[31] Notice 2018-67, Section 8.02

[32] Notice 2018-67, Section 8.02

[33] Notice 2018-67, Section 9

[34] Notice 2018-67, Section 9

[35] Notice 2018-67, Section 9

[36] Notice 2018-67, Section 10