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Timestamp: 2019-02-20 18:28:54
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Matched Legal Cases: ['§1', '§501', '§501', '§501', '§401', '§501', '§501', '§401', '§501', '§512', '§1', '§1', '§501', '§501', '§512']

UBIT | Carla Neeley Freitag's UBIT Blog
Tag Archives: UBIT
Posted on April 7, 2012 by Carla Neeley Freitag
Recent publicity about former Governor Mitt Romney’s $23 million IRA and its investments in foreign tax havens has raised the profile of so-called UBIT blocker corporations. What is a UBIT blocker and how does it work to the advantage of retirement accounts and other exempt organizations?
Income from Debt-Financed Property is UBTI
If an exempt organization borrows funds to acquire an asset, income from the asset is treated as debt-financed income to the extent of the debt financing. Debt-financed income is included in the organization’s UBTI, unless an exception applies. For example, rents from real property are generally excluded from UBTI. If, however, an exempt organization leases mortgaged property as an investment, part of the rental income is treated as debt-financed income. Similarly, if an exempt organization invests in a partnership that uses borrowed funds to acquire an asset, the debt-financed income rules apply to the organization’s distributive share of the partnership’s income from the asset. Because most alternative asset investments, such as hedge funds, use debt financing, exempt organizations cannot invest directly in hedge funds and other non-traditional investments without incurring UBTI.
Note: Under a special exception, debt incurred by educational organizations and qualified pension and retirement plans to purchase or improve real property is not treated as acquisition indebtedness. Thus, the real property is not debt-financed property and income from the property is excluded from UBTI. The exception is limited to real property and does not apply to hedge fund investments.
Blocking Debt-Financed Income
The debt-financed income rules reduce an exempt organization’s ability to take advantage of leveraged investments without suffering adverse UBIT consequences. Seeking to get around this restriction, some exempt organizations have interposed a corporation between themselves and the investment partnership. The result of such an arrangement is that dividends paid from the corporation to the exempt organization are treated as excludible dividends rather than debt-financed income. The taint of the debt financing does not flow through from the partnership to the corporation to the exempt organization.
Increasing the Advantage by Using Foreign Corporations
Where do tax havens come in? If the UBIT blocker is a U.S. corporation, the corporation will owe income tax on its distributive share of the partnership income. To minimize the income taxation at the corporate level, exempt organizations use a foreign corporation to invest in the partnership owning the mortgaged property. Income of foreign corporations is not taxed until the income is repatriated to the U.S. Some foreign jurisdictions do not impose corporate taxes on corporations owned by non-citizens. Other countries impose very limited corporate taxes. Either way, by using a foreign corporation, an exempt organization can eliminate or minimize the tax payable at the corporate level, reducing the overall cost of the UBIT avoidance strategy.
UBIT Blockers Are Not Illegal
The strategy of using UBIT blocker corporations is not illegal or contrary to any tax laws. Large retirement funds and exempt organizations are seeking to diversify their investment portfolios into non-traditional investments and to increase their returns using leveraged investments. Under the tax laws, income of foreign corporations owned by U.S. citizens or corporations is not subject to U.S. income tax until the income is brought into the country. Giant multinational corporations routinely use these tax principles to avoid billions in U.S. income tax on income of their foreign subsidiaries. The avoidance is permanent if the corporations use the income in their foreign operations rather than repatriate it. In contrast to business corporations, tax-exempt organizations may repatriate dividends from a foreign corporation without adverse UBIT consequences because of the dividend exclusion.
Despite their legal status, the use of UBIT blockers by exempt organizations has resulted in millions of dollars in lost taxes that would have been paid as unrelated business income tax if exempt organizations made direct investments or invested in partnerships without using the intervening corporation. Federal legislators are well aware of the lost revenues resulting from UBIT blockers. In the current political climate emphasizing deficit reduction, Congress may act to reduce or eliminate the use of UBIT blockers by exempt organizations. More than likely, any changes will come as part of an overhaul of the whole system for taxing foreign income and will occur after the election year.
For other articles discussing the use of UBIT blockers by exempt organizations, see Weisman, Romney’s Returns Revive Scrutiny of Lawful Offshore Tax Shelters (Feb. 2012); David Wheeler Newman, Recent Rulings Illustrate Creative Strategies to Deal with UBTI (2011); Council on Foundations, Statement Regarding Unrelated Debt-Financed Income and “Blocker Corporations” (2007)
For a more detailed discussion of the UBTI and debt-financed income rules in the context of UBIT blockers, see Joint Committee on Taxation, Present Law and Analysis Relating to Tax Treatment of Partnership Carried Interests and Related Issues, Part II (2007).
Posted in Debt-Financed Income, Unrelated Business Taxable Income	| Tagged debt-financed income, DFI, income from foreign corporations, UBIT, UBIT blockers, UBTI
Tax Court: An Exempt Organization Subject to the UBIT is Still an Exempt Organization
Posted on March 13, 2012 by Carla Neeley Freitag
To those not accustomed to dealing with subchapter F of the Code (pertaining to exempt organizations) it may seem contradictory that so-called exempt organizations are subject to the unrelated business income tax. And the UBIT is not the only tax that may apply to exempt organizations. Charitable organizations which are private foundations are taxed on their net investment income and are subject to a series of excise taxes designed to curb particular behaviors susceptible to abuse. Thus, exempt organizations, which are not subject to the regular income tax imposed under §§1 and 11, are distinguished from for-profit companies that must pay income taxes. For convenience, we refer to them as exempt organizations, even though we know that they may be liable for the UBIT or other specialized taxes.
Section 501 expressly recognizes that concept of tax-exempt organizations being subject to taxation. Exemption from taxation is provided under §501(a) for organizations described in §501(c), §501(d), and §401(a). These organizations are charities and 28 other categories of organizations described in §501(c), religious and apostolic organizations described in §501(d), and qualified retirement plans described in §401(a).
Section 501(b) states that an organization exempt from taxation under §501(a) is subject to tax as provided in parts II (taxes on private foundations), III (the UBIT), and VI (taxes on political organizations) of subchapter F. Notwithstanding parts II, III, and VI of subchapter F, however, such an organization is “considered an organization exempt from income taxes for purposes of any law referring to organizations exempt from income taxes.”
The Tax Court recently considered this seemingly straightforward Code provision in Research Corporation v. Commissioner, 138 T.C. No. 7 (2012). Continue reading →
Posted in Compliance, Uncategorized	| Tagged charitable organization qualified plan, excise tax on distribution of qualified plan, exempt organizations, Tax Court, UBIT, UBTI
Inflation Adjusted UBIT Items for 2012
Posted on March 1, 2012 by Carla Neeley Freitag
Rev. Proc. 2011-52 provides exempt organizations with two inflation adjustments for 2012. Continue reading →
Posted in Exceptions, Trade or Business, UBTI	| Tagged agricultural organization, charitable contributions, dues, horticultural organization, los cost articles, members, trade or business, UBIT, UBTI, unrelated business taxable income
Partial Exclusion for Post-2005 Payments Received from a Controlled Subsidiary under a Pre-Aug. 18, 2006 Contract Expired in 2011
Posted on February 28, 2012 by Carla Neeley Freitag
In Publication JCX-6-12, dated January 27, 2012, the Joint Committee on Taxation listed tax provisions that expired in 2011 and provisions slated to expire through 2022. Only one item mentioned in the publication applies to the UBIT. Section 512(b)(13)(E), regarding certain payments received from controlled subsidiaries, expired for payments made after December 31, 2011. Continue reading →
Posted in Modifications, UBTI	| Tagged payments from controlled entities, UBIT, UBTI, UBTI modifications
Educational Organization Unitizes Endowment; Unitrust Invests in Endowment Units
Posted on February 27, 2012 by Carla Neeley Freitag
Once again, the IRS has ruled that an educational organization that owns an endowment fund and that is also trustee of an unrelated unitrust may unitize its endowment fund, exchange the assets of the unitrust for endowment fund units, and pay a contractual amount to the unitrust with respect to the units the unitrust owns. All without any adverse UBIT consequences to the educational organization or the unitrust. The purpose of such an arrangement is to allow the unitrust to take advantage of the large and well-diversified endowment fund, which earns a higher return than the unitrust can achieve investing on its own.
PLR 201208038 is the latest ruling concerning a university that manages an endowment fund and also serves as trustee for various unrelated unitrusts. This post points out a few key points raised in the ruling. Continue reading →
Posted in UBTI	| Tagged dividends exclusion, educational organization, endowment fund, UBIT, UBTI, undowment units, unitrust
Controversial Issue of UBTI for VEBAs Addressed in §512(a)(3)(E) and Treas. Reg. §1.512(a)-5T
Code section 512(a)(3)(E) and Treas. Reg. §1.512(a)-5T address the computation of the unrelated business taxable income of voluntary employees’ beneficiary associations (VEBAs) described in §501(c)(9). The provisions also apply to supplemental unemployment compensation benefit trusts (SUBs) described in §501(c)(17).
§512(a)(3)(E). Unrelated business taxable income for social clubs, VEBAs, and SUBs is calculated differently than for most other exempt organizations. Continue reading →
Posted in Regulations, UBTI	| Tagged Deficit Reduction Act of 1984, exempt function income, IRS priority Guidance Plan, qualified asset account limit, set aside, social club, supplemental unemployment compensation benefit trust, UBIT, UBTI, VEBA, voluntary employees' beneficiary association