Source: https://www.bluejlegal.com/blog/changes-to-taxation-of-exempt-organizations
Timestamp: 2019-09-17 04:12:57
Document Index: 120338364

Matched Legal Cases: ['§ 512', '§ 512', '§ 512', '§ 513', '§ 501', '§ 512', '§ 512', '§ 512', '§ 162', '§ 512', '§ 513', '§ 1']

As a result of the new IRC § 512(a)(6), tax exempt organizations are no longer able to aggregate gross income from multiple unrelated trades or businesses for the purposes of calculating their unrelated business taxable income (UBTI).
A Brief Overview of § 512(a)(6)
Exempt organizations are subject to taxation on their unrelated business taxable income (UBTI), defined in § 512(a)(1) as the gross income derived by any exempt organization from an unrelated trade or business regularly carried on by it, less deductions allowed by Chapter 1 that are directly connected with the carrying on of a trade or business.
An unrelated trade or business is defined in § 513(a) as any trade or business which is not substantially related (aside from the need for funds) to the function constituting the basis for the organization’s exemption under section 501.
As a result of these provisions, organizations that are exempt from taxation under § 501(a) are nonetheless obligated to pay tax on income derived from a trade or business that is regularly carried on and which is not substantially related to the organization’s exempt purpose.
The TCJA introduced changes to the way exempt organizations that engage in two or more trades or businesses calculate UBTI. The new § 512(a)(6) section reads as follows:
§ 512(a)(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—
Now, thanks to § 512(a)(6), aggregation of income and deductions from more than one trade or business is no longer allowed.
Taxpayers may rightly wonder how the IRS will determine when a particular activity constitutes a separate trade or business. So far, Congress and the IRS have provided little guidance on this question. Furthermore, the Internal Review Code contains no general statutory definition of the term “trade or business.” For the purpose of UBTI, “trade or business” has the same meaning as in § 162 (concerning the deductibility of trade or business expenses) and generally includes any activity carried on for the production of income from the sale of goods or performance of services.
The IRS has solicited comments regarding the implementation of § 512(a)(6). In the interim, the IRS has stated that taxpayers should rely on a “reasonable, good faith interpretation” to determine what constitutes a separate trade or business. Until further guidance is provided, reliance on the North American Industry Classification System (NAICS) 6-digit codes will be considered a reasonable, good-faith interpretation.
One effect of relying on NAICS to separate out trades or businesses is that all of an exempt organization’s advertising activities could be considered one trade or business activity, regardless of the source of the advertising income.
The fragmentation principle may also provide helpful guidance in determining when an activity is considered a separate trade or business. This principle, described in § 513(c) and Treasury Regulation § 1.513-1(b), states 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 the organization.
Blue J Legal’s machine learning platform is part of a new generation of legal research tools using machine learning to predict likely legal outcomes based on the universe of past decisions. By focusing on key factors, our algorithm is able to determine how likely it is that a court would find that an activity constitutes an unrelated trade or business.
If you’re interested in learning more about how machine learning can help practitioners navigate unrelated business income tax decisions, watch our US Tax Reform for Exempt Organizations Webinar on demand.