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Notice 2018-67: Guidance for new UBTI rules under section 512(a)(6)
Guidance for new UBTI rules under section 512(a)(6)
The IRS today released an advance version of Notice 2018-67 as guidance concerning new section 512(a)(6) (which was added to the Code by the U.S. tax law enacted December 22, 2017 (Pub. L. No. 115-97)).
Section 512(a)(6) requires an organization subject to the unrelated business income tax under section 511, with more than one unrelated trade or business, to calculate unrelated business taxable income (UBTI) separately with respect to each trade or business.
Notice 2018-67 [PDF 113 KB] describes issues arising under new section 512(a)(6) and provides the following transition rules and interim guidance under section 512(a)(6) on which organization may rely pending publication of proposed regulations:
- For exempt organizations investing in partnerships, Notice 2018-67 provides the following interim rule:
- 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) if one of two tests is met:
- A de minimis test, which the exempt organization satisfies if it holds directly no more than 2% of the profits interest and no more than 2% of the capital interest of the partnership; or
- A control test, which the exempt organization satisfies if it directly holds no more than 20% of the capital interest and does not have control or influence over the partnership.
- An exempt organization may aggregate all partnership interests meeting the de minimis or control test and treat the aggregate group of qualifying partnership interests as comprising a single trade or business for purposes of section 512(a)(6).
- For a partnership interest acquired prior to August 21, 2018, an exempt organization may treat each partnership interest as comprising a single trade or business for purposes of section 512(a)(6)—regardless of whether it meets the de minimis or control test and regardless of whether or not there is more than one trade or business directly or indirectly conducted by the partnership or lower-tier partnerships.
- 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) if one of two tests is met:
- For trades or businesses that an exempt organization engages in other than through a partnership, Notice 2018-67 states that the use of North American Industry Classification System (NAICS) 6-digit codes to determine whether an exempt organization has more than one unrelated trade or business will be considered a reasonable, good-faith interpretation of section 512(a)(6) on which taxpayers may rely.
- Notice 2018-67 announces that Treasury and the IRS have determined that an inclusion of global intangible low-taxed income (GILTI) under section 951A(a) is to be treated as a dividend, which is generally excluded from UBTI under section 512(b)(1). This is the manner in which an inclusion of subpart F income under section 951(a)(1)(A) is generally treated for UBTI purposes.
- Notice 2018-67 states that any amount included in UBTI under new section 512(a)(7) (relating to certain qualified transportation fringes) is not subject to section 512(a)(6).
- Notice 2018-67 also contains preliminary observations regarding amounts included in UBTI under section 512(b)(4) (relating to unrelated debt-financed income), section 512(b)(13) (relating to certain income from controlled entities), and section 512(b)(17) (relating to certain insurance income). The notice states that Treasury and the IRS do not currently see a distinction between these categories of UBTI and income derived from an unrelated trade or business for purposes of section 512(a)(6) but recognize that aggregating income included in UBTI under section 512(b)(4), (13), or (17) “may be appropriate in certain circumstances.”
The IRS notice requests comments on these and other issues and generally provides that exempt organizations may rely on a reasonable, good-faith interpretation of sections 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 section 512(a)(6).
Overview
Notice 2018-67 is organized as follows:
- Section 2 of Notice 2018-67 provides a general background of the law on UBTI and section 512(a)(6).
- Section 3 outlines general concepts for identifying separate trades or businesses for purposes of section 512(a)(6) and provides interim reliance on a reasonable, good-faith standard for making such a determination.
- Section 4 discusses the possible treatment of income described in section 512(b)(4), (13), and (17).
- Section 5 discusses general principles surrounding income from partnerships.
- Section 6 sets forth interim and transition rules under section 512(a)(6) for aggregating income from partnerships and debt-financed income from partnerships.
- Section 7 discusses the application of section 512(a)(6) to certain organizations subject to the UBTI rules of section 512(a)(3).
- Section 8 discusses the effect of section 512(a)(6) on income described in section 512(a)(7) (fringe benefits).
- Section 9 provides information on how to calculate net operating losses (NOLs) within the framework of section 512(a)(6).
- Section 10 concludes that, for purposes of calculating UBTI, an inclusion of GILTI is treated as a dividend and follows the treatment of dividends under section 512(b)(1) and 512(b)(4).
- Section 11 summarizes reliance on rules provided in this notice.
- Section 12 requests comments and provides information for submitting comments.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com
Randall Thomas | +1 202 533 3786 | randallthomas@kpmg.com
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