IRS Chief Counsel Advice: Treatment of NOLs of unrelated trades or businesses

Treatment of NOLs of unrelated trades or businesses

The IRS publicly released a Chief Counsel Advice (CCA) memorandum that addresses the treatment under section 512(a)(6) of a net operating loss (NOL) arising from an unrelated trade or business of a tax-exempt organization and carried back to a tax year beginning before January 1, 2018 (pre-2018 year) and to a tax year beginning after December 31, 2017 (post-2017 year).

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The CCA memo clarifies that under the “siloing rules” of section 512(a)(6), NOLs from one of a tax-exempt organization’s separate unrelated trades or businesses that is carried back to pre-2018 years may not be deducted against the aggregate unrelated business taxable income (UBTI) for a post­-2017 year.

Read the CCA memo: AM-2020-008 [PDF 124 KB] (released July 10, 2020, and dated June 25, 2020)

Background

In pre-2018 years, an exempt organization deriving gross income from the regular conduct of two or more unrelated trades or businesses calculated unrelated business taxable income (UBTI) by determining its aggregate gross income from all such unrelated trades or businesses and reducing that amount by the aggregate deductions allowed with respect to all such unrelated trades or businesses.

Section 512(a)(6) was added to the Code by the 2017 tax law (Pub. L. No. 115-97, known commonly as the “Tax Cuts and Jobs Act” (TCJA)) to amend this treatment for exempt organizations with more than one unrelated trade or business. Section 512(a)(6) requires an organization subject to the unrelated business income tax, with more than one unrelated trade or business, to calculate the UBTI separately, including for purposes of calculating any NOL deduction, with respect to each such trade or business in post-2017 years. This is referred to as “siloing.”

Code section 172 was amended by the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) (Pub. L. No. 116-136) to provide that any NOL arising in a tax year beginning after December 31, 2017, and before January 1, 2021—these are referred to as “CARES Act NOLs”— may be carried back to the five tax years preceding the tax year of such loss, which includes tax years prior to the enactment of section 512(a)(6).

Chief Counsel Advice

In the CCA memo, two questions were presented:

  • Whether an organization under section 512(a)(6) that incurs a NOL from one of its separate unrelated trades or businesses in a post-2017 year, may carry back and deduct that NOL against aggregate UBTI for a pre-2018 year?  The CCA memo concludes “yes” that an organization subject to section 512(a)(6) that incurs an NOL from one of its separate unrelated trades or businesses in a post-2017 year may carry back and deduct that NOL against aggregate UBTI for a pre-2018 year.

The CCA memo concludes “yes” that an organization subject to section 512(a)(6) that incurs an NOL from one of its separate unrelated trades or businesses in a post-2017 year may carry back and deduct that NOL against aggregate UBTI for a pre-2018 year. 

  • Whether an organization subject to section 512(a)(6) that incurs an NOL in a post-2017 year from one of its separate unrelated trades or businesses that is carried back under section 172(b) to pre-2018 years may deduct against aggregate UBTI for a post­-2017 year any of the remaining NOL carried to the post-2017 year? In other words, whether the “silo rules” requirement of section 512(a)(6) applies to the deduction of an NOL in post-2017 years if the NOL arose in a post-2017 year and was carried back to a pre-2018 year before the remaining NOL is carried to the post-2017 year?

The CCA memo concludes “no.” An organization that incurs an NOL in a post­-2017 year from one of its separate unrelated trades or businesses that is carried back under section 172(b) to pre-2018 years may not deduct against the aggregate UBTI for a post­-2017 year any of that NOL carried to the post-2017 year. The silo rules requirement applies to the deduction in post-2017 years of all NOLs that arise in post-2017 years. The CCA memo ends by stating that an NOL arising in a post-2017 year is subject to section 512(a)(6) regardless of whether the NOL was first carried back to a pre-2018 year.  

KPMG observation

The conclusions reached in the CCA memo generally reflect the position of the IRS in previously announced “frequently asked questions” (FAQs) concerning the treatment of NOL carrybacks by certain exempt organizations. Read TaxNewsFlash


For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | +1 202 533 8817 | ruthmadrigal@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com 

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