IRS Issues Final Regulations Addressing UBTI Issues for Certain Exempt Organizations

On December 9, 2019, the U.S. Treasury Department and IRS released for publication in the Federal Register final regulations (T.D. 9886) providing guidance on how certain organizations that provide employee benefits—including voluntary employee beneficiary associations (VEBAs) under Internal Revenue Code section 501(c)(9), supplemental unemployment benefit trusts (SUBs) under 501(c)(17), social and recreational clubs under section 501(c)(7), and section 501(c)(2) title holding corporations that have income payable to the listed organizations—are to calculate their unrelated business taxable income (UBTI).

Background

Section 512(a)(3)(E) was added to the Internal Revenue Code under the Tax Reform Act of 1984. Congress enacted section 512(a)(3)(E) to limit the extent to which a VEBA's or SUB's income is exempt from tax, noting that “[p]resent law does not specifically limit the amount of income that can be set aside” by a VEBA or SUB on a tax-free basis.

To implement Internal Revenue Code section 512(a)(3)(E), § 1.512(a)-5T was published in the Federal Register as TD 8073 on February 4, 1986, with an immediate effective date. A cross-referencing Notice of Proposed Rulemaking (the 1986 proposed regulation) was issued contemporaneously with the temporary regulation. Written comments were received on the 1986 proposed regulation, and a public hearing was held on June 26, 1986. The 1986 proposed regulation was withdrawn and replaced by a new proposed regulation (the 2014 proposed regulation) that was published in the Federal Register on February 6, 2014.

With the recent release, regulations that were proposed in 2014 are finalized and corresponding temporary regulations are removed.

The preamble to the final regulations explains that Treasury and the IRS considered comments received in response to the 2014 proposed regulations, and that the final regulations adopt the provisions of the 2014 proposed regulations “with no modifications” other than the following changes:

  • A change in the applicability date to tax years beginning on or after the date of publication of these final regulations

  • A modification of the definition of covered entity to include certain corporations described in section 501(c)(2), as provided in section 512(a)(3)(C)

  • The addition of a clause that refers to the provision in section 512(a)(3)(D) addressing nonrecognition of gain in the case of sales of certain property

  • Minor updates to the examples, formatting changes, and other minor changes in wording that are described as “nonsubstantive”

Accessing the Final Regulations

The Final Regulations were published in the Federal Register on December 10, 2019 and are located in the Federal Register. The Final Regulations provide a summary of comments and explanation of provisions.

Effective/Applicability Date

The regulation applies to taxable years beginning on or after December 10, 2019. For rules that apply to earlier periods, see § 1.512(a)-5T as contained in 26 CFR part 1, revised April 1, 2019.

Have questions regarding UBTI and your exempt organization? We can help.

While the law has wide-ranging implications, numerous provisions specifically affect tax-exempt organizations, including public charities, social welfare organizations, colleges and universities, healthcare organizations, associations, and private foundations. If you have additional questions regarding UBTI and your nonprofit organization, nonprofit attorney Jonathan Grissom can help. Please contact Mr. Grissom via the contact button below.

Tax ComplianceJonathan Grissom, AttorneyUBIT