New rules impact tax-exempt trusts

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September 2019


Pension trusts and exempt organizations formed as trusts need to evaluate the impact of the changes to the Code made by the 2017 tax reform legislation (the Act). While much attention has been given to the Act's impact on exempt entities organized as corporations (e.g., universities and hospitals), it may treat exempt organizations that are structured as trusts differently.

More specifically, tax-exempt trusts with unrelated business income (UBI) from partnership investments are affected by new Sections 512(a)(6) and 199A. These provisions must be analyzed in conjunction with pre-tax reform rules that have remained predominantly intact. For example, tax-exempt trusts, like taxable trusts, are subject to the passive activity loss (PAL) rules under Section 469, net operating loss (NOL) rules under Section 172, and alternative minimum tax (AMT) under Section 55. This Insight addresses key issues concerning this complex landscape of old and new tax rules as related to tax-exempt trusts, including most pension funds.

The takeaway

Tax-exempt trusts should plan for the additional time needed to track new information (e.g., partnership capital percentages and QBI). Furthermore, until further guidance under Section 512(a)(6) is issued, tax-exempt trusts should review their investment portfolio to address the impacts of applying Notice 2018-67 or taking an alternative reasonable interpretation of the statute.

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Rob Friz

Health Services Tax Leader, PwC US

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