Treatment of investments in the UBTI proposed regulations

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August 2020


The IRS earlier this year released proposed regulations (Proposed Regulations) under Section 512(a)(6) requiring segmentation of unrelated business taxable income (UBTI). Many exempt organizations, and the partnerships in which exempt organizations invest, were surprised that the definitions relevant to investment activities did not change significantly from IRS Notice 2018-67. For example, the IRS stood firm on the ‘control test’ requirement by maintaining a bright-line 20% threshold in defining qualifying partnership interests (QPI); commenters had advocated for an increased threshold.

The impact of COVID-19 on the global economy made the timing of the Proposed Regulations challenging for exempt organizations with an extended Form 990-T deadline of May 15, 2020 (extended to July 15, 2020 due to COVID-19).

This Tax Insight focuses on the portion of the Proposed Regulations that addresses the treatment of UBTI from partnership investments and provides observations around administering these rules. The Proposed Regulations will apply to tax years beginning on or after the date the final regulations are published in the Federal Register.

The takeaway

The Proposed Regulations provide a roadmap to comply with Section 512(a)(6). Exempt organizations waiting for the final regulations should review their investment fund portfolios and engage with their asset management providers to better understand the underlying structure of their partnership investments, especially those that do not meet the control test. This should help exempt organizations identify investments from which they may require additional trade or business information, depending on how the regulations are finalized.

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Rob Friz

Health Services Tax Leader, PwC US

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