Partial Exclusion for Post-2005 Payments Received from a Controlled Subsidiary under a Pre-Aug. 18, 2006 Contract Expired in 2011

In Publication JCX-6-12, dated January 27, 2012, the Joint Committee on Taxation listed tax provisions that expired in 2011 and provisions slated to expire through 2022. Only one item mentioned in the publication applies to the UBIT. Section 512(b)(13)(E), regarding certain payments received from controlled subsidiaries, expired for payments made after December 31, 2011. 

 Although generally interest, annuities, royalties, and rents are excluded from UBTI, §512(b)(13) provides that such receipts are taxable when received by an exempt organization from an entity in which it owns 50% or more of the stock, partnership interest, or beneficial interest. Otherwise excluded interest, annuities, royalties, and rents are included in the UBTI of the controlling organization to the extent the payment reduces the net unrelated income (or increases any net unrelated loss) of the controlled entity, determined as if that entity were tax-exempt.

 The Pension Protection Act of 2006 enacted §512(b)(13)(E), which limits the amount of interest, annuities, royalties, and rents from a controlled entity that a controlling organization has to include in UBTI. The provision applies to post-2005 payments made pursuant to a binding written contract in effect on August 17, 2006, including renewals of such contracts under substantially similar terms. Such receipts have to be included in UBTI only to the extent that the payment exceeds the amount that would have been paid under an arm’s length standard. Under this provision, many exempt organizations did not have to include payments from controlled entities in UBTI.

 Section 512(b)(13)(E) was originally scheduled to expire for payments received or accrued after December 31, 2007. The Tax Extenders and Alternative Minimum Tax Relief Act of 2008 extended the provision for payments made through December 31, 2009. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended its application for payments received or accrued before January 1, 2012.

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