Welcome to the UBIT Blog

This is a blog about the unrelated business income tax (UBIT), which applies to most tax-exempt organizations. The blog will discuss new IRS and judicial developments and new and proposed legislation involving the UBIT. Attorneys, accountants, officers and directors of exempt organizations, and others interested in the UBIT will find the information useful and are welcome to comment.

Educational Organization Unitizes Endowment; Unitrust Invests in Endowment Units

Once again, the IRS has ruled that an educational organization that owns an endowment fund and that is also trustee of an unrelated unitrust may unitize its endowment fund, exchange the assets of the unitrust for endowment fund units, and pay a contractual amount to the unitrust with respect to the units the unitrust owns. All without any adverse UBIT consequences to the educational organization or the unitrust. The purpose of such an arrangement is to allow the unitrust to take advantage of the large and well-diversified endowment fund, which earns a higher return than the unitrust can achieve investing on its own.

 PLR 201208038 is the latest ruling concerning a university that manages an endowment fund and also serves as trustee for various unrelated unitrusts. This post points out a few key points raised in the ruling. Continue reading

Operation of Community Center Raises Various UBIT Issues in IRS Ruling

In PLR 201147035, a charitable organization devoted to disaster relief and general charitable purposes amended its articles to permit ownership and operation of community activity centers throughout country. The proposed community centers would offer a broad range of programs designed to serve all community members and would be accessible to the public through memberships. The organization was controlled by a fraternal beneficiary society described in §501(c)(8).

 In the ruling, the organization proposed to acquire its first community center. The acquisition was financed primarily through the issuance of long-term bonds. The community center would offer the following activities:  Continue reading

Tax Reform and the UBIT

Speaking for the Obama administration today, Treasury Secretary Timothy Geithner proposed reducing the highest corporate tax rate from 35% to 28% (25% for manufacturing). The proposal would also do away with some corporate tax deductions and subsidies to compensate for the lost tax revenues. Leading Republican presidential candidates have called for even lower corporate tax rates. Mitt Romney has proposed a 25% top corporate tax rate. Rick Santorum’s plan would reduce the top rate to 17.5%.

 How is the possibility of corporate tax reform relevant to exempt organizations?  Continue reading

UBIT Compliance Is an IRS Priority for 2012

It is no surprise that the IRS has identified UBIT compliance as a priority for 2012. With government funding and private donations decreasing during the recession years, exempt organizations reportedly stepped up unrealted business activities to supply needed revenues. Also, the redesigned Form 990, Return of Organization Exempt from Income Tax, effective in 2008, now provides the IRS with information it can use to identify exempt organizations which are engaging in activities that may generate UBTI. Form 990-T, Exempt Organization Business Income Tax Return, is used to report the UBIT.

 In its 2011 Annual Report & 2012 Work Plan, released on February 8, 2012, the Exempt Organizations section of Tax Exempt and Government Entities announced that it would use the information on Form 990 for UBIT compliance to identify organizations that reported unrelated business activities on Form 990 but did not file a Form 990-T. In addition,the IRS proposes to analyze Form 990-T data to develop risk models to identify organizations that consistently report significant gross receipts from unrelated businesses but also report no tax due. Cryptically, the Work Plan also states that the IRS will use its analyses of the Forms 990 and 990-T “in connection with a coming UBIT project.”  Continue reading

Exempt Organizations: Be Proactive with UBIT Compliance

Whether large or small, exempt organizations need a plan for UBIT compliance. At a minimum, the plan should include:

  • Education about the UBIT in general
  • Specific direction on business activities the organization already conducts
  • Contact person to consult before engaging in new business activities
  • Policy to notify the organization’s attorney or accountant regarding proposed new business activities that might generate UBTI   Continue reading

Exempt Organizations Need to Know About the UBIT

 Most tax-exempt organizations are subject to the unrelated business income tax (UBIT), which is a tax imposed income of exempt organizations from the regular conduct of businesses that are unrelated to the organizations’ exempt purposes. Thus, the unrelated business income tax is an exception to the general rule that exempt organizations do not have to pay income taxes. For 2007 (the latest year for which figures are available), tax returns filed by 45,069 exempt organizations showed $11,682,909,000 in gross unrelated business income and owed $594,126,000 in unrelated business income tax. Continue reading