Advisory Committee on Tax Exempt and Government Entities Makes Recommendations on Reporting of Unrelated Business Taxable Income

The Advisory Committee on Tax Exempt and Government Entities (“ACT”), an IRS advisory panel, made several recommendations on issues relating to unrelated business taxable income (“UBTI”) in its annual report to the IRS (the “Report”). In recent years, the IRS has focused on UBTI reporting for tax exempt organizations; issues relating to UBTI reporting were addressed in Colleges and Universities Project Final Report, which was released in April last year. In light of the IRS’ increased focus on UBTI reporting, ACT selected UBTI as a focus for its annual project.

ACT made the following recommendations in the Report:

  • Commerciality Test. The IRS should open a regulation project to clarify that profits from substantial commercial activity will not disqualify an organization from exemption under Section 501(c)(3), provided that the charitable activity is commensurate in scope with the organization’s financial resources, as set forth in Rev. Rul. 64-182. The regulation project should also reject the application of the “commerciality test,” which has been applied in certain recent court cases and IRS rulings to determine whether business activity precludes exemption under Section 501(c)(3) and what constitutes UBTI.
  • Allocating Indirect Costs. The IRS should provide formal guidance relating to proper methods for allocating indirect costs to exempt activities and unrelated trade or business when facilities and personnel are used in both types of activities.
  • Revenue Rulings. The IRS should publish a comprehensive revenue ruling on a number of unrelated business issues, including categories of activities that are considered related and unrelated, guidance on preparatory time spent on activities, and situations that were frequently reported by colleges and universities (such as facility rentals and dual use properties). The Report includes a draft of the proposed revenue ruling.
  • New Form 990-T. The IRS should formalize and adopt a new Form 990-T based on the format proposed in the Report. The new Form 990-T would be web-based and include activity-by-activity reporting, which would allow for activity-specific worksheets that provide step-by-step processes for calculating revenues and expenses.
  • Improve Web Resources. The IRS should continue to use its web resources to facilitate communication, education and training. The IRS should also continue to improve access to IRS materials and information on its website.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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