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Abstract: 

Although IRC §501(c)(3) organizations commonly are referred to as “tax exempt,” they are subject to tax on the income derived from any unrelated trade or businesses that they regularly carry on. The organization does not need to conduct the trade or business directly in order to be subject to tax. If the trade or business is conducted by a partnership (or an entity treated as a partnership for federal income tax purposes) of which the organization is a partner, the organization includes in its unrelated business taxable income (UBTI) its distributive share of partnership gross income (even if not distributed) and partnership deductions directly connected with such income. The IRS has issued proposed regulations that provide guidance on how an exempt organization subject to the unrelated business income tax (UBIT) under IRC §511 determines if it has more than one unrelated trade or business, and, if so, how it calculates unrelated business taxable income. Under the proposed changes, many foundations could find they face higher tax bills.

Keywords: IRC §4943 Prohibition on Excess Business Holdings; New Section 512(a)(6); Permitted Aggregation of Investment Activities

Affiliations:  1: Clark Hill PLC.