IRS Releases Interim Guidance on Unrelated Business Income Tax (UBIT): Notice 2018-67

    New Internal Revenue Code Section 512(a)(6), enacted by Congress as part of The Tax Cuts and Jobs Act, now requires a tax-exempt organization to determine if it has more than one “unrelated trade or business,” and to calculate its unrelated business income tax (UBIT) separately with respect to each unrelated trade or business activity.  However, section 512(a)(6), as enacted, does not provide criteria for determining:

    • Whether a tax-exempt organization has more than one unrelated trade or business, or
    • How to identify separate trades or businesses for purposes of calculating UBIT.

    On August 21, 2018, the Internal Revenue Service issued Notice 2018-67 (the Notice), to provide tax-exempt organizations with interim guidance that includes these determinations, and addresses other items in new Section 512(a)(6).

    As described below, the Notice may be relied on until proposed regulations are issued. A few of the salient provisions of the Notice are as follows:

    Separate trade or business

    Under the Notice, exempt organizations may use reasonable, good-faith interpretations in determining separate trades or businesses. For this purpose, use of the North American Industry Classification System (NAICS) 6-digit codes for the generators of the revenue streams of the organization will be considered reasonable and in good-faith. For example, an exempt organization, the sole income of which is derived from advertising, may regard itself as having one trade or business – advertising -- regardless of the actual source of the advertising income.

    Investment Activities:
    Per the Notice, proposed regulations will later be issued and will allow treating “certain [emphasis added] investment activities” of a tax-exempt organization as one trade or business for purposes of Section 512(a)(6)(A). The Notice requests comments by December 3, 2018 regarding the scope of activities that should be included in the category of “certain investment activities.”

    Partnership Interests:

    Aggregation of Partnership Interests: Tax-exempt organizations may aggregate UBTI from a single partnership conducting multiple trades or businesses (including those businesses or trades directed by lower-tier partnerships), if at least one of two tests is met:

    • De Minimis Test - satisfied when the tax-exempt organization does not directly hold more than 2% of the profits interest and no more than 2% of the capital interest in the partnership; OR
    • Control Test - satisfied when the tax-exempt organization does not hold more than a 20% capital interest and does not have any influential control over the partnership.

    Schedule K-1s received from the partnerships may be relied upon in determining these percentages.

    Aggregation of Qualifying Partnership Interests: Under the Notice, a tax-exempt organization may aggregate the activities from all its partnership interests meeting either the de minimis test or the control test as a single trade or business for purposes of Section 512(a)(6)(A).

    Partnership interests acquired prior to August 21, 2018:Under a transition rule, a partnership interest acquired by a tax-exempt organization prior to August 21, 2018, may be treated as a single trade or business under Section 512(a)(6), regardless of the number of trades or businesses conducted by the partnership (or its lower-tier partnerships), or whether the de minimis or the control tests are met.

    Under the transition rules included in the Notice, all such qualifying partnership interests may be aggregated and treated as one trade or business for purposes of Section 512 (a)(6).

    Debt-financed income, controlled entities, and certain foreign insurance income

    The Notice advises that UBTI for debt-financed income (Section 512(b)(4)), income derived from certain controlled entities (Section 512(b) (13)) and certain foreign insurance income (Section 512(b)(17)) could create a burden for tax-exempt organizations if each debt-financed property, each controlled entity, or each insurance income stream through a controlled foreign corporation, is treated as a separate trade or business.

    In the Notice, it is posited that treating such UBTI in the aggregate could reduce this burden, and comments are requested in this regard.

    Global intangible low-taxed income (“GILTI”)

    A United States shareholder owning more than 10 percent of the stock of a foreign corporation is required to include the net income earned by such foreign corporation to the extent that it exceeds a deemed fixed rate of return (10%) on the tangible assets owned by the foreign corporation. This income pickup is referred to as “GILTI” and under the Notice is treated as a dividend, which is generally excluded from UBTI under Section 512(b)(1).

    Social clubs, VEBAs, and SUBs

    The Notice requests comments as to how to apply the Section 512(a)(6) rules to the investment income of social clubs, VEBAs, and supplemental unemployment compensation benefits trusts.

    Qualified transportation and other fringe benefits

    The Notice provides that the provision of fringe benefits described in Section 512(a)(7) (qualified transportation and other fringe benefit income) is not considered an unrelated trade or business, and therefore UBTI related to these is not subject to Section 512(a)(6).


    Comments regarding the Notice are due by December 3, 2018.

    Effective date

    Until proposed regulations are issued, this Notice may be relied upon.

    The rules provided under the Notice are complex, detailed and nuanced, and therefore must be implemented carefully. For additional information, please contact Thomas Lanning, CPA, Partner, Tax, Not-for-Profit and Education Industry Practice, CohnReznick at, 646-834-4108; or Lori Yokobosky, CPA, Senior Manager, Not-for-Profit and Education Industry Practice, CohnReznick at, 973-403-6940.

    Subject matter expertise

    • John Alfonso
      Contact John John+Alfonso
      John Alfonso

      CPA, CGMA, Partner - Not-for-Profit & Education Industry Leader

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    CohnReznick’s Not-for-Profit & Education Industry Practice

    Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.