Bucketing Rule Proposed Regs Issued

• DOI: http://doi.org/10.1002/npc.30736
• Published date: 01 July 2020
• Date: 01 July 2020

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

BUCKETING RULE

PROPOSED REGS

ISSUED

April 23 brought the long-awaited proposed regulations from the Treas-

ury Department and the IRS concerning the bucketing rule, used in computing

tax-exempt organizations’ unrelated business taxable income (IRC § 512(a)(6))

(REG-106864-18).

Overview

Due to law changes occasioned by enactment of the Tax Cuts and Jobs Act,

exempt organizations are no longer permitted to aggregate income and deduc-

tions from all unrelated businesses when calculating UBTI.

Congress, in fashioning the bucketing rule, did not provide criteria for deter-

mining when an exempt organization has more than one unrelated business or

how to identify separate unrelated businesses for purposes of calculating UBTI.

In essence, the bucketing rule is this: An exempt organization with more than

one unrelated business must compute UBTI separately with respect to each unre-

lated business (Prop. Reg. § 1.512(a)-6(a)(1)). An organization identifies its separate

unrelated businesses using the rules that follow (Prop. Reg. § 1.512(a)-6(a)(2)).

Separate Unrelated Business

The preamble to these proposed regulations states that “[t]here is no general

statutory or regulatory definition of what activities constitute” a business for unre-

lated business purposes. (Note the sidestepping of acknowledgment of any judi-

cial definition of the concept.) In the notice preceding these proposed regulations

(Notice 2018-67 (summarized in the November 2018 issue)), Treasury and the IRS

stated they were considering use of the North American Industry Classification

System codes as a method for determining whether an exempt organization has

more than one unrelated business and for purposes of calculating UBTI. In the

proposed regulations, the NAICS codes are the system for these purposes, albeit

using only the first two digits of the six-digit codes (Prop. Reg. § 1.512(a)-6(b)). This

approach is seen by the government as “administrable” for exempt organizations.

These codes are to be reported only once, even though there may be some

expansion of the activities. The codes are not to be changed unless there is a

showing that the initial code was chosen in error and that another code is more

descriptive. © 2020 Wiley Periodicals LLC

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DOI:10.1002/npc

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 37 Number 7

July 2020

Also in This issue...

COVID-19 Relief Law Update 4

IRS Issues Proposed Revised

Group Exemption Procedures 4

Deemed Approval Clause Dooms

Facade Easement Charitable

Deduction 5

Nonentities as Exempt

Organizations 6

IRS PLR Teaches Lesson 6

Income From Nonrecurring Event

Ruled Not Destructive of Club’s

Exemption 6

Private Foundation Corner 7

Operational Test Precludes

Exemption 7

Supreme Court Update 8

Other Development 8