Bucketing Rule Proposed Regs Issued

Published date01 July 2020
Date01 July 2020
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))
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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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

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