Final Bucketing Rule Regulations Issued

Published date01 February 2021
Date01 February 2021
The Department of the Treasury and the IRS, on November 19, made pub-
lic final regulations concerning the bucketing rule, used in computing tax-exempt
organizations’ unrelated business taxable income (IRC § 512(a)(6)) (T.D. 9933).
The proposed regulations are summarized in the July 2020 issue.
Due to law changes occasioned by enactment of the Tax Cuts and Jobs Act,
exempt organizations are not permitted to aggregate income and deductions
from all unrelated businesses when calculating their unrelated business taxable
income. Instead, UBTI must be calculated on a business-by-business basis, with
each separate unrelated business in a bucket (or basket or silo).
Congress, in fashioning the bucketing rule, did not provide criteria for determin-
ing whether an exempt organization has more than one unrelated trade or 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 (Reg. § 1.512(a)-6(a)(1)). Organizations determine whether they
regularly carry on unrelated trades or businesses by applying four sections of the
federal tax code (IRC §§ 511-514). An organization identifies its separate unrelated
businesses using the rules in the bucketing rule regulations (Reg. § 1.512(a)-6(a)(2)).
An organization that changes the identification of a separate unrelated busi-
ness must report the change in the tax year of the change in accordance with
forms and instructions (Reg. § 1.512(a)-6(a)(3)).
Changes from Proposed Regulations
Generally, these final regulations track the proposed ones. Notable changes
are (1) a renaming of the proposed control test as the participation test in connec-
tion with the partnership rules, (2) addition of rules for determining percentage
interests in partnerships, (3) inclusion of a definition of what it means to signifi-
cantly participate in a partnership, (4) provision of greater clarity regarding how
the QPI rules apply to S corporation interests, (5) addition of rules concerning net © 2021 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 38 Number 2
February 2021
Also in This issue...
Charitable Deduction Valuation:
Timing, Not Experts, Proves To
Be Everything 4
2020-2021 Priority Guidance
Plan Released 4
Absence of Gift Triggers Gross
Valuation Misstatement Penalty 5
IRS Delays Foundations’
Electronic Filing of Forms 4720 6
Recent IRS Private Letter Rulings 6
Supreme Court Update 7
“Tax Insurance” Premiums
Concerning Charitable Gift
Adjustment Ruled Nondeductible 7
IRS Updates Inflation
Adjustments for 2021 7
IRS Sending Warnings As To
Opportunity Funds 8
Other Developments 8

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