Final Bucketing Rule Regulations Issued

• Published date: 01 February 2021
• DOI: http://doi.org/10.1002/npc.30819
• Date: 01 February 2021

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

FINAL BUCKETING

RULE REGULATIONS

ISSUED

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.

Overview

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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DOI:10.1002/npc

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 38 Number 2

February 2021

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Recent IRS Private Letter Rulings 6

Supreme Court Update 7

“Tax Insurance” Premiums

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IRS Updates Inflation

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IRS Sending Warnings As To

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