IRS Issues Proposed Revised Group Exemption Procedures

• DOI: http://doi.org/10.1002/npc.30738
• Date: 01 July 2020
• Published date: 01 July 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 July 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

Specific and Charitable Contribution

Deductions

The proposed regulations provide that the total UBTI

of an exempt organization with more than one unrelated

business is the sum of the UBTI computed with respect

to each unrelated business, less the specific deduction

(IRC § 512(b)(12)).

Likewise, the charitable contribution deductions (IRC

§ 512(b)(10), (11)) are to be taken against UBTI.

Net Operating Losses

The proposed regulations state that an exempt

organization with more than one unrelated business

determines the net operating loss deduction (IRC §

512(b)(6)) separately with respect to each unrelated busi-

ness (Prop. Reg. § 1.512(a)-6(h)). Treasury and the IRS

noted the changes made to the NOL deduction by the

CARES Act (summarized in last month’s issue) and stated

that additional guidance may be issued on the point.

Miscellany

The proposal clarifies that the bucketing rule applies

to individual retirement accounts (IRC § 408(e)) (see the

article beginning on p. 6 of this issue). It also clarifies

that an inclusion of subpart F income (IRC § 951(a)(1)(A))

is treated in the same manner as a dividend. It further

clarifies that an inclusion of global intangible low-taxed

income (IRC § 951A(a)) is treated in the same manner as

an inclusion of subpart F income. The IRS will be updat-

ing Form 990-T and its schedules and instructions. [25.5]

Commentary: These proposed regulations are, in sev-

eral respects, more favorable, from an exempt organ-

izations standpoint, than the guidance in the notice.

Comments obviously had a positive impact.

Classification of unrelated business activities based

on a two-digit NAICS system, rather than one based on

six digits, will give exempt organizations greater latitude

in combining similar activities into a single business. This

topic is, however, a matter of law; thus, there should be

substantive policy guidance on the point in the regula-

tions, such as along the lines of the US Tax Court’s opin-

ions concerning the conduct of businesses by marijuana

dispensaries (see the summary in the February 2019

issue). That type of legal analysis, along with the codes,

would be more in keeping with the tenor of the existing

regulations and the seriousness of the topic.

The proposed regulations do not address some

topics, such as the matter of allowable expense deduc-

tions and the treatment of NOLs reflecting the changes

wrought by the CARES Act. One quite positive highlight:

the ability of charitable organizations to aggregate net

income and losses from unrelated businesses for pur-

poses of computation of public support. ◆

COVID-19 RELIEF LAW UPDATE

• President Trump, on April 24, signed into law an

appropriations bill (Pub. L. No. 116-139) that pro-

vides additional funding to further fight COVID-

19 (Paycheck Protection Program and Health Care

Enhancement Act). Most of these funds will be used

to replenish the Small Business Administration’s

Paycheck Protection Program. Twenty billion dollars

are allocated to the Economic Injury Disaster Loan

program, while $75 billion are set aside for the Public

Health and Social Services Emergency Fund.

• The Federal Reserve published a FAQ on April 30

stating that nonprofit organizations are not currently

eligible for assistance under the Main Street Lending

Program. It is also stated, however, that the Fed and

the Treasury Department are “evaluating the feasi-

bility of adjusting the borrower eligibility criteria and

loan eligibility metrics” of the program for nonprofit

organizations.

• The IRS, on May 7, published a FAQ concerning

CARES Act §§ 3504, 18004, and 18008, stating that

emergency financial aid grants to college students

for unexpected expenses, unmet financial need, or

expenses related to the disruption of campus oper-

ations because of the pandemic are not included in

their gross income inasmuch as the grants are quali-

fied disaster relief payments (IRC § 139).

• Controversies are brewing over which types of

nonprofit entities should receive federal assistance

under the Paycheck Protection Program in the face

of the COVID-19 pandemic, notwithstanding eligi-

bility for forgivable loans as a matter of law. One of

these flashpoints is provision of funds to universities,

colleges, and prep schools, particularly those with

considerable endowments (see, e.g., an article in the

April 30 New York Times titled “Prep Schools Face

Setback, and a Quandary on Federal Aid”). ◆

IRS ISSUES PROPOSED

REVISED GROUP EXEMPTION

PROCEDURES

The IRS, on May 1, issued a proposed revenue proce-

dure setting forth updated group exemption procedures

(Notice 2020-36). This proposal includes new procedures

a central organization must follow to maintain a group

exemption. In understatements, the IRS recognizes that

the proposal would make “substantial changes” to the

existing procedures (generally in Rev. Proc. 80-27) and

“may” impose “additional administrative burden[s]” on

central organizations.