IRS Issues Proposed Revised Group Exemption Procedures

Date01 July 2020
Published date01 July 2020
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
Specific and Charitable Contribution
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.
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.
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
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”).
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.

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