presented by: ubit reform proposals from the advisory committee on tax exempt entities eric carriker...
TRANSCRIPT
PRESENTED BY:
UBIT Reform Proposals from the Advisory Committee on Tax Exempt Entities
Eric Carriker - Moderator
Milton Cerny
Virginia Gross
Dave Moja
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BackgroundColleges and Universities Compliance Report
Questionnaire sent to 400 randomly selected colleges and universities.
Examination of 34 colleges and universities focusing on UBIT, executive compensation, and employment tax.
180 adjustments covering 90% of the returns – aggregate increase of $90M for UBIT.
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Background
Primary reasons for increases in UBIT
Improper reporting of losses as connected to unrelated business activities.
Errors in computing/substantiating NOLs.
Misclassification of activities as related.
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ACT Committee
Fact Finding
Reviewed existing rules, regulations and reporting pertaining to UBIT.
Interviewed representatives from various stakeholder groups (including IRS staff, tax professionals) regarding UBIT.
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Recommendation #1
The IRS Exempt Organizations Division should recommend that Chief Counsel and Treasury open a regulation project so that profits from a substantial commercial activity will not preclude exemption under I.R.C. § 501(c)(3) as long as an organization’s income and its financial resources are used commensurate in scope with its charitable program.
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Recommendation #1
• Correct inconsistency in the application of Treas. Reg. 1.50l (c)(3)-1(c)(1) and 1.501(c)(3)-1( e) on primary activity and purpose.
• Application of the commensurate with test of Rev. Rul. 64-182 its genesis and application
• Historic roots for allowing charities to engage in business activities.
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Recommendation #2
The Exempt Organizations Division should work with Chief Counsel and the Treasury Department to provide formal guidance to the field regarding proper methods for allocating indirect costs where facilities and/or personnel are used to carry on exempt activities and to conduct unrelated trade or business.
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IRS Priority Guidance Plan 2014-15 (EO)
9. Guidance under §512 regarding methods of allocating expenses relating to dual use facilities.
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Cost Allocations – Unit-based
College Y operates a golf course that is used by students, faculty, their golf teams, alumni, and the general public• Fees charged to alumni are higher than students/
faculty/teams, but 10% less than general public fees
• Y notes that fees paid by alumni and the general public are unrelated business income
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Cost Allocations – Unit-based
Y has allocated expenses to the unrelated business income on a “unit-based” allocation method as follows:
Number of unrelated (alumni and general public) rounds
of golf (numerator) / Total number of rounds of golf (denominator)
= % of expenses allocable to unrelated business income from golf fees
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Cost Allocations – Space-based
University E owns a 10,800 square-foot, four-story office building• Three of the floors are occupied by professors and other
employees of E whose work is part of the exempt purpose of E
• One of the floors is rented out to a software company, Q, that does not do any work with E
• E provides significant cleaning services for Q
• Each floor is 2,500 square feet with a common-space 800 square-foot entryway on the first floor
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Cost Allocations – Space-based
E allocates its dual-use expenses on a “square footage” allocation method as follows:• Unrelated = 2,700 sq ft (including 200 sq ft of common
space) = 25%
• Related = 8,100 sq ft (including 600 sq ft of common space) = 75%
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Cost Allocations – Time Spent
University P has a computer repair department, W, that employees three people• W provides computer services to W’s various campus
departments, faculty, and students
• On a limited basis, W provides computer repair services to the outside public
• The three employees of W track their total time spent on repairs and their time spent on outside public repair projects
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Recommendation #3
The Exempt Organizations Division should work with the Chief Counsel and the Treasury Department to publish a comprehensive revenue ruling on a range of UBI issues. The ruling should provide categories of activities that will be considered related and unrelated, guidance on preparatory time spent on activities, and scenarios of situations involving the activities frequently reported on the college and university questionnaire, such as facility rentals and dual use properties.
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Recommendation #3
• Facility Rental and Dual Use Property• Focus is on situations in which a C&U may have UBI
from a facility used by the public
• Cell Tower Rentals
• Hotel Rentals and Dorm Use• Focus is on when public use of facilities results in UBI
• Not UBI if educational (hotel management/education of youth)
• Catering/food services• Focus is on UBI from the provision of services to the
public
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Recommendation #3
• Exclusive provider agreement (sports drink manufacturer)
• Website publications
• Bookstore operations
• Youth camps
• Technology transfers/royalty income
• Preparatory time (tournament publication)
• Foreign blocker corporation
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Recommendation #4
The IRS should expeditiously formalize and adopt a new Form 990-T based upon the proposed format enumerated in this report. The new form will be web-based and have as its centerpiece activity-by-activity reporting on “Checklist A.” This checklist — which would not be open to public disclosure — includes links to education and outreach materials; activity-specific worksheets that provide step-by-step processes for calculating revenues and expenses; and flow-through to a new, streamlined Form 990-T (see Appendices B and C).
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Form 990-T: Redesign!
New Form 990-T Vision
The vision of the redesigned form would be to:
A. Heighten education and outreach in the UBIT arena
B. Simplify Form 990-T for those organizations required to file
C. Minimize the size of the return – if possible
D. Provide IRS-requested Yes/No questions to provide overall UBIT data
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Form 990-T: Redesign!
• Unrelated Business Activities Checklist
• Guide sheets
• Form 990-T (new) • Part I – Revenues and Expenses
• Part II – Signature
• Part III – Tax Computation & Payments
• Part IV – Other Information Regarding Unrelated Business Activities
• Worksheets
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Recommendation #5
The IRS should continue to leverage its use of its electronic database and web based resources to improve and enhance its communication, education, and training. The IRS should continue to improve, update and enhance the public and tax professional’s access to the IRS materials and information available on its website.
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2014 ACT report (EO section) at:
http://www.irs.gov/pub/irs-tege/tege_act_rpt13.pdf
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Thank you.Dave MojaNational Director of Not-for-Profit Tax Services
p. 321.258.9907
©CapinCrouse LLP 2014
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