Tax Matters Update

Tod Wilson August 14, 2014

IRS Renewed Focus on Unrelated Business Income (“UBI”)

• Current Environment

– Results of the IRS College and University Questionnaire Final Report

– Advisory Committee on Tax Exempt and Government Entities proposed new Form 990-T

– 2014 Proposed Tax Legislation concerning UBI

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IRS College & University Questionnaire

• IRS sent 400 questionnaires in October 2008

• Questionnaire focused on UBI, executive compensation and employment taxes

– 33 page questionnaire

– 13 pages devoted to 47 activities that may generate UBI

• 2010 – IRS issued interim report summarizing responses

• April 2013 – IRS released final report

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IRS College & University Questionnaire

• Opened 34 IRS examinations resulting in more than 180 adjustments

• $90 million of adjustments due to increase in UBI

• Primary adjustments included

– Improper reporting of losses in connection with UBI

– Errors in computation or substantiation of net operating allowances ($19 million in NOL disallowed)

– Misclassification of activities as exempt when they were unrelated

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IRS College & University Questionnaire

• IRS examination findings included:

– Institutions claimed losses from activities that were not a trade or business (no profit motive found)

• IRS disallowed losses on 70% of returns examined

• More than $150 million in losses and NOLs were disallowed

– 60% of institutions misallocated expenses between related and unrelated activities

– 40% misclassified unrelated activities as related

• Going forward, IRS will focus on recurring losses and allocation of expenses

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Advisory Committee on Tax Exempt and Government Entities (ACT)

• ACT is governed by the Federal Advisory Committee Act, Public Law 92-463

• ACT is an organized public forum for discussion of items of importance to the sector

• ACT members are appointed by the Department of the Treasury upon recommendation of the Commissioner of the IRS and serve for two-year terms

• UBI was one of five items addressed in ACT’s 2014 report 6

Advisory Committee on Tax Exempt and Government Entities

Statement in UBI Section of ACT’s 2014 Report:

“The focus of our project was to review the existing rules, regulations and reporting to find the reasons for the significant under-reporting of unrelated business income and to recommend specific changes as to the reporting of such income and additional guidance to the sector and to the revenue agents who must administer this important area.”

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Advisory Committee on Tax Exempt and Government Entities

• Goal of ACT’s written report is to provide workable recommendations, which the IRS can and will implement for the areas studied

• ACT’s selection of UBI as an issue was a direct result of the IRS College and University Final Report

• ACT’s focus was on Form 990-T

– Form 990-T, originally introduced in 1951, remains substantially unchanged

– $1,000 specific deduction has not changed since 1951

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Advisory Committee on Tax Exempt and Government Entities

• UBI recommendations included: – Treasury open a regulation project to address commercial activity

– IRS provide formal guidance regarding proper methods to allocate

indirect expenses

– IRS publish a ruling to provide categories of activities that are related and unrelated (ACT drafted a proposed ruling)

– IRS formalize and adopt a new Form 990-T (ACT drafted a redesigned form)

– IRS communicate, educate, train

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Advisory Committee on Tax Exempt and Government Entities

• Proposed Redesigned Form 990-T

• Web based

• Proposed form includes

– Check list for activity by activity reporting (covering 60 – 70 activities)

– Check list not open to the public

– Links to education and outreach materials

– Activity specific worksheets providing step by step process for calculating revenues and expenses

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Advisory Committee on Tax Exempt and Government Entities

Proposed components of the redesigned Form 990-T:

• Unrelated business activities checklist

• Guide sheets

• Form 990-T (new) – Part I – Revenue and Expenses – Part II – Signature – Part III – Tax Computation and Payments – Part IV – Other Information Regarding Unrelated Business Activities

• Worksheets – Periodical Advertising – Unrelated Debt-financed Rentals

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Tax Reform Act of 2014 UBI Provisions

• Tax royalties from sale or license of organization’s name or logo

• Tax corporate sponsorship payments if the sponsor acknowledgement refers to sponsor’s product lines

• Tax exclusive sponsorships greater than $25,000

• Impose tax on income from fundamental research that is not made publicly available

• Segregate unrelated business activities and disallow netting of losses across all activities

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Questions?

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