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The Department of the Treasury and the IRS released a notice of proposed rulemaking (NPRM) on April 23 to address Internal Revenue Code section 512(a)(6), requiring exempt organizations, including colleges and universities, to calculate unrelated business taxable income (UBTI) separately by each category of activity or line of business, rather than in the aggregate. The new requirement was enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017. 

The proposed rules chiefly follow the interim guidance included in IRS Notice 2018-67, with some modifications in response to comments received from the regulated community, including NACUBO’s recommendations.

Classifying Unrelated Business Activities

The proposed regulations require reliance on the North American Industry Classification System (NAICS) codes to determine whether an exempt organization has more than one unrelated trade or business and for categorizing lines of business and calculating UBTI. Notice 2018-67 proposed using the more-detailed NAICS six-digit codes; however, the proposed rules reflect public comments, including NACUBO’s recommendation that such an approach would be needlessly burdensome. Instead, institutions and organizations can use the first two digits of the NAICS code that most precisely describes a business activity.

Treasury and the IRS did not include guidance on the allocation between an exempt activity and an unrelated trade or business, stating that they intend to publish a separate notice addressing that topic. In the meantime, the IRS confirmed that allocation on a reasonable basis should still be used and that using an unadjusted gross-to-gross method is not reasonable.


The proposed regulations treat investment activities as a single separate unrelated trade or business. This permits an organization to aggregate gross income and directly connected deductions from multiple separate unrelated trades or businesses.

According to the preamble, policymakers “recognize that exempt organizations have UBTI under sections 511 through 514  from activities engaged in with an intent to make an investment rather than with the intent to actively participate in any of the unrelated trade or business activities generating the UBTI.”

Investment activities under the proposed regulations are limited to qualifying partnership interests, debt-financed properties, and qualifying S corporation interests. According to the NPRM, Treasury and the IRS will continue to consider whether investment activities can be defined more generally in a way that is administrable and consistent with legislative intent.

The rules specify that a partnership in which an exempt organization is a general partner for federal tax purposes is not a qualifying partnership interest within the meaning of the proposed regulations, regardless of the institution’s percentage interest.

With regard to partnerships, the term “influence” was removed as defining an institution’s control of a partnership. The NPRM sets forth specific circumstances that evidence control, focusing on four discrete rights or powers:

  1. Can the exempt organization require partnership to perform or prevent from performing act that affects operations of partnership?
  2.  Can it appoint or remove partnership’s officers, employees, and a majority of directors?
  3. Does it have a right to participate in partnership management?
  4. Can it conduct the partnership’s business?

These parameters should provide more clarity to institutions as they determine control of partnerships for purposes of accurate reporting and calculation of UBTI.

Interim Rule

The proposed regulations retain the interim rule in Notice 2018-67 that permits an organization to aggregate UBTI from some partnership interests with multiple trades or businesses and allows the aggregation of any qualifying partnership interest (QPI) with all other QPIs. Under the proposed rules, institutions would be permitted, but not required, to aggregate UBTI from QPIs. However, the proposed regulations note that once an organization designates a partnership interest as a QPI, it cannot later identify the trades or businesses conducted by the partnership that are unrelated trades or businesses for the institution using NAICS two-digit codes unless and until the partnership ceases being a QPI.

Transition Rule

The transition rule, originally set forth in Notice 2018-67, permits exempt organizations to treat each partnership interest acquired before August 21, 2018, that didn’t meet the requirements of either the de minimis test or the control test set as a single trade or business. However, in the case of a partnership conducting more than one business that is a separate unrelated trade or business, applying the transition rule to all partnership interests and treating each nonqualifying partnership interest as one trade or business would undermine the purpose of the new basketing requirement by allowing gains from one unrelated trade or business to offset losses from another, according to the NPRM.

The NPRM clarifies that a partnership interest acquired before August 21, 2018, will continue to meet the transition rule requirement even if the institution’s percentage interest changes after that date. The proposed regulations allow an exempt organization to rely on the transition rule only until the first day of the organization’s first tax year starting after the date final regulations are published.

The proposed rules also  allow an institution to apply either the transition rule or the look-through rule to a partnership interest that satisfies the requirements for both rules. 

The NPRM also allows exempt organizations to:

  • Include all the UBTI from the organization’s debt-financed properties in the list of investment activities treated as a separate unrelated trade or business.
  • Aggregate all specified payments received from a controlled entity and treat the payments as received from one separate unrelated trade or business.
  • Treat insurance provided by all controlled foreign corporations (CFC) as one trade or business, regardless of whether the insurance income is received from more than one CFC.

Net Operating Losses

Under section 512(a)(6), an organization cannot offset income from one unrelated trade or business with losses from a separate unrelated trade or business; however, it can use net operating losses (NOLs) with respect to each of its unrelated trades or businesses in calculating UBTI from those trades or businesses. Institutions may have two types of NOLs: those generated before 2018 that are not tied to a specific unrelated trade or business and those generated after 2017 that are connected to a specific unrelated trade or business. The notice also states that an exempt organization with both pre-2018 and post-2017 NOLs will deduct its pre-2018 NOLs from its total UBTI before deducting any post-2017 NOLs with regard to a separate unrelated trade or business from the UBTI from such unrelated trade or business.

In addition, the general NOL rules under Section 172 that were tightened as part of TCJA were recently relaxed by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The proposed regulations do not address the recent changes to the use of NOLs and recognize that additional guidance will be needed.


Working with members of the Tax Council, NACUBO will be submitting recommendations to Treasury and IRS for consideration as final rules are developed. The comment deadline is June 23, 2020. Please share your institution’s concerns or suggestions for comments on the proposed rules with us.


Mary Bachinger

Director, Tax Policy


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