2014 ACT Report Released on the Unrelated Business Income Tax

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On June 11, 2014, the IRS’ Advisory Committee on Tax-Exempt & Government Entities (“ACT”) released its 2014 Annual Report of Recommendations.  Approximately two hundred pages of the 357-page report are specifically focused on tax laws affecting exempt organizations, and all of the recommendations set forth therein focus on the unrelated business income tax.  The following are five key recommendations:

1.     Commerciality Doctrine.  Reject application of the “Commerciality Test” to determine when an exempt organization has engaged in too much unrelated business activity to preclude tax-exemption.

2.     Allocation Methods.  Identify what methods are reasonable and unreasonable for allocating facility and personnel costs used to carry on both exempt activities and unrelated business activities.  Create safe harbors for organizations that follow proper allocation methods. 

3.     New 990-T.  Develop a new Form 990-T that better educates and identifies the specific unrelated business activity and the amount of revenue and expense associated with each activity.

4.     Revenue Ruling.  The ACT has drafted a proposed Revenue Ruling that describes the unrelated business income tax analysis for 23 fact patterns, which it recommends the IRS publish as formal guidance. 

5.     You’ve Got Mail! The ACT recommends that exempt organizations be required to submit an email address on the Form 1023 Application and Form 990s.  The email addresses will be utilized by the IRS to distribute ongoing training and educational guidance.