Not For Profit/Exempt Organizations Blog

Inclusion of Qualified Transportation Fringe Benefits in UBTI: Guidance, Relief, and Rumors of Possible Repeal

December 10, 2018 saw significant activity with respect to Section 512(a)(7) of the Internal Revenue Code (the “Code”), which requires tax-exempt employers to increase their unrelated business taxable income (“UBTI”) by amounts paid or incurred for qualified transportation fringe benefits provided to employees, including the provision of parking and public transportation benefits. Section 512(a)(7) was enacted pursuant to the 2017 U.S. tax legislation known as the “Tax Cuts and Jobs Act,” and caused concern amongst tax-exempt organizations because of the prospect of increased tax liability, the lack of clarity for determining the taxable amount of such benefits, and the additional administrative burdens triggered for certain organizations.

Guidance issued by the Internal Revenue Service (“IRS”) and a new New York State law, all as of December 10, 2018, may help alleviate some of these concerns.

Notice 2018-99: IRS Issues Guidance Regarding Parking Provided by Tax-Exempt Organizations

On December 10, 2018, the IRS released Notice 2018-99 and Notice 2018-100, which together provide guidance and relief for tax-exempt organizations with respect to determining the amount of UBTI attributable to qualified parking expenses and other qualified transportation fringe benefits. Pursuant to Section 512(a)(7), tax-exempt employers are required to increase their UBTI by amounts paid or incurred for qualified transportation fringe benefits provided to employees. The tax imposed by Section 512(a)(7) applies whether the tax-exempt employer pays for these benefits at its own expense or allows employees to deduct money from their compensation to pay for the benefits on a pre-tax basis.

Notice 2018-99 provides interim guidance for determining the amount of qualified parking expenses subject to UBTI. The Notice generally provides that organizations may use “any reasonable method” to calculate their UBTI with respect to such parking expenses. However, the Notice also includes a specific safe harbor that tax-exempt employers may use until further guidance is issued to calculate the amount of parking expenses that should be included in UBTI, as well as several examples that illustrate use of this safe harbor. For purposes of these rules, the Notice provides that tax-exempt employers may aggregate multiple parking facilities within the same geographic location (i.e., in the same city). The safe harbor delineates four steps:

  • First, a tax-exempt organization would calculate its expenses related to parking explicitly (or effectively) reserved for employees (whether it is on property the employer owns or leases, at or near the employer’s business, or at a location from which the employee commutes to work).
  • Next, the tax-exempt organization would identify the remaining parking spots in the facility that are not explicitly reserved for employees, and determine whether their “primary use” is for the general public. To the extent more than 50% of actual or estimated use of parking spots in the parking facility during typical business hours is for use by the general public, then the “primary use” of the parking facility may be considered to be for the general public, and accordingly, the amount of parking expenses allocated to these non-reserved parking spaces will not be included as UBTI.
  • Third, to the extent the “primary use” of the parking facility is not for the general public (i.e., more than 50% of the actual or estimated use of the facility is for employees, even if spaces are not explicitly reserved), then the tax-exempt organization would identify any such spots that are specifically reserved for non-employee or general public use. Amounts allocable to these spots would not be included as UBTI.
  • Finally, if there are any remaining parking spots not addressed in steps 1-3, the tax-exempt organization would reasonably determine the typical use of those remaining spots, based on actual or estimated usage, and amounts allocable to spots that are typically used by employees would be included as UBTI.

Pursuant to the Notice, tax-exempt organizations are permitted to reduce their UBTI with respect to parking arrangements by reducing the number of explicitly reserved employee parking spots at any time on or prior to March 31, 2019, with retroactive effect to January 1, 2018.

The Notice further provides that UBTI generated under Section 512(a)(7) is not considered a separate unrelated trade or business for purposes of the rules requiring separate computation of UBTI for each separate unrelated trade or business under Section 512(a)(6). This position was previously stated in Notice 2018-67, which was issued in August of 2018.

Notice 2018-100: IRS Provides Penalty Relief for Tax-Exempt Organizations with Respect to Section 512(a)(7)

In coordination with Notice 2018-99, and also on December 10, 2018, the IRS issued Notice 2018-100, which waives tax penalties for tax-exempt organizations that failed to make estimated income tax payments, to the extent the underpayment was attributable to the changes to the qualified transportation fringe benefit rules in Section 512(a)(7). Notably, however, this relief only applies to tax-exempt organizations that were not required to file Form 990-T for the previous taxable year.

New York Law Declines to Tax Tax-Exempt Organizations for Qualified Transportation Fringe Benefits

Relatedly, New York Governor Andrew Cuomo signed a bill on December 10, 2018 that decouples the New York State tax code from the changes made to the federal UBTI rules. This move exempts amounts paid or incurred by tax-exempt organizations for commuter benefits from an additional 9% New York State tax.


Finally, there continues to be momentum in Congress to amend or repeal Section 512(a)(7). On December 10, 2018, Chairman of the House Ways and Means Committee, Kevin Brady (R-TX) introduced an amendment to H.R. 88 that would repeal Section 512(a)(7), retroactive to the date of enactment. Other bills proposed by different members of Congress have contained similar provisions.

IRS Announces Relief from the “Once-In-Always-In” Requirement for Excluding Part-Time Employees Under 403(b) Plans

Last week, the IRS released Notice 2018-95 to provide transition relief to 403(b) plans that improperly excluded certain employees.  Specifically, Notice 2018-95 targets employers that may have erroneously excluded part-time employees from eligibility to make elective deferral when the employees should have been eligible to participate under the “once-in-always-in” requirement (“OIAI”).  According to the OIAI requirement, once an employee becomes eligible to make elective deferrals, an employer may not exclude the employee from eligibility in any later year on the basis that the employee does not work sufficient hours to participate.  Notice 2018-95 consequently provides transition relief for employers that sponsored 403(b) plans and did properly follow the OIAI requirement applied to their part-time employees.

For plans that did not properly apply the OIAI requirement, Notice 2018-95 establishes relief regarding plan operations and plan language, as well as a “fresh-start opportunity.”  Notice 2018-95 also makes it clear that if a 403(b) plan excludes part-time employees for purposes of making elective deferrals, the plan must explicitly include the OIAI requirement in the plan document prior to April 1, 2020, which may require many 403(b) plans to be amended.

Employers sponsoring 403(b) plans that exclude part-time employees for purposes of elective deferral eligibility should carefully consider how the OIAI requirement affects their plans and whether any changes will be necessary to either their procedures or plan documents.

We have provided more detailed information regarding the relief offered under Notice 2018-95 on our Employee Benefits & Executive Compensation Blog, available at the following link:

IRS Announces Transition Relief From The Once-In-Always-In Requirement For Excluding Part-Time Employees Under 403(b) Plans

Proskauer’s 23rd Annual Trick or Treat Seminar

Proskauer’s 23rd Annual Trick or Treat Seminar was held on Wednesday, October 31.

The Seminar discussed:

  • Sexual Harassment in the #MeToo Era
  • Taxing Times for Tax-Exempt Organizations: The Impact of Tax Reform on Executive Compensation and Employee Benefits for Tax Exempt Organizations
  • Recent, Spooky Tax Changes Affecting the UBTI Rules

Amanda Nussbaum welcomed everyone and briefly discussed the five major trends impacting tax-exempt organizations today, including the general impact of the Tax Cuts and Jobs Act (the “Act”), and introduced the presenters.

Here are some key points from each presentation:

Harris Mufson discussed the impact that the #MeToo movement has had on employers.  For example, employers in New York are required to conduct annual, interactive sexual harassment training for all employees and must update their policies and procedures to ensure compliance with new regulatory requirements.  Harris also addressed practical solutions to handling sexual harassment complaints and suggested various proactive measures to mitigate against the risk of such claims, including evaluating hiring processes, changes to employment agreements, assessing the organization’s culture through surveys and increasing focus and attention on diversity and inclusion initiatives. For up to date information on the employment impact of the #MeToo movement and other employment issues, visit our Law and the Workplace blog.

Steven Einhorn discussed the impact that the Act has on executive compensation and employee benefits, particularly as it relates to tax-exempt organizations.  Steven first discussed that, as a result of the addition of new Section 4960 to the Internal Revenue Code of 1986, as amended (the “Code”), many tax-exempt organizations will now face an excise tax for certain compensation payments that will increase the cost for organizations to attract and retain top talent.  Generally, Code Section 4960 imposes a 21% excise tax on annual compensation in excess of $1 million that is paid to a tax-exempt organization’s covered employees.  Code Section 4960 also imposes a 21% excise tax on certain “parachute payments” (payments that are contingent upon a covered employee’s termination of employment).  Steven then discussed the impact that the Act has on retirement plans, focusing on changes to the hardship distribution rules under the Act and also under the Bipartisan Budget Act of 2018, the increased time that a participant has to roll over a “loan offset,” and the ability certain retirement plans had to permit participants who experienced an economic loss due to certain federally declared disasters that occurred in 2016 to take special disaster distributions.

Amy Zelcer discussed the rules governing unrelated business taxable income (“UBTI”) generally and provided an overview of the two major changes to these rules implemented by the Act. First, she discussed the new rule which requires tax-exempt organizations to include as UBTI, amounts paid or incurred for certain employee fringe benefits, including qualified transportation benefits, parking facilities used in connection with qualified parking, and on-premises athletic facilities. Second, she discussed the new rules and recent IRS guidance requiring tax-exempts to separately compute UBTI for each trade or business activity conducted (rather than on an aggregate basis as under previous law). Finally, Amy discussed the overall expected impact of these changes on tax-exempt organizations and highlighted certain open questions left unanswered by the statute and existing guidance.

Tax-Exempts May Limit Fund Investments Pursuant to New IRS Guidance on UBTI

On August 21, 2018, the Internal Revenue Service (“IRS”) released Notice 2018-67 (the “Notice”), addressing issues relevant to tax-exempt organizations arising under new Section 512(a)(6) of the Internal Revenue Code (the “Code”), promulgated pursuant to the 2017 U.S. tax legislation that is commonly referred to as the “Tax Cuts and Jobs Act.”  Section 512(a)(6) requires tax-exempt organizations to compute unrelated business taxable income (“UBTI”) separately with respect to each unrelated trade or business, and precludes the ability to use losses from one trade or business to offset income from a separate trade or business. This new law generally should not impact governmental pension plans that take the position they are exempt from UBTI.

As discussed in more detail below, the Notice allows a tax-exempt organization to treat unrelated businesses held through multiple partnerships as a single unrelated business for this purpose, as long as the tax-exempt organization and certain related persons either (1) directly hold no more than 2% of the capital and profits of the applicable partnership or (2) directly hold no more than 20% of the capital of the applicable partnership and do not have “control or influence” over the applicable partnership. Accordingly, tax-exempt investors may limit their investments in private investment funds to meet one of these safe harbors.

In addition, the Notice confirms that global intangible low-taxed income (“GILTI”) generally does not constitute UBTI.

The provisions of the Notice discussed below regarding aggregation of partnership interests and identification of a separate trade or business may be relied upon until proposed regulations are published.


Section 511 of the Code imposes a tax on the UBTI of organizations that are otherwise exempt from federal income taxation. UBTI is gross income derived by any tax-exempt organization from any unrelated trade or business regularly carried on by it, less deductions directly connected with the carrying on of such trade or business. UBTI includes “unrelated debt-financed income.” An unrelated trade or business is any trade or business that is not substantially related to the exercise or performance of the tax-exempt organization’s “tax-exempt purpose” (i.e., the charitable, educational or other purpose or function that provides the basis for its federal income tax exemption).

Pursuant to Section 512(c) of the Code, where a tax-exempt organization is a partner in a partnership that regularly carries on a trade or business unrelated to the tax-exempt organization’s tax-exempt purpose, the tax-exempt organization must include in its UBTI its share of partnership gross income (whether or not the income is actually distributed to the organization) and deductions directly connected with such income.

Tax-exempt organizations exclude from the calculation of UBTI gross income from dividends, interest, annuities, royalties, rents, and gains and losses from the sale or exchange of property pursuant to Section 512(b) of the Code. However, under the “unrelated debt financed income” rules, some or all of such income may be taxable to a tax-exempt organization if the asset giving rise to such income has “acquisition indebtedness.”

New UBTI Computation Rule

Prior to the enactment of Section 512(a)(6), if a tax-exempt organization derived income from multiple unrelated businesses, UBTI was calculated by aggregating the gross income and gains, net of expenses and losses, from all unrelated businesses. Pursuant to Section 512(a)(6), for taxable years beginning after December 31, 2017, UBTI must be computed separately with respect to each unrelated trade or business, and the UBTI as separately computed for each trade or business cannot be less than zero for any such trade or business. As a result, tax-exempt organizations can no longer use losses or expenses from one unrelated trade or business to offset gains or income from another unrelated trade or business.

General Guidance for Separate Trades or Businesses

When enacting Section 512(a)(6), Congress did not specify how to identify separate unrelated trades or businesses. Unfortunately, the general approach of the Notice is not much clearer, simply providing that tax-exempt organizations can rely on a reasonable, good-faith interpretation of Sections 511 through 514 of the Code and should consider all “facts and circumstances” when determining separate unrelated businesses (although the Notice acknowledges that further guidance requires a “more administrable method.”)  The Notice does, however, provide that the North American Industry Classification System (“NAICS”) six-digit codes may be used to make such determination until regulations are published.

The NAICS is an industry classification system for purposes of collecting, analyzing, and publishing statistical data related to the U.S. business economy, and tax-exempt organizations are already required to use NAICS codes when describing their unrelated trades or businesses pursuant to annual tax reporting requirements. This system, however, was not designed for this purpose, and there are many activities that do not have a specific corresponding NAICS code, and also situations in which NAICS codes separate what would otherwise intuitively be considered related activities. There is also potential for abuse, as tax-exempt organizations could begin to overuse the catch-all NAICS code “900099,” typically reserved for situations where none of the other NAICS codes accurately describe the activity.

Special Rule for Partnerships

The Notice provides a special rule that allows tax-exempt organizations to treat all “qualifying partnership interests” as a single trade or business.  For these purposes, a partnership interest is a qualifying partnership interest if the tax-exempt organization (and its disqualified persons, supporting organizations, and controlled entities) either (1) directly holds no more than 2% of the profits and capital of the partnership or (2) directly holds no more than 20% of the capital of the partnership and lacks “control or influence” over the partnership (the “2 or 20 Test”). For purposes of determining ownership of partnership capital and/or profits under the 2 or 20 Test, the ownership percentage is based on an average of the tax-exempt organization’s ownership of the partnership at the beginning and end of the partnership’s tax year (or the tax-exempt organization’s ownership of the partnership at the beginning and end of the ownership period in the applicable year, where the tax-exempt organization does not hold an interest in the partnership for the entire year).

In determining the existence of “control or influence,” all facts and circumstances are relevant, including (1) having the ability to require the partnership to perform, or refrain from performing, any act that significantly affects the operations of the partnership; (2) participating in the management of the partnership; (3) conducting the partnership’s business; and (4) having the power to appoint or remove any of the partnership’s officers, directors, trustees, or employees. Because of the vagaries of the “control or influence” requirement, tax‑exempt organizations should review any voting or blocking rights they may have on the activities of a partnership and may not want to hold LPAC seats or have special voting rights.

As a result of the inability to net losses across separate unrelated businesses and the significant administrative burden of determining and reporting separate businesses, many tax‑exempt investors may limit their investments in private investment funds to well below 20% of capital (to provide a “cushion” for related persons who might also be counted) or, for those partnership interests where there are concerns about meeting the control or influence test, to be well below 2% of capital and profits (with a similar “cushion”).

Transition Rule

Acknowledging that it may be difficult for a tax-exempt organization to modify its investment in an existing partnership to satisfy the 2 or 20 Test, the Notice provides a transition rule for partnership interests acquired prior to August 21, 2018. Under this transition rule, a tax-exempt organization may treat each such partnership interest as comprising a single trade or business, regardless of whether the partnership conducts more than one trade or business (either directly or indirectly through lower-tier partnership interests).  The transition rule applies without regard to the tax-exempt organization’s ownership percentage in the partnership or whether it has control or influence over the partnership.

The transition rule by itself does not appear to permit a tax-exempt organization to then aggregate existing partnership interests, which could lead to significant administrative complexity.


New Section 951A of the Code requires each U.S. shareholder of any controlled foreign corporation to include its share of GILTI in gross income for the taxable year. The Notice confirms that for purposes of calculating UBTI, an inclusion of GILTI will be treated as a dividend and thus generally excluded from UBTI.

Request for Comments

The Treasury Department and the IRS have requested comments on the application of Section 512(a)(6), due by December 3, 2018. As a result, regulations may differ from the guidance set forth in the Notice.

Please consult with the members of your Proskauer tax team to further discuss the details of this new guidance and how it may apply to your particular circumstances.

IRS Provides Guidance on Searching for Missing 403(b) Participants

On February 23rd, the IRS issued a memorandum to its examiners instructing them not to challenge a 403(b) plan for failing to satisfy the required minimum distribution (“RMD”) rules with respect to missing participants or beneficiaries if the plan sponsor has taken certain specific steps to find them.

Generally, the RMD rules require that a 403(b) participant must begin taking minimum distributions by the April 1st following the year the participant reaches age 70 ½ or, if the plan allows, the April 1st following the year that the participant retires, if later.  Questions frequently arise regarding whether the IRS may challenge a plan for failing to timely commence benefit payments to participants that the plan is unable to locate. Continue Reading

Updates for Tax-Exempt Organizations from the Senate Bill

Early on December 2, 2017, the Senate passed the Tax Cuts and Jobs Act (the “Senate Bill”).  This blog entry describes certain provisions of the Senate Bill that would have the most significant impact on the nonprofit community, including important differences between the Senate Bill and the prior version of the Senate bill and the bill passed by the House of Representatives (the “House Bill”) (both of which we described several weeks ago in “Updates for Tax-Exempt Organizations from the Senate Markup to the Tax Cuts and Jobs Act”). Continue Reading

Recaps from Proskauer’s 22nd Annual Trick or Treat Tax Exempt Seminar

Proskauer’s 22nd Annual Trick or Treat Seminar was held on Tuesday, October 31.

The Seminar discussed:

  • New Rules for Tax-Exempt Bond Compliance
  • The Excess Benefit Transaction Rules
  • Hot Topics in Employee Benefits and Executive Compensation for Tax-Exempt Organizations
  • Partnership Audit Rules: Considerations for Tax-Exempt Investors

Amanda Nussbaum welcomed everyone to the 22nd Annual Trick or Treat Seminar, briefly discussed the impact of tax reform on tax exempt organizations, and introduced the presenters. Continue Reading

Updates for Tax-Exempt Organizations from the Senate Markup to the Tax Cuts and Jobs Act

Over the last several days, there have been significant developments relating to the Tax Cuts and Jobs Act, the pending tax reform legislation in Congress.[1]  On Thursday, a detailed summary of the Senate Finance Committee’s proposal was released (the “Senate Markup”),[2] and the House Ways and Means Committee voted (in a 24-16, party-line vote) to advance their bill for consideration by the full House of Representatives (the “House Bill”).[3]  This alert describes certain provisions of the Senate Markup and House Bill that would have the most significant impact on the nonprofit community, including important differences between the two proposals.  We described significant elements of the initial version of the House Bill last week in “New Rules for Tax-Exempt Organizations in the Tax Cuts and Jobs Act.”

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New Rules for Tax-Exempt Organizations in the Tax Cuts and Jobs Act

House Republican Tax Bill Imposes Excise Tax on Wealthy Private Universities and Excess Compensation of Highly Paid Employees; Subjects State Pension Plans to UBTI Rules

On Thursday, November 2, House Republicans led by Speaker Paul Brady (R-WI) and Chairman of the House Ways & Means Committee Kevin Brady (R-TX), released the first public draft of the much-anticipated Tax Cuts and Jobs Act (the “bill”). (Our full coverage of the bill can be found here.)

In addition to providing substantial rate cuts for corporations and many pass-through businesses and repealing the estate tax, the 429-page document contains several provisions of interest to public charities and private foundations (as well as their advisors).

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Supreme Court Agrees Religiously Affiliated Hospitals Can Have “Church Plans”

The United States Supreme Court unanimously ruled in favor of religiously-affiliated hospitals and healthcare organizations in holding that a pension plan need not be established by a church in order to qualify for ERISA’s church plan exemption. Petitioners are religiously affiliated non-profit healthcare organizations appealing decisions by the Third, Seventh, and Ninth Circuit Courts of Appeal that a church must establish an ERISA-exempt church plan. Respondents are current and former employees of these organizations.
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