Also found in: Financial.
UBTIUnrelated Business Taxable Income
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In recent years, reportable UBTI of tax-exempt organizations with alternative investments has increased significantly, possibly because of an increase in debt-financed activity conducted by the alternative investments.
Most IRA investments do not trigger current tax consequences, not because all income an IRA earns grows tax free, but because the types of income that an IRA typically earns are exempt from UBTI rules.
If the fund is a partnership for tax purposes its borrowing is attributed to the partners, giving rise to UBTI exposure for tax-exempt investors.
Moreover, UBTI is managed and reduced through a properly structured lease agreement which is intended to shift income (in the form of non-UBTI rental income) to PropCo.
However, even if an activity is viewed as generating UBTI, the Internal Revenue Service (IRS) has recognized that income from an activity that would normally be considered UBTI may be treated as exempt function income if other facilities are not available within a reasonable distance to provide the service, or if other facilities are inadequate to conduct the service.
Still, assets that will generate UBTI can be donated to a private foundation if they do not violate self-dealing or excess business holdings rules.
The modification further provides exceptions to the "look-through" rule whereby such income would not be included as UBTI if attributable to an insurance or reinsurance policy under which the insured (directly or indirectly) is (i) the tax-exempt organization; (ii) a tax-exempt affiliate of such organization; or (iii) a director, officer or employee of the tax-exempt organization or its affiliate providing that the coverage solely concerns risks associated with the performance of services for the benefit of the tax-exempt organization or its affiliate.
In order to remove UBTI as a deterrent to pension funds in making certain investments in real estate, the 1993 tax legislation, amending code section 514(c), relaxes the above-mentioned restrictions, effective for acquisitions of real estate after December 31, 1993.
While UBTI may be a deterrent for a venture capital fund, rather than a deal breaker, the inability to obtain preferred stock from an LLC has historically functioned as the latter.
If it is not possible for a person that owns an interest in a CFC through a domestic partnership to have amounts "included in gross income under Section 951(a)" under the Textron-type analysis, then avoiding [section] 512(b)(17) UBTI characterization as to insurance income is achievable by simply inserting a domestic partnership between the CFC and the exempt organization.
A tax-exempt trust was generally allowed a deduction for charitable contributions under the rules applicable to individual taxpayers, except that the limit on the deduction was determined in relation to UBTI computed without regard to the contributions deduction, rather than in relation to adjusted gross income.
Gain or loss on the sale of S corporation stock will also be included in the calculation of UBTI for these entities.