UBTI


Also found in: Financial.
AcronymDefinition
UBTIUnrelated Business Taxable Income
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The Employee Retirement Income Security Act (ERISA) does not prohibit investments that generate UBTI. However, ERISA fiduciaries should consider the impact of such income on the plan trust's or VEBA's rate of investment return in light of the fact that plan trusts and VEBAs are otherwise tax-exempt organizations.
Under the TCJA, nonprofits can no longer exclude from UBTI those amounts used to provide certain fringe benefits to employees, such as parking and transportation.
512(a)(1), tax-exempt organizations must pay federal income tax on their UBTI, which generally consists of income derived from any trade or business not substantially related to the conduct of their exempt purpose.
SMAs often generate UBTI and may not be appropriate for qualified accounts or tax-exempt investors.
UBTI from operations is thus isolated in OpCo, which is generally a corporation, and gain from the sale (generally not subject to UBIT) flows through PropCo to the tax exempt investors.
Despite this, the IRS found that the VEBAs could be aggregated with the Section 419 fund, which did maintain reserves, in order to reduce UBTI because the income from the Section 419 account would not be subject to the tax on UBTI in the first place.
Further, the company which will not buy additional excess inclusion income producing assets and has not done so since 2002 will restructure in order to remove UBTI's exposure to its tax-exempt investors and allow its common stock to continue to be eligible for inclusion in the Russell Indexes.
Because many investors in funds may be tax-exempt (and therefore not subject to tax on their investments in a partnership as long as they avoid UBTI), a manager might have trouble convincing tax-exempt entities to invest in a fund which will be subject to an entity-level U.S.
Obvious tax areas that must be addressed are income tax, gift tax, estate tax, and generation skipping transfer tax (GSTT) matters, and the not-so-obvious taxes include (but are not limited to) foreign tax, employment tax, excise tax, return filing, collection, penalties, criminal tax misconduct, corporate tax, deferred compensation, UBTI, partnership tax, capital gains tax, and special valuation rules.
If a charitable remainder trust (CRT-see Q 7949, Q 7951, and Q 7952) is a partner in a partnership or a shareholder in a real estate investment trust (REIT-see Q 7903), and if the partnership or the REIT has excess inclusion income from holding a residual interest in a REMIC, the Service has ruled that: (1) the excess inclusion income allocated to a CRT is not UBTI to the CRT and, thus, does not affect the CRT's tax exemption for the taxable year; (2) a CRT is a disqualified organization for purposes of IRC Section 860E; and (3) a pass-through entity that has excess inclusion income allocable to a CRT is subject to the pass-through entity tax under IRC Section 860E(e)(6)(A).