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While exempt organizations investing in passthrough entities may owe income tax under the UBTI rules, these organizations need to consider how their after-tax rate of return compares between their UBTI- and non-UBTI-generating investments.
The IRS should be commended for its work to ensure that exempt organizations, including social clubs, are acting in a manner consistent with their exempt purposes.
Exempt organizations should also review all prior transactions occurring after September 13, 1995, to see if any corrective action is necessary.
After Revenue Ruling 2004-24, the issue remained murky for exempt organizations for two reasons.
Ancillary joint ventures involve a limited portion of the assets or services of an exempt organization.
However, how an exempt organization computes UBTI for state income tax purposes varies from state to state.
Tax exempt organizations (EO) were generally not required to file the new form at the time they apply for tax exempt status, said Williams.
Subjecting tax-exempt organizations to taxation when they enter the commercial realm has long been an objective of both the IRS and the taxable enterprises against which exempt organizations compete.
Marcus Owens, director of the exempt organizations division, told tire publication that the plans are not finalized yet, but even if they go through he does not expect to see a dramatic increase in the number of non-profit organization that lose their tax-exempt status or receive "intermediate sanctions" -- penalties that fall short of revocation of exempt status.
The FY 2012 Work Plan for the IRS Exempt Organizations Division (E0) indicates that EO will be looking at organizations that report ownership of foreign bank accounts to determine whether the organization complies with exempt purpose, documentation, and filing requirements.
* Increased congressional and IRS scrutiny of exempt organizations includes looking at unrelated business income (UBI).