Bulletin No. 2020–52

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HIGHLIGHTS

OF THIS ISSUE

Bulletin No. 2020–52

December 21, 2020

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

REV. RUL. 2020-28, page 1669.

Interest rates: underpayments and overpayments. The

rates for interest determined under Section 6621 of the

code for the calendar quarter beginning January 1, 2021,

will be 3 percent for overpayments (2 percent in the case

of a corporation), 3 percent for underpayments, and 5

percent for large corporate underpayments. The rate of

interest paid on the portion of a corporate overpayment

exceeding $10,000 will be 0.5 percent.

T.D. 9912, page 1688.

These final regulations under sections 36B and 6011 of

the Internal Revenue Code (Code) clarify that the reduction

of the personal exemption deduction to zero for taxable

years beginning after December 31, 2017, and before

January 1, 2026, does not affect an individual taxpayer’s

ability to claim the premium tax credit. These final regulations affect individuals who claim the premium tax credit.

EXEMPT ORGANIZATIONS

T.D. 9933, page 1692.

Certain organizations that are generally exempt from federal

income taxes are taxed on income from business activities

that are not related to their exempt purpose. The calculation

Finding Lists begin on page ii.

of the tax on the unrelated business income depends upon

whether the tax-exempt organization has more than one unrelated trade or business. The final regulations provide guidance on how these tax-exempt organizations determine if

they have more than one unrelated trade or business, and, if

so, how to calculate the amount of taxable income they have

from the unrelated business activities. The final regulations

also clarify that these regulations, as well as others on this

topic, apply to individual retirement accounts.

INCOME TAX

T.D. 9934, page 1729.

This document contains final regulations that coordinate the

extraordinary disposition rules issued under Treasury regulation section 1.245A-5(c) and (d) and the disqualified basis rule

issued under Treasury regulation section 1.951A-2(c)(5). This

document also contains reporting rules under section 6038 to

facilitate administration of these rules.

T.D. 9935, page 1746.

These final regulations amend the current like-kind exchange

regulations to add a definition of real property to implement

statutory changes limiting section 1031 treatment to like-kind

exchanges of real property. The final regulations also provide

a rule addressing a taxpayer’s receipt of personal property

that is incidental to real property the taxpayer receives in an

otherwise qualifying like-kind exchange of real property.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

December 21, 2020

Bulletin No. 2020–52

Part I

Section 6621.—

Determination of Rate of

Interest

26 CFR 301.6621-1: Interest rate.

Rev. Rul. 2020-28

Section 6621 of the Internal Revenue

Code establishes the interest rates on overpayments and underpayments of tax. Under

section 6621(a)(1), the overpayment rate is

the sum of the federal short-term rate plus

3 percentage points (2 percentage points in

the case of a corporation), except the rate

for the portion of a corporate overpayment

of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate

plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is

the sum of the federal short-term rate plus

3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section

6601 on any large corporate underpayment, the underpayment rate under section

6621(a)(2) is determined by substituting

“5 percentage points” for “3 percentage

points.” See section 6621(c) and section

301.6621-3 of the Regulations on Procedure and Administration for the definition

of a large corporate underpayment and

for the rules for determining the applicable date. Section 6621(c) and section

301.6621-3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the

Secretary will determine the federal shortterm rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides

that the federal short-term rate determined

Bulletin No. 2020–52

under section 6621(b)(1) for any month

applies during the first calendar quarter beginning after that month. Section 6621(b)

(3) provides that the federal short-term rate

for any month is the federal short-term rate

determined during that month by the Secretary in accordance with section 1274(d),

rounded to the nearest full percent (or, if a

multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent).

Notice 88-59, 1988-1 C.B. 546, announced that in determining the quarterly

interest rates to be used for overpayments

and underpayments of tax under section

6621, the Internal Revenue Service will

use the federal short-term rate based on

daily compounding because that rate is

most consistent with section 6621 which,

pursuant to section 6622, is subject to daily compounding.

The federal short-term rate determined

in accordance with section 1274(d) during

October 2020 is the rate published in Revenue Ruling 2020-22, 2020-45 IRB 963, to

take effect beginning November 1, 2020.

The federal short-term rate, rounded to the

nearest full percent, based on daily compounding determined during the month of

October 2020 is 0 percent. Accordingly,

an overpayment rate of 3 percent (2 percent in the case of a corporation) and an

underpayment rate of 3 percent are established for the calendar quarter beginning

January 1, 2021. The overpayment rate for

the portion of a corporate overpayment exceeding $10,000 for the calendar quarter

beginning January 1, 2021 is 0.5 percent.

The underpayment rate for large corporate

underpayments for the calendar quarter

beginning January 1, 2021, is 5 percent.

These rates apply to amounts bearing interest during that calendar quarter.

1669

Sections 6654(a)(1) and 6655(a)(1)

provide that the underpayment rate established under section 6621 applies in determining the addition to tax under sections

6654 and 6655 for failure to pay estimated

tax for any taxable year. Thus, the 3 percent rate also applies to estimated tax underpayments for the first calendar quarter

beginning January 1, 2021. Pursuant to

section 6621(b)(2)(B), in determining the

addition to tax under section 6654 for any

taxable year for an individual, the federal short-term rate that applies during the

third month following the taxable year

also applies during the first 15 days of the

fourth month following the taxable year.

In addition, pursuant to section 6603(d)

(4), the rate of interest on section 6603

deposits is 0 percent for the first calendar

quarter in 2021.

Interest factors for daily compound interest for annual rates of 0.5 percent are

published in Appendix A of this Revenue

Ruling. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published

in Tables 9, 11, and 15 of Rev. Proc. 9517, 1995-1 C.B. 563, 565, and 569.

Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the

tables accompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Casey R. Conrad of the Office of

the Associate Chief Counsel (Procedure

and Administration). For further information regarding this revenue ruling, contact

Mr. Conrad at (202) 317-6844 (not a tollfree number).

December 21, 2020

APPENDIX A

Days

Factor

0.000013699

0.000027397

0.000041096

0.000054796

0.000068495

0.000082195

0.000095894

0.000109594

0.000123294

0.000136995

0.000150695

0.000164396

0.000178097

0.000191798

0.000205499

0.000219201

0.000232902

0.000246604

0.000260306

0.000274008

0.000287711

0.000301413

0.000315116

0.000328819

0.000342522

0.000356225

0.000369929

0.000383633

0.000397336

0.000411041

0.000424745

0.000438449

0.000452154

0.000465859

0.000479564

0.000493269

0.000506974

0.000520680

0.000534386

0.000548092

0.000561798

December 21, 2020

365 Day Year

0.5% Compound Rate 184 Days

Days

Factor

0.000863380

0.000877091

0.000890801

0.000904512

0.000918223

0.000931934

0.000945646

0.000959357

0.000973069

0.000986781

0.001000493

0.001014206

0.001027918

0.001041631

0.001055344

0.001069057

0.001082770

0.001096484

0.001110197

0.001123911

0.001137625

0.001151339

0.001165054

0.001178768

0.001192483

0.001206198

0.001219913

0.001233629

0.001247344

0.001261060

0.001274776

0.001288492

0.001302208

0.001315925

0.001329641

0.001343358

0.001357075

100

0.001370792

101

0.001384510

102

0.001398227

103

0.001411945

1670

Days

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

Factor

0.001713784

0.001727506

0.001741228

0.001754951

0.001768673

0.001782396

0.001796119

0.001809843

0.001823566

0.001837290

0.001851013

0.001864737

0.001878462

0.001892186

0.001905910

0.001919635

0.001933360

0.001947085

0.001960811

0.001974536

0.001988262

0.002001988

0.002015714

0.002029440

0.002043166

0.002056893

0.002070620

0.002084347

0.002098074

0.002111801

0.002125529

0.002139257

0.002152985

0.002166713

0.002180441

0.002194169

0.002207898

0.002221627

0.002235356

0.002249085

0.002262815

Bulletin No. 2020–52

0.000575504

0.000589211

0.000602917

0.000616624

0.000630331

0.000644039

0.000657746

0.000671454

0.000685161

0.000698869

0.000712578

0.000726286

0.000739995

0.000753703

0.000767412

0.000781121

0.000794831

0.000808540

0.000822250

0.000835960

0.000849670

Bulletin No. 2020–52

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

0.001425663

0.001439381

0.001453100

0.001466818

0.001480537

0.001494256

0.001507975

0.001521694

0.001535414

0.001549133

0.001562853

0.001576573

0.001590293

0.001604014

0.001617734

0.001631455

0.001645176

0.001658897

0.001672619

0.001686340

0.001700062

1671

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

0.002276544

0.002290274

0.002304004

0.002317734

0.002331465

0.002345195

0.002358926

0.002372657

0.002386388

0.002400120

0.002413851

0.002427583

0.002441315

0.002455047

0.002468779

0.002482511

0.002496244

0.002509977

0.002523710

December 21, 2020

Days

Factor

0.000013661

0.000027323

0.000040984

0.000054646

0.000068308

0.000081970

0.000095632

0.000109295

0.000122958

0.000136620

0.000150283

0.000163947

0.000177610

0.000191274

0.000204938

0.000218602

0.000232266

0.000245930

0.000259595

0.000273260

0.000286924

0.000300590

0.000314255

0.000327920

0.000341586

0.000355252

0.000368918

0.000382584

0.000396251

0.000409917

0.000423584

0.000437251

0.000450918

0.000464586

0.000478253

0.000491921

0.000505589

0.000519257

0.000532925

0.000546594

0.000560262

0.000573931

December 21, 2020

366 Day Year

0.5% Compound Rate 184 Days

Days

Factor

0.000861020

0.000874693

0.000888366

0.000902040

0.000915713

0.000929387

0.000943061

0.000956735

0.000970409

0.000984084

0.000997758

0.001011433

0.001025108

0.001038783

0.001052459

0.001066134

0.001079810

0.001093486

0.001107162

0.001120839

0.001134515

0.001148192

0.001161869

0.001175546

0.001189223

0.001202900

0.001216578

0.001230256

0.001243934

0.001257612

0.001271291

0.001284969

0.001298648

0.001312327

0.001326006

0.001339685

0.001353365

100

0.001367044

101

0.001380724

102

0.001394404

103

0.001408085

104

0.001421765

1672

Days

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

Factor

0.001709097

0.001722782

0.001736467

0.001750152

0.001763837

0.001777522

0.001791208

0.001804893

0.001818579

0.001832265

0.001845951

0.001859638

0.001873324

0.001887011

0.001900698

0.001914385

0.001928073

0.001941760

0.001955448

0.001969136

0.001982824

0.001996512

0.002010201

0.002023889

0.002037578

0.002051267

0.002064957

0.002078646

0.002092336

0.002106025

0.002119715

0.002133405

0.002147096

0.002160786

0.002174477

0.002188168

0.002201859

0.002215550

0.002229242

0.002242933

0.002256625

0.002270317

Bulletin No. 2020–52

0.000587600

0.000601269

0.000614939

0.000628608

0.000642278

0.000655948

0.000669618

0.000683289

0.000696959

0.000710630

0.000724301

0.000737972

0.000751643

0.000765315

0.000778986

0.000792658

0.000806330

0.000820003

0.000833675

0.000847348

Bulletin No. 2020–52

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

0.001435446

0.001449127

0.001462808

0.001476489

0.001490170

0.001503852

0.001517533

0.001531215

0.001544897

0.001558580

0.001572262

0.001585945

0.001599628

0.001613311

0.001626994

0.001640678

0.001654361

0.001668045

0.001681729

0.001695413

1673

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

0.002284010

0.002297702

0.002311395

0.002325087

0.002338780

0.002352473

0.002366167

0.002379860

0.002393554

0.002407248

0.002420942

0.002434636

0.002448331

0.002462025

0.002475720

0.002489415

0.002503110

0.002516806

December 21, 2020

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

Before

Jul.

Feb.

Jan.

Jul.

Jan.

Jul.

Jan.

Jul.

Jan.

Jul.

1975–Jan.

1976–Jan.

1978–Jan.

1980–Jan.

1982–Dec.

1983–Jun.

1983–Dec.

1984–Jun.

1984–Dec.

1985–Jun.

1985–Dec.

1986–Jun.

1986–Dec.

RATE

31,

30,

31,

30,

31,

30,

31,

30,

31,

1975

1976

1978

1980

1982

1983

1984

1985

1986

12%

20%

16%

11%

13%

11%

10%

Table

In 1995-1 C.B.

DAILY RATE TABLE

pg.

37,

pg.

27,

pg.

75,

pg.

75,

pg.

31,

pg.

27,

pg.

25,

pg.

23,

pg.

557

559

558

557

560

591

581

629

585

581

579

577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 - Dec. 31, 1998

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

1987–Mar.

1987–Jun.

1987–Sep.

1987–Dec.

1988–Mar.

1988–Jun.

1988–Sep.

1988–Dec.

1989–Mar.

1989–Jun.

1989–Sep.

1989–Dec.

1990–Mar.

1990–Jun.

1990–Sep.

1990–Dec.

1991–Mar.

1991–Jun.

December 21, 2020

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

1987

1988

1989

1990

1991

RATE

10%

11%

10%

1674

OVERPAYMENTS

1995-1 C.B.

TABLE

575

577

627

625

627

579

581

579

577

UNDERPAYMENTS

1995-1 C.B. RATE

RATE

TABLE

577

10%

579

11%

629

10%

627

10%

627

11%

629

11%

581

12%

583

12%

583

11%

581

11%

581

11%

581

11%

581

11%

581

11%

581

10%

579

Bulletin No. 2020–52

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

1991–Sep.

1991–Dec.

1992–Mar.

1992–Jun.

1992–Sep.

1992–Dec.

1993–Mar.

1993–Jun.

1993–Sep.

1993–Dec.

1994–Mar.

1994–Jun.

1994–Sep.

1994–Dec.

1995–Mar.

1995–Jun.

1995–Sep.

1995–Dec.

1996–Mar.

1996–Jun.

1996–Sep.

1996–Dec.

1997–Mar.

1997–Jun.

1997–Sep.

1997–Dec.

1998–Mar.

1998–Jun.

1998–Sep.

1998–Dec.

Bulletin No. 2020–52

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

1991

1992

1993

1994

1995

1996

1997

1998

1675

577

623

621

619

571

573

575

577

575

623

621

623

575

573

10%

579

625

623

621

573

575

577

579

577

625

623

625

577

575

December 21, 2020

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 - PRESENT

NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

1995-1 C.B.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

December 21, 2020

1999–Mar.

1999–Jun.

1999–Sep.

1999–Dec.

2000–Mar.

2000–Jun.

2000–Sep.

2000–Dec.

2001–Mar.

2001–Jun.

2001–Sep.

2001–Dec.

2002–Mar.

2002–Jun.

2002–Sep.

2002–Dec.

2003–Mar.

2003–Jun.

2003–Sep.

2003–Dec.

2004–Mar.

2004–Jun.

2004–Sep.

2004–Dec.

2005–Mar.

2005–Jun.

2005–Sep.

2005–Dec.

2006–Mar.

2006–Jun.

2006–Sep.

2006–Dec.

2007–Mar.

2007–Jun.

2007–Sep.

2007–Dec.

2008–Mar.

2008–Jun.

2008–Sep.

2008–Dec.

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

1676

RATE

TABLE

PAGE

573

575

623

625

577

575

573

571

569

567

615

617

615

617

569

571

573

575

621

619

617

619

Bulletin No. 2020–52

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Bulletin No. 2020–52

2009–Mar.

2009–Jun.

2009–Sep.

2009–Dec.

2010–Mar.

2010–Jun.

2010–Sep.

2010–Dec.

2011–Mar.

2011–Jun.

2011–Sep.

2011–Dec.

2012–Mar.

2012–Jun.

2012–Sep.

2012–Dec.

2013–Mar.

2013–Jun.

2013–Sep.

2013–Dec.

2014–Mar.

2014–Jun.

2014–Sep.

2014–Dec.

2015–Mar.

2015–Jun.

2015–Sep.

2015–Dec.

2016–Mar.

2016–Jun.

2016–Sep.

2016–Dec.

2017–Mar.

2017–Jun.

2017–Sep.

2017–Dec.

2018–Mar.

2018–Jun.

2018–Sep.

2018–Dec.

2019–Mar.

2019–Jun.

2019–Sep.

2019–Dec.

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

1677

569

567

565

567

565

613

565

613

615

567

569

571

569

December 21, 2020

Jan.

Apr.

Jul.

Oct.

Jan.

December 21, 2020

2020–Mar.

2020–Jun.

2020–Sep.

2020–Dec.

2021–Mar.

31,

30,

31,

2020

2021

1678

617

613

565

Bulletin No. 2020–52

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 - PRESENT

CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

1999–Mar.

1999–Jun.

1999–Sep.

1999–Dec.

2000–Mar.

2000–Jun.

2000–Sep.

2000–Dec.

2001–Mar.

2001–Jun.

2001–Sep.

2001–Dec.

2002–Mar.

2002–Jun.

2002–Sep.

2002–Dec.

2003–Mar.

2003–Jun.

2003–Sep.

2003–Dec.

2004–Mar.

2004–Jun.

2004–Sep.

2004–Dec.

2005–Mar.

2005–Jun.

2005–Sep.

2005–Dec.

2006–Mar.

2006–Jun.

2006–Sep.

2006–Dec.

2007–Mar.

2007–Jun.

2007–Sep.

2007–Dec.

2008–Mar.

2008–Jun.

2008–Sep.

2008–Dec.

Bulletin No. 2020–52

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

OVERPAYMENTS

1995-1 C.B.

RATE

TABLE

571

573

621

623

575

573

571

569

567

565

613

615

613

615

567

569

571

573

619

617

615

617

1679

UNDERPAYMENTS

1995-1 C.B.

RATE

TABLE

573

575

623

625

577

575

573

571

569

567

615

617

615

617

569

571

573

575

621

619

617

619

December 21, 2020

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

1,z

2009–Mar.

2009–Jun.

2009–Sep.

2009–Dec.

2010–Mar.

2010–Jun.

2010–Sep.

2010–Dec.

2011–Mar.

2011–Jun.

2011–Sep.

2011–Dec.

2012–Mar.

2012–Jun.

2012–Sep.

2012–Dec.

2013–Mar.

2013–Jun.

2013–Sep.

2013–Dec.

2014–Mar.

2014–Jun.

2014–Sep.

2014–Dec.

2015–Mar.

2015–Jun.

2015–Sep.

2015–Dec.

2016–Mar.

2016–Jun.

2016–Sep.

2016–Dec.

2017–Mar.

2017–Jun.

2017–Sep.

2017–Dec.

2018–Mar.

2018–Jun.

2018–Sep.

2018–Dec.

2019–Mar.

2019–Jun.

2019–Sep.

2019–Dec.

2020–Mar.

December 21, 2020

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,,

31,

30,

31,

30,

31,

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

1680

567

565

563

565

563

611

563

611

613

565

567

569

567

615

569

567

565

567

565

613

565

613

615

567

569

571

569

617

Bulletin No. 2020–52

Apr.

Jul.

Oct.

Jan.

2020–Jun.

2020–Sep.

2020–Dec.

2021–Mar.

Bulletin No. 2020–52

30,

31,

2020

2021

1681

615

611

563

617

613

565

December 21, 2020

TABLE OF INTEREST RATES

FOR LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

December 21, 2020

1991–Mar.

1991–Jun.

1991–Sep.

1991–Dec.

1992–Mar.

1992–Jun.

1992–Sep.

1992–Dec.

1993–Mar.

1993–Jun.

1993–Sep.

1993–Dec.

1994–Mar.

1994–Jun.

1994–Sep.

1994–Dec.

1995–Mar.

1995–Jun.

1995–Sep.

1995–Dec.

1996–Mar.

1996–Jun.

1996–Sep.

1996–Dec.

1997–Mar.

1997–Jun.

1997–Sep.

1997–Dec.

1998–Mar.

1998–Jun.

1998–Sep.

1998–Dec.

1999–Mar.

1999–Jun.

1999–Sep.

1999–Dec.

2000–Mar.

2000–Jun.

2000–Sep.

2000–Dec.

2001–Mar.

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

1682

RATE

13%

12%

11%

10%

11%

12%

11%

10%

11%

10%

11%

1995-1 C.B.

TABLE

585

583

629

627

625

577

579

581

583

581

629

627

629

581

579

577

579

627

629

581

Bulletin No. 2020–52

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Bulletin No. 2020–52

2001–Jun.

2001–Sep.

2001–Dec.

2002–Mar.

2002–Jun.

2002–Sep.

2002–Dec.

2003–Mar.

2003–Jun.

2003–Sep.

2003–Dec.

2004–Mar.

2004–Jun.

2004–Sep.

2004–Dec.

2005–Mar.

2005–Jun.

2005–Sep.

2005–Dec.

2006–Mar.

2006–Jun.

2006–Sep.

2006–Dec.

2007–Mar.

2007–Jun.

2007–Sep.

2007–Dec.

2008–Mar.

2008–Jun.

2008–Sep.

2008–Dec.

2009–Mar.

2009–Jun.

2009–Sep.

2009–Dec.

2010–Mar.

2010–Jun.

2010–Sep.

2010–Dec.

2011–Mar.

2011–Jun.

2011–Sep.

2011–Dec.

2012–Mar.

2012–Jun.

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1683

10%

579

577

575

573

571

619

621

619

621

573

575

577

579

625

623

621

623

573

571

569

571

569

617

December 21, 2020

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

Apr.

Jul.

Oct.

Jan.

December 21, 2020

2012–Sep.

2012–Dec.

2013–Mar.

2013–Jun.

2013–Sep.

2013–Dec.

2014–Mar.

2014–Jun.

2014–Sep.

2014–Dec.

2015–Mar.

2015–Jun.

2015–Sep.

2015–Dec.

2016–Mar.

2016–Jun.

2016–Sep.

2016–Dec.

2017–Mar.

2017–Jun.

2017–Sep.

2017–Dec.

2018–Mar.

2018–Jun.

2018–Sep.

2018–Dec.

2019–Mar.

2019–Jun.

2019–Sep.

2019–Dec.

2020–Mar.

2020–Jun.

2020–Sep.

2020–Dec.

2021–Mar.

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

30,

31,

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

1684

617

569

617

619

571

573

575

573

621

617

569

Bulletin No. 2020–52

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 – PRESENT

1995-1 C.B.

RATE

TABLE

Jan.

1995–Mar.

31,

1995

6.5%

572

Apr.

1995–Jun.

30,

1995

7.5%

574

Jul.

1995–Sep.

30,

1995

6.5%

572

Oct.

1995–Dec.

31,

1995

6.5%

572

Jan.

1996–Mar.

31,

1996

6.5%

620

Apr.

1996–Jun.

30,

1996

5.5%

618

Jul.

1996–Sep.

30,

1996

6.5%

620

Oct.

1996–Dec.

31,

1996

6.5%

620

Jan.

1997–Mar.

31,

1997

6.5%

572

Apr.

1997–Jun.

30,

1997

6.5%

572

Jul.

1997–Sep.

30,

1997

6.5%

572

Oct.

1997–Dec.

31,

1997

6.5%

572

Jan.

1998–Mar.

31,

1998

6.5%

572

Apr.

1998–Jun.

30,

1998

5.5%

570

Jul.

1998–Sep.

30,

1998

5.5%

570

Oct.

1998–Dec.

31,

1998

5.5%

570

Jan.

1999–Mar.

31,

1999

4.5%

568

Apr.

1999–Jun.

30,

1999

5.5%

570

Jul.

1999–Sep.

30,

1999

5.5%

570

Oct.

1999–Dec.

31,

1999

5.5%

570

Jan.

2000–Mar.

31,

2000

5.5%

618

Apr.

2000–Jun.

30,

2000

6.5%

620

Jul.

2000–Sep.

30,

2000

6.5%

620

Oct.

2000–Dec.

31,

2000

6.5%

620

Jan.

2001–Mar.

31,

2001

6.5%

572

Apr.

2001–Jun.

30,

2001

5.5%

570

Jul.

2001–Sep.

30,

2001

4.5%

568

Oct.

2001–Dec.

31,

2001

4.5%

568

Jan.

2002–Mar.

31,

2002

3.5%

566

Apr.

2002–Jun.

30,

2002

3.5%

566

Jul.

2002–Sep.

30,

2002

3.5%

566

Oct.

2002–Dec.

31,

2002

3.5%

566

Jan.

2003–Mar.

31,

2003

2.5%

564

Apr.

2003–Jun.

30,

2003

2.5%

564

Jul.

2003–Sep.

30,

2003

2.5%

564

Oct.

2003–Dec.

31,

2003

1.5%

562

Jan.

2004–Mar.

31,

2004

1.5%

610

Apr.

2004–Jun.

30,

2004

2.5%

612

Bulletin No. 2020–52

1685

December 21, 2020

Jul.

2004–Sep.

30,

2004

1.5%

610

Oct.

2004–Dec.

31,

2004

2.5%

612

Jan.

2005–Mar.

31,

2005

2.5%

564

Apr.

2005–Jun.

30,

2005

3.5%

566

Jul.

2005–Sep.

30,

2005

3.5%

566

Oct.

2005–Dec.

31,

2005

4.5%

568

Jan.

2006–Mar.

31,

2006

4.5%

568

Apr.

2006–Jun.

30,

2006

4.5%

568

Jul.

2006–Sep.

30,

2006

5.5%

570

Oct.

2006–Dec.

31,

2006

5.5%

570

Jan.

2007–Mar.

31,

2007

5.5%

570

Apr.

2007–Jun.

30,

2007

5.5%

570

Jul.

2007–Sep.

30,

2007

5.5%

570

Oct.

2007–Dec.

31,

2007

5.5%

570

Jan.

2008–Mar.

31,

2008

4.5%

616

Apr.

2008–Jun.

30,

2008

3.5%

614

Jul.

2008–Sep.

30,

2008

2.5%

612

Oct.

2008–Dec.

31,

2008

3.5%

614

Jan.

2009–Mar.

31,

2009

2.5%

564

Apr.

2009–Jun.

30,

2009

1.5%

562

Jul.

2009–Sep.

30,

2009

1.5%

562

Oct.

2009–Dec.

31,

2009

1.5%

562

Jan.

2010–Mar.

31,

2010

1.5%

562

Apr.

2010–Jun.

30,

2010

1.5%

562

Jul.

2010–Sep.

30,

2010

1.5%

562

Oct.

2010–Dec.

31,

2010

1.5%

562

Jan.

2011–Mar.

31,

2011

0.5%*

Apr.

2011–Jun.

30,

2011

1.5%

562

Jul.

2011–Sep.

30,

2011

1.5%

562

Oct.

2011–Dec.

31,

2011

0.5%*

Jan.

2012–Mar.

31,

2012

0.5%*

Apr.

2012–Jun.

30,

2012

0.5%*

Jul.

2012–Sep.

30,

2012

0.5%*

Oct.

2012–Dec.

31,

2012

0.5%*

Jan.

2013–Mar.

31,

2013

0.5%*

Apr.

2013–Jun.

30,

2013

0.5%*

Jul.

2013–Sep.

30,

2013

0.5%*

Oct.

2013–Dec.

31,

2013

0.5%*

Jan.

2014–Mar.

31,

2014

0.5%*

Apr.

2014–Jun.

30,

2014

0.5%*

Jul.

2014–Sep.

30,

2014

0.5%*

Oct.

2014–Dec.

31,

2014

0.5%*

December 21, 2020

1686

Bulletin No. 2020–52

Jan.

2015–Mar.

31,

2015

0.5%*

Apr.

2015–Jun.

30,

2015

0.5%*

Jul.

2015–Sep.

30,

2015

0.5%*

Oct.

2015–Dec.

31,

2015

0.5%*

Jan.

2016–Mar.

31,

2016

0.5%*

Apr.

2016–Jun.

30,

2016

1.5%

610

Jul.

2016–Sep.

30,

2016

1.5%

610

Oct.

2016–Dec.

31,

2016

1.5%

610

Jan.

2017–Mar.

31,

2017

1.5%

562

Apr.

2017–Jun.

30,

2017

1.5%

562

Jul.

2017–Sep.

30,

2017

1.5%

562

Oct.

2017–Dec.

31,

2017

1.5%

562

Jan.

2018–Mar.

31,

2018

1.5%

562

Apr.

2018–Jun.

30,

2018

2.5%

564

Jul.

2018–Sep.

30,

2018

2.5%

564

Oct.

2018–Dec.

31,

2018

2.5%

564

Jan.

2019–Mar.

31,

2019

3.5%

566

Apr.

2019–Jun.

30,

2019

3.5%

566

Jul.

2019–Sep.

30,

2019

2.5%

564

Oct.

2019–Dec.

31,

2019

2.5%

564

Jan.

2020–Mar.

31,

2020

2.5%

612

Apr.

2020–Jun.

30,

2020

2.5%

612

Jul.

2020–Sep.

30,

2020

0.5%*

Oct.

2020–Dec.

31,

2020

0.5%*

Jan.

2021–Mar.

31,

2021

0.5%*

* The asterisk reflects the interest factors for daily compound interest for annual rates of 0.5 percent published in Appendix A of

this Revenue Ruling.

Bulletin No. 2020–52

1687

December 21, 2020

26 CFR 1.36B

T.D. 9912

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Guidance Clarifying

Premium Tax Credit

Unaffected by Suspension

of Personal Exemption

Deduction

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document includes final regulations under sections 36B and

6011 of the Internal Revenue Code (Code)

that clarify that the reduction of the personal exemption deduction to zero for taxable years beginning after December 31,

2017, and before January 1, 2026, does

not affect an individual taxpayer’s ability to claim the premium tax credit. These

final regulations affect individuals who

claim the premium tax credit.

DATES: Effective date: These final regulations are effective on December 1, 2020.

Applicability date: These final regulations apply to taxable years ending on or

after December 31, 2020.

FOR FURTHER INFORMATION

CONTACT: Suzanne R. Sinno at (202)

317-4718 or Lisa Mojiri-Azad at (202)

317-4649 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of

Provisions

I. Overview

This document contains final amendments to the Income Tax Regulations (26

December 21, 2020

CFR part 1) under sections 36B and 6011

of the Code.

Section 151 of the Code generally allows a taxpayer to claim a personal exemption deduction, based on the exemption amount defined in section 151(d),

for the taxpayer, the taxpayer’s spouse,

and any dependents, as defined in section 152 of the Code. On December 22,

2017, section 151(d)(5) was added to the

Code by section 11041 of Public Law

115-97, 131 Stat. 2054, 2082, commonly

referred to as the Tax Cuts and Jobs Act

(TCJA). Section 151(d)(5)(A) provides

that, for taxable years beginning after

December 31, 2017, and before January

1, 2026, “[t]he term ‘exemption amount’

means zero.” However, section 151(d)

(5)(B) provides that the reduction of the

exemption amount to zero is not taken

into account in determining whether a

deduction under section 151 is allowed

or allowable to a taxpayer, or whether a

taxpayer is entitled to a deduction under

section 151, for purposes of any other

provision of the Code. The conference

report to the TCJA states that this provision clarifies that the reduction of the

personal exemption to zero “should not

alter the operation of those provisions

of the Code which refer to a taxpayer

allowed a deduction . . . under section

151.” See H.R. Rep. No. 115-466 at 203

n.16 (Conf. Rep.) (2017).

Beginning in 2014, under the Patient

Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)),

and the Health Care and Education Reconciliation Act of 2010, Public Law 111152 (124 Stat. 1029 (2010)) (collectively,

PPACA), eligible individuals who purchase coverage under a qualified health

plan through a Health Insurance Exchange

(Exchange) established under section

1311 of the PPACA may claim a premium

tax credit under section 36B of the Code.

Several rules relating to the premium tax

credit apply based on whether a taxpayer

properly claims or claimed a personal exemption deduction under section 151 for

the taxpayer, the taxpayer’s spouse, and

any dependents. These rules affect eligibility for the premium tax credit, computation of the premium tax credit, reconciliation of advance credit payments with the

premium tax credit a taxpayer is allowed

for the taxable year, and income tax return

1688

filing requirements related to the premium

tax credit.

II. Eligibility for, and Computation of, the

Premium Tax Credit

To be eligible for the premium tax

credit, an individual must be an applicable

taxpayer. Under section 36B(c)(1), an applicable taxpayer generally is a taxpayer

whose household income for the taxable

year is at least 100 percent but not more

than 400 percent of the Federal poverty

line for the taxpayer’s family size for the

taxable year. A taxpayer’s family size is

equal to the number of individuals in the

taxpayer’s family. Section 1.36B-1(d) of

the Income Tax Regulations provides the

rules for determining the individuals in

a taxpayer’s family. Section 1.36B-1(d),

as currently in effect, provides that a taxpayer’s family means the individuals for

whom a taxpayer properly claims a deduction for a personal exemption under

section 151 for the taxable year, and further provides that family size means the

number of individuals in the family. Additionally, §1.36B-2(b)(3) provides that an

individual is not an applicable taxpayer if

another taxpayer may claim a deduction

under section 151 for the individual for

a taxable year beginning in the calendar

year in which the individual’s taxable year

begins.

Section 36B(c)(2) provides that the

premium tax credit generally is not allowed for a month with respect to an individual if for that month the individual is

eligible for minimum essential coverage

other than coverage in the individual market. However, under a special eligibility

rule in §1.36B-2(c)(4)(i), an individual

who may enroll in minimum essential

coverage because of a relationship to another person eligible for the coverage but

for whom the other eligible person does

not claim a personal exemption deduction

under section 151 is treated as eligible for

minimum essential coverage under such

coverage only for months that the related

individual is enrolled in the coverage.

Under section 36B(a), a taxpayer’s premium tax credit is equal to the premium

assistance credit amount for the taxable

year. Section 36B(b)(1) and §1.36B-3(d)

generally provide that the premium assistance credit amount is the sum of the pre-

Bulletin No. 2020–52

mium assistance amounts for all coverage

months in the taxable year for individuals in the taxpayer’s family, as defined in

§1.36B-1(d).

III. Reconciliation of Advance Credit

Payments with the Premium Tax Credit

Under section 1412 of the PPACA,

advance payments of the premium tax

credit (advance credit payments) may be

paid directly to issuers of qualified health

plans on behalf of eligible individuals.

The amount of advance credit payments

made on behalf of a taxpayer in a taxable

year is determined by a number of factors,

including projections of the taxpayer’s

household income and family size for the

taxable year. Under §1.36B-4, a taxpayer

generally must reconcile all advance credit payments for coverage of any member

of the taxpayer’s family with the amount

of the premium tax credit allowed under

section 36B.

Section 1.36B-4(a)(1)(ii) provides allocation rules to reconcile advance credit payments when a taxpayer’s family

members are enrolled with one or more

individuals who are not members of the

taxpayer’s family. If a taxpayer enrolls an

individual and another taxpayer claims a

personal exemption deduction for the individual, the allocation rules in §1.36B(a)

(1)(ii)(B) apply for purposes of computing

each taxpayer’s premium tax credit and

reconciling any advance credit payments.

If advance credit payments are made for

coverage of an individual for whom no

taxpayer claims a personal exemption deduction, §1.36B-4(a)(1)(ii)(C) provides

that the taxpayer who attested to the Exchange to the intention to claim a personal

exemption deduction for the individual as

part of the advance credit payment eligibility determination for coverage of the

individual must reconcile the advance

credit payments.

IV. Income Tax Return Filing

Requirements Related to the Premium Tax

Credit

Section 6011 provides the general

rules for filing a return. Section 1.60118 requires a taxpayer who receives the

benefit of advance credit payments in a

taxable year to file an income tax return

Bulletin No. 2020–52

for that taxable year to reconcile advance

credit payments with the taxpayer’s premium tax credit. The regulation further

provides that if advance credit payments

are made for coverage of an individual

for whom no taxpayer claims a personal

exemption deduction, the taxpayer who

attested to the Exchange to the intention

to claim a personal exemption deduction

for the individual as part of the advance

credit payment eligibility determination

for coverage of the individual must file a

tax return and reconcile the advance credit payments. Taxpayers who are required

to reconcile advance credit payments or

who claim the premium tax credit must

complete Form 8962, Premium Tax Credit (PTC), and file it with their income tax

return.

V. Notice 2018-84

On November 5, 2018, the Department of the Treasury (Treasury Department) and the IRS issued Notice 201884, 2018-45 I.R.B. 768, which provided

interim guidance clarifying that the reduction of the personal exemption deduction to zero under section 151(d)(5) does

not affect the ability of individual taxpayers to claim the premium tax credit.

Specifically, the notice provides that (1)

a taxpayer is considered to have claimed

a personal exemption deduction for himself or herself for a taxable year if the

taxpayer files an income tax return for the

year and does not qualify as a dependent

of another taxpayer under section 152 for

the year; and (2) a taxpayer is considered

to have claimed a personal exemption

deduction for an individual other than

the taxpayer if the taxpayer is allowed

a personal exemption deduction for the

individual, taking into account section

151(d)(5)(B), and lists the individual’s

name and taxpayer identification number

(TIN) on the Form 1040, U.S. Individual Income Tax Return, or Form 1040NR,

U.S. Nonresident Alien Income Tax Return, the taxpayer files for the year. The

notice states that until further guidance is

issued, the interim guidance described in

the notice applies. The notice also states

that the Treasury Department and the

IRS intend to amend the regulations under sections 36B and 6011 to clarify the

application of section 151(d)(5).

1689

VI. Proposed Regulations

On May 27, 2020, the Treasury Department and the IRS published a notice

of proposed rulemaking (REG-12481019) in the Federal Register (85 FR

31710) under section 36B. The notice of

proposed rulemaking announced that the

regulations currently in effect would be

amended to reflect the guidance in Notice 2018-84. Specifically, §1.36B-1(d),

as proposed, would define the term family to mean the taxpayer, including both

spouses in the case of a joint return, except for individuals who qualify as a dependent of another taxpayer under section

152, and any other individual for whom

the taxpayer is allowed a personal exemption deduction and whom the taxpayer

properly reports on the taxpayer’s income

tax return for the taxable year. Consistent

with Notice 2018-84, the proposed regulations would provide that an individual is

reported on the taxpayer’s income tax return if the individual’s name and taxpayer

identification number (TIN) are listed on

the taxpayer’s Form 1040 series return.

To conform to §1.36-1(d) as proposed,

§§1.36B-2, 1.36B-4, and 1.6011-8 would

be amended. These amendments as proposed would apply for taxable years ending after the date of publication of the final

regulations in the Federal Register.

VII. Final Regulations

No comments responsive to the subject

of the notice of proposed rulemaking were

received. There were no requests for a public hearing on the proposed regulations, so

no public hearing was held. Accordingly,

the Treasury Department and the IRS are

finalizing the proposed regulations with

no changes. The final regulations are applicable for taxable years ending on or

after December 31, 2020. However, taxpayers may apply the final regulations for

taxable years to which section 151(d)(5)

applies ending before December 31, 2020.

See section 7805(b)(7).

Special Analyses

These final regulations are not subject

to review under section 6(b) of Executive

Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) be-

December 21, 2020

tween the Treasury Department and the

Office of Management and Budget regarding review of tax regulations.

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), it is hereby certified that this final rule will not have a significant economic impact on a substantial

number of small entities. This certification

is based on the fact that the final regulations affect individual taxpayers, not entities. Accordingly, the Secretary certifies

that the rule will not have a significant

economic impact on a substantial number

of small entities.

Pursuant to section 7805(f), these final

regulations have been submitted to the

Chief Counsel for the Office of Advocacy

of the Small Business Administration for

comment on their impact on small business (85 FR 31710). No comments on

the notice were received from the Chief

Counsel for the Office of Advocacy of the

Small Business Administration.

Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated

costs and benefits and take certain other actions before issuing a final rule that

includes any Federal mandate that may

result in expenditures in any one year

by a state, local, or tribal government,

in the aggregate, or by the private sector, of $100 million (updated annually

for inflation). This rule does not include

any Federal mandate that may result in

expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132: Federalism

Executive Order 13132 (entitled

“Federalism”) prohibits an agency from

publishing any rule that has federalism

implications if the rule either imposes

substantial, direct compliance costs on

state and local governments, and is not

required by statute, or preempts state law,

unless the agency meets the consultation

and funding requirements of section 6 of

the Executive Order. This final rule does

not have federalism implications and does

not impose substantial direct compliance

costs on state and local governments or

December 21, 2020

preempt state law within the meaning of

the Executive Order.

Statement of Availability of IRS

Documents

The regulations, notices and other guidance cited in this preamble are generally

published in the Internal Revenue Bulletin

and are available from the Superintendent

of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by

visiting the IRS website at www.irs.gov.

Drafting Information

The principal author of these final regulations is Suzanne R. Sinno of the Office

of Associate Chief Counsel (Income Tax

and Accounting). Other personnel from the

Treasury Department and the IRS participated in the development of the regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding entries in

numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Par. 2. Section 1.36B-0 is amended by:

1. Revising the entries for §1.36B-1(d)

and (o).

2. Revising the entries for §1.36B-2(c)

(4)(i) and (e).

3. Revising the entries for §1.36B-4(a)

(1)(ii)(B) and (C).

4. Revising the entry for §1.36B-4(c).

The revisions read as follows:

§1.36B-1 Premium tax credit definitions.

*****

(d) Family and family size.

(1) In general.

(2) Special rule for tax years to which

section 151(d)(5) applies.

*****

1690

(o) Applicability dates.

§1.36B-2 Eligibility for premium tax

credit.

*****

(4) * * *

(i) Related individual.

*****

(e) Applicability dates.

§1.36B-4 Reconciling the premium tax

credit with advance credit payments.

*****

(a) * * *

(1) * * *

(ii) * * *

(B) Individuals enrolled by a taxpayer

and claimed by another taxpayer.

payments for an individual not reported

on any taxpayer’s return.

*****

Par. 3. Section 1.36B-1 is amended by

1. Redesignating paragraph (d) as paragraph (d)(1).

2. Adding new paragraph (d) and new

heading.

3. Revising the paragraph heading to

newly designated paragraph (d)(1).

4. Adding paragraph (d)(2).

5. Revising paragraph (o).

The additions and revisions read as follows:

§1.36B-1 Premium tax credit definitions.

*****

(d) Family and family size—(1) In general.* * *

(2) Special rule for tax years to which

section 151(d)(5) applies. For taxable

years to which section 151(d)(5) applies,

a taxpayer’s family means the taxpayer,

including both spouses in the case of a

joint return, except for individuals who

qualify as a dependent of another taxpayer under section 152, and any other individual for whom the taxpayer is allowed a

personal exemption deduction and whom

the taxpayer properly reports on the taxpayer’s income tax return for the taxable

year. For purposes of this paragraph (d)

Bulletin No. 2020–52

(2), an individual is reported on the taxpayer’s income tax return if the individual’s name and taxpayer identification

number (TIN) are listed on the taxpayer’s

Form 1040 series return. See §601.602 of

this chapter.

*****

(o) Applicability dates. (1) Except for

paragraphs (d)(2), (l), and (m) of this section, this section applies to taxable years

ending after December 31, 2013.

(2) Paragraph (d)(2) of this section applies to taxable years ending on or after

December 31, 2020.

(3) Paragraphs (l) and (m) of this section apply to taxable years beginning after December 31, 2018. Paragraphs (l)

and (m) of §1.36B-1 as contained in 26

CFR part 1 edition revised as of April 1,

2016, apply to taxable years ending after

December 31, 2013, and beginning before

January 1, 2019.

Par. 4. Section 1.36B-2 is amended by:

1. Revising paragraph (c)(4)(i).

2. Revising the heading for paragraph

(e).

3. Adding paragraph (e)(4).

The revisions and addition read as follows:

§1.36B-2 Eligibility for premium tax

credit.

*****

(4) Special eligibility rules—(i) Related

individual. An individual who may enroll

in minimum essential coverage because of

a relationship to another person eligible

for the coverage, but is not included in the

family, as defined in §1.36B-1(d), of the

other eligible person, is treated as eligible

for such minimum essential coverage only

for months that the related individual is

enrolled in the coverage.

*****

(e) Applicability dates. * * *

(4) Paragraph (c)(4)(i) of this section

applies to taxable years ending on or after

December 31, 2020.

Par. 5. Section 1.36B-4 is amended by:

1. The heading of paragraph (a)(1)(ii)

(B) is revised.

2. Adding a sentence to the end of

paragraph (a)(1)(ii)(B)(1).

Bulletin No. 2020–52

3. Revising paragraphs (a)(1)(ii)(B)(2)

and (a)(1)(ii)(C).

4. Revising the paragraph heading to

paragraph (c) and adding a sentence at the

end.

The additions and revisions read as follows:

§1.36B-4 Reconciling the premium tax

credit with advance credit payments.

(a) * * *

(1) * * *

(ii) * * *

(B) Individuals enrolled by a taxpayer

and claimed by another taxpayer—(1) In

general. * * * For taxable years to which

section 151(d)(5) applies, the claiming

taxpayer is the taxpayer who properly includes the shifting enrollee in his or her

family for the taxable year.

(2) Allocation percentage. The enrolling taxpayer and claiming taxpayer may

agree on any allocation percentage between zero and one hundred percent. If the

enrolling taxpayer and claiming taxpayer

do not agree on an allocation percentage,

the percentage is equal to the number of

shifting enrollees properly included in the

enrolling taxpayer’s family divided by

the number of individuals enrolled by the

enrolling taxpayer in the same qualified

health plan as the shifting enrollee.

*****

payments for an individual not reported

on any taxpayer’s return. If advance credit payments are made for coverage of an

individual who is not included in any taxpayer’s family, as defined in §1.36B-1(d),

the taxpayer who attested to the Exchange

to the intention to include such individual

in the taxpayer’s family as part of the advance credit payment eligibility determination for coverage of the individual must

reconcile the advance credit payments.

*****

sentence of paragraph (a)(1)(ii)(B)(1),

paragraph (a)(1)(ii)(B)(2), and paragraph

(a)(1)(ii)(C) of this section apply to taxable years ending on or after December

31, 2020.

Par. 6. Section 1.6011-8 is amended by

revising paragraphs (a) and (b) as follows:

1691

§1.6011-8 Requirement of income tax

return for taxpayers who claim the

premium tax credit under section 36B.

(a) Requirement of return. Except as

otherwise provided in this paragraph (a),

a taxpayer who receives the benefit of advance payments of the premium tax credit

(advance credit payments) under section

36B must file an income tax return for that

taxable year on or before the due date for

the return (including extensions of time

for filing) and reconcile the advance credit payments. However, if advance credit

payments are made for coverage of an

individual who is not included in any taxpayer’s family, as defined in §1.36B-1(d),

the taxpayer who attested to the Exchange

to the intention to include such individual

in the taxpayer’s family as part of the advance credit payment eligibility determination for coverage of the individual must

file a tax return and reconcile the advance

credit payments.

(b) Applicability dates—(1) In general.

Except as provided in paragraph (b)(2) of

this section, paragraph (a) of this section

applies for taxable years ending on or after

December 31, 2020.

(2) Prior periods. Paragraph (a) of this

section as contained in 26 CFR part 1 edition revised as of April 1, 2016, applies to

taxable years ending after December 31,

2013, and beginning before January 1,

2017. Paragraph (a) of this section as contained in 26 CFR part 1 edition revised as

of April 1, 2020, applies to taxable years

beginning after December 31, 2016, and

ending before December 31, 2020.

Sunita Lough,

Deputy Commissioner for Services

and Enforcement.

Approved: September 4, 2020.

David J. Kautter,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on

November 27, 2020, 11:15 a.m., and published in the

issue of the Federal Register for December 01, 2020,

85 F.R. 76976)

December 21, 2020

26 CFR 1.512(a)-6: Special rule for organizations

with more than one unrelated trade or business

T.D. 9933

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Unrelated Business

Taxable Income Separately

Computed for Each Trade

or Business

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final rule.

SUMMARY: This document contains

final regulations that provide guidance

on how an exempt organization subject

to the unrelated business income tax determines if it has more than one unrelated trade or business, and, if so, how the

exempt organization calculates unrelated

business taxable income. The final regulations also clarify that the definition

of “unrelated trade or business” applies

to individual retirement accounts. Additionally, the final regulations provide that

inclusions of “subpart F income” and

“global intangible low-taxed income”

are treated in the same manner as dividends for purposes of determining unrelated business taxable income. The final

regulations affect exempt organizations

that are subject to the unrelated business

income tax.

DATES: Effective date: The final regulations are effective on December 2, 2020.

Applicability date: For dates of applicability, see §§1.170A-9(k)(3), 1.509(a)3(o),

1.512(a)-1(h),

1.512(a)-6(i),

1.512(b)-1(a)(3), 1.512(b)-1(g)(5), and

1.513-1(h).

FOR FURTHER INFORMATION CONTACT: Jonathan A. Carter at (202) 3175800 or Stephanie N. Robbins at (202)

317-4086 (not toll-free numbers).

December 21, 2020

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income

Tax Regulations (26 CFR Part 1) by adding final regulations under section 512(a)

(6) of the Internal Revenue Code (Code).

Section 512(a)(6) was added to the Code

by section 13702 of Public Law 115-97,

131 Stat. 2054 (2017), commonly referred

to as the Tax Cuts and Jobs Act (TCJA).

Section 512(a)(6) requires an exempt organization subject to the unrelated business income tax under section 511 (UBIT)

that has more than one unrelated trade or

business, to calculate unrelated business

taxable income (UBTI), separately with

respect to each such trade or business including for purposes of determining any

net operating loss (NOL) deduction.

In August 2018, the Department of the

Treasury (Treasury Department) and the

IRS released Notice 2018-67 (2018-36

IRB 409 (Sept. 4, 2018)), which discussed

and solicited comments regarding various

issues arising under section 512(a)(6) and

set forth interim guidance and transition

rules relating to that section. The Treasury

Department and the IRS received 24 comments in response to Notice 2018-67.

On April 24, 2020, the Treasury Department and the IRS published a notice

of proposed rulemaking (REG-10686418) in the Federal Register (85 FR

23172) that proposed regulations to provide guidance regarding how an exempt

organization subject to UBIT (hereinafter

referred to as an exempt organization) determines if it has more than one unrelated

trade or business, and, if so, how the exempt organization calculates UBTI under

section 512(a)(6) (proposed regulations).

No public hearing was requested or held.

The Treasury Department and the IRS

received 17 comments in response to the

proposed regulations.

The proposed regulations reserved two

issues for additional consideration. The

first issue relates to the allocation of expenses, depreciation, and similar items

shared between an exempt activity and

an unrelated trade or business or between

more than one unrelated trade or business.

The second issue relates to changes made

to the section 172 NOL deduction by the

Coronavirus Aid, Relief, and Economic

1692

Security Act, Public Law 116-136, 134

Stat. 281 (2020) (CARES Act). The Treasury Department and the IRS anticipate

publishing a separate notice of proposed

rulemaking that will address these issues.

After consideration of the comments

received, the proposed regulations are adopted as modified by this Treasury Decision. The major areas of comment and the

revisions to the proposed regulations are

discussed in the following Summary of

Comments and Explanation of Revisions.

The comments are available for public inspection at www.regulations.gov or on request. Other minor, non-substantive modifications made to the proposed regulations

and adopted in these final regulations are

not discussed in the Summary of Comments and Explanation of Revisions.

Summary of Comments and

Explanation of Revisions

These final regulations provide guidance on how an exempt organization determines if it has more than one unrelated

trade or business, and, if so, how the exempt organization calculates UBTI under

section 512(a)(6). The final regulations

also clarify that the definition of “unrelated trade or business” in section 513(b) applies to individual retirement accounts and

that inclusions of subpart F income and

global intangible low-taxed income are

treated in the same manner as dividends

for purposes of section 512.

1. Separate Unrelated Trade or Business

Consistent with section 512(a)(6) and

the proposed regulations, the final regulations provide that an exempt organization with more than one unrelated trade or

business must compute UBTI separately

with respect to each unrelated trade or

business, without regard to the specific

deduction in section 512(b)(12), including

for purposes of determining any NOL deduction.

a. NAICS 2-Digit Codes Retained

The proposed regulations generally provided that an exempt organization

must identify each of its separate unrelated trades or businesses using the first

two digits of the North American Industry

Bulletin No. 2020–52

Classification System code (NAICS 2-digit code) that most accurately describes the

unrelated trade or business. Most commenters agreed with the proposed regulations’ adoption of NAICS 2-digit codes

over NAICS 6-digit codes, which Notice

2018-67, for purposes of interim guidance,

provided was a reasonable way to identify

separate trades or businesses. One commenter discussed how the use of NAICS

2-digit codes balances the legislative intent of not allowing the losses from one

unrelated trade or business to offset the

income from another unrelated trade or

business with the need for an administrable and efficient method of identifying

separate unrelated trades or businesses.

Other commenters agreed that NAICS

2-digit codes offer the most administrable

and least burdensome method of identifying separate unrelated trades or businesses

for both exempt organizations and the IRS.

One commenter disagreed with the

use of NAICS 2-digit codes to identify

separate unrelated trades or businesses.

This commenter noted that, in passing the

TCJA, Congress intended to limit exempt

organizations’ use of tax benefits that are

unrelated to their tax-exempt purpose or

purposes, and the commenter asserted

that the proposed regulations reversed this

congressional intent by identifying separate unrelated trades or businesses using

the twenty broad categories provided by

NAICS 2-digit codes. This commenter

recommended instead that the rules relating to the qualified business deduction

under section 199A for identifying a separate trade or business should be used for

purposes of section 512(a)(6). The regulations under section 199A provide that

the term “trade or business” has the same

meaning as in section 162. The commenter contended that enough case law exists

with respect to section 162 to define “trade

or business” and that the section 199A

regulations have provided practitioners

with enough experience to identify a trade

or business using this definition.

The final regulations do not adopt the

approach taken by the section 199A regulations as a method of identifying separate unrelated trades or businesses for

purposes of section 512(a)(6) because,

although sections 199A and 512(a)(6)

were both enacted as part of the TCJA,

they serve different purposes. Section

Bulletin No. 2020–52

199A, in part, provides individuals, estates, and certain trusts a deduction of up

to 20 percent of business income from

certain domestic trades or businesses. Such taxpayers might be engaged

in one or more trades or businesses for

which they may be entitled to the section 199A deduction. For purposes of

computing the section 199A deduction,

taxpayers are required to determine the

specific lines between trades or business to ensure that only qualified items

of income and expense traced to each

qualified trade or business are used to

compute the deduction and that the W-2

wage and unadjusted basis immediately

after acquisition (UBIA) limitations are

properly applied. Therefore, the section

199A regulations look to section 162

to determine how these lines should be

drawn. By contrast, section 512 looks to

section 162 to determine whether a trade

or business exists but employs a simplified regime to identify separate unrelated

trades or businesses under section 512(a)

(6) for exempt organizations because

they are not primarily engaged in section

162 for-profit trades or businesses. The

regime also applies for a more limited

purpose, that is preventing exempt organizations from using losses of one unrelated trade or business to offset the gains

of any other unrelated trade or business,

and uniformly to all of an exempt organization’s separate unrelated trades or

businesses. The Treasury Department

and IRS believe that using NAICS 2-digit codes in this context provides an objective means to identify separate trades

or businesses consistent with Congress’s

intent without imposing an undue burden

on exempt organizations. Accordingly,

the final regulations under section 512(a)

(6) do not adopt this comment.

b. No Additional Methods of Identifying

Separate Unrelated Trades or Businesses

One commenter recommended that

NAICS 2-digit codes be used as a safe-harbor and that a facts and circumstances

test be applied as the primary method of

identifying separate unrelated trades or

businesses. This commenter asserted that

a facts and circumstances test would be

more consistent with other parts of the

Code (including the regulations under

1693

section 199A) and would provide a more

flexible framework for variations in activities across exempt organizations. This

commenter proposed considering multiple

factors for identifying separate trades or

businesses that would include the interdependence of the activities, the geographic

location of the activities, and the relationship the exempt organization has with the

operation of the activity. The commenter

opined that a facts and circumstances test

would help alleviate any inequity caused

by section 512(a)(6).

As explained both in Notice 2018-67

and the preamble to the proposed regulations, Congress did not provide any explicit criteria for determining whether an

exempt organization has “more than one

unrelated trade or business” or for identifying “separate” unrelated trades or businesses for purposes of calculating UBTI

in accordance with section 512(a)(6). The

Joint Committee on Taxation (JCT) noted

that “it is intended that the Secretary issue guidance concerning when an activity will be treated as a separate unrelated

trade or business for purposes of [section

512(a)(6)].” Staff of the Joint Committee on Taxation, General Explanation of

Pub. L. 115-97 (December 2018), at 293

(General Explanation). Notice 2018-67

stated that the Treasury Department and

the IRS would like to set forth a more administrable method than a facts and circumstances test for identifying separate

unrelated trades or businesses. Nonetheless, the Treasury Department and the IRS

considered a facts and circumstances test

as a method of identifying separate unrelated trades or businesses in response to

comments received following the enactment of section 512(a)(6) and again in

response to Notice 2018-67. The factors

suggested by commenters, and previously

considered, generally were derived from

other Code provisions, such as sections

132, 162, 183, 414, and 469. However,

these Code provisions primarily consider

whether an activity is a trade or business

and not whether one trade or business is

“separate” from another. Accordingly, the

Treasury Department and the IRS continue to consider these Code provisions,

alone or in conjunction with each other, as

unhelpful models for identifying separate

trades or businesses for purposes of section 512(a)(6).

December 21, 2020

It continues to be the case that adoption of a facts and circumstances test, as

the only identification method or in addition to a safe harbor using NAICS 2-digit

codes, would increase the administrative

burden on exempt organizations in complying with section 512(a)(6) because a

fact-intensive analysis would be required

with respect to each unrelated trade or

business. Additionally, adoption of a

facts and circumstances test would offer

exempt organizations less certainty and

likely result in inconsistency among exempt organizations conducting more than

one unrelated trade or business because

of differing approaches exempt organizations would take in applying such a test.

Also, a facts and circumstances test would

increase the administrative burden on the

IRS, which, upon examination, must perform the same fact-intensive analysis with

respect to each of the unrelated trades or

businesses identified by the exempt organization for purposes of calculating UBTI.

Accordingly, the final regulations do not

adopt a facts and circumstances test in

addition to or in place of NAICS 2-digit

codes as a method of identifying separate

unrelated trades or businesses for purposes of section 512(a)(6).

c. Identifying the Appropriate NAICS

2-Digit Code

The proposed regulations provided that

an exempt organization’s separate unrelated trades or businesses are determined

based on the applicable NAICS 2-digit

code. Before an exempt organization can

identify its “separate” unrelated trades or

businesses, it must first determine whether it regularly carries on unrelated trades

or businesses within the meaning of sections 511 through 514. Section 1.513-1(a)

clarifies that, unless one of the specific

exceptions of section 512 or 513 applies,

gross income of an exempt organization

is includible in the computation of UBTI

if: (1) it is income from a trade or business; (2) such trade or business is regularly carried on by the organization; and

(3) the conduct of such trade or business

is not substantially related (other than

through the production of funds) to the

organization’s performance of its exempt

functions. Accordingly, the final regulations provide that an exempt organization

determines whether it carries on unrelated

trades or businesses by applying sections

511 through 514. Under the final regulations, the exempt organization then identifies its separate unrelated trades or businesses for purposes of section 512(a)(6)

using the methods described in the final

regulations. With respect to most unrelated trade or business activities, an exempt

organization determines whether those

activities are separate unrelated trades or

businesses for purposes of section 512(a)

(6) based on the most accurate NAICS

2-digit codes describing the activities.

Several commenters requested additional guidance regarding how to choose

the “most accurate” NAICS 2-digit code.

These commenters suggested that strict

adherence to NAICS 2-digit codes can

result in unrelated trade or business activities that the exempt organization considers to be one unrelated trade or business

being separated into two or more unrelated trades or businesses. Other commenters requested that aggregation of NAICS

2-digit codes be allowed in certain circumstances. The commenters provided

examples of unrelated trade or business

activities that they considered to be one

unrelated trade or business but that may

be identified as more than one unrelated trade or business when using NAICS

2-digit codes.

For example, one commenter stated that

an organization operating a gift shop that

sells clothing, electronics, and books in a

bricks-and-mortar store and online would

report those activities under two different

NAICS 2-digit codes – one for the sale of

clothing and electronics (44) and one for

books and online sales (45). Another example provided by a commenter is a museum that provides catering services, valet

parking, and personal property rentals as

part of a package for special events, such

as weddings, held on its premises. The

commenter noted that the museum may be

required to identify these activities using

three different NAICS 2-digit codes – one

for catering (72), one for parking (81), and

one for rentals (53). The commenter posit-

ed that the museum should be able to treat

this activity as one trade or business based

on a reasonable and common sense understanding of the service provided (hosting

an event), rather than the various components of the provided services.

The Treasury Department and the IRS

note that NAICS 2-digit codes aggregate

trade or business activities into only 20

separate trades or businesses, compared to

the more than 1,000 trades or businesses

identified at the NAICS 6-digit code level. Like the proposed regulations, the final

regulations provide that a separate unrelated trade or business is identified by the

NAICS 2-digit code that most accurately

describes the exempt organization’s trade

or business activity. In addition, the final

regulations add that this determination is

based on the more specific NAICS code,

such as at the 6-digit level, that describes

the activity that it conducts. The final regulations also state that the descriptions in

the current NAICS manual (available at

www.census.gov) of trades or businesses

using more than two digits of the NAICS

codes are relevant in this determination.

In response to commenter examples, the

final regulations incorporate a rule used

in NAICS for identifying certain industries1 and provide that, in the case of the

sale of goods, both online and in stores,

the separate unrelated trade or business is

identified by the goods sold in stores if the

same goods generally are sold both online

and in stores.

With respect to the museum example,

the Treasury Department and the IRS note

that income from activities that is appropriately characterized as income from

rentals is generally exempt from UBTI

under section 512(b)(3). The analysis of

whether an activity produces rental income depends, in part, on whether other

services are provided by the exempt organization in connection with the possible

rental activity (such as providing space

for a wedding). To the extent other services are provided, income from the use

of space may cease to be rent from real

property and instead take on the character

of the services provided. See §1.512(b)1(c)(5). Exempt organizations already

need to do this analysis of the facts and

The NAICS code for “Electronic Shopping and Mail-Order Houses” provides that “Store retailing or a combination of store retailing and nonstore retailing in the same establishment—are

classified in Sector 44-45, Retail Trade, based on the classification of the store portion of the activity.”

December 21, 2020

1694

Bulletin No. 2020–52

circumstances to determine their UBTI.

Similarly, whether services provided in

connection with hosting an event should

be aggregated or not depends on the facts

and circumstances, including the language

of the contract or contracts, the services

provided, who is providing the services,

etc. It is possible that the activities could

be separate trades or businesses based on

the fragmentation rule contained in section 513(c) and §1.513-1(b) (“[a]ctivities

of producing or distributing goods or performing services from which a particular

amount of gross income is derived do not

lose identity as trade or business merely

because they are carried on within a larger

aggregate of similar activities or within a

larger complex of other endeavors which

may, or may not, be related to the exempt

purposes of the organization”).

Because NAICS at the 2-digit code level aggregates all trade or business activities into only 20 separate trades or businesses, many trade or business activities

that could be considered separate trades or

businesses, such as the provision of food or

lodging, are already aggregated into broad

categories (NAICS code 72 includes both

lodging and food services) and therefore

treated as one trade or business under the

final regulations. Accordingly, if an exempt organization determines that, based

on the facts and circumstances, its trade or

business activities must be separated into

two or more unrelated trades or businesses

under NAICS 2-digit codes, the Treasury

Department and the IRS view that result

as appropriate to achieve the balance of

tax administrability and carrying out the

purposes of section 512(a)(6). Thus, under

the final regulations, if trade or business

activities would be best described by different NAICS 2-digit codes, those activities should be identified using different

NAICS 2-digit codes and treated as separate unrelated trades or businesses.

In addition, consistent with the proposed regulations, the final regulations

continue to provide that the NAICS

2-digit code must identify the separate

unrelated trade or business in which the

exempt organization engages (directly

or indirectly). The NAICS 2-digit code

cannot describe activities the conduct of

which are substantially related to the exercise or performance by such organization of its charitable, educational, or other

Bulletin No. 2020–52

purpose or function constituting the basis

for its exemption under section 501 (or,

in the case of an organization described

in section 511(a)(2)(B), to the exercise or

performance of any purpose or function

described in section 501(c)(3)). For example, a college or university described in

section 501(c)(3) or 511(a)(2)(B) cannot

use the NAICS 2-digit code for educational services to identify all of its separate unrelated trades or businesses, and a

qualified retirement plan described in section 401(a) cannot use the NAICS 2-digit

code for finance and insurance to identify

all of its unrelated trades or businesses.

Also consistent with the proposed regulations, the final regulations continue to

provide that an organization will report

each NAICS 2-digit code only once. The

Treasury Department and the IRS note

that this rule permits exempt organizations to aggregate trade or business activities that may occur in different geographic

locations. The final regulations include

the same example as provided by the proposed regulations — the pharmacies operated in different geographic locations

that are one unrelated trade or business for

purposes of section 512(a)(6) because the

pharmacy trade or business is identified

using one NAICS 2-digit code.

d. Changing NAICS 2-Digit Codes

The proposed regulations generally

provided that, once an organization has

identified a separate unrelated trade or

business using a particular NAICS 2-digit

code, the organization cannot change the

NAICS 2-digit code describing that separate unrelated trade or business unless two

requirements are met. First, the exempt

organization must show that the NAICS

2-digit code chosen was due to an unintentional error. Second, the exempt organization must show that another NAICS

2-digit code more accurately describes the

unrelated trade or business. The preamble

to the proposed regulations stated that the

instructions to the Form 990-T, “Exempt

Organization Business Income Tax Return,” would be updated to describe how

an exempt organization notifies the IRS of

a change in a NAICS 2-digit code due to

an unintentional error.

At least one commenter requested

clarification regarding what is meant by

1695

“unintentional error.” Commenters also

suggested that the final regulations should

include additional circumstances in which

exempt organizations can change the

NAICS 2-digit code describing a separate unrelated trade or business. Several

commenters explained that the nature of

a separate unrelated trade or business may

change or evolve to the extent that the unrelated trade or business would be more

accurately reported under a different NAICS 2-digit code. One commenter likened

this shift in trade or business activities

to the commencement of a new unrelated trade or business. Accordingly, these

commenters recommended that an exempt

organization be permitted to change the

NAICS 2-digit code identifying a separate

unrelated trade or business if a change in

the unrelated business activity results in it

being better described by a different NAICS 2-digit code. Finally, one commenter

requested that a code change be permitted

if the exempt organization’s tax preparer

reasonably believes that an unrelated trade

or business activity is more accurately described by a different NAICS 2-digit code.

Several commenters also requested

clarification of the process for reporting

an erroneous code. One commenter recommended that the instructions to the

Form 990-T clarify that an exempt organization should provide such notification

to the IRS on the Form 990-T — including an explanation of the change and any

necessary supporting information — and

that such change would be effective on

the first day of the taxable year beginning

after the taxable year for which the Form

990-T providing such notification is filed.

This commenter also questioned whether

reconciliation was required for the prior

taxable year or years in which the erroneous code was used and, if so, how an

adjustment resulting from such reconciliation would be applied.

In response to these comments, the final regulations remove the restriction on

changing NAICS 2-digit codes. Instead,

the final regulations require an exempt organization that changes the identification

of a separate unrelated trade or business

to report the change in the taxable year of

the change in accordance with forms and

instructions. See section 6012(a)(2) and

§1.6012-2(e). The final regulations clarify

that a change in identification of a sepa-

December 21, 2020

rate unrelated trade or business includes

the changed identification of the separate

unrelated trade or business with respect

to a partnership interest that was incorrectly designated as a qualifying partnership interest (discussed in part 2.b of this

Summary of Comments and Explanation

of Revisions). To report the change in

identification, the final regulations require

an organization to provide certain information with respect to each separate unrelated trade or business the identification

of which changes: the identification of the

separate unrelated trade or business in the

previous taxable year, the identification of

the separate unrelated trade or business in

the current taxable year, and the reason for

the change. The Treasury Department and

the IRS anticipate that the instructions to

the Form 990-T will be revised for taxable

years for which the final regulations are

effective to provide instructions regarding

where and how changes in identification

are reported. The effect on NOLs caused

by changes of the identification of separate unrelated trades or businesses are

discussed in part 6.d of this Summary of

Comments and Explanation of Revisions.

e. Transition from NAICS 6-Digit Codes

to NAICS 2-Digit Codes

The preamble to the proposed regulations provided that, for taxable years

beginning before the date the proposed

regulations are published in the Federal

organization may rely on a reasonable,

good-faith interpretation of sections 511

through 514, considering all the facts and

circumstances, when identifying separate

unrelated trades or businesses for purposes of section 512(a)(6). The preamble to

the proposed regulations provided that

an exempt organization could rely on the

proposed regulations in their entirety or,

alternatively, the methods of aggregating

or identifying separate trades or businesses provided in Notice 2018-67, which

provided that a reasonable, good-faith interpretation included using NAICS 6-digit

codes.

One commenter recommended that the

final regulations confirm that an exempt

organization that reported separate unrelated trades or businesses using NAICS

6-digit codes in taxable years beginning

December 21, 2020

prior to the exempt organization’s first

taxable year for which the final regulations are effective can reclassify their activities using NAICS 2-digit codes without having to report an unintentional error.

As discussed in the Applicability Dates

section of this preamble, these final regulations are applicable to taxable years beginning on or after December 2, 2020. Although an exempt organization may have

used NAICS 6-digit codes to identify its

separate unrelated trades or businesses in

taxable years beginning before this date,

the transition from NAICS 6-digit codes

to NAICS 2-digit codes does not require

the reporting of a code change because

the exempt organization will be using the

same NAICS code to identify its separate unrelated trades or businesses – just

with fewer digits. The move from NAICS

6-digit codes to NAICS 2-digit codes may

result in the combination of NOLs if an

exempt organization has trade or business

activities that would be separate unrelated trades or businesses if identified using

NAICS 6-digit codes but would be one

unrelated trade or business if identified

using NAICS 2-digit codes. An exempt

organization may choose, but is not required, to amend Forms 990-T filed prior

to December 2, 2020 to report separate

unrelated trades or businesses using NAICS 2-digit codes.

f. No De Minimis Exception Provided

The preamble to the proposed regulations discussed one comment with respect

to Notice 2018-67 that suggested the Treasury Department and the IRS adopt a de

minimis exception for exempt organizations reporting less than $100,000 of gross

UBTI. The preamble to the proposed regulations explained that the Treasury Department and the IRS declined to adopt the

comment because section 512(a)(6) does

not provide discretionary authority for the

Treasury Department and the IRS to establish a de minimis exception. Further,

the preamble to the proposed regulations

explained that, even at a lower threshold,

a de minimis test would be contrary to the

stated congressional intent of not permitting exempt organizations to use losses

from one unrelated trade or business to

offset the gains from another unrelated

trade or business.

1696

One commenter on the proposed regulations nonetheless recommended the

adoption of a de minimis exception. This

commenter proposed that an exempt organization with less than $10,000 of total

gross revenues from all unrelated trade or

business activities be permitted to treat all

its unrelated trades or businesses as one

trade or business for purposes of section

512(a)(6). For exempt organizations with

more than $10,000 of total gross revenues

from all unrelated trade or business activities, the commenter suggested aggregation of all separate unrelated trades or

businesses with less than $1,000 of total

gross revenues. The commenter reasoned

that exempt organizations with less than

$10,000 of total gross revenues from unrelated trade or business activities likely

lack the resources necessary to comply

with section 512(a)(6).

The commenter attempted to refute the

argument that the Treasury Department

and the IRS lack the authority to promulgate a de minimis exception by noting

that the Treasury Department and the IRS

already exercised discretion by permitting exempt organizations to treat their

activities in the nature of investments as

a separate unrelated trade or business for

purposes of section 512(a)(6). The commenter cites the JCT General Explanation

as confirmation that the Treasury Department and the IRS are authorized to permit the aggregation of separate unrelated

trades or businesses.

Permitting the aggregation of certain

investment activities is an administrative

rule premised on the difficulty an exempt

organization partner may experience in

certain situations in obtaining the information needed to determine whether the

trades or businesses conducted by the

partnership are separate unrelated trades

or businesses with respect to the exempt

organization partner (see part 2 of this

Summary of Comments and Explanation

of Revisions for a more in depth discussion). By contrast, permitting the aggregation of “de minimis” separate unrelated trades or businesses is contrary to the

congressional intent of not permitting

exempt organizations to offset the losses

from one unrelated trade or business with

the gains from another, without regard to

the amount of the gross receipts in either

trade or business. Finally, the concept of a

Bulletin No. 2020–52

de minimis amount of UBTI is incompatible with the fragmentation rule in section

513(c); §1.513-1(b). That is, the fragmentation rule requires the identification of

unrelated trade or business activities no

matter the size.

To the extent that smaller exempt organizations may have difficulty complying

with section 512(a)(6), the Treasury Department and the IRS expect that adoption

of NAICS 2-digit codes, as opposed to

NAICS 6-digit codes, may relieve much

of this burden because smaller exempt

organizations are unlikely to have numerous unrelated trades or businesses under

these final regulations. Furthermore, under §1.6012-2(e), an exempt organization

is required to file Form 990-T only “if it

has gross income, included in computing

[UBTI] for such taxable year, of $1,000

or more.” This filing threshold, which applies regardless of the number of separate

unrelated trades or businesses conducted

by the exempt organization, serves as a

de minimis rule for small exempt organizations. Accordingly, the Treasury Department and the IRS do not adopt this

comment in the final regulations for these

reasons as well as the reasons cited in the

preamble to the proposed regulations.

For example, if facilities are used both to

carry on exempt activities and to conduct

unrelated trade or business activities, then

expenses, depreciation, and similar items

attributable to such facilities must be allocated between the two uses on a reasonable basis (reasonable basis standard).

The preamble to the proposed regulations noted that an exempt organization

with more than one unrelated trade or

business must not only allocate shared expenses among exempt and taxable activities as described in §1.512(a)-1(c) but also

among separate unrelated trades or businesses. Accordingly, the proposed regulations incorporated the existing allocation

standard in §1.512(a)-1(c) for purposes

of section 512(a)(6). No comments were

received regarding this approach. Accordingly, the final regulations continue to

provide that an exempt organization with

more than one unrelated trade or business

must allocate deductions between separate unrelated trades or businesses using

the reasonable basis standard described in

§1.512(a)-1(c).

g. Allocation of Directly Connected

Deductions

The preamble to the proposed regulations did, however, describe the concerns

of the Treasury Department and the IRS regarding the administrability of the reasonable basis standard. The preamble to the

proposed regulations announced that the

Treasury Department and the IRS would

continue to consider whether the reasonable basis standard should be retained and

announced the intention to publish a separate notice of proposed rulemaking. As an

initial matter, however, the proposed regulations stated that allocation of expenses,

depreciation, and similar items using an

unadjusted gross-to-gross method is not

reasonable. In general, a gross-to-gross

method of allocation uses a ratio of gross

income from an unrelated trade or business activity over the total gross income

from both unrelated and related activities

generating the same indirect expenditures.

The percentage resulting from this ratio

is used to determine the percentage of the

shared costs attributable to the unrelated

trade or business activity (or activities).

If a price difference exists between the

i. In General

Section 512(a)(1) permits an exempt

organization with an unrelated trade or

business to take the deductions allowed

under chapter 1 of the Code (chapter 1)

that are directly connected with the carrying on of such unrelated trade or business.

Section 512(a)(3) similarly permits a social club described in section 501(c)(7), a

voluntary employees’ beneficiary association (VEBA) described in section 501(c)

(9), or a supplemental unemployment

benefits trust (SUB) described in section

501(c)(17) to take the deductions allowed

under chapter 1 that are directly connected

with the production of gross income (excluding exempt function income). To the

extent that an exempt organization may

have items of deduction that are shared between an exempt activity and an unrelated

trade or business, §1.512(a)-1(c) provides

special rules for allocating such expenses.

Bulletin No. 2020–52

ii. The Unadjusted Gross-to-Gross

Method Unreasonable in Certain

Circumstances

1697

provision of a good or service to different

populations and no adjustment is made,

the gross-to-gross ratio may be described

as “unadjusted.”

Several commenters asserted that the

unadjusted gross-to-gross method should

not be considered unreasonable. Of these

commenters, two stated that the gross-togross method can be reasonable if there is

no price difference for goods or services

provided in related and unrelated activities or if adjustments are made for any

price differences. One commenter further

argued that no allocation method should

be per se unreasonable because what is

unreasonable with respect to one set of

facts and circumstances may be reasonable with respect to another.

In response to these commenters’ recommendations, the final regulations clarify that allocation of expenses, depreciation, and similar items is not reasonable if

the cost of providing a good or service in

a related and an unrelated activity is substantially the same, but the price charged

for that good or service in the unrelated

activity is greater than the price charged

in the related activity and no adjustment is

made to equalize the price difference for

purposes of allocating expenses, depreciation, and similar items based on revenue

between related and unrelated activities.

For example, if a social club described in

section 501(c)(7) charges nonmembers a

higher price than it charges members for

the same good or service, but does not

adjust the price of the good or service

provided to members for purposes of allocating expenses, depreciation, and similar

items attributable to the provision of that

good or service, the allocation method is

not reasonable.

The Action on Decision (AOD) relating to Rensselaer Polytechnic Institute v.

Commissioner stated that the IRS would

not litigate the reasonableness of an allocation method “until the allocation rules

of [§1.512(a)-1(c)] are amended.” 732

F.2d 1058 (2d Cir. 1984), aff’g 79 T.C.

967 (1982); AOD 1987-014 (Jun. 18,

1987). The final regulations amend the

rules of §1.512(a)-1(c) and, as discussed

in the Applicability Dates section of this

preamble, are effective for taxable years

beginning on or after December 2, 2020.

Accordingly, the IRS rescinds the AOD to

the limited extent of any allocation meth-

December 21, 2020

od that fails to equalize price differences

between related activities and unrelated

trade or business activities for such taxable years. The IRS will continue to refrain from litigating the reasonableness

of other allocation methods pending the

publication of further guidance, which the

Treasury Department and the IRS continue to consider and expect to publish in a

separate notice of proposed rulemaking.

2. Activities in the Nature of Investments

The proposed regulations treat an exempt organization’s activities in the nature

of an investment (investment activities) as

a separate trade or business for purposes of

section 512(a)(6). Several commenters repeated the suggestion previously made in

response to Notice 2018-67 that the Treasury Department and the IRS should not

treat an exempt organization’s investment

activities as an unrelated trade or business,

and therefore the income and losses from

these activities should not be considered

for purposes of applying section 512(a)(6).

The preamble to the proposed regulations

explained that the Treasury Department

and the IRS concluded that the structure

and purposes of sections 511 through 514

indicate that an exempt organization’s investment activities are an unrelated trade

or business for purposes of section 512(a)

(6), although certain income from such

investment activities (investment income)

is excluded from the calculation of UBTI

under modifications in section 512(b). The

Treasury Department and the IRS also

noted that the language of section 512(a)

(6)(B) states an organization’s total UBTI

is the sum of the UBTI computed for each

separate unrelated trade or business under

section 512(a)(6)(A). To conclude that

investment income is not included in the

separately computed UBTI under section

512(a)(6)(A) would be to remove such

income entirely from UBTI under section

512(a)(6)(B), even when no modification

in section 512(b) applies to the income.

Nothing in the legislative history or the

statute suggests that Congress intended to

amend the items of income that are taxable under section 511. Accordingly, the

final regulations continue to treat an ex-

empt organization’s investment activities

that are subject to UBIT as a separate unrelated trade or business for purposes of

section 512(a)(6).

a. Exclusive List of Investment Activities

The proposed regulations provided an

exclusive list of an exempt organization’s

investment activities that may be treated

as a separate unrelated trade or business

for purposes of section 512(a)(6). Under

the proposed regulations, for most exempt

organizations, such investment activities

are limited to: (i) qualifying partnership

interests (see part 2.b of this Summary of

Comments and Explanation of Revisions);

(ii) qualifying S corporation interests (see

part 3.a of this Summary of Comments

and Explanation of Revisions); and (iii)

debt-financed properties (see part 2.d of

this Summary of Comments and Explanation of Revisions).2 Although commenters

recommended modifications to the rules

regarding the individual items included

in this list, no commenters objected to the

treatment of these items as investment activities. Accordingly, the final regulations

adopt the list of investment activities provided in the proposed regulations without

change.

Nonetheless, some commenters recommended that this exclusive list be expanded to include specified payments from

controlled entities that are included in

UBTI under section 512(b)(13) (discussed

in part 2.a.i of this Summary of Comments

and Explanation of Revisions) and certain

amounts from controlled foreign corporations that are included in UBTI under

section 512(b)(17) (discussed in part 2.a.ii

of this Summary of Comments and Explanation of Revisions).

i. Specified Payments from Controlled

Entities

Section 512(b)(13)(A) requires an exempt organization, referred to as a “controlling organization,” that receives or

accrues (directly or indirectly) a specified

payment from another entity which it controls, referred to as a “controlled entity,”

to include such payment as an item of

gross income derived from an unrelated

trade or business to the extent such payment reduces the net unrelated income of

the controlled entity (or increases any net

unrelated loss of the controlled entity).

See also §1.512(b)-1(l)(1). Section 512(b)

(13)(C) defines the term “specified payment” as any interest, annuity, royalty,

or rent. Accordingly, section 512(b)(13)

treats certain amounts that would ordinarily be excluded from the calculation of

UBTI under section 512(b)(1), (2), and (3)

as income derived from an unrelated trade

or business.

The proposed regulations provided

that, if an exempt organization controls

another entity (within the meaning of

section 512(b)(13)(D)), the specified payments from that controlled entity will be

treated as gross income from a separate

unrelated trade or business for purposes

of section 512(a)(6). If a controlling organization receives specified payments

from two different controlled entities, the

proposed regulations treated the payments

from each controlled entity as separate unrelated trades or businesses.

Two commenters recommended that

income included in UBTI under section

512(b)(13) should be part of the investment activities trade or business under

section 512(a)(6). These commenters

noted that different fact patterns can produce different tax results because of the

interaction between section 512(b)(13)

and the debt-financed property rules of

section 514. For example, one commenter

provided a series of examples in which a

wholly owned taxable subsidiary rented

space from its exempt organization parent

in a debt-financed property owned by the

parent.

Section 1.514(b)-1(b)(2)(ii) of the

current regulations states that section

514 does not apply to amounts specifically taxable under other provisions of

the Code, such as rents and interest from

controlled organizations includible pursuant to section 512(b)(13). Thus, if a controlling organization leases debt-financed

property to a controlled organization, the

amount of rents includible in the controlling organization’s UBTI shall first

be determined under section 512(b)(13),

Special rules discussed in part 4 of this Summary of Comments and Explanation of Revisions apply to social clubs described in section 501(c)(7).

December 21, 2020

1698

Bulletin No. 2020–52

and only the portion of such rents not taken into account by operation of section

512(b)(13) are taken into account by operation of section 514. See §1.512(b)-1(l)

(5)(ii). Because the regulations provide a

clear ordering rule that sets section 512(b)

(13) income apart from the rules of section

514, section 512(b)(13) taxable income

can never be debt-financed investment income.

The Treasury Department and the IRS

considered in the preamble to the proposed

regulations whether specified payments

should be included with an exempt organization’s investment activities and concluded that this treatment would be inconsistent with the purpose of section 512(b)

(13)(A), which is to prevent a controlled

entity from gaining a competitive advantage (in contravention of the purposes of

section 512) through making deductible

payments to a controlling organization that

is exempt from tax. See S. Rep. No. 91552, at 73 (1969) (explaining that certain

“rental” arrangements between exempt organizations and taxable subsidiaries “[enable] the taxable [subsidiary] to escape

nearly all of its income taxes”). Consistent

with this purpose, section 512(b)(13)(A)

treats specified payments as income from

an unrelated trade or business only “to

the extent such payment reduces the net

unrelated income of the controlled entity

(or increases any net unrelated loss of the

controlled entity).” Additionally, the required degree of control of the controlling

organization over the controlled entity indicates that the controlled entities are not a

part of the controlling organization’s otherwise appropriately characterized investment activities.

Alternatively, if specified payments

are not included with an exempt organization’s investment activities, these commenters requested that specified payments

from any source be treated as one unrelated trade or business for purposes of section 512(a)(6). The commenters asserted

that the aggregation of specified payments

would reduce the incentive to restructure

financial transactions to obtain more favorable tax results. One commenter set

out an example in which the UBTI from

the separate unrelated trades or businesses

for specified payments received from two

controlled entities of an exempt organization differed under section 512(b)(13)

Bulletin No. 2020–52

depending on whether the exempt organization owned both subsidiaries directly

or one subsidiary directly and the other

subsidiary indirectly through the first subsidiary. The commenter asserted that aggregating the UBTI from all the controlled

entities would create the same tax result

for all exempt organizations with these

facts regardless of the structure of the subsidiaries and the rental payments.

The Treasury Department and the IRS

continue to view specified payments as

not appropriately characterized as part

of an exempt organization’s investment

activities. Furthermore, because section 512(b)(13) views specified payments

as stemming from the trade or business

activity of the controlled entity rather

than from its investment activities, the

Treasury Department and the IRS decline

to adopt the suggestion that all specified

payments be treated as one unrelated

trade or business for purposes of section

512(a)(6). Rather, because section 512(b)

(13)(A) provides that specified payments

from a controlled entity are income derived from an unrelated trade or business,

the final regulations adopt the proposed

regulations regarding specified payments

without modification.

ii. Certain Amounts from Controlled

Foreign Corporations

Section 512(b)(17) requires any

amount included in gross income under

section 951(a)(1)(A) to be included as

an item of gross income derived from an

unrelated trade or business to the extent

the amount so included is attributable

to insurance income (as defined in section 953) which, if derived directly by the

exempt organization, would be treated as

gross income from an unrelated trade or

business. Section 953(a)(1) defines “insurance income” as any income that (A)

is attributable to the issuing (or reinsuring) of an insurance or annuity contract,

and (B) would (subject to certain modifications not relevant here) be taxed under

subchapter L of chapter 1 if such income

were the income of a domestic insurance

company. Thus, section 512(b)(17) “applies a look-through rule in characterizing

certain subpart F insurance income for unrelated business income tax purposes.” H.

R. Rep. No. 104-586 (1996), at 137.

1699

The proposed regulations treated the

provision of insurance by all controlled

foreign corporations (CFCs) as one trade

or business, regardless of whether such

insurance income is received from more

than one CFC, which is consistent with

how NAICS would categorize the provision of insurance (52 – Finance and Insurance). However, the proposed regulations

did not permit the aggregation of an exempt organization’s insurance income included in UBTI under section 512(b)(17)

with any insubstantial commercial-type

insurance activities conducted directly

by the exempt organization because the

CFC, not the exempt organization, is engaged in the activity giving rise to the insurance income included in UBTI under

section 512(b)(17). The insurance activity described in section 512(b)(17) is not

attributed to the exempt organization and

thus is distinguishable from any commercial-type insurance activity engaged in directly by the exempt organization.

One commenter recommended that

amounts included in income under section 512(b)(17) should be part of an exempt organization’s investment activities.

This commenter questioned the statement

in the preamble to the proposed regulation that “the required degree of control

of the exempt organization over the controlled foreign corporation indicates that

the exempt organization’s interest in a

controlled foreign corporation is probably not part of the exempt organization’s

otherwise appropriately characterized

investment activities.” The commenter

explained that, with respect to insurance

income specifically, the required ownership by United States shareholders for

CFC status is reduced to 25 percent from

the usual 50 percent. The commenter asserted that an exempt organization shareholder therefore could hold less than a 10

percent interest in a CFC that as a whole is

owned by United States shareholders. The

commenter stated that the low percentage of ownership necessary to have such

amounts included in UBTI should warrant inclusion with an exempt organization’s investment activities, based on the

similarity to the ownership percentages

for qualifying partnership interest status

discussed in part 2.b of this Summary of

Comments and Explanation of Revisions.

However, another commenter recom-

December 21, 2020

mended retention of the rules in the proposed regulations for amounts included in

income under section 512(b)(17).

As explained in the preamble to the

proposed regulations, the reasons for not

treating amounts included in income under section 512(b)(17) as an exempt organization’s investment activities extend

beyond the amount of control the exempt

organization may have over the CFC. In

particular, that preamble explained that

insurance income included in UBTI under

section 512(b)(17) should not be treated

as gross income from an exempt organization’s investment activities because

the provision of insurance generally is an

unrelated trade or business. See section

501(m) (providing that, in the case of an

exempt organization described in section 501(c)(3) or (4) that does not provide

commercial-type insurance as a substantial part of its activities, the activity of

providing commercial-type insurance is

treated as an unrelated trade or business

(as defined in section 513)). Further, the

percentage interest prongs of the qualifying partnership interest rules, discussed in

parts 2.b.iii and 2.b.iv.A of this Summary

of Comments and Explanation of Revisions, serve as a proxy for an exempt organization’s ability to obtain the information necessary to identify the underlying

trade or business of the partnership. For

amounts included in income under section

512(b)(17), the underlying trade or business is known because the only amounts

included are from the insurance activity

of the CFC. Thus, the same treatment of

income under section 512(b)(17) is not

needed for administrative convenience.

Accordingly, the final regulations

adopt without change the proposed regulations regarding the treatment of amounts

included in UBTI under section 512(b)

(17) for purposes of section 512(a)(6).

b. Qualifying Partnership Interests

In general, for exempt organizations,

the activities of a partnership are considered the activities of the exempt organization partners.3 Specifically, section 512(c)

states that if a trade or business regularly

carried on by a partnership of which an

exempt organization is a member is an

unrelated trade or business with respect to

such organization, such organization shall

include its share of the gross income of

the partnership in UBTI. However, commenters on both Notice 2018-67 and the

proposed regulations explained the difficulty of obtaining information regarding

the trade or business activities of lower-tier partnerships. Therefore, as a matter of

administrative convenience for both the

exempt organization and the IRS, the proposed regulations permitted, but did not

require, an exempt organization to aggregate its UBTI from an interest in a partnership with more than one unrelated trade or

business (including unrelated trades or

businesses conducted by lower-tier partnerships) if it met certain requirements

(qualifying partnership interest, or QPI).

Additionally, the proposed regulations

permitted the aggregation of any QPI with

all other QPIs, resulting in the treatment

of the aggregate group of QPIs (along

with associated debt-financed income under section 514 and qualifying S corporation interests, both discussed in parts 2.d

and 3.a, respectively, of this Summary of

Comments and Explanation of Revisions)

as a single “investment activities” trade or

business for purposes of section 512(a)(6)

(A).

The proposed regulations identified a

partnership interest as a QPI if it met the

requirements of either the de minimis test

(discussed in part 2.b.iii of this Summary of Comments and Explanation of Revisions) or the control test (discussed in

part 2.b.iv of this Summary of Comments

and Explanation of Revisions). A few

commenters recommended alternative or

additional tests to identify a QPI. Three

commenters suggested that the generally

accepted accounting principles (GAAP)

codified by the Financial Accounting

Standards Board (FASB) should replace

the de minimis and the control tests to

identify partnership interests as QPIs.

These commenters recommended that any

interest that is reported as “fair value” under these standards should be considered

a QPI and included as part of the exempt

organization’s investment activities. Two

other commenters recommended that a

partnership that uses an investment manager should be a QPI. For this purpose,

one of these commenters recommended

defining an investment manager as someone who is either (i) included in a listing

of investment managers with the Securities and Exchange Commission (SEC), (ii)

in the business of providing investment

advice for compensation and manages at

least $150 million in client assets, or (iii)

has filed a Form D notice with the SEC

with respect to the partnership at issue indicating that interests in such partnership

are offered under an exemption from SEC

registration requirements. Finally, one

commenter provided a general list of facts

and circumstances that should be considered when determining whether a partnership interest is a QPI, such as whether the

exempt organization is a limited partner,

whether the exempt organization has the

right to be involved in the day-to-day

management or operations of the partnership, and whether the exempt organization

formed the partnership.

As noted in Notice 2018-67, the purpose of permitting the aggregation of

QPIs is to reduce the administrative burden of obtaining information from the

partnership regarding the trade or business

activities of the partnership in which the

exempt organization holds a modest interest, and particularly of lower-tier partnerships under such partnership. As stated in

the preamble to the proposed regulations,

the percentage interest level for QPIs was

intended as a proxy to identify partnership

interests in which the exempt organization

does not significantly participate. 85 FR at

23180. Taking into account the comments

received, the Treasury Department and the

IRS have determined that, for purposes of

section 512(a)(6), if the percentage interest level indicates that an exempt organization does not significantly participate in

a partnership, the exempt organization is

not likely to be able to easily obtain the

information required to identify the trades

or businesses conducted, directly or indirectly, by the partnership that are unrelated trades or businesses with respect to the

exempt organization partner.

The recommendations of the commenters regarding alternate or additional meth-

See sections 512(c), 513(a); §1.513-1(d)(1) and (2); Plumstead Theatre Society, Inc. v. Commissioner, 74 T.C. 1324 (1980); 675 F.2d 244 (9th Cir. 1995); Service Bolt & Nut Co. Profit Sharing

Trust v. Commissioner, 724 F.2d 519 (6th Cir.1983), affg, 78 T.C. 812 (1982); Rev. Rul. 98-15, 1998-1 C.B. 718.

December 21, 2020

1700

Bulletin No. 2020–52

ods to determine whether a partnership

interest is a QPI do not provide administrable methods for proximately measuring

an exempt organization’s ability to obtain

information about the partnership’s trades

or businesses. Under GAAP, an exempt

organization accounts for a partnership

interest using “fair value” if it does not

control a partnership or have “significant

influence” in the partnership or if it holds

an interest the value of which is “readily determinable.” FASB, 2020, ASC par.

958-810-15-4. As discussed in more detail in part 2.b.iv.B of this Summary of

Comments and Explanation of Revisions,

determining “significant influence” under

GAAP is substantially similar to determining significant participation under the

participation test. By FASB’s own admission, however, determining significant influence is not always clear. FASB, 2020,

ASC par. 323-10-15-7. Further, whether

a partnership interest has a readily determinable value does not indicate whether

an exempt organization has access to the

information needed to identify trades or

businesses conducted by the partnership

that are unrelated trades or businesses with

respect to the exempt organization partner.

The de minimis and control tests provide a

substantially similar standard to that found

in GAAP that is more objective and that

does not include additional factors outside

the scope of the QPI test. Additionally, unlike the adoption of NAICS 2-digit codes,

adopting GAAP would mean using a set

of rules that are maintained and amended

frequently by a non-governmental third

party. Furthermore, GAAP does not always align with tax standards.

Similarly, the presence of an investment manager does not indicate whether

an exempt organization can obtain information to identify separate unrelated

trades or businesses conducted by a partnership. In addition, the requirements for

being an investment manager, as outlined

by the commenter, require reliance on an

SEC system that is designed for purposes

that do not align with the those of the QPI

tests. As a result, the investment manager

test does not satisfy the purpose of the QPI

tests and the Treasury Department and the

IRS do not adopt this suggestion. Finally,

the facts and circumstances test suggested

by commenters relies on factors that do not

tend to relate to the exempt organization’s

Bulletin No. 2020–52

ability to obtain the information from the

partnership needed to identify separate

unrelated trades or businesses and therefore do not advance the administrative

convenience purpose of the QPI test. Accordingly, the Treasury Department and

the IRS do not adopt these suggestions as

a reliable method for identifying QPIs.

Other commenters suggested the inclusion of all limited partnerships or limited liability companies (LLCs) in which

the exempt organization is not a general

partner or managing member (regardless

of the exempt organization’s percentage interest or other participation in the

partnership) as QPIs. As discussed in the

preamble to the proposed regulations, the

Treasury Department and the IRS decline

to adopt this standard because of the variation in state law for determining non-managing member equivalent interests and

the administrative burden that reliance on

state law places on the IRS.

Accordingly, the Treasury Department

and the IRS do not adopt the recommended alternative or additional methods for

identifying a QPI.

i. Designation of a QPI

The proposed regulations provided that,

once an organization designates a partnership interest as a QPI (in accordance with

forms and instructions), it cannot thereafter identify the trades or businesses conducted by the partnership that are unrelated trades or businesses with respect to the

exempt organization using NAICS 2-digit

codes unless and until the partnership interest is no longer a QPI. For example, if

an exempt organization has a partnership

interest that is a QPI and the exempt organization designates that partnership interest as a QPI on its Form 990-T, the exempt

organization cannot, in the next taxable

year, identify the trades or businesses of

the partnership that are unrelated trades

or businesses with respect to the exempt

organization using NAICS 2-digit codes.

However, if, in a future taxable year, the

exempt organization’s partnership interest

is no longer a QPI, then the exempt organization would be required to identify the

trades or businesses of the partnership that

are unrelated trades or businesses with

respect to the exempt organization using

NAICS 2-digit codes. No comments were

1701

received regarding this provision. Accordingly, the final regulations adopt the proposed regulations regarding the designation of QPIs without change.

ii. General Partner Prohibition

The proposed regulations clarified that

any partnership in which an exempt organization is a general partner is not a QPI,

regardless of the exempt organization’s

percentage interest. One commenter noted

that, while related parties are considered

for determination of the percentage interest prong of the control test, these same

related parties are not considered when

determining the general partner status of

the exempt organization under the de minimis test or for determining control under

the second prong of the control test. Thus,

a related entity may be a general partner

in or may control the partnership in which

an exempt organization has an interest and

such control by the related party would

not affect the outcome under the proposed

regulations.

The Treasury Department and the IRS

agree with the commenter that the determination of whether an exempt organization is a general partner should include

related organizations. Thus, the final regulations clarify that, if an organization the

interest of which must be taken into account when determining the exempt organization’s percentage interest for purposes

of the first prong of the control test is a

general partner in a partnership in which

an exempt organization holds an interest,

then such interest is not a QPI.

One commenter recommended that the

per se prohibition against general partner

status for a partnership interest to be a QPI

should be extended to status as a managing member of a limited liability company

(LLC). The Treasury Department and the

IRS agree that the term “partnership” includes all entities, including LLCs, treated

as partnerships for Federal tax purposes.

Accordingly, an interest in an LLC treated

as a partnership for Federal tax purposes

can be a QPI. However, the rule in the

proposed regulations precluding a general partner interest from being a QPI was

intended to apply only to interests held

by partners classified as general partners

under applicable state law. The Treasury

Department and the IRS do not believe it

December 21, 2020

is appropriate to expand the per se prohibition to persons classified as managing

members under applicable state law without the opportunity for further notice and

comment, although managing members

are unlikely to satisfy the participation

test due to their significant participation

in the LLC. Accordingly, the final regulations adopt the proposed regulation with

the clarification that general partner status

is determined under applicable state law.

iii. De Minimis Test

The proposed regulations provided that

a partnership interest is a QPI that meets

the requirements of the de minimis test if

the exempt organization holds directly or

indirectly no more than 2 percent of the

profits interest and no more than 2 percent

of the capital interest.

One commenter recommended removing the de minimis test. The Treasury Department and the IRS have concluded that

the de minimis test reduces administrative

burden by establishing a clear limit below

which no other factors need to be considered for inclusion of such interest as a part

of an exempt organization’s investment

activities. Therefore, the Treasury Department and the IRS retain the de minimis

test in the final regulations.

One commenter recommended that the

percentage interest threshold of the de minimis test should be increased to 5 percent

consistent with other sections of the Code

and regulations. The commenter notes

that, not only have other parts of the Code

determined that 5 percent is sufficiently

de minimis, but also that increasing the

amount from 2 percent to 5 percent would

reduce administrative burden by potentially increasing the number of partnership

interests that would meet the requirements

of the de minimis test.

The Treasury Department and the IRS

do not adopt this commenter’s suggestion

for the following reasons. For purposes of

administrative convenience, the de minimis test allows certain partnership investments to be treated as an investment activity and aggregated with other investment

activities. Otherwise, as previously discussed in this section of the preamble, section 512(c) mandates that any partnership

interest, even a de minimis interest, must

be analyzed to determine whether it is an

December 21, 2020

unrelated trade or business with respect to

the exempt organization partner and, by

extension, how many unrelated trades or

businesses for purposes of section 512(a)

(6). Accordingly, any exception made in

the interest of the administrative convenience of taxpayers must be narrowly tailored to achieving that purpose.

Furthermore, under the control test,

partnership interests that exceed 2 percent are QPIs if those interests meet the

requirements of the control test (now renamed the participation test, as discussed

in part 2.b.iv of this Summary of Comments and Explanation of Revisions).

Many exempt organizations with partnership interests between 2 percent and 5 percent should be able to determine, without

much additional burden, that they do not

significantly participate in the partnership

and thus the partnership interest is a QPI;

thus, not much additional convenience

would be gained for exempt organizations

by increasing the de minimis percentage

amount from 2 percent to 5 percent. On

the other hand, increasing the percentage

under which an exempt organization does

not have to demonstrate a lack of significant participation to be able to treat the

partnership interest as a QPI would extend

the administrative convenience exception

to identifying the separate unrelated trades

or businesses of the partnership (in accord

with section 513(c)) farther than necessary and undermine the statutory requirement of section 512(a)(6). Therefore, the

final regulations follow the proposed regulations and provide that a partnership interest is a QPI that meets the requirements

of the de minimis test if the exempt organization holds, directly or indirectly, no

more than 2 percent of the profits interest

and no more than 2 percent of the capital

interest. Additionally, the final regulations

clarify that the exempt organization must

meet the percentage interest requirement

of the de minimis rule during the exempt

organization’s taxable year with which or

in which the partnership’s taxable year

ends.

iv. Control Test Renamed the

“Participation Test”

The proposed regulations provided that

a partnership interest is a QPI that meets

the requirements of the control test if the

1702

exempt organization (i) directly holds no

more than 20 percent of the capital interest; and (ii) does not have control over the

partnership. As previously discussed in

this section, the QPI tests focus on determining whether an exempt organization

significantly participates in a partnership,

thereby indicating an ability to obtain the

information needed from the partnership

to determine whether a trade or business

conducted by the partnership is an unrelated trade or business with respect to the

exempt organization partner. To better reflect this intent, the control test has been

renamed in these final regulations as the

“participation test.” Accordingly, the final regulations modify the participation

test so that a partnership interest is a QPI

that meets the requirements of the participation test if the exempt organization (i)

directly holds no more than 20 percent of

the capital interest; and (ii) does not significantly participate in the partnership.

A. Percentage Interest

Numerous commenters made recommendations regarding the first prong of the

control test, most of which recommended

increasing the percentage threshold to 50

percent to conform with the definition of

control in section 512(b)(13). These commenters noted that the 50 percent threshold for capital interest is more in line with

other definitions of control found in the

Code. Other commenters suggested that

the percentage interest requirement be

eliminated entirely because an exempt

organization may control a partnership regardless of its percentage interest.

The final regulations retain the 20 percent threshold used in the proposed regulations. As explained in the preamble to

the proposed regulations, the percentage

interest prong of the control test was intended to identify partnership interests in

which the exempt organization does not

have the ability to significantly participate

in any partnership trade or business and

therefore may be considered an investment

activity for purposes of section 512(a)(6).

Although an exempt organization may not

significantly participate in a partnership in

which it has more than a 20 percent interest, the Treasury Department and the IRS

note that, as an exempt organization’s percentage interest in a partnership increas-

Bulletin No. 2020–52

es, so too does the exempt organization’s

ability to obtain the information necessary

to identify the trades or businesses conducted by the partnership that are separate

unrelated trades or businesses with respect

to the exempt organization partner. Thus,

the Treasury Department and the IRS have

determined that, for purposes of this aspect of the administrative exception for

investment activities, a 20 percent capital

interest is a threshold below which the exempt organization may not be able to obtain the needed information if it does not

otherwise significantly participate.

The preamble to the proposed regulations noted that the 20 percent threshold is

consistent with the administrative exception found in the regulations under section

731 for certain investment activities. See

section 731(c)(3)(C)(i) & §1.731-2(e).

Some commenters noted that this was not

a relevant standard because section 731(c)

(3)(C)(i) does not define control. Section

731 defines investment partnerships, in

part, as any partnership that has never

been engaged in a trade or business.

The regulations under section 731(c)

(3)(C)(i) identify situations in which the

trade or business activities of a lower tier

partnership should not be attributed to

an upper tier partnership for purposes of

determining whether the upper tier partnership is engaged in a trade or business.

Similarly, the QPI rules in the proposed

regulations seek to determine when the

trade or business of a partnership should

not be attributed to the exempt organization such that the partnership may be

counted as part of an investment activity

rather than as the participation in any underlying trade or business. Thus, the purpose of the regulations under section 731

and the QPI rules in the proposed regulations is similar.

The 20 percent capital interest threshold is further supported by the GAAP

standard for “significant influence” that

some commenters recommended as an

alternative to the de minimis and participation tests (see parts 2.b.iii and 2.b.iv of

this Summary of Comments and Explanation of Revisions). Due to the difficulty

of the significant influence determination,

GAAP provides that holding 20 percent

voting stock in an investee is presumed,

without more, to constitute a significant

influence. FASB, 2020, ASC par. 323-1015-8. The 20 percent voting stock standard

in GAAP was written for determining

whether the investor has “significant influence” in a corporation. FASB, 2020, ASC

par. 323-10-15-5. For tax purposes, it is

common in the Code, when applying corporate standards to partnerships, to substitute “capital interest” for “voting stock.”

See e.g. sections 4943(c)(3), 6166(b), &

6038(e)(3). Thus, the 20 percent capital

interest threshold in the proposed regulations is consistent with FASB’s determinations of the percentage interest that

represents “significant influence,” which

is similar to the significant participation

standard found in these regulations.

Accordingly, the final regulations retain

the 20 percent capital interest threshold

provided by the proposed regulations but

clarify that the exempt organization must

meet the percentage interest requirement

for the exempt organization’s taxable year

with which or in which the partnership’s

taxable year ends.

No comments were received regarding

how an exempt organization determines

its percentage interest in a partnership.

Therefore, consistent with the proposed

regulations and for purposes of both the

de minimis test and the participation test,

the final regulations continue to provide

that an exempt organization determines its

percentage interest by taking the average

of the exempt organization’s percentage

interest at the beginning and the end of

the partnership’s taxable year, or, in the

case of a partnership interest held for less

than a year, the percentage interest held

at the beginning and end of the period of

ownership within the partnership’s taxable year. However, the final regulations

clarify that, for purposes of the de minimis test, an exempt organization’s profits

interest in a partnership is determined in

the same manner as its distributive share

of partnership taxable income (see section 704(b) relating to the determination

of the distributive share by the income or

loss ratio, and §§1.704-1 through 1.7044). For purposes of both the de minimis

test and the participation test the final reg-

ulations provide that, in the absence of a

provision in the partnership agreement, an

exempt organization’s capital interest in a

partnership is determined on the basis of

its interest in the assets of the partnership

which would be distributable to such organization upon its withdrawal from the

partnership, or upon liquidation of the

partnership, whichever is the greater.4

B. Definition of “Significant

Participation”

Under the proposed regulations, a partnership interest met the requirements of

the control test if the exempt organization

holds no more than a 20 percent of the capital interest and does not control the partnership. The proposed regulations provided that all the facts and circumstances are

relevant for determining whether an exempt organization controls a partnership.

The proposed regulations clarified that the

partnership agreement is among the facts

and circumstances that may be considered

when determining control. The proposed

regulations also listed four specific circumstances that evidence control. Two of

the circumstances focused on the exempt

organization’s ability to perform certain

actions on its own. Specifically, the proposed regulations provided that an exempt

organization controls a partnership if the

exempt organization, by itself, may require the partnership to perform, or may

prevent the partnership from performing,

any act that significantly affects the operations of the partnership or has the power to

appoint or remove any of the partnership’s

officers or employees or a majority of directors. The remaining two circumstances focused on whether any of the exempt

organization’s officers, directors, trustees,

or employees have rights to participate in

the management of the partnership at any

time or to conduct the partnership’s business at any time.

In essence, the proposed regulations

provided a two-part test for determining

control: (1) a general facts and circumstances test based on the well-defined

concept in the Code of “control,” and

(2) factors evidencing “per se” control.

As discussed in the introduction to part

These clarifying rules for determining an exempt organization’s partnership interest are consistent with longstanding rules in §53.4943-3(c)(2) for purposes of a private foundation’s determination of whether it has excess business holdings.

Bulletin No. 2020–52

1703

December 21, 2020

2.b.iv of this Summary of Comments and

Explanation of Revisions, the Treasury

Department and the IRS have renamed

the “control test” the “participation test”

to better capture the purpose of the test,

which is to identify partnerships in which

exempt organization partners significantly participate. However, unlike “control,”

“significant participation” generally is not

a defined term in the Code. A test considering all the facts and circumstances to

determine whether an exempt organization partner significantly participates in a

partnership could have a broader application than intended. Furthermore, a general

facts and circumstances standard for a test

that is not well-defined increases uncertainty and, as a result, the administrative

burden on exempt organizations and the

IRS. Therefore, the final regulations do not

include a general facts and circumstances

test as part of the significant participation

prong of the participation test, but instead

retain only the four factors, which, in the

final regulations, evidence significant participation rather than control.

Some commenters stated that the list of

factors indicating control was too broad.

One commenter contended that the factors

focusing on whether an officer, director, or

employee of an exempt organization has

rights to manage the partnership or conduct the business of the partnership should

be removed entirely as the presence of

these factors does not indicate control by

the exempt organization. While the factors identified by this commenter and the

factors other commenters characterized as

too broad may not always represent control, these factors do indicate when an exempt organization participates in the partnership to an extent that would allow the

exempt organization to obtain sufficient

information to identify the underlying

separate trades or businesses.

Another commenter suggested that the

factors listed as indicating control may not

always result in control, and thus, the factors listed should create a rebuttable presumption of control rather than being “per

se” indicators of control. The Treasury

Department and the IRS retain the factors

listed in the proposed regulations as “per

se” indicators of significant participation

because the QPI rules, including the participation test, are designed to provide administrative convenience for both the IRS

December 21, 2020

and exempt organizations. In this way,

firm standards that indicate significant participation allow both the IRS and exempt

organizations to have more certainty in the

decision whether to include such interests

with an exempt organization’s investment

activities. A rebuttable presumption would

introduce more uncertainly, rely more on

facts and circumstances, and be more difficult for both the IRS and exempt organizations to administer.

The Treasury Department and the IRS

note that the factors provided in the regulations are similar to the factors indicating “control” and “significant influence”

under FASB’s codification of GAAP,

which several commenters proposed as

an alternative test. For partnership interests, GAAP determines that enough control exists to require the consolidation

of partnership interests with the investor

if the investor has substantive kick-out

or participating rights. A kick-out right

is the ability of limited partners to dissolve (liquidate) the limited partnership

or otherwise remove the general partners

without cause. FASB, 2020, ASC section

958-810-20. These rights are included, in

the proposed regulations, in an exempt

organization’s ability to require, by itself,

the partnership to perform, or prevent the

partnership from performing, any act that

significantly affects the operations of the

partnership.

Further, under GAAP, certain participating rights are considered per se substantive rights and overcome the presumption of control by a general partner. These

include:

• Selecting, terminating, and setting

the compensation of management

responsible for implementing the

limited partnership policies and procedures; and

• Establishing operating and capital

decisions of the limited partnership,

including budgets, in the ordinary

course of business. ASC paragraph

958-810-25-22.

These substantive participating rights

are similar to an exempt organization’s

ability to appoint or remove, by itself, any

of the partnership’s officers or employees

or a majority of directors; or its officers,

directors, trustees, or employees’ rights to

conduct the partnership’s business at any

time, respectively. As such, these substan-

1704

tive participating rights found in GAAP

are covered by the four factors listed in the

proposed regulations as indicating control

(here renamed significant participation).

Additionally, some of the factors relevant to “significant influence” included in

GAAP are representation on the board, the

ability to participate in the policy-making

process, and the interchange of managerial personnel. FASB, 2020, ASC par. 32310-15-6. These factors are also similar to

the factors in the proposed regulations,

which focus on whether an exempt organization’s officers, directors, trustees,

or employees have rights to participate

on the partnership’s board or participate

in management of the business. Moreover, the ability to participate in the policy-making process could stem from the

investor’s ability to require the partnership to perform, or prevent the partnership

from performing, any act that significantly

affects the operations of the partnership.

Consequently, the factors for determining

“significant influence” under GAAP are

also covered by the factors listed in the

proposed regulations.

Accordingly, the Treasury Department

and the IRS have concluded that the list of

factors indicating significant participation

(renamed from “control” as used in the

proposed regulations) is consistent with

other standards recommended by commenters for making similar determinations. Therefore, the Treasury Department

and the IRS continue to believe that, for

purposes of the administrative exception

for investment activities, the factors listed

in the proposed regulations appropriately

identify partnerships in which the exempt

organization significantly participates

such that it can obtain the information

needed to identify the trades or businesses

conducted by the partnership that are separate unrelated trades or businesses with

respect to the exempt organization.

Commenters pointed out that the exercise of certain rights common to all partners in a partnership may be construed to

come within the ambit of the list of factors

indicating significant participation. Specifically, these commenters explained that

an exempt organization with voting rights

equal to those of a large number of other

limited partners might be considered to be

able to prevent the actions of a partnership

if the vote requires a unanimous vote. The

Bulletin No. 2020–52

Treasury Department and the IRS agree

with these commenters that the ability to

prevent an action of the partnership due to

a unanimous vote requirement or through

minority consent rights was not intended

to be covered by the proposed regulations.

Accordingly, the final regulations modify the proposed regulations’ treatment of

the ability of an exempt organization, by

itself, to prevent a partnership from performing an act as a factor that indicates

significant participation. As modified, the

final regulations provide that an exempt

organization significantly participates in a

partnership if—

• The exempt organization, by itself,

may require the partnership to perform, or prevent the partnership

from performing (other than through

a unanimous voting requirement or

through minority consent rights), any

act that significantly affects the operations of the partnership;

• Any of the exempt organization’s officers, directors, trustees, or employees have rights to participate in the

management of the partnership at any

time;

• Any of the organization’s officers, directors, trustees, or employees have

rights to conduct the partnership’s

business at any time; or

• The organization, by itself, has the

power to appoint or remove any of

the partnership’s officers or employees or a majority of directors.

Some commenters recommended that

instead of, or in addition to, a list of factors that indicate significant participation,

the regulations should provide a list of

powers that do not indicate significant

participation, such as the ability to remove

or replace a fund manager who manages

partnership investments, to approve the

selection or removal of a general partner,

to appoint a member of an advisory board

of the partnership, to withdraw from a

partnership, or to dissolve or terminate the

partnership.

The Treasury Department and the IRS

expect that, because the participation test

no longer includes a general facts and circumstances test, the need to define actions

that do not evidence significant participation is significantly reduced or eliminated.

An exempt organization need not consider

rights or powers other than the four specif-

Bulletin No. 2020–52

ically listed in the participation test when

determining whether a partnership interest

is a QPI. Accordingly, the Treasury Department and the IRS decline to adopt the

suggestion to include a list of powers that

do not indicate significant participation.

C. Combining Related Interests

The proposed regulations provided a

rule to address situations in which an exempt organization may control a partnership through the aggregation of interests

(aggregation rule). The aggregation rule

in the proposed regulations applied only

for purposes of the control test and not for

purposes of the de minimis test. The aggregation rule in the proposed regulations

required an exempt organization to consider the interests of supporting organizations (as defined in section 509(a)(3)) and

controlled entities (as defined in section

512(b)(13)) in the same partnership. The

preamble to the proposed regulations stated that the Treasury Department and the

IRS would continue to consider whether

the aggregation of the interests of supporting organizations is appropriate in the

circumstance in which the exempt organization is a supported organization that

has little to no control over its supporting

organizations.

A supporting organization is characterized as a Type I, Type II, or Type III

supporting organization depending on its

relationship with its supported organization. The supporting organization may be

(i) operated, supervised, or controlled by

(Type I), (ii) supervised or controlled in

connection with (Type II), or (iii) operated

in connection with (Type III), its supported organization.

For a Type I relationship to exist, a

supported organization must have a substantial degree of direction over the policies, programs, and activities of its supporting organization. The relationship of

the supported organization to the Type I

supporting organization is comparable to

that of a parent and subsidiary, where the

subsidiary is under the direction of, and

accountable or responsible to, the parent

organization.

For a Type II relationship to exist, there

must be common supervision or control

by the persons supervising or controlling

both the supporting organization and the

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publicly supported organizations to ensure

that the supporting organization will be responsive to the needs and requirements of

the publicly supported organizations. The

relationship of the supported organization

to the Type II supporting organization is

comparable to that of a brother and sister,

where the supporting organization and

the supported organization are subject to

common control. Polm Family Foundation, Inc. v. United States, 655 F. Supp. 2d

125, 128 (D.C. Cir. 2009) (quoting Cockerline Memorial Fund v. Commissioner,

86 T.C. 53, 59 (1986)).

For a Type III relationship to exist, a

supporting organization must, among other things, maintain significant involvement

in the operations of a supported organization or provide support on which the supported organization is dependent. A Type

III supporting organization can either be

functionally integrated or non-functionally integrated. A functionally integrated

Type III supporting organization can support its supported organization through

engaging in activities substantially all of

which directly further the exempt purposes of the supported organization, being the

parent of the supported organization, or by

supporting certain types of governmental

supported organizations. A functionally

integrated Type III supporting organization is a parent of the supported organization if the supporting organization exercises a substantial degree of direction over

the policies, programs, and activities of

the supported organization and a majority of the officers, directors, or trustees of

the supported organization is appointed or

elected, directly or indirectly, by the governing body, members of the governing

body, or officers (acting in their official

capacity) of the supporting organization.

A non-functionally integrated Type III

supporting organization provides financial

support to the supported organization that

meets the distribution requirements found

in §1.509(a)-4(i)(5)(ii).

Two commenters addressed whether

partnership interests of related supporting organizations should be considered

in determining the supported organization’s percentage interest for purposes of

determining whether the supported organization meets the control test. One commenter recommended that none of the

partnership interests of a supporting orga-

December 21, 2020

nization should be considered when determining the supported organization’s percentage interest. Another made the same

recommendation but only with respect to

Type III supporting organizations.

An exempt organization with more

than one unrelated trade or business may

be a supporting organization or a supported organization. If the exempt organization is a supported organization, the

exempt organization, or individuals that

control the exempt organization, may

control the investment activities (including any partnership interests) of its Type

I or Type II supporting organizations due

to the parent/subsidiary relationship required for a Type I relationship to exist

or the brother/sister relationship required

for a Type II relationship to exist. In any

event, these close relationships increase

the likelihood that the exempt organization can obtain the information about

its Type I or Type II supporting organization’s partnership investments and that

the exempt organization significantly

participates in the partnership, even if

indirectly. Accordingly, the final regulations continue to require an exempt organization that is a supported organization

to include the partnership interests of

its Type I or II supporting organizations

when determining whether its partnership interests meet the percentage interest threshold of the participation test.

On the other hand, in the case of a Type

III supporting organization, the exempt organization that is a supported organization

is required to have a “significant voice”

in the investment policies of its Type III

supporting organization; nevertheless, depending on the basis for this Type III relationship, this relationship may not permit the supported organization to obtain

detailed information regarding its Type

III supporting organization’s partnership

interests or to significantly participate in

the partnership. In the case of a Type III

supporting organization that is the parent

of its supported organizations, the relationship between the supported and supporting organizations is similar to that of

a Type I supporting organization, except

the supporting organization controls the

supported organizations instead of the opposite. Due to this close relationship, the

final regulations continue to require the

aggregation of partnership interests held

December 21, 2020

by a Type III supporting organization that

is the parent of its supported organizations

for the purposes of determining whether

the supported organization’s partnership

interest meets the percentage interest

threshold of the participation test. However, the interests held by nonparent Type

III supporting organizations are not so aggregated.

One commenter recommended adding

additional interests to the list of related

interests that must be considered when

determining percentage interest for purposes of the control test. This commenter

recommended including related persons

within the definition of section 267(b)

(9) and “controlled taxpayers” within the

principles of section 482 to the list of organizations with which partnership interests

must be aggregated. The same commenter

also recommended adding indirect interests owned by an exempt organization for

the purposes of determining the organization’s percentage interest.

As mentioned previously, the QPI rules

were created to reduce the administrative

burden of obtaining the information needed to determine whether trades or businesses conducted – directly or indirectly

– by the partnership are separate unrelated

trades or businesses with respect to the exempt organization partner. The addition of

the interests recommended to be included

by this commenter would significantly

increase the administrative burden of the

rule but would not necessarily capture interests that demonstrate an increased ability for the exempt organization to obtain

the information needed to identify separate underlying trades or businesses. Accordingly, the Treasury Department and

the IRS do not adopt these recommended

additions to the aggregation rule. The final

regulations provide that, when determining an organization’s percentage interest

for purposes of the participation test (formerly the control test), the interests of a

supporting organization (other than a Type

III supporting organization that is not a

parent of its supported organizations) or a

controlled entity in the same partnership

are taken into account.

v. Look-Through Rule

The proposed regulations provided

that, if an exempt organization does not

1706

control a partnership in which the exempt

organization holds a direct interest (directly-held partnership interest) but the directly-held partnership interest is not a QPI

because the exempt organization holds

more than 20 percent of the capital interest, any partnership in which the exempt

organization holds an indirect interest

through the directly-held partnership interest (indirectly-held partnership interest)

may be a QPI if the indirectly-held partnership interest meets the requirements of

the de minimis test (look-through rule).

Accordingly, the proposed regulations

permitted (but did not require) an exempt

organization to aggregate the UBTI from

de minimis indirectly-held QPIs with its

directly-held QPIs. However, the proposed look-through rule did not apply to

indirectly-held QPIs that do not meet the

requirements of the de minimis test but

might meet the requirements of the control test (now renamed participation test).

Several commenters recommended expanding the look-through rule to permit

use of the control test for indirectly-held

partnership interests and to permit use of

the look-through rule even if the exempt

organization controls the directly-held

partnership. These commenters stated that,

even if an exempt organization controls a

directly-held partnership, if the lower-tier

partnerships meet the de minimis test or

the control test, an exempt organization

would be prevented from controlling the

lower-tier partnerships. Further, the commenters noted that, preventing the use of

such look-through rules would treat organizations holding the same level and

type of partnership interests differently

depending on whether they

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