Reversion and UBIT

[Guest LBBarr]

It is my understanding that the IRS position is that receipt of ubti (whether or not it is offset by a deduction for a plan contribution)by a tax-exempt organization subjects the entire reversion to the Section 4980 excise tax. Has anyone been successful in contesting this position? Thanks

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[Kirk Maldonado]

The position of the IRS is based on the precise wording of the statute, so it would be very difficult to challenge.

[Guest LBBarr]

It is interesting to note that in a 1993 PLR the IRS, in the context of the 4972 excise tax that refers to 4980, was willing to take a proportionate approach i.e., in proportion to the UBTI. It was only in 1996 that the IRS consistently took the opposite approach under 4972 (i.e., any UBIT taint the entir exclusion from the excise tax)and I have been unable to locate any PLRs directly on point under 4980. Moreover,it appears to me that a plain reading of the statute and legislative history supports the proportionate approach. The reference to an entity exempt from tax in 4980 must mean a tax-exempt entity whether or not it was subject to UBIT. (For example, a 501©(3) organization is still tax-exempt even if it pays UBIT and is always subject to the UBIT rules even if it does not generate UBTI.) Otherwise, if you say exempt from tax means that the entity never paid tax it should include for-profits that never had tax! In this context the 4980 legislative hisory that states "TO THE EXTENT" there is UBIT makes sense in that it means that there is a reversion tax only to the extent there was previously UBIT or a tax benefit i.e., in that proportionate amount.

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[This message has been edited by LBBarr (edited 06-16-99).]

[This message has been edited by LBBarr (edited 06-16-99).]