August 01, 2014
If a tax-exempt organization incurs indebtedness to acquire income-producing property, Sections 512(b)(4) and 514(a)(1) may require taxation of the debt-financed portion of the income as “unrelated business taxable income.” UBTI arises only if there is “acquisition indebtedness”, which is indebtedness incurred in acquiring or improving property. The IRS has held in PLRs 200235042 and 200233032 that short-term borrowing to meet administrative needs is not acquisition indebtedness. These PLRs involved indebtedness incurred by a pension fund to meet deadlines for payment of pension benefits where the loan was repaid within about 20-30 days and was a relatively small amount. In these PLRs, the IRS reasoned the loan was not incurred for the purpose of acquiring investment property, but rather for the purpose of solving temporary cash flow problem in a relatively small amount. The debt was, in effect, traced to its use to pay pension benefits.
The same concept was found in PLR 200320027, in which short-term borrowing (20-30 days) by a common trust fund in which an exempt organization owned shares was undertaken to redeem units. The borrowing was found not to constitute acquisition indebtedness.
Although these PLRs are welcome, they leave open the issue of what is the outer limit on the time for the borrowing to remain outstanding. Is indebtedness that is outstanding for 60 days to effectuate a redemption covered under these rulings? What about 90 days? How significant is the amount of the borrowing? It was a de minimis amount in one of the PLRs, but what if it is a large amount? The answer to these questions are not known, and advisors often have to provide guidance on fact patterns that do not fit precisely into the PLRs.
Lisa B. Petkun
Lisa B. Petkun is a partner in the Tax Practice Group of Pepper Hamilton LLP. Ms. Petkun concentrates her practice on sophisticated tax planning on behalf of individuals, partnerships and corporations. Her areas of concentration include choice of business entity, tax and compliance issues associated with nonprofit organizations, taxation of lawsuit payments and recoveries, estate, gift and personal planning, independent contractor compliance, and tax structuring for Marcellus Shale owners.
Ms. Petkun counsels nonprofit organizations on a wide range of issues, including unrelated business taxable income, Forms 990 and 990-PF compliance, excess benefit transaction matters, formation of new exempt entities, and state charitable solicitation and registration laws. In the area of independent contractor and wage/hour compliance, Ms. Petkun designs programs for companies to enhance compliance with such laws at the federal and state levels. She co-heads Pepper’s Independent Contractor Compliance Practice Group, an interdisciplinary team of more than 30 labor, tax, employee benefits and class action attorneys. She also co-publishes a blog on the subject at www.IndependentContractorCompliance.com, including a monthly update of IC Compliance News. She also co-authored “Michigan Limited Liability Company,” which is published by Data Trace Legal Publishers, Inc. Ms. Petkun is a co-author of BNA Tax Management Portfolio, “Charitable Remainder Trusts and Pooled Income Funds” (First Edition).
In December 2013, Ms. Petkun received The William R. Klaus Pro Bono Award from Pepper Hamilton for her work in assisting with the formation of numerous charitable organizations on a pro bono basis and for conducting training sessions for both Pepper attorneys and clients.
For more information on Lisa B. Petkun, please see her full biography here.