Off-shore investments by tax-exempts.A provision on deemed and actual dividends paid to a U.S. tax-exempt entity by a foreign subsidiary is part of the Tax Simplification and Technical Corrections technical correction A temporary downturn in the price of a stock or in the market itself following a period of extensive price increases. A technical correction takes place in a generally increasing market when there is no particular reason that the Act of 1993 passed by the House Ways and Means WAYS AND MEANS. In legislative assemblies there is usually appointed a committee whose duties are to inquire into, and propose to the house, the ways and means to be adopted to raise funds for the use of the government. This body is called the committee of ways and means. Committee last year. If enacted, such a provision could make it more costly for tax-exempt entities to gain access to foreign investments and insurance markets. Under Sec. 512(b)(1) , unrelated business taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. (UBTI UBTI Unrelated Business Taxable Income ) generally excludes dividend income. While the treatment of subpart F Subpart F Special category of foreign-source "unearned" income that is currently taxed by the IRS whether or not it is remitted to the US income earned by an exempt organization's foreign subsidiary is not clear, several favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. letter rulings have been issued to exempt entities that owned shares in offshore insurance companies. Those rulings conclude that, since dividends would not be UBTI, dividends from foreign companies should not be UBTI. The Ways and Means Committ ee hcld hearings on a number of miscellaneous revenue proposals, including one that would treat certain deemed and actual distributions from a 10%-or-more-owned foreign corporation to an exempt entity as UBTI. Under the proposal, the income earned through the foreign corporation would be UBTI if it would be taxable had it been earned directly by the entity. In opposing the provision, Assistant Treasury Secretary for Tax Policy Leslie Samuels cxpressed concern that the real target of the proposal was the offshore captive insurance Captive insurance companies are limited purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups, they sometimes also insure risks of the parent company's customers. industry. Samuels suggested that a proposal dealing more narrowly with the perceived abuse (and not applying the subpart F rules) might be more appropriate. If this provision becomes law, it will affect hospitals and universities with offshore insurance captives. Since commercial insurance activities generate UBTI, if an organization is insuring more than its own risk, the underlying activity could be considered insurance taxable as UBTI. Organizations could be paying tax on income they do not even receive. This provision could also affect pension plans and other exempt organizations that invest in active foreign businesses and own more than a 10% interest. From Laura Kalick, J.D., Washington, D.C. |
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