Printer Friendly

Ruling clarified UBIT exemption for swaps.

After a period of reflection, the IRS has ruled that income earned on interest rate swaps and currency swaps by exempt organizations will not be subject to the unrelated business income tax (UBIT). This ruling will clarify the future treatment of these investment vehicles in the hands of tax-exempt organizations.

By way of background, Sec. 511 specifies that an exempt organization will be taxed on its unrelated business taxable income, defined in Sec. 512(a)(1) as income from any regularly carried on trade or business not related to the organization's exempt purpose. For investment-type activities, Sec. 512(b) exempts from tax certain income, such as dividends, interest and payments on securities loans. The IRS has proposed amending the regulations to exclude from UBIT not only these items, but also "substantially similar income from ordinary and routine investments in connection with a securities portfolio."

The Service has proposed a ruling that income from interest rate swaps and currency swaps will be considered "substantially similar" to the other types of income routinely earned from a portfolio. In simple terms, an interest rate swap is a contract between two parties to exchange interest payments on a specified principal amount for a specified period. A currency swap is an exchange of principal in two different currencies, with an agreement to repay principal at a specified date at current interest rates. Interest is generally paid by the parties based on the interest rates available in the two currencies at the inception of the agreement. Some currency swaps may provide only for interest flows, not an exchange of principal.

Pending final approval, the proposed ruling is effective with respect to amounts received after Aug. 30, 1991. The UBIT exclusion will not apply if the swap positions are debt-financed.

This ruling is clearly helpful to those organizations that were considering the use of swaps as a means to enhance the returns from their portfolio. The ruling and regulatory change were necessary because the form of income generated did not literally fall within the language of a statute that was originally intended for more traditional investment forms.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Ben-Ami, Andrew R.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Apr 1, 1992
Previous Article:Charitable contributions of inventory by C corporations.
Next Article:Reconsolidation of subsidiary corporations; waiver of the 60-month waiting period.

Related Articles
Exempt employer's excise tax for nondeductible contributions to qualified plan.
Exempt organizations and UBIT.
IRS says certain associate member dues could be UBI.
Interest income can be debt-financed.
Organization's significant unrelated activity does not cause loss of tax-exempt status.
Taxation of investment income of section 501(c)(6) organizations.
The Internet and tax-exempt organizations.
Sponsorship prop. regs. may increase UBIT liability.
Establishing an Affiliated Organization.
IRS tackles exclusive provider arrangements and UBIT.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters