On its website, the IRS has posted instructions for claiming a refund or credit of unrelated business income tax (UBIT) or adjusting a Form 990-T in the wake of the repeal of IRC Section 512(a)(7), which addressed qualified transportation fringe benefits.

Background

Tax-extenders legislation signed into law on December 20, 2019 (the Taxpayer Certainty and Disaster Tax Relief Act of 2019) retroactively repealed IRC Section 512(a)(7), which effectively imposed UBIT on the cost of qualified transportation fringe benefits that tax-exempt organizations provided to their employees. IRC Section 512(a)(7) had been added to the Code by the Tax Cuts and Jobs Act of 2017 and was effective for amounts paid or incurred after December 31, 2017.

Refund opportunity

The retroactive repeal of IRC Section 512(a)(7) creates refund opportunities for tax-exempt organizations that incurred higher UBIT liability under the Code section while it was in effect because they had paid or incurred qualified transportation fringe benefits and reported this UBIT liability on Form 990-T for 2017 or 2018.

The IRS now instructs tax-exempt organizations wanting to claim a refund or credit for UBIT overpaid on Form 990-T for 2017 or 2018 to file an amended Form 990-T. In addition to generally following the Form-990-T instructions for filing an amended return, the tax-exempt organization should:

• Write "Amended Return — Section 512(a)(7) Repeal" at the top of the form
• Complete the Form 990-T as it was originally completed, but incorporate these changes:
• For a 2017 Form 990-T
• Subtract the 512(a)(7) unrelated business taxable income (UBTI) amount from the figure originally included on line 12 (Other income)
• Complete the rest of the Form 990-T taking that revised entry into account
• Include on the "Other" sub-line of line 45g (Other credits and payments) the amount of tax due on line 48 from the original return
• Enter, if these changes indicate that an overpayment was made, that amount on line 49 (Overpayment) of the amended return, and request this amount as a refund or credit on line 50
• For a 2018 Form 990-T
• Enter "0" on line 34 (Amounts paid for disallowed fringes)
• Complete the rest of the Form 990-T taking that revised entry into account
• Include on the "Other" sub-line of line 50g (Other credits, adjustments, and payments) the amount of tax due on line 53 from the original return
• Enter, if these changes indicate that an overpayment was made, that amount on line 54 (Overpayment) of the amended return, and request this amount as a refund or credit on line 55
• Attach a statement to the amended return explaining which line numbers from the original return were modified and the reason for each change (e.g., "repeal of Section 512(a)(7)").

The IRS also reminds tax-exempt organizations that the time limits under IRC Section 6511 for filing refund claims apply here — generally the later of three years from the date the original Form 990-T was filed or two years from the date the tax was paid.

Implications

The guidance that the IRS provided on its website was largely anticipated after IRC Section 512(a)(7) was repealed and Representatives Richard Neal (D-MA) and John Lewis (D-GA) wrote the IRS Commissioner on January 8, 2020 requesting such guidance. At that time, it was uncertain whether the guidance historically provided in the Form 990-T instructions regarding amended returns would be sufficient to address the repeal of the Code section. The IRS website posting provides needed clarity for entities that had been subject to IRC Section 512(a)(7) for the 2017 and/or 2018 tax year. Organizations wishing to claim a refund or credit for taxes paid may now do so under the expanded instructions provided by the Service.

Although this guidance provides instructions on how to receive a refund of taxes paid due to the application of IRC Section 512(a)(7), it does not directly address instances in which the UBIT created by IRC Section 512(a)(7) was offset by the net operating loss carryforward of the organization.

In addition to the federal mechanics of claiming a refund due to the repeal of IRC Section 512(a)(7), tax-exempt organizations should also consider any state and/or local implications created by this guidance. For example, states that follow a rolling conformity methodology to the Internal Revenue Code have also effectively repealed IRC Section 512(a)(7); therefore, a tax-exempt organization should consider the impact that filing an amended federal return could have on its request for any refund or credit on its state return. For states that follow a fixed conformity methodology to the Internal Revenue Code, however, depending upon the wording of their conformity statute, the state may need to enact a new law to reflect the repeal of IRC Section 512(a)(7). Therefore, to determine if a state return should be amended, an organization should determine if the state in which it files has retroactively repealed IRC Section 512(a)(7).

Other considerations

If a tax-exempt organization has paid estimated tax for the UBTI generated under IRC Section 512(a)(7) and wishes to claim a refund before filing its Form 990-T, the organization could file Form 4466, "Corporation Application for Quick Refund of Overpayment of Estimated Tax," as long as the estimated tax meets certain thresholds (generally, the overpayment must be at least $500 and at least 10% of the expected tax liability). This form would need to be filed after the end of the tax year for which the estimated tax was paid, but (1) before the organization files its Form 990-T for the tax year and (2) no later than the due date for the return, not including extensions.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.

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