IRS RULES THAT TAX-EXEMPT ORGANIZATIONS MAY CARRY UNRELATED BUSINESS NOLS FORWARD
It is sometimes thought that losses incurred by tax exempt organizations provide no real tax benefit. A private letter ruling issued earlier this year shows one way in which unrelated business losses can be used to the advantage of organizations that lose their tax-exemptions. The IRS ruling holds that tax-exempt organizations that have NOLs from unrelated business activities may carry those NOLs over to future post-exemption taxable years and use them to reduce their taxable income in those years.
LTR 2009-27-031 involved a social club that was tax-exempt under § 501(c)(7) (the “Club”). In recent years, the Club had been allowing use of its facilities by non-members. The use of Club facilities by non-members had grown to such an extent that the Club itself acknowledged that it would lose its tax-exemption. The Club asked the IRS to rule that the losses from the Club’s non-member activities would carry over to its post-exemption years.
Tax-exempt social clubs are permitted to derive up to 35% of their receipts from non-member sources, but they must pay tax on that non-member income. In computing their unrelated business taxable income, a tax-exempt social club is permitted to make a reasonable allocation of certain of the club’s expenses that are attributable to both exempt function income and unrelated business taxable income.
Non-exempt social clubs are subject to tax on their taxable income each year, but expenses of a taxable social club from providing member benefits can be deducted only to the extent of income from that activity. Any excess deductions are taken into account as a deduction in the subsequent year. Thus, a taxable social club has a one-year NOL carryover, but the carryover will not expire.
The IRS reviewed the applicable Internal Revenue Code provisions and the regulations thereunder and found no reason for denying the carryover of unrelated business losses to post-taxable years. Thus, the IRS ruled in the Club’s favor.
Observation: The analysis in the ruling is not limited to social clubs; the analysis appears to apply quite broadly.
Jackson & Campbell, P.C.'s Business Law Practice Group can assist you interpret the new IRS rules. For more information, contact Mike Bell at mbell@jackscamp.com or John Matteo at jmatteo@jackscamp.com.
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