TAX ALERT: "Fiscal Cliff" Bill Extends Sec. 512(b)(13) Tax Modification through 2013

The recently-passed "American Taxpayer Relief Act of 2012" has revived a modification of IRC

section 512(b)(13) that permitted exempt organizations to exclude from tax, certain payments

from controlled organizations. This provision, one of the so-called "tax extenders," died at the end

of 2011, and was pretty much given up for dead by many organizations and their advisers, as

weeks and months ticked by without any Congressional efforts to bring it back. While this latest

revival has not made the provision permanent, it will have an additional 2-year run, and another

shot at renewal in 2014 (or before, hopefully).

The section 512(b)(13) modification is a little complicated, so here's some background: Prior to

the passage of the Pension Protection Act of 2006, section 512(b)(13) uniformly treated

otherwise nontaxable payments of rent, royalty, annuity, and interest received by an exempt

organization as taxable, if such income was received from a taxable or tax-exempt organization

controlled by that organization (50% or more control). Payments were subject to the unrelated

business income tax to the extent that they reduced the net unrelated business income of the

controlled organization (or increased its net unrelated loss).

PPA 2006 modified section 512(b)(13) to provide that such payments would be treated as

unrelated business income only to the extent that they exceeded the amount of any payment that

would have been paid or accrued if such payment had been determined under the fair market

value principles of section 482. Originally designed to sunset on December 31, 2007, this

modification provision was re-extended several times, until it finally ran out on December 31,

2011. So for all of 2012, exempts have been living with the possibility of having to pay tax on

section 512(b)(13) payments for the first time in several years. The ATRA 2012 extension is

retroactive, so it will cover 2012, expiring at December 31, 2013 (unless re-extended or made

permanent).

It is important to note that this modification applies only to payments made pursuant to a binding

written contract in effect before December 31, 2005. Essentially, payments which qualified as

nontaxable under the modification prior to its expiration, will qualify for the re-extension.

However, payments associated with contracts effective after 2005 will be subject to the regular

section 512(b)(13) rules.

ATRA 2012 also re-extended several other tax provisions that may be helpful to some exempts:

50% bonus depreciation for qualifying property

Increased section 179 expensing limitations ($500,000 dollar limit and $2 million

investment limit, through 2013)

Off-the-shelf software and certain real property eligible for section 179 treatment

15-year cost recovery for qualified leasehold improvements

Contact:

Deborah G. Kosnett, CPA

Tax Principal

dkosnett@tatetryon.com