On November 2, 2017, Representative Brady (the Chairman of the House Ways and Means Committee) released the proposed text of the long-awaited federal income tax reform bill entitled the “Tax Cuts and Jobs Act.” Much of the early media coverage has focused on the changes to the individual and corporate tax rates and certain popular deductions. However, the bill also includes a provision that appears aimed at subjecting public pension plans to unrelated business taxable income (UBTI). Although the bill purports to be a clarification of existing law, the position taken in the bill is contrary to the position taken by most public pension funds. If enacted, a change in the analysis of potential investments may be necessary.
The text of the relevant section of the Act is pasted below for your reference.
Title V – Exempt Organizations
Subtitle A – Unrelated Business Income Tax
Sec. 5001 – CLARIFICATION OF UNRELATED BUSINESS INCOME TAX TREATMENT OF ENTITIES TREATED AS EXEMPT FROM TAXATION UNDER SECTION 501(a).
(a) IN GENERAL.—Section 511 is amended by adding at the end the following new subsection:
‘‘(d) ORGANIZATIONS AND TRUSTS EXEMPT FROM TAXATION NOT SOLELY BY REASON OF SECTION 501(a).—For purposes of subsections (a)(2) and (b)(2), an organization or trust shall not fail to be treated as exempt from taxation under this subtitle by reason of section 501(a) solely because such organization is also so exempt, or excludes amounts from gross income, by reason of any other provision of this title.’’.
(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017.
Although the outlook of the bill is highly uncertain at this point, it is common for provisions of bills that are introduced to reappear in later versions or later bills. If enacted, this provision could have potentially wide-reaching impacts on public pension plans, particularly with respect to their investment transactions. We will continue to monitor the legislation and consider what steps might be advisable to plan for this significant potential change.