One of the original provisions of the Shipping Act, 1916 was former Section 17 (which became section lO(d)(l) of the 1984 Act and was recodified in 1998 as 46 U.S.C. §41102(c)). This section provided that no regulated entity could "fail to establish, observe and enforce just and reasonable regulations relating to or connected with receiving, handling, storing or delivery of property." And, for over 90 years, this section was interpreted to mean that in order to find that some allegedly unreasonable action had violated the Act, those actions had to be the normal, customary, or repeated practice of the vessel operator, ocean forwarder, or NVOCC. Consequently, a single unreasonable or inappropriate practice by a carrier or OTI would not be a violation of the Act, even if it might otherwise be actionable civilly as a breach of contract or was negligent.

However, over the past several years, a majority of the FMC Commissioners took a more expansive view of this section and, in a series of cases, held that a single act by a regulated entity could constitute an unreasonable practice. These Commission decisions were issued notwithstanding lengthy and vigorous dissents by Commissioner, now Acting Chairman, Khouri, who took great pains to explain why this change of policy was both inconsistent with the intent of Congress and unfair to carriers, NVOCCs and forwarders.

To address this, the Commission issued a notice of Proposed Rulemaking on September 6, 2018 seeking public comment about issuing an interpretive rule to reverse this trend. The NPRM proposed that a challenged practice would need both to be unreasonable and be the normal, customary and continuous practice of the carrier or OTI in order to be found to be a violation of the Act.

Due to the importance of the issue, we filed extensive comments on behalf of the National Customs Brokers & Forwarders Association of America supporting the NPRM. We pointed out that the proposal was consistent with both the legislative history of former Section 10(d)(1) as well as almost 100 years of unbroken precedent. In doing so, we also analyzed the more recent decisions and highlighted the unfairness of making a dispute over a single incident become the basis for awarding substantial damages under the Shipping Act, especially since those damages might well have otherwise not been available to the complainants under normal principles of contract and commercial law. For example, a claimant could bypass the provisions of COGSA by claiming the loss, damage or delay of cargo was an unreasonable practice and seek damages above the $500 per package limitations or even use it to avoid the 1-year limitation period for initiating suit under that statute. Or, claimants could contend, as was the case in one of the more expansive decisions, that the exercise of the contractual lien in an OTI' s terms and conditions was unreasonable and accordingly subject the OTI to an award of damages and attorneys' fees.

In a decision issued and effective December 18, 2018, the FMC agreed with our comments and found that the proper reading of former Section 10(d)(l) requires that a regulated entity must engage in an unjust or unreasonable practice on a normal, customary and continuous basis before being held to have violated the Shipping Act.

This is an important decision because it could reverse the growing trend of having shippers using the expansive view of Section 10(d)(l) to hold forwarders and NVOCCs liable for normal commercial disputes. And, by doing so, avoid limitations in terms and conditions and other statutes and provide a basis for obtaining awards of attorneys' fees that could not otherwise be granted by courts.

The decision was issued in the FMC's Docket No. 18-06, Interpretive Rule, Shipping Act of 1984 and can be viewed on the Commission's website at www.fmc.gov.

On December 10, 2018, the Internal Revenue Service (“IRS” or “Service”) issued Notice 2018-99 and Notice 2018-100 which interpret and provide administrative guidance and transition rules relating to new Internal Revenue Code (“Code”) §§ 274(a)(4) and 512(a)(7)—the dreaded parking benefit addition to unrelated business income taxes.  These notices provide the first published guidance available to exempt organizations about these new provisions to the Code that have caused a significant amount of consternation amongst tax-exempt organizations. Although the new Code provisions may be harmful to exempt organizations that provide employees with the benefit of free parking, the recently published guidance is generally favorable to such organizations. This December 10 guidance applies to:

• Apportionment of Parking Facility Expenses to UBTI
• Form 990-T Reporting Threshold
• Waiver for Unpaid Quarterly Payments of UBTI

Background

The tax reform act passed in December 2017 (“Act”) added Code § 274(a)(4), which generally provides that no deduction is allowed for the expense of any qualified transportation fringe benefit (“QTF”) expenses (as defined in section 132(f)) provided by taxpayers to their employees.  Section 132(f)(1) defines QTFs to include: (1) transportation in a commuter highway vehicle between the employee’s residence and place of employment, (2) any transit pass, and (3) qualified parking. 

As they are exempt from federal income tax, historically, Code § 274 has not been applicable to tax-exempt organizations except with regard to determining their deductions connected with unrelated trades or businesses.  However, the Act added a new section 512(a)(7) which provides that an organization’s unrelated business taxable income (“UBTI”) is increased by any amount for which a deduction is not allowable for an expense by reason of section 274 and which is paid or incurred by such organization for: (1) any QTF as defined in § 132(f), (2) any parking facility used in connection with qualified parking as defined in § 132(f)(5)(C), or (3) any on-premises athletic facility as defined in section 132(j)(4)(B)

Basically, if an organization provides any QTF, including on-premises parking, then the total amount of the organization’s UBTI is increased by the amount of the expense that would not be deductible under Code § 274(a)(4).  As such, an organization that does not have any unrelated business income may none-the-less be subject to tax on the amount of its expenses related to providing employees with non-deductible QTFs. 

Specific Guidance

The purpose of Notice 2018-99 was to offer guidance relating to the calculation of the additional UBTI attributable to non-deductible employee parking expenses, and to clarify the Form 990-T filing requirements on organizations who incurred UBTI as a result of Code § 512(a)(7).  The purpose of Notice 2018-100 is to waive the penalties related to the failure to make required estimated tax payments for certain tax-exempt organizations affected by section 512(a)(7).

• (a) Notice 2018-99

Apportionment of Parking Facilities Expenses to UBTI

Most significantly, Notice 2018-100 provides that, for taxpayers that own or lease parking facilities where their employees may park, “the § 274(a)(4) disallowance may be calculated using any reasonable method.” 

In addition to expressly permitting “any reasonable method,” the notice offers one method upon which taxpayers may rely.  Under the “reasonable method,” taxpayers can allocate parking facility expenses by: (1) attributing expenses to the proportion to the number of parking spaces reserved for organization employees (ex., if 1% of the parking spaces are reserved, then 1% of the parking lot expense should be included in the 512(a)(7) UBTI addition); (2) attributing expenses based on the primary use of the non-reserved parking spaces (ex., if the primary use of less than 50% of the unreserved parking spaces are used by employees during the normal hours of the organization’s activities, then no amount of the proportionate expenses of the unreserved parking spaces should be included in the 512(a)(7) UBTI addition); (3) attributing expenses to the proportion of the number of parking spaces reserved for non-employees (ex., if 3% of the parking spaces are reserved for non-employees, then 3% of the parking lot expense should be excluded from the 512(a)(7) UBTI addition regardless of the facility’s other uses); and (4) attribute the expenses related to any remaining spaces based on a reasonable determination of the use of those spaces.

In addition to providing one reasonable method of calculating the Code § 512(a)(7) addition to UBTI, the notice further provides that, for years beginning on or after January 1, 2019, any “method that fails to allocate expenses to reserved employee spots cannot be a reasonable method.”  Thus, organizations that own or lease parking facilities with any reserved parking spaces for employees will be required to report some increase in UBTI for each tax year beginning on or after January 1, 2019. 

The January 2019 effective date is significant for two reasons: (1) it means that it may be reasonable for organizations to attribute no expenses to reserved parking spots in calculating their UBI for tax years beginning in 2018; and (2) the notice provides organizations that currently have reserved parking spaces for their employees until March 31, 2019 to eliminate the reserved parking spaces and the related increase in UBTI.  Pursuant to the notice, reserved parking spots that are no longer reserved by March 31, 2019 will be characterized as unreserved retroactively up to fifteen months back to January 1, 2018.

Form 990-T Filing Threshold

The notice also clarifies that organizations that report less than $1,000 in UBTI are not required to file a Form 990-T regardless of whether the UBTI is derived from an unrelated business activity or due to an increase in UBTI pursuant to Code § 512(a)(7).  Thus, an organization that is not otherwise required to file a Form 990-T will only be required to file that return if the section 512(a)(7) UBTI addition increases the organization’s total UBTI to an amount greater than $1,000.

Finally, for organizations that own their parking facilities, Notice 2018-99 provides that depreciation is not an expense for purposes of calculating the Code § 512(a)(7) UBTI addition.  Organizations will not incur any tax based on the depreciation of parking facilities that they own.

• (b) Notice 2018-100

Waiver for Unpaid Quarterly Payments of UBTI

Generally, organizations subject to tax on their unrelated business income are required to make quarterly payments on the estimated amount of the taxes that will be due at the end of the year, and an organization’s failure to make the full amount of the required estimated payments is subject to a penalty pursuant to Code § 6655.  Notice 2018-100 provides relief from the section 6655 penalties for certain organizations subject to the section 512(a)(7) UBTI addition that failed to make the required estimated payments in 2018.

The notice waives the Code § 6655 penalties for any tax-exempt organization that: (1) provides QTFs resulting in additional UBTI, pursuant to section 512(a)(7), for which estimated income tax payments would have been required; and (2) was not required to file a Form 990-T for the preceding tax year.  Finally, the relief is only available to organizations that timely file their Form 990-T and pay the amount of tax due for the tax year for which the relief was granted.

Next Steps

Both Notice 2018-99 and Notice 2018-100 are significant to exempt organizations providing QTFs which may be subject to Code § 512(a)(7), and it is strongly advised that each organization’s review take advantage of the notices by implementing and documenting a reasonable method of apportioning any expenses which may be subject to the section 274(a) limitation.  The protections afforded by establishing a reasonable method of calculating any section 512(a)(7) additions to UBTI are particularly important in light of the uncertainty of the Service’s interpretation and future enforcement of this provision.