Notional Principal Contracts Excluded from UBTI of Pension Trusts

In September 1991, the IRS issued a proposed regulation under Code sec512(6)(1) concerning the items that are excluded as investment income from the unrelated business income on tax exempt organizations, including Code sec501(a) retirement trusts. Section 512(b)(1) excludes from income dividends, interest, payments with respect to securities loans, and annuities, and all deductions directly connected with such income. The IRS issued proposed regulations and a proposed revenue ruling which indicated that income similar to dividends, interest, and annuities could be excludable from an exempt organization's ordinary and routine investments in connection with its securities portfolio. The proposed revenue ruling stated that for purposes of secsec512(b), 509(e) and 4940(c)(2), income from interest rates swaps and currency swaps constituted substantially similar income to ordinary routine investments in connection with the securities portfolio. Neither the proposed regulation nor the proposed revenue ruling, however, specifically addressed the treatment of income from "notional principal contracts."