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Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 28. Multiple Parent Title Holding Corporations or Trusts IRC 501(c)(25)

4.76.28  Multiple Parent Title Holding Corporations or Trusts IRC 501(c)(25)

4.76.28.1  (08-01-2002)
Introduction

  1. This IRM section contains specific examination guidelines for an organization recognized as exempt from income tax under IRC section 501(a) as an organization described in IRC section 501(c)(25). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC 501(c)(25) organization.

  2. These guidelines provide specific assistance for the examination of an IRC 501(c)(25) organization and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM sections 4.75.10 through 4.75.13. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC 501(c)(25) organizations. The examiner should review the technical information contained in IRM 7.25.5.

4.76.28.2  (08-01-2002)
Background Information

  1. IRC 501(c)(25)(A) describes multiple-parent title holding companies that are either corporations or trusts, have no more than 35 shareholders or beneficiaries, have only one class of stock or beneficial interest, and are organized for the exclusive purposes of acquiring, holding title to, and collecting income from, real property, and remitting the entire amount of income from such property (less expenses) to one or more organizations described in IRC 501(c)(25)(C) which are shareholders or beneficiaries of title holding companies. Each shareholder or beneficiary must be:

    1. A qualified pension or profit-sharing plan; or stock bonus plan that meets the requirements of IRC 401(a),

    2. A governmental plan described in IRC 414(d),

    3. The United States, any state or political subdivision thereof, or any agency or instrumentality of the foregoing,

    4. An organization described in IRC 501(c)(3), or

    5. Another organization described in IRC 501(c)(25).

4.76.28.3  (08-01-2002)
Basic Requirements for Tax Exemption

  1. An IRC 501(c)(25) organization is organized and operated for the exclusive purpose of:

    1. Acquiring and holding title to real property,

    2. Collecting income from real property, and

    3. Remitting the entire amount of income, less expenses, to one or more organizations described under IRC section 501(c)(25)(C).

    4. The IRC 501(c)(25) must hold only direct interests in real property. See IRC 501(c)(25)(A), last sentence, explaining what is meant by "real property." The IRC 501(c)(25) cannot be a tenant in common. A direct interest in real property does however include long-term ground leases that are recordable on the real estate land records. A direct interest in real property does NOT include any interest under a state Horizontal Property Act (commonly known as a Condominium Act or condominium regime) because condominiums are not considered a "direct interest in real property."

4.76.28.3.1  (08-01-2002)
Examination Guidelines

  1. Review the organizing documents to determine whether the organization is organized for the exclusive purpose of holding title to property.

  2. Determine if the organization has included all the required language in its organizing documents as specified in Notice 87-18, 1987-1 C.B. 455 and Notice 88-121, 1988-2 C.B. 457.

    Note:

    If state law prevents a corporation from including the required language in its articles of incorporation, the organization must include such language in its bylaws.

  3. Inspect financial records to determine if income is derived exclusively from property held for investment purposes.

  4. Analyze disbursements to determine if the organization is distributing all income, less expenses, to organizations described in IRC section 501(c)(25)(C).

4.76.28.4  (08-01-2002)
Shareholder Requirements

  1. IRC section 501(c)(25) explicitly requires control by the organizations to which income is turned over. These organizations must be as described in IRC section 501(c)(25)(C).

  2. IRC section 501(c)(25)(D)(i) provides that shareholders or beneficiaries must be permitted to dismiss the investment advisor, upon reasonable notice, upon a vote of the shareholders or beneficiaries holding a majority interest.

  3. IRC 501(c)(25)(D)(ii) provides that shareholders or beneficiaries must be permitted to terminate their interest by either or both of the following alternatives, as determined by the corporation or trust:

    1. By selling or exchanging their stock or beneficial interest to an appropriate shareholder or beneficiary, provided that the sale or exchange does not increase the number of shareholders or beneficiaries above 35; or

    2. By having the stock or beneficial interest redeemed by the corporation or trust upon 90 days notice to the corporation or trust.

4.76.28.4.1  (08-01-2002)
Examination Guidelines

  1. Research IDRS or request documentation, such as determination letters, to verify that the organization's shareholders or beneficiaries are described in IRC section 501(c)(25)(C).

  2. Review minutes, bylaws, contracts and agreements, and interview officials to determine whether the shareholders or beneficiaries control the title holding corporation, as specified in IRC section 501(c)(25)(D).

    Note:

    Shareholders and beneficiaries are to control the title holding corporation rather than investment advisors.

  3. Review articles of incorporation and other corporate documents to ensure the organization has no more than 35 shareholders or beneficiaries and only one class of stock or beneficial interest.

    1. A nonstock corporation may also be described in section 501(c)(25) if its articles of incorporation or bylaws provide members with the same rights as required in Notice 87-18, 1987-1 C.B. 455.

4.76.28.5  (08-01-2002)
Unrelated Business Activities

  1. An IRC 501(c)(25) may not engage in unrelated business activities. The following are exceptions:

    1. IRC section 501(c)(25)(F) treats as real property a limited amount of personal property leased with the real property. This applies only if the rental income attributable to the personal property does not exceed 15 percent of the total rental income.

    2. Acquisition indebtedness as described in IRC section 514(b)(9), does not include indebtedness incurred in acquiring or improving certain real property.

    3. To the extent shareholders of an IRC 501(c)(25) organization are "qualified organizations as described in IRC section 501(c)(25)", organization will not be considered to have acquisition indebtedness and income from the property will not be taxable. See IRC section 514(c)(9)(C)(iii), "Definition of Qualified Organization" that includes organizations described in IRC 501(c)(25).

  2. IRC section 501(c)(25)(G) allows IRC 501(c)(25) organizations to receive unrelated business income of up to 10 percent of their gross income, provided that the unrelated business income is incidentally derived from the holding of real property.

    1. Examples of incidentally derived income are parking revenue and income from vending machines.

    2. Exempt status will not be affected by the receipt of debt-financed income which is treated as unrelated business taxable income solely because of IRC section 514.

4.76.28.5.1  (08-01-2002)
Examination Guidelines

  1. Inspect all sources of income, e.g. cash receipts journal, bank statements, to determine if the organization receives income from unrelated business activities.

  2. If the organization receives unrelated business income, determine whether the income:

    1. Is incidental to the holding of real property and

    2. Does not exceed 10 percent of the organization's gross income.

  3. Review lease agreements to identify rental of personal property. Determine whether the rental of real property includes personal property. If rental of real property includes personal property, determine whether the amount attributable to personal property exceeds the 15 percent of total rental income.

  4. Determine whether the organization is receiving income from the business of acquiring, improving, and selling real property or trading options. Such income is unrelated trade or business income and will result in the loss of exempt status.

  5. If the organization receives unrelated business income from permissible activities, inspect the Form 990-T Return to determine if properly filed and to identify other sources of unrelated business income. Examine the 990-T return, if appropriate.

4.76.28.6  (08-01-2002)
Assets

  1. An IRC 501(c)(25) organization may own one or more qualified subsidiaries, as long as at all times 100 percent of the stock of such subsidiary is held by an organization described in IRC 501(c)(25). A qualified subsidiary may however cease to be a subsidiary and become an independent IRC 501(c)(25) organization so long as it otherwise meets the requirements of IRC 501(c)(25). See IRC 501(c)(25)(E)(iii) as to date of creation. Thus, a "qualified subsidiary" may be transferred to another duly qualified IRC 501(c)(25) parent OR to a parent that is an organization described in IRC 501(c)(25)(C). Qualified subsidiaries do not report their operations separately but are included in the return of their IRC 501(c)(25) parent. They use their parent's EIN. Qualified subsidiaries may be recognized exempt in their parent's exemption letter or by separate exemption letters. See IRC 501(c)(25)(E) generally for their tax treatment.

    1. If the parent transfers any qualified subsidiary stock to another person, other than another duly qualified IRC 501(c)(25) or to a proper IRC 501(c)(25)(C) described parent, the subsidiary is disqualified. If the parent holds an impermissible interest, such as an indirect interest in real property, it no longer meets the requirements for exemption under IRC section 501(c)(25).

    2. A qualified subsidiary is limited to holding property that could be held directly by an IRC 501(c)(25) organization, that is, a direct interest in real property. See IRC 501(c)(25)(A), last sentence, explaining what is meant by "real property." The IRC 501(c)(25) cannot be a tenant in common. A direct interest in real property includes long-term ground leases that are recordable on the real estate land records. A direct interest in real property does NOT include any interest under a state Horizontal Property Act (commonly known as a Condominium Act or condominium regime) because condominiums are not considered a "direct interest in real property." All assets, liabilities, and items of income of qualified subsidiaries are considered assets, liabilities, and items of income of the IRC 501(c)(25) organization.

      Note:

      The qualified subsidiary must comply with the requirements of IRC section 501(c)(25) for the parent to retain exemption.

  2. IRC section 501(c)(25) title holding companies generally may not own stock, as stock is not real property. The sole exception to this rule is IRC section 501(c)(25)(E), which permits a title holding company to own 100 percent of the stock in a qualified subsidiary.

  3. An IRC 501(c)(25) organization may acquire and hold options to purchase real property if the options are purchased in accordance with a plan to purchase the particular real estate involved and not for purposes of options trading.

  4. An organization may hold reasonable cash reserves sufficient to meet its operational requirements.

    1. The reserves must be held in cash, or in short term investments such as certificates of deposit, bankers' acceptances, interest-bearing savings accounts, commercial paper, government obligations, and shares in money market funds.

    2. Investments will not be considered short term if the period to maturity exceeds 91 days.

4.76.28.6.1  (08-01-2002)
Examination Guidelines

  1. Analyze the organization's balance sheet to identify all assets.

  2. Analyze financial records and interview officials to determine if the organization owns options and if the purpose of owning the options is to purchase real estate.

  3. Review minutes, correspondence files and agreements to determine if the organization owns one or more qualified subsidiaries and has not transferred stock to any person.

  4. Determine if the organization is improperly accumulating income.


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