Accessibility Skip to Top Navigation Skip to Main Content Home  |  Change Text Size  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 1. Single Parent Title Holding Corporations IRC 501(c)(2)

4.76.1  Single Parent Title Holding Corporations IRC 501(c)(2)

4.76.1.1  (04-15-2003)
Introduction

  1. This IRM 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)(2). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC 501(c)(2) title holding corporation.

  2. These guidelines provide specific assistance for the examination of an IRC 501(c)(2) title holding corporation and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM 4.75.10 through IRM 4.75.13.

  3. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  4. This IRM does not contain detailed technical information regarding IRC 501(c)(2) title holding corporation. The examiner should review the technical information contained in IRM 7.25.2.

4.76.1.2  (04-15-2003)
Background Information

  1. IRC section 501(c)(2) provides for recognition of exemption of title holding corporations which are organized for the exclusive purpose of holding title to property, collecting income from the property, and turning over the entire amount less expenses to a parent organization which is exempt under IRC section 501(a). An organization cannot be exempt under IRC section 501(c)(2) if it:

    1. Engages in any business other than holding title to property and collecting income therefrom. See Treas. Reg. section 1.501(c)(2)-1.

      Note:

      Property can be either real or personal. Income from investments is permitted.

    2. Accumulates income rather than turning it over to the parent organization. See Treas. Reg. section 1.501(c)(2)-1(b).

    Note:

    The term " corporation" as used in IRC section 501(c)(2) includes corporations, associations and certain business or commercial trusts (but not ordinary trusts) which are treated as corporations. See IRC section 7701(a)(3), Treas. Reg. 301.7701-2(b), and Treas. Reg. 301.7701-4.

    Caution:

    Treas. Reg. section 1.501(c)(2) has not been updated to reflect section 13146(b) of Public Law 103–66, Omnibus Budget Reconciliation Act of 1993 that allows IRC 501(c)(2) title holding corporations to receive up to 10% of their income from activities incidental to holding real property.

4.76.1.3  (04-15-2003)
Organizational Requirements

  1. A 501(c)(2) title holding corporation is organized for the exclusive purpose of:

    1. Holding title to property,

    2. Collecting income therefrom, and

    3. Turning over the entire amount less expenses to an parent organization described in IRC section 501(a).

4.76.1.3.1  (06-27-2002)
Examination Guidelines

  1. Research IDRS, Integrated Data Retrieval System, and request a copy of the parent organization's determination letter to verify the parent organization's current exempt status as an organization described in IRC section 501(a).

  2. Review the organizing documents to determine whether an IRC 501(c)(2) title holding corporation is organized for the exclusive purpose of holding title to property. Any language in the organizational documents empowering the title holding corporation to engage in any other business indicates it has not been formed for the "exclusive purpose" required by the statute.

    Note:

    In a situation where the organizational documents are outside the purview of the " exclusive purpose" requirement but the title holding corporation's activities are permissible, the examiner will give the title holding corporation an opportunity to amend the language in the organizational documents to comply with the statute.

  3. Review the organizing documents to determine whether the title holding corporation has more than one parent organization. As a general rule an organization exempt under IRC section 501(c)(2) cannot have more than one parent organization but multiple parent organizations may be allowed in specific circumstances, e.g., multiple parent organizations may be allowed if related organizations create a title holding company to hold title to a building used at least in part by the parent organizations themselves. If the organization has more than one parent organization, the examiner should develop all of the facts, review the determination file (microfiche), and conduct current research to determine whether the organization qualifies for exemption under IRC section 501(c)(2).

    Note:

    If the title holding corporation does not qualify under IRC section 501(c)(2) because it has multiple parent organizations, the examiner will determine whether it qualifies under IRC section 501(c)(25) as a multiple parent title holding corporation.

4.76.1.4  (04-15-2003)
Relationship

  1. The statute does not specify the relationship required between a title holding corporation and its parent organization. Traditionally, the relationship is parent and subsidiary, i.e.; the parent organization owns the title holding corporation.

  2. A parent organization receiving support from a title holding corporation must exercise some control or ownership over the title holding corporation supporting it. Some examples of the necessary control are:

    1. Ownership of the voting stock of the title holding corporation

    2. Authority to select nominees to hold the voting stock

    3. Power to appoint directors

    4. Control over the distribution of the income

  3. The absence of the parent organization's control over the title holding corporation will preclude the exemption of the title holding corporation under IRC section 501(c)(2).

4.76.1.4.1  (06-27-2002)
Examination Guidelines

  1. Review the organizing documents, agreements, contracts and correspondence with the parent organization and interview officials to determine:

    1. The relationship between the title holding corporation and the parent organization and

    2. The control the parent organization exercises over the title holding corporation.

4.76.1.5  (04-15-2003)
Distribution of Income

  1. A title holding corporation must turn over the entire amount of its income, less expenses, to an organization which is itself exempt under IRC section 501(a).

  2. The timing of this distribution is not defined in the Code or Regulations. As a practical matter, it is reasonable to allow the title holding corporation until the end of the succeeding taxable year to make the distribution.

  3. The type of distribution is not important. It could be termed a dividend on stock or given some other description, or the title holding corporation could provide the parent organization rent free use of the facilities. What is important is the distribution must actually be paid over to the parent organization, not accrued. A mere obligation to use the income for the parent organization's benefit or parental control of the title holding corporation does not satisfy this requirement.

4.76.1.5.1  (06-27-2002)
Examination Guidelines

  1. Review documents, such as bylaws, minutes, and agreements which may contain established procedures on the distribution of net income.

  2. Analyze disbursements to determine if the title holding corporation is distributing its income, less expenses, to the parent organization.

    Note:

    The term "expenses" includes the operating costs deductible by for-profit entities.

  3. Review financial records, e.g., bank statements, disbursements journals, the general ledger, to determine whether the title holding corporation is timely distributing its income or is improperly accumulating the income. The Service has ruled a title holding corporation may retain part of its income each year to apply to indebtedness on property it holds. See Rev. Rul. 77-429, 1977-2 C.B. 189.

4.76.1.6  (04-15-2003)
Permissible Sources of Income

  1. IRC 501(c)(2) title holding corporations may hold title to passive investments and collect the income they yield.

  2. Investments in stocks, bonds, certain types of oil and mineral interests, and real estate are all traditional and generally permissible sources of income for IRC 501(c)(2) title holding corporation.

  3. A working interest, in which the holder of the interest is responsible for a portion of the operating costs of oil or mineral production, is not a permissible holding for a title holding corporation.

4.76.1.6.1  (06-27-2002)
Examination Guidelines

  1. Analyze financial records to determine whether income from investments is derived from passive investments or from an active business, e.g., securities trading.

4.76.1.7  (04-15-2003)
Unrelated Business Income

  1. As a general rule, an IRC 501(c)(2) title holding corporation may engage only in the business of holding title to property for and turning the income over to the parent organization. A title holding corporation cannot have unrelated business taxable income as defined in IRC section 512 other than certain specific categories of unrelated business taxable income.

  2. Treas. Reg. section 1.501(c)(2)-1(a) sets out the following exceptions to this rule. A title holding corporation may retain exemption if it has income treated as unrelated business income tax solely because of the applicability of:

    1. IRC section 512(a)(3)(c) which pertains to income of title holding corporations whose parent organizations are described in IRC section 501(c)(7), IRC section 501(c)(9), or IRC section 501(c)(17),

      Note:

      IRC section 512(a)(3)(c) also lists organizations described in IRC section 501(c)(20). IRC section 501(c)(20) was terminated for all years beginning after June 30, 1992. IRC section 512(a)(3)(c) has not been updated to reflect this change. If the title holding corporation has a parent organization which has a determination letter stating it is exempt because it is described in IRC section 501(c)(20), the examiner should follow the instructions provided in IRM 7.25.20.4.

    2. IRC section 514 which pertains to debt financed income,

    3. IRC section 512(b)(3)(B)(ii) which pertains to income from leases where the amount of the rent depends on the net income or profits from the leased property,

    4. IRC section 512(b)(13) which pertains to interest, annuities, royalties, and rents received from controlled entities,

    5. IRC section 512(b)(3)(A)(ii) which pertains to rents from personal property leased with real property if the rents attributable to the personal property are an incidental amount of the total rents under the lease, or

    6. IRC section 512(b)(3)(B)(i) which pertains to rents attributable to such personal property exceeding 50 percent of the total rents received or accrued under the lease.

  3. IRC section 501(c)(2) applies the rules of IRC section 501(c)(25)(G) to IRC 501(c)(2) title holding corporation. IRC section 501(c)(25)(G) permits title holding corporations to have unrelated business income up to 10 percent of their gross income from sources incidental to the holding of real property, e.g., income from parking lots or vending machines.

4.76.1.7.1  (06-27-2002)
Examination Guidelines

  1. Review the title holding corporation's activities to determine whether the title holding corporation has engaged in nonexempt activities. The activities may be established by interviewing officers, directors and employees, reviewing the minutes, correspondence files, agreements and contracts.

  2. Review sources of income to determine whether the title holding corporation has unrelated debt financed income.

  3. Look for rental of personal property including personal property leased with real property. If the title holding corporation has rental income from personal property leased with real property, determine whether the income is included in unrelated business income. See IRC section 512(b)(3)(A)(ii) and IRC section 512(b)(3)(B)(i).

  4. If the title holding corporation is deriving unrelated business income from permissible activities incidental to the holding of real property, determine whether the income exceeds 10 percent of its gross income.

  5. If the title holding corporation received unrelated business income from permissible activities, inspect Form 990-T to verify that all unrelated business income and expenses were properly reported.

  6. If the title holding corporation received unrelated business income from non-permissible activities, consider revocation of its exempt status under IRC section 501(c)(2).


More Internal Revenue Manual