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Form 990-T – Organizations with Controlled Entities

Specified payments of interest, annuities, royalties, and rents received or accrued (directly or indirectly) by a controlling organization from a controlled organization are subject to tax. This is true regardless of whether the activity conducted by the controlling organization to earn these amounts is a trade or business or is regularly carried on.

An entity is a controlled organization if the controlling organization owns:

  • By vote or value more than 50 percent of a corporation's stock (for an organization that is a corporation);
  • More than 50 percent of a partnership's profits or capital interests (for an organization that is a partnership); or
  • More than 50 percent of the beneficial interests in an organization (for an organization other than a corporation or partnership).

To determine the ownership of stock in a corporation, apply the principles of Internal Revenue Code section 318 (constructive ownership of stock). Apply similar principles to determine the ownership of interests in partnership or any other organization.

Specified payment means any payment of interest, annuities, royalties, or rents. Include the specified payment in gross income to the extent that the payment reduces the net unrelated income (or increases the net unrelated loss) of the controlled organization. If any part of a specified payment is included in gross income, Schedule F of Form 990-T must be completed.

However, exempt organizations may exclude qualifying specified payments from unrelated business income.  Qualifying specified payment means any payment of interest, annuities, royalties or rents received or accrued from a controlled organization after December 31, 2005 and before January 1, 2012, pursuant to a binding written contract that was in effect on August 17, 2006, or is a renewal contract under substantially similar terms of a contract in effect on August 17, 2006.  However, qualifying specified payments are subject to tax on the amount that exceeds what would have been paid or accrued if such payment had been determined under the principles of section 482.

Organizations must report specified and qualifying specified payments on Form 990-T, Schedule F.  See Instructions to Form 990-T, Schedule F for more information.

Note  When completing Schedule F, Column 6 or 11 (deductions) for qualifying specified payments, enter only the portion of expenses that are directly connected to the amounts included in columns 5 or 10, i.e., the excess of the payment over the fair market value amount as determined in accordance with Code section 482.  Do not enter any expenses relating to the portion of such payment that is not includible in income under this special rule.

CAUTION:  For valuation misstatements, the Code imposes a 20 percent addition to tax.  See section 512(b)(13)(E)(ii) for details.


Page Last Reviewed or Updated: 20-Mar-2015