7.25.2  Single Parent Title Holding Corporations

7.25.2.1  (11-28-1997)
Overview

  1. This section discusses the operation of Single Parent Title Holding Corporations under IRC 501(c)(2).

  2. IRC 501(c)(2) exempts from Federal income tax corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization described in IRC 501(a).

  3. The organization cannot have unrelated business taxable income, except as noted in IRM 7.25.2.7.

  4. Also, an IRC 501(c) (2) organization cannot retain its exemption if it accumulates its income rather than turning it over to its parent.


7.25.2.2  (11-28-1997)
Form of Organization

  1. The term "corporations" as used in the Code includes "associations." See IRC 7701(a)(3). Accordingly, it also includes business or commercial trusts classified as associations for purposes of the Code. However, since it does not include "ordinary trusts," within the meaning of the regulations (Reg. 301.7701–4(a)), an ordinary trust cannot qualify for exemption under IRC 501(c)(2). See IRM 7.25.2.5.1 for discussion of the legal relationship that must exist between the IRC 501(c)(2) organization and the exempt organization for which it holds title.


7.25.2.3  (11-28-1997)
Charter Powers

  1. IRC 501(c)(2) refers to corporations "organized for the exclusive purpose" of holding title to property and collecting income.

    1. This organizational purpose is established by reference to the activities of the organization, by the events surrounding its incorporation, and also by the language of its charter.

    2. If the charter states corporate purposes and powers that go beyond holding property and collecting income by empowering the corporation to engage in other business, this is evidence that the corporation was not organized for the "exclusive purpose" required by the Code.

  2. When a newly organized corporation having no actual history of operations requests exemption, the charter language will weigh heavily in a determination of the organization’s purpose. This is necessary in the absence of a record of operations.

  3. Exemption was denied to an organization that possessed broad powers and business purposes beyond those necessary to a holding company and, in addition, used part of its income to reduce indebtedness on property that would ultimately revert to private individuals. See Rev. Rul. 58–566, 1958–2 C.B. 261. The charter language was not alone determinative, but when combined with the other facts and circumstances, it established that the corporation was not organized exclusively for IRC 501(c)(2) purposes.

    1. The relative weight given to various factors depends on the circumstances of the individual case. When actual operations are beyond the scope of IRC 501(c)(2), even an impeccable charter will not qualify the corporation for exemption.

    2. Similarly, if events surrounding an organization’s formation reveal a purpose outside the scope of IRC 501(c)(2), then charter language alone cannot establish exemption.

  4. When an organization’s history and activities point to an acceptable IRC 501(c)(2) operation, but its charter does not, the Service will look favorably upon an offer to amend the charter. Where the charter amendment merely conforms the charter to the actual intent of the organizers, exemption will ordinarily be recognized for all years.

  5. An organization’s refusal to relinquish charter purposes and powers which are clearly outside the acceptable scope for a titleholding company is a good indication that the organization intends to use those powers to engage in activities beyond those proper for an IRC 501(c)(2) title holding company.


7.25.2.4  (11-28-1997)
Holding Title to Property

  1. The Code limits the activities of IRC 501(c)(2) organizations to holding title to property and collecting the income therefrom. By so doing, it automatically limits the sources from which they may receive income. Reg. 1.501(c)(2)–1(a) states the limitation this way: ". . . a corporation described in section 501(c)(2) cannot be exempt under section 501(a) if it engages in any business other than that of holding title to property and collecting income therefrom."

7.25.2.4.1  (11-28-1997)
Permissible Holdings and Sources of Income

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

    1. Traditionally, investment in stocks and bonds is an allowable source of income under IRC 501(c)(2). It is not proscribed by the regulations and is not prohibited by the restrictions on "business" income (as a primary source of income) imposed on feeders by IRC 502. Clearly, an organization exempt under IRC 501(c)(2) may invest in stocks and bonds and passively collect the income from these investments. However, permissible investment activities should be distinguished from the active "business" of securities trading.

    2. Rent from real property is the other traditional source of income for title holding companies. At the time the first predecessor to IRC 501(c)(2) was enacted, many title holding companies had rental income, and available information indicates that Congress meant to exempt this type of organization when it passed that provision. Nothing in IRC 501(c)(2) prevents organizations exempt under that provision from renting their realty to the general public. See Rev. Rul. 69–381, 1969–2 C.B. 113. In general, the definition of rent from real property for purposes of IRC 501(c)(2) is the same as rent from real property under IRC 512(b)(3). However, see IRM 7.25.2.4.2 for some important differences.

    3. Oil (and similar mineral) production payments sometimes raise the problem of distinguishing between certain kinds of passive investment holdings on the one hand and participation in a business venture on the other. The question arises where an exempt organization holds the right to receive oil or mineral production payments—a fairly common investment for title holding corporations in certain parts of the country. Generally, holding a royalty interest in such property, as opposed to an active working interest, would fall within the IRC 512(b)(2) exclusion from the definition of unrelated business taxable income and would be a permissible source of income. On the other hand, holding a working interest in such property would not fall within the IRC 512(b)(2) exclusion, would be an impermissible source of unrelated business income for an IRC 501(c)(2) title holding corporation, and could result in
      revocation of exempt status under the provisions of Reg. 1.501(c)(2)–1(a).

    4. There has also been some question about title holding companies participating in "ABC" transactions. In these situations, the title holding company derives income through the acquisition, with borrowed funds, of oil and gas production payments. The payments are not from working interests. The income received from each production payment exceeds the amount the organization is charged on the borrowed funds. The income derived by an exempt title holding corporation from mineral production payments purchased with borrowed funds would not affect the title holding corporation’s exemption under IRC 501(c)(2) but would constitute unrelated business taxable income under IRC 514. See Rev. Rul.
      76–354, 1976–2 C.B. 179.

    5. A 1993 amendment to IRC 501(c)(2) provides that rules similar to the rule of IRC 501(c)(25)(G) shall apply for purposes of IRC 501(c)(2). IRC 501(c)(25)(G) provides, in effect, that effective for tax years beginning on or after January 1, 1994, an organization will not qualify as a title holding company if its otherwise disqualifying income which is incidentally derived from the holding of real property exceeds 10 percent of its gross income for the taxable year. This treatment will not apply if the organization establishes to the satisfaction of the Service that the receipt of the disqualifying income in excess of the limitation was inadvertent and reasonable steps are being taken to correct the circumstances giving rise to the income. Disqualifying income includes income from the leasing of parking spaces and vending machine revenue.

7.25.2.4.2  (11-28-1997)
Prohibited Holdings and Sources of Income

  1. Except as noted in IRM 7.25.2.7, an IRC 501(c)(2) organization may not hold title to properties which involve unrelated business income.

    1. Exemption was denied under IRC 501(c)(2) to a student bookstore ( Stanford University Bookstore v. Commissioner, 29 B.T.A. 1280 (1934), affd. 83 F.2d 710 (D.C. Cir. 1936)) and a public utility ( Sand Springs Railway Co. v. Commissioner, 21 B.T.A. 1291 (1931)) because their activities constituted business beyond merely holding title to property. It did not matter that income was turned over to an exempt organization.

    2. Reg. 1.501(c)(2)–1(a) was amended in 1980 to address the problems of applying the revisions in the unrelated business income tax provisions made by the Tax Reform Act of 1969 (Pub. L. 91–172, 83 Stat. 543) to exempt title holding corporations. The regulation provides exceptions to the general prohibition against title holding corporations engaging in unrelated business by permitting title holding corporations to retain exemption (even though they would still be subject to tax on their related business taxable income) in cases where they have certain enumerated types of unrelated business taxable income. See IRM 7.25.2.7 for a description of the types of unrelated business taxable income that an IRC 501(c)(2) title holding corporation may have and yet still retain exemption.

    3. The rental of personal property, unless leased with realty, has consistently been treated as the conduct of a trade or business, whether with respect to exempt organizations or taxable entities. For example, income from rental of personal property would be subject to unrelated business income tax if received regularly by an exempt organization subject to IRC 511. The leasing of trucks, even though the lessees were responsible for fueling, maintaining, and insuring them, has been held to be engaging in a trade or business that would preclude exemption under IRC 501(c)(2). It was not material that the parties to the lease, a title holding company as lessor and three exempt fraternal beneficiary societies as lessees, were also parties to a separate lease involving realty. See Rev. Rul. 69–278, 1969–1 C.B. 148.


7.25.2.5  (11-28-1997)
Parent Organization

  1. The phrase "exempt under this section" refers to organizations exempt under IRC 501(a) and therefore includes pension trusts described in IRC 401(a) and exempted by IRC 501(a). Thus, a pension trust is an acceptable recipient for the income of a title holding corporation.

  2. Rev. Rul. 76–335, 1976–2 C.B. 141, holds that an organization incorporated as a subsidiary of an exempt title holding corporation for the exclusive purpose of holding title to investment property, collecting the income therefrom, and turning over such income, less expenses, to the parent, qualifies for exemption under IRC 501(c)(2).

7.25.2.5.1  (11-28-1997)
Relationship Required

  1. An exempt organization receiving support from a title holding company must exercise some control or ownership over the title holding company supporting it. See Rev. Rul. 71–544, 1971–2 C.B. 227.

    1. Such control ensures proper distribution.

    2. Some examples of the necessary control are owning the voting stock of the title holding company, possessing the power to select nominees to hold the voting stock, appointing directors, etc.

  2. The absence of some control by the supported organization will be fatal to the exemption of the titleholding corporation.

    1. For example, in Rev. Rul. 71–544, a nonprofit corporation was formed by a group of philanthropists to hold title to securities and turn over its income to a selected organization exempt under IRC 501(a). The exempt organization did not own or control the title holding corporation. The corporation was independent of the distributee and had complete discretion in selecting the distributee. The revenue ruling held that the organization was not an exempt title holding corporation under IRC 501(c)(2).

  3. A parent-subsidiary relationship commonly exists, but such a relationship is not required by the statute. If the title holding company is a stock corporation, its stock need not be held by an exempt organization, as long as the stock confers no rights to dividends or liquidating distributions and all income from the property, less expenses, is paid over to the exempt organization. See Rev. Rul. 68–222 1968–1 C.B. 243.

7.25.2.5.2  (11-28-1997)
Limitations Arising from Relationship

  1. An IRC 501(c)(2) organization may not engage in any activity on behalf of the exempt organization to which it turns over its income if the latter could not engage in such activity and retain exempt status. (United States v. Fort Worth Club of Fort Worth, Texas, 348 F.2d 891 (5th Cir. 1965)). Thus, if an exempt organization is prohibited by the terms of the paragraph under which it claims exemption from receiving income from nonmember sources then, derivatively, any IRC 501(c)(2) organization feeding it is limited in the same fashion. Income which the parent may not earn directly, may not be earned indirectly. Similarly, a title holding company will not continue to qualify for exemption when the organization to which it makes distributions of income ceases to qualify for exemption under IRC 501(a) because the title holding company would no longer be turning over the entire amount of its income, less expenses, to an exempt organization as required by the statute. See Rev. Rul. 68–371, 1968–2 C.B. 204.

  2. The fact that the parent is not subject to IRC 511 does not relieve the title holding company of its obligation to pay the tax on its unrelated business taxable income with respect to payments to the parent. See Rev. Rul. 68–490, 1968–2 C.B. 241.

  3. The foregoing is not to be construed to mean that a holding company can carry on all the activities its parent can. The strict limitations of IRC 501(c)(2) and the pertinent regulations apply, regardless of the freedoms permitted to the parent. See Rev. Rul. 66–150, 1966–1 C.B. 147.


7.25.2.6  (11-28-1997)
Turning Over Income to Parent

  1. Although neither the Code nor the Regulations specify the actual timing of remittance, an IRC 501(c)(2) organization should turn over its net income to its parent as soon as practicable, but at least annually.

7.25.2.6.1  (11-28-1997)
Accumulation Prohibition

  1. Reg. 1.501(c)(2)–1(b) states that a corporation described in section 501(c)(2) cannot accumulate income and retain exemption, but it must turn over the entire amount of such income, less expenses, to an organization which is itself exempt under section 501(a).

    1. Regarding the actual timing of the divestiture, neither the Code nor regulations specifies that it must be turned over as soon as earned; however, it can be readily deduced from the wording of the regulation that the intent of the law would be violated if divestiture were delayed beyond a period sufficient to allow for normal accounting and administrative action by the holding company.

    2. An abnormal delay in distribution could create a hardship for the exempt recipient. It might also distort the income and therefore the support test under IRC 509 for organizations exempt under IRC 501(c)(3).

7.25.2.6.2  (11-28-1997)
Method of Payment

  1. The type of distribution is immaterial. It could be termed a dividend on stock or given some other description. What is important is that the distribution must actually be paid over to the exempt organization. A mere obligation to use the income for the parent’s benefit, or parental control of the title holding company would not satisfy this requirement.

  2. Often an exempt parent occupies realty owned by the holding company. There is commonly no payment of rent. In this situation, the statutory requirement that income be paid over to the parent is satisfied if the holding company turns over whatever income is available. Though there may be no cash income, the benefit to the parent from use of the property is real enough.

7.25.2.6.3  (11-28-1997)
Deductible Expenses

  1. As used here the term "expenses" includes the operating costs that could be deductible by a taxable corporation.

    1. Depreciation is included. See Rev. Rul. 66–102, 1966–1 C.B. 133.

    2. Corporate deductions such as charitable contributions, which do not represent costs, are not included.

  2. The retirement of indebtedness by a title holding company is one exception to the rule. Although this is a capital outlay rather than an expense, income used for this purpose is not treated as part of the accumulated earnings of the title holding company. If a title holding company were required to remit all its net income to its parent every year, it would have no funds to meet its own indebtedness on the property it holds. It would then have to turn repeatedly to the organization for which it holds title for additional contributions to its capital. This would in part defeat the very purpose for which most title holding companies are set up—i.e., to serve as an administrative convenience for their parent organizations.

    1. The Service has ruled that a title holding company may retain part of its income each year to apply to indebtedness on property it holds. See Rev. Rul. 67–104, 1967–1 C.B. 120.


7.25.2.7  (11-28-1997)
Unrelated Business Income

  1. As a general rule, an exempt IRC 501(c)(2) organization may engage only in the business of holding title to property for an exempt parent and turning over the income to the parent. Ordinarily, an exempt title holding corporation may not have unrelated business taxable income (UBTI) and would be revoked if it engaged in unrelated trade or business.

  2. However, Reg. 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 that is treated as UBTI solely because of the applicability of:

    1. IRC 512(a)(3)(C), making the unrelated business income rules covering an IRC 501(c)(7) or (9) organization applicable to its title holding corporation;

    2. IRC 514, making income from debt-financed property subject to unrelated business income tax;

    3. IRC 512(b)(3)(B)(ii), removing rents, based on the income or profits derived by any person from leased property, from the IRC 512(b)(3) rental exclusion;

    4. IRC 512(b)(13), taking into income interests, annuities, royalties, and rents derived by a controlling organization from a controlled organization;

    5. IRC 512(b)(3)(A)(ii), excluding from UBTI rents from personal property leased with real property, if the rents attributable to the personal property are an incidental amount of the total rents; or,

    6. IRC 512(b)(3)(B)(i), removing rents, if more than 50 percent of the total rent received under a lease is attributable to personal property, from the IRC 512(b)(3) rental exclusion.

  3. IRC 511(c) sets out the special rule for imposing a tax on the unrelated business taxable income of an IRC 501(c)(2) title holding corporation. An IRC 501(c)(2) corporation may be treated, for purposes of imposing the IRC 511 tax, as being organized and operated for the purposes of its exempt IRC 501(a) parent, if the IRC 501(c)(2) organization pays any amount of its net income for the taxable year to the exempt parent (or would pay such amount if it were available) and the IRC 501(c)(2) organization and its exempt parent file a consolidated income tax return (Form 990–T) for the taxable year.

  4. IRC 1501 allows an affiliated group of corporations to file a consolidated income tax return. IRC 1504(e) confers the consolidated filing privilege on "two or more organizations exempt from taxation under section 501, one or more of which is described in section 501(c)(2) and the others of which derive income from such 501(c)(2) organizations . . ."


7.25.2.8  (11-28-1997)
Application for Exemption

  1. A corporation applying for exemption as an organization described in IRC 501(c)(2) must file its application on Form 1024, Application for Recognition of Exemption.


7.25.2.9  (11-28-1997)
Digests of Published Rulings

  1. Criteria; powers and purposes—A corporation will not be considered a holding company within the meaning of IRC 501(c)(2) where it has broad powers and business purposes far beyond the scope necessary to a holding company. Furthermore, where part of its income is used to reduce indebtedness on property which will ultimately revert to private individuals, it will not be considered as being operated for exempt purposes. Rev. Rul. 58–566, 1958–2 C.B. 261.

  2. Depreciation as an expense—The term "expenses" as used in IRC 501(c)(2), of an exempt corporation which holds title to property, collects income therefrom, and turns over the entire amount, less expenses, to another exempt organization includes a reasonable allowance for depreciation determined in accordance with IRC 167. Rev. Rul. 66–102, 1966–1 C.B. 133.

  3. Operating social facilities for parent—A subsidiary of a veterans’ organization which holds title to a building housing its parent, which is exempt under IRC 501(c)(4), maintains the building and operates the social facilities located in the building, does not qualify for exemption under IRC 501(c)(2) or IRC 501(c)(4), but does qualify for exemption under IRC 501(c)(7). Rev. Rul. 66–150, 1966–1 C.B. 147.

  4. Oil and gas production payments; income from—The acquisition with borrowed funds of oil and gas production payments from properties in which there is no ownership of working interests will not preclude exemption of an organization which otherwise meets the requirements for exemption from Federal income tax under IRC 501(c)(2). Rev. Rul. 66–295, 1966–2 C.B. 207.

  5. Accumulating income to reduce property indebtedness—Where a title holding corporation exempt from tax under IRC 501(c)(2) retains part of its income each year to apply to indebtedness on property to which it holds title, such retention may be treated as if the parent received the income and used it to make a contribution to the capital of the corporation which applied such contribution to the indebtedness. Rev. Rul. 67–104, 1967–1 C.B. 120.

  6. Stock held by others than an exempt corporation—A corporation created to hold title to the chapter house of an exempt college fraternity may be exempt under IRC 501(c)(2) even though its stock is held by fraternity members who have no right to profits. Rev. Rul. 68–222, 1968–1 C.B. 243.

  7. Renting; real and personal property rented under separate leases—A title holding corporation renting a building and trucks under separate unrelated leases to exempt fraternal beneficiary societies is engaged in the business of renting personal property independent of real property and is not except under IRC 501(c)(2). Rev. Rul. 69–278, 1969–1 C.B. 148.

  8. Real property rented to general public.—A title holding corporation that leases a building to the general public and turns over the rents less expenses incident to the operation and maintenance of the building to its parent, an exempt charitable organization, is not precluded from exemption under IRC 501(c)(2). Rev. Rul. 69–381, 1969–2 C.B. 113.

  9. Investment services—An organization regularly carrying on an investment service, that would be unrelated trade or business if carried on by any of the exempt organizations on whose behalf it operates, is not exempt under IRC 501(c)(2) or 501(c)(3). Rev. Rul. 69–528, 1969–2 C.B. 127.

  10. Lack of parental control—A nonprofit corporation formed to hold title to securities transferred to it by a group of philanthropists, and to turn over its income to a selected exempt organization that has no control over the corporation, is not an exempt title holding corporation. Rev. Rul. 71–544, 1971–2 C.B. 227.

  11. Title holding corporation subsidiary—An organization incorporated as a subsidiary of an exempt title holding corporation for the exclusive purpose of holding title to investment property, collecting the income therefrom, and turning over such income, less expenses, to the parent, qualifies for exemption under section 501(c)(2) of the Code. Rev. Rul. 76–335, 1976–2 C.B. 141.

  12. Acquisition indebtedness; subsidiary of labor union—Indebtedness owed to a labor union by its wholly owned tax-exempt subsidiary title holding company resulting from a loan to pay debts incurred to acquire two income-producing office buildings is not "acquisition indebtedness" within the meaning of section 514(c) of the Code. Rev. Rul. 77–72, 1977–1 C.B. 157.

  13. Accumulation of Income—An exempt title holding corporation may retain part of its income each year to apply to indebtedness on property to which it holds title; the transaction will be treated as if the income had been turned over to the exempt parent and the latter had used such income to make a capital contribution to the titleholding corporation which, in turn, applied such contribution to the indebtedness; Rev. Rul. 67–104 superseded in part and obsoleted in part. Rev. Rul. 77–429, 1977–2 C.B. 189.

  14. Leasehold interest in an office building—A corporation that holds a leasehold interest in an office building, derives all its income from subleasing space in the building to the general public, and turns over the net rents to its exempt parent qualifies for exemption under section 501(c)(2) of the Code. Rev. Rul. 81–108, 1981–1 C.B. 327.


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