Should a filing organization report on Schedule R, Form 990, other organizations in which it has an indirect ownership interest, such as second and third tier subsidiaries?
Yes, if the filing organization directly or indirectly controls the other organization. For this purpose, the constructive ownership rules of section 318 of the Code apply to determine control of a corporation, and similar principles apply to determine control of a partnership or trust.
For example, if filing organization X owns 80 percent of a taxable corporation Y, and Y holds a 70 percent profits interest as a limited partner of a limited partnership Z, then X is deemed to own 56 percent of Z (80 percent of Y’s 70 percent interest in Z). Thus, X controls both Y and Z, which are therefore both related organizations with respect to X. X would report Y in Schedule R, Part IV, and would report Z in Schedule R, Part III.
These constructive ownership rules also apply to determine whether the filing organization is controlled by or under common control with another organization.